Meeting Our Commitments
2019 ANNUAL REPORT Cubic is a technology-driven, market-leading provider of integrated solutions
that increase situational understanding for transportation, defense C4ISR
and training customers worldwide to decrease urban congestion and improve
the militaries’ effectiveness and operational readiness.
Our teams innovate to make a positive difference in people’s lives. We
simplify their daily journeys. We promote mission success and safety for
those who serve their nation.
CUBIC AT A GLANCE
$3.4B
$1.5B
5
BACKLOG
SALES
CONTINENTS
6,200
19
>90%
EMPLOYEES
COUNTRIES
PRIME CONTRACTOR (% OF SALES)
SALES BY GEOGRAPHY (%)
UNITED KINGDOM
15%
64%
UNITED STATES
2%
MIDDLE EAST
FAR EAST
3%
AUSTRALIA
11%
SALES IN OTHER REGIONS: 5%
LETTER FROM THE CHAIRMAN, PRESIDENT & CEO
Record Results and Strong Progress
Thanks to our outstanding teammates and their focus
on winning the trust of our customers and meeting
our commitments, we delivered another year of strong
performance reaching all-time highs for continuing
operations in Sales and Adjusted EBITDA.
At the same time, we made investments in research and development (R&D), strategic
Bradley H. Feldmann
acquisitions, talent development and business optimization to further advance our
strategy. Over the last three years, our Sales and Adjusted EBITDA have grown at
a compound annual growth rate of 12 percent and 16 percent, respectively.
27% YoY*
$1,496
$1,203
$1,108
44% YoY*
$146.6
110 bps YoY
9.8%
8.7%
7.9%
$104.6
$87.5
49% YoY*
$3.13
$2.19
$1.62
7
1
0
2
8
1
0
2
9
1
0
2
7
1
0
2
8
1
0
2
9
1
0
2
7
1
0
2
8
1
0
2
9
1
0
2
7
1
0
2
8
1
0
2
SALES ($M)
ADJ EBITDA ($M)
ADJ EBITDA MARGIN
ADJ EPS
9
1
0
2
9
1
0
2
* FY2019 growth rates for Sales, Adj. EBITDA and Adj. EPS reflect constant currency basis. Constant currency growth rates are calculated by translating current
period local currency amounts to USD based on prior period average exchange rates. The amounts are compared to prior period GAAP amounts to derive constant
currency growth. Unadjusted growth rates: Sales 24%, Adj. EBITDA 40% and Adj. EPS 43%.
1
We achieved a key milestone in May with the successful launch
of the first phase of the New York Metropolitan Transportation
Authority’s next-generation fare payment system.
* Command, Control, Communications, Computers, Intelligence, Surveillance and Reconnaissance
This state-of-the art system, known as One Metro New York (OMNY), features
mobile and open payments via contactless bankcards and mobile wallets to improve
customer convenience and service for travelers. We will leverage our success in New
York throughout our upcoming large-scale transit system launches, which include
Boston, Brisbane and the San Francisco Bay Area, all of which share a common core of
technology and solutions to help drive Cubic’s current and future growth and margin
improvement. While our transportation team has much to celebrate, I am particularly
pleased with the advancements of our mobile solutions, including our announcements to
integrate contactless transit cards with Google Pay and Apple Pay. Cubic strives to be at
the forefront of creating mobile transit payment solutions and next-generation apps, and
we are confident these developments will provide the most efficient way for travelers to
“pay and go.”
2
In addition to robust growth from delivery on our major transportation
projects, our growth this year was also fueled by demand for our
networked C4ISR* solutions, led by strong sales of GATR, the world’s
most portable, secure satellite antenna systems.
We made important business investments in airborne SATCOM
positioning us for further growth in the Rugged Internet of Things
and common datalink (CDL) communications in connection
(IoT) market. We continued to invest in and advance our ISR-
with several key platform wins including awards to provide the
as-a-Service priority and conducted a successful first flight and
SATCOM and CDL communications for Boeing’s MQ-25 program,
endurance testing of our ISR One Unmanned Air Vehicle. We also
and Video Data Link for the F-35 Lightning II Program. Our
signed a cooperative research and development agreement with
ongoing advancements with multi-link communication technology
the U.S. Special Operations Command (USSOCOM) to mature
led to a network contract with the Air Force Research Lab to
this capability. While making significant organic investments
develop and demonstrate this solution. We won significant
to support future growth, our Cubic Mission Solutions (CMS)
Command Post opportunities this year with the U.S. Army,
business increased Adjusted EBITDA by an impressive 31 percent
U.S. Marine Corps and the U.S. Special Operations Command
year-over-year.
* Command, Control, Communications, Computers, Intelligence, Surveillance and Reconnaissance
3
As a result of our commitment to innovation and market
leadership in defense training, we recently won several
demonstration contracts to support our customers in defining
their future training requirements.
One such contract was for the Live Training Environment within the U.S. Army’s training
modernization program. We were selected for an innovative non-laser-based solution
that provides significant levels of accuracy and ballistic modeling while taking into
account the surrounding environment, enabling highly realistic and threat-representative
operational environments – the first time an effective non-laser system has been
demonstrated and proven. Our solutions better train,
equip and engage warfighters by replicating warfare
domains, as well as creating realistic and immersive
training experiences with Live, Virtual and Constructive
(LVC) technologies. In the near-term, our performance in
defense training will be supported by recently awarded
international air and ground training contracts, coupled
with disciplined cost management.
4
In addition to robust organic growth, we also expanded through
acquisitions to advance the breadth and depth of our offerings in
transportation and defense.
Our fiscal 2019 acquisitions included Trafficware, GRIDSMART and Nuvotronics. Two months after the fiscal year-end, we announced
the acquisitions of two additional companies: Delerrok and Pixia.
SURFACE TRANSPORT MANAGEMENT
Acquisitions of Trafficware (October 2018) and GRIDSMART (January 2019)
In connection with our vision to be the leading provider of integrated payment and information systems and services for all forms
of mobility, we acquired Trafficware and GRIDSMART, two leading providers of best-in-class intelligent intersection management
technologies. We are pleased with our early wins with these businesses, including our first international cross-sell of GRIDSMART
technology in Victoria, Australia. We believe that significant value can be created by integrating these technologies with our broader
regional traffic and intelligent congestion management platforms. Ultimately, our goal is to reduce congestion by optimizing the
transportation network and providing travelers with vital information, allowing them to navigate more efficiently across the city.
PROTECTED COMMUNICATIONS
Acquisition of Nuvotronics (March 2019)
Nuvotronics is a disruptive technology provider of advanced radio frequency devices
that provide exceptional performance with leading size, weight and power parameters.
This game-changing technology enables supply chain synergies within our protected
communications business and positions Cubic to address high-priority, dual-use
technology markets in space, electronic warfare, hypersonics and 5G communications.
C2ISR
Pixia (January 2020)
Pixia advances Cubic’s battlefield cloud strategy of processing and disseminating data-
rich, actionable intelligence at the edge of the battlefield in real-time. This acquisition
will enhance Cubic’s existing video dissemination network with access to Wide Area
Motion Imagery (WAMI).
FARE COLLECTION-AS-A-SERVICE
Delerrok (January 2020)
Delerrok expands our services to small and mid-market transportation customers
with an innovative fare collection-as-a-service solution. Our industry expertise in fare
collection and real-time information solutions and services, combined with Delerrok’s
innovative and scalable technology, will allow us to deliver a cost-effective and complete
offering for small to mid-sized transit agencies.
5
68
SALES BY
TYPE (%)
32
Product
Service
57
SALES BY
SEGMENT (%)
22
21
Cubic Transportation Systems
Cubic Mission Solutions
Cubic Global Defense
6
When Our Teams are Engaged, Energized & Enabled – We Win
We aim to empower our employees with the purpose, vision and resources necessary
to attract and retain top talent and to create superior value for our customers. We have
greatly improved our human resources systems and talent initiatives across a variety of
programs related to employee recognition, employee development and total rewards.
We focus on developing a highly engaged, “all-in” culture and we measure this through
quarterly employee engagement surveys. Starting this year, our annual performance
goals for leaders across all levels of the company now specify that we will hold ourselves
accountable for performing in the top quartile for employee engagement. Another
primary area of focus is our talent development initiatives which are designed to enable
our teams and help us continuously build our talent pipeline.
We developed our Diversity and Inclusion strategic plan and are launching several
initiatives focused on fostering inclusive and diverse environments to strengthen our
company culture, generate innovative ideas and, in turn, best serve our customers. One
such initiative is the establishment of employee resource groups (ERGs) to help foster
an inclusive environment in which all employees are fully engaged, working together
effectively to help each other maximize their potential and meet our business objectives.
Championing and reinforcing a culture where Innovation is the DNA of the company
– all the time, everywhere – activates us to connect diverse and global innovators to
transform knowledge and technologies into new products and accelerate results. These
cross-functional and inclusive teams create breakthroughs by successfully harnessing the
talents of every individual.
Financial and Operating Highlights
CONTINUING OPERATIONS
(Amounts in thousands, except per share data and percentages)
2019
2018
2017
Bookings
Backlog
Sales
Sales growth %
Research & development
Operating income
Net income (loss) per share, continuing operations
attributable to Cubic
Adjusted EBITDA (1)
Adjusted EBITDA growth %
Adjusted earnings per share (1)
Adjusted earnings per share growth %
Cash dividend per share
Long-term debt, inclusive of current portion
$
1,002,320
$ 3,400,952
$
1,496,475
24%
50,132
86,237
1.67
146,594
40%
3.13
43%
0.27
199,824
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2,779,782
4,064,451
1,202,898
9%
52,398
24,382
0.29
104,561
20%
2.19
35%
0.27
199,793
$
$
$
$
$
$
$
$
$
$
1,234,013
2,536,499
1,107,709
52,652
2,628
(0.95)
87,470
1.62
0.27
199,761
(1) See reconciliation of GAAP to non-GAAP financial measures tables in Management’s Discussion and Analysis of Financial Condition and Results
of Operations in the Form 10-K.
A
SALE PRICE OF
Common Shares
a
nd Dividends
Q1
Q3
HIGH
LOW
DIVIDENDS
HIGH
LOW
DIVIDENDS
2019
$72.29 / $50.85
2018
$63.00 / $51.90
–
–
Q2
2019
$65.25 / $53.09
$0.14
2018
$65.65 / $54.05
$0.14
HIGH
LOW
DIVIDENDS
HIGH
LOW
DIVIDENDS
2019
$64.48 / $53.43
2018
$71.85 / $59.80
–
–
Q4
2019
$73.00 / $63.36
$0.14
2018
$76.85 / $65.90
$0.14
7
Commitment to Innovation in the Digital World
Innovation sits at the heart of everything we do. The mission of
Our digital pivot also prioritizes increased productivity and
Cubic Innovation is to accelerate solving our customers’ toughest
engagement of the global Cubic workforce through access to
problems to create extraordinary value for the end-users, from
increased customer insights, new ways to work and cyber-
their perspective, and to generate new revenue streams for Cubic.
resiliency across our workspace, so Cubes can do their best
Cubic’s Innovation Social System is both collaborative and dynamic
work. We will leverage and build upon our One Cubic enterprise
– we are constantly evolving to integrate new technologies and
modernization investments including SAP, unified Product
implement better methodologies. Our cutting-edge research and
Lifecycle Management and our experience with secure hybrid-
development delivers robust solutions for our growing global
cloud environments. Our digital talent development and
customer base. We will continue to innovate and work relentlessly
recruitment priorities emphasize increased data and analytics
with our customers to meet their challenges of tomorrow and drive
expertise, entrepreneurship and agility.
superior value for our customers, employees and shareholders.
Ultimately, we will transform our way of doing business by
Cubic’s commitment to Winning the Customer requires us to
shifting, from:
master the forces of digital disruption as we serve our customers
and our team members. Cloud computing, mobile devices and
• Programs and bespoke solutions to digital platforms.
data-powered platforms are disrupting market landscapes
• Lengthy development to rapid and agile release methods for
and raising the bar on customer experience. Industry norms
our offerings.
surrounding bidding processes, data rights and pricing models are
• Data collection to data-driven decision-making for our
being reinvented as customers embrace “as-a-service” offerings,
customers and Cubic.
digital platforms and data-powered solutions.
• Periodic and one-time delivery to recurring revenue streams.
We remain focused on building technology-driven, market-leading
businesses and our actions continue to be guided by Cubic’s
In Closing
In fiscal year 2020, we are in a solid position to deliver another
five key priorities: Winning the Customer, Building NextCity™,
year of strong growth in Sales, Adjusted EBITDA and Adjusted
Building NextMission™, Building NextTraining™ and Living One
earnings per share. We expect to reach approximately $1.6 billion
Cubic. In the next evolution of our strategy, Cubic’s digital pivot
in Sales while further expanding margins.
will bolster and enhance these growth initiatives by aiming to
activate recurring revenue growth and margin expansion through
We recently announced that Matt Cole, Senior Vice President
strategic digital initiatives across Cubic.
and President of Cubic Transportation Systems (CTS), will be
8
leaving Cubic at the end of January to lead a technology business
industry. I look forward to their leadership as we continue to
in a non-competing market. On behalf of Cubic, I would like to
build technology-driven, market-leading businesses with a strong
express my gratitude for Matt’s significant contributions over
focus on digitalization. We are grateful to John Warner who will
the last 17 years. Matt has led and significantly advanced Cubic’s
retire from the Board at the 2020 Annual Meeting after more
NextCityTM vision, including four major contract wins in fiscal
than a decade of dedicated service.
2018 and key advancement in our strategic priorities related to
mobile and Intelligent Transport Systems. We are fortunate that
I will close by thanking our talented employees not only for their
CTS is very well positioned for continued success by delivering
hard work and many achievements, but also for their impeccable
innovative solutions that reduce urban congestion.
ethics and moral conduct. As I reflect on my fifth year as Cubic’s
CEO, I am proud of what we have accomplished together.
Laurent Eskenazi, who is currently Senior Vice President and
Managing Director of CTS EMEA, will assume the responsibility
To our shareholders, thank you for your confidence in Cubic.
of interim President of CTS, while we conduct a formal search
I remain very optimistic about the future as we continue to
process for a permanent replacement. Laurent brings extensive
transform Cubic into a technology-driven, market-leading company.
experience in ticketing and revenue collection globally and we are
confident in his ability to serve in this interim role. Prior to Cubic,
Laurent was Managing Director for Thales, responsible for the
Revenue Collection Systems business across nine countries.
Thank you to my fellow oard members for your insight,
B
Chairman, President and CEO
guidance and active engagement in our strategic planning. In
January 13, 2020
Bradley H. Feldmann
fiscal 2020, we have continued our active Board refreshment
with two new directors: Denise Devine, a financial leader
and innovator with a breadth of experience developing and
commercializing technology platforms, and Carolyn Flowers,
a seasoned executive and thought leader in the transportation
In Memory of Edwin A. Guiles
In June, we shared with great sadness the news of the passing of long-time oard member Edwin
B
Guiles. Ed was a devoted family man and a passionate, thoughtful leader.
Ed provided guidance and oversight for Cubic since 2008, serving as lead independent director for
the last two years in addition to having a director role for the California Water Service Group.
In 1972, Guiles joined San Diego Gas & Electric (SDG&E) where he held a variety of management
roles before becoming Chairman and CEO of Sempra Energy’s utilities SDG&E and Southern
California Gas Company in 2000. During his tenure, he was responsible for overseeing the
company’s procurement, generation and transmission of electricity and natural gas; operation of
the company’s power plants; as well as the administration of its 20-percent ownership of the San
Onofre Nuclear Power Plant. Guiles retired from Sempra Energy in 2009.
His tremendous business experience with strategy, people and financial management has helped
transform Cubic into the company it is today. He was not only a colleague, but also a great friend
and mentor. He will be deeply missed.
9
2019
Fiscal 2019 Year in Review
2018
O C T O B E R
Cubic enters fiscal 2019 with the highest backlog in our history
Acquired Trafficware, a leading provider of intelligent traffic solutions
“Business App of the Year Award” from Mobile Breakthrough Awards for Cubic
Transportation Systems’ Mobile Suite
Deployed GATR SATCOM antenna to aid recovery efforts in communities
impacted by Hurricane Michael
N O V E M B E R
Awarded the National Training and Simulation Training Award for Air Live,
Virtual and Constructive system
Cubic and Transport for New South Wales extend contactless payments to
Sydney’s trains
D E C E M B E R
Completed public offering with net proceeds of $216m
2019
J A N U A R Y
Cubic Corporation Named a 2019 Best Employer for Diversity by Forbes Magazine
Acquired GRIDSMART, a leading provider of intelligent traffic solutions
DTECH, a product line under Cubic’s Rugged IoT offering, was selected by the
U.S. Marine Corps to provide a data communications backbone for its Combat
Data Network
F E B R U A R Y
Awarded a contract from the Naval Air Systems Command (NAVAIR) to
provide a Full Motion Video system for the U.S. Navy’s MH-60S Helicopter
Demonstrated Multi-Domain Live, Virtual and Constructive analytics and
visualization platform (SPEAR) at USAF Red Flag Exercise
M A R C H
Acquired Nuvotronics, a disruptive technology provider of microfabricated radio
frequency products
Delivered account-based ticketing pilot for Abellio ScotRail, bringing world-
leading, pay-as-you-go One Account management technologies to U.K. rail
10
2019
A P R I L
Cubic recognized on “America’s Best Large Employers” list by Forbes
Announced that Cubic is working with Apple to bring Apple Pay to
U.S. transit systems
Awarded contract from National Transport Authority to deliver mobile
ticketing system in Ireland
Awarded contract from New Zealand Ministry of Defence to Deliver
Command and Control capabilities
Awarded a subcontract to provide wideband SATCOM and Common Data
Link for Boeing’s MQ-25
M AY
Delivered next-generation fare payment system for the first phase of New
York Metropolitan Transportation Authority’s OMNY fare payment system
J U N E
Awarded defense training contracts from customers in the Indo-Pacific region
Cubic’s Engage™ Air Combat Training System Miniature Encryptor receives
NSA certification
Awarded a contract to deliver secure video data link solution for F-35
Lightning II program
Awarded Small Form Factor Radio prototype for the U.S. Air Force
Data Link Enterprise
Upgraded LA County’s TAP retail network point of sale device with our Cubic
Mobile for Merchants Android app
Acquired minority stake in Pixia, a commercial technology company that
provides high-performance platform solutions to manage massive amounts of
imagery data for U.S. Intelligence agencies and other customers
J U LY
Cubic extends contactless payment to Sydney’s bus fleet, marking the final
rollout of contactless payment technologies in Sydney’s Opal network
A U G U S T
Cubic named a winner of Stevie® Awards in the 16th Annual International
Business® Awards within four categories: Big Data Solution; Integrated
Mobile Experience; Travel; and Best New Product or Service of the Year –
Transportation
Launched open payments for Miami-Dade Department of Transportation and
Public Works’ EASY Card transit fare system
S E P T E M B E R
Cubic expands Trafficware Central Transportation Management System in
Connecticut
Deployed GATR SATCOM antenna and rugged IoT solutions to aid Hurricane
Dorian recovery efforts
11
Living One Cubic
One Cubic is our ongoing priority to share resources across the
company. By Living One Cubic we will be a unified, global team with
shared values, policies, enabling-systems and technologies, working
together toward common goals. Our One Cubic initiatives support
Cubic’s growth strategy, help us operate more efficiently and enable our
teams to focus on the most important thing – Winning the Customer.
12
This year our teams at Cubic Mission Solutions and Cubic
Global Defense collaborated with Cubic Transportation
Systems and its customer, Network Rail, in a key
redevelopment project. The objective of this project was to
de-risk large-scale track and station renovations through
real-time tracking and situational understanding of project
asset locations to improve overall project delivery of their
track renovation.
Validator
image
Cubic’s new Tri-Reader 4 validator, which is the device
at the forefront of our next-generation fare collection
systems, is an innovation developed through engineering
collaboration across all three businesses.
This year we launched the first phase of our Product Lifecycle
Management (PLM) system. The biggest benefit of PLM for
Cubic is the ability to share technical information and data
amongst our engineering teams and the overall company, using
disciplined workflows. This is expected to result in increased
quality and cost-savings across the organization.
13
CUBIC TRANSPORTATION SYSTEMS
Decrease Urban Congestion
Growing urbanization and rising consumer expectations are driving innovation and
demand for mobility management technologies.
Governments need new policies and solutions to manage
insights to maximize the use of new and existing transportation
congestion and respond to and absorb new technologies, such as
infrastructure and achieve wider policy goals.
autonomous and connected vehicles and shared mobility services.
Travelers expect increasingly sophisticated and data-driven
NextCity™ is our vision and strategic roadmap to becoming
experiences integrating new technological trends.
the leader in providing integrated payment and information
systems and services for all forms of mobility, not just mass
We optimize journeys better than anybody else through
transit. NextCity™ is centered on three core principles: integrated
integrated payment, information and management solutions.
customer experience, One Account and integrated operations
We deliver superior technologies to turn data into actionable
and analytics.
REVENUE
MANAGEMENT
s
e
S e r v ic
ROAD USER
CHARGING
Data
ONE ACCOUNT
REAL-TIME PASSENGER
INFORMATION
INTEGRATED
OPERATIONS
& ANALYTICS
INTEGRATED
CUSTOMER
EXPERIENCE
PREDICTIVE
ANALYTICS
TRANSPORT
MANAGEMENT
PARKING &
SHARED SERVICES
14
BACKLOG
$2,953.3
SALES
$849.8
ADJ EBITDA
$110.5
DOLLARS ARE IN
MILLIONS
58
SALES BY
TYPE (%)
42
Product
Service
SALES BY
REGION (%)
59
24
17
U.S.
Europe
Asia Pacific
15
CUBIC MISSION SOLUTIONS
Increase Operational Effectiveness
Geopolitical global complexity is driving the need for robust, secure, mobile situational
surveillance solutions at the edge.
As a leading C4ISR innovator, Cubic Mission Solutions provides
• Higher performing – Greater bandwidth, resilient to threats,
integrated mission capabilities to solve our customers’ hardest
expeditionary, more capabilities.
problems in protected communications, ruggedized tactical
• Lower SWaP-C – Significantly lower size, weight and power
cloud computing, secure networking, autonomous systems and
– cost-enabling additional platform capabilities at similar
command, control, intelligence, surveillance and reconnaissance
prices and higher margins.
(C2ISR). Our solutions enable rapid and continuous situational
• Low life-cycle costs –Interoperability, low-cost integration,
understanding that provides the knowledge needed to make
fewer parts, higher reliability, industry-leading warranty and
timely decisions to achieve desired effects for defense,
value-based pricing.
intelligence, security and commercial missions.
• Challenging environments – Harsh, austere environments,
high-threat anti-access/area-denial (A2/AD) resilience.
Our powerful, differentiated solutions address our customers’
most pressing needs:
WIDEBAND
DATALINKS
FULL MOTION VIDEO
RADIO OVER IP
NextMission™
RUGGED IoT
SATELLITE
COMMUNICATIONS
CROSS-DOMAIN
AUTONOMOUS
SYSTEMS
16
BACKLOG
$103.7
SALES
$328.8
ADJ EBITDA
$34.4
DOLLARS ARE IN
MILLIONS
8
SALES BY
TYPE (%)
92
Product
Service
SALES BY
TYPE (%)
63
25
12
Protected Communications
Rugged IoT
C2ISR
17
CUBIC GLOBAL DEFENSE
Increase Operational Readiness
The rise of near-peer adversaries demands multi-domain readiness enabled by Live,
Virtual and Constructive solutions.
Accelerating readiness through training proficiency across the
With more than 30 years of experience, Cubic Global Defense
entire spectrum of conflict is a top priority of our customers.
continues to be an innovator of military training and a market
Emerging and evolving threats continue to drive the need for high
leader in integrated defense training solutions. Our NextTraining™
fidelity, secure, multi-domain training solutions with electronic
portfolio delivers leading edge capabilities for the multi-domain
warfare, space and cyber effects. To achieve readiness for the
training environment.
future operational environment, there is increased demand for
“leapfrog” technologies in the shift from Live to Live, Virtual and
Constructive (LVC) training environments to allow warfighters to
cost-effectively “train as they fight.”
AIR
GROUND
SPECIAL OPERATIONS
NextTraining™
The Foundation
of Readiness
MARITIME
NATIONAL
SECURITY
CYBERSPACE
SPACE
18
BACKLOG
$344.0
SALES
$317.9
ADJ EBITDA
$32.8
DOLLARS ARE IN
MILLIONS
33
SALES BY
TYPE (%)
67
Product
Service
57
SALES BY
TYPE (%)
13
30
Ground Training
Air Training
Virtual Training
19
Corporate Social Responsibility (CSR)
At Cubic, we believe in making a positive difference in people’s lives while creating long-
term value for shareholders. Giving back to the community is one of the many ways
our Cubes help cultivate a sense of well-being in our society. Our employees graciously
donate their time to company and non-company-sponsored charitable organizations
and are encouraged to find philanthropic causes through volunteering that they are
passionate about.
Giving back to the
community is one of
the many ways our
Cubes help cultivate a
sense of well-being in
our society.
20
Cubic also has long-standing relationships with a diverse group of local and national non-
profit organizations and programs that are relevant to Cubic’s humanitarian and social
interests, focused in: Health and Human Services; Veterans; and Science, Technology,
Engineering and Math (STEM).
Since 2005, Cubic’s GATR satellite terminals have been deployed to support 15 natural
disasters worldwide. The ease of deployment and extreme portability make them ideal
systems for disaster recovery efforts. In September, after Hurricane Dorian struck the
Bahamas, Cubic deployed our GATR satellite communication (SATCOM) antennas and
DTECH rugged IoT solutions to restore connectivity within 72 hours of arrival at five
different locations.
Across the globe, our UK Cubes spent a spring day cleaning up an abandoned field overrun
by weeds and junk and turned it into a play space for local, underprivileged children;
while in Australia, Cubic proudly aided nearby businesses, provided shelters from Cubic’s
deployable Combat Centers and rescued kids using Cubic’s high axled IVECO trucks after
major flooding devastated Townsville. Additionally, Cubic made monetary donations to
support the recovery efforts.
Additionally, Cubic’s products and services further the company’s commitment to
sustainability. For example, Cubic’s transportation products reduce congestion and
disposable consumables in cities and improve travel efficiency for millions of customers.
In our defense businesses, Cubic’s Live, Virtual and Constructive (LVC) training programs
reduce the need for on-battlefield training and our efforts to improve size, weight,
power and cost for our products reduces power draws in order to efficiently support our
customers’ missions.
As Cubic continues to grow worldwide, we seek to minimize our carbon footprint, conserve
natural resources, reduce waste and utilize safe materials in our products. In July 2019,
we broke ground on redeveloping our corporate campus in San Diego. This project
consolidates our two main San Diego campuses into One Cubic site, modernizing the
buildings and facilities. It has been designed to LEED Silver Certification Standards and
exemplifies Cubic’s commitment to sustainability. Cubic’s new buildings will incorporate
water efficiency, energy efficiency, a 730kWh carport photovoltaic system, battery
storage, electric vehicle charging stations, natural light accessibility, healthy air circulation,
sustainable materials, and other efforts to promote employee well-being throughout the
space. Additionally, in fiscal year 2020 we will conduct a full review of our CSR strategy
and key priorities, while ensuring that we continue to operate to the highest ethical
standards across our global operations.
In July 2019, we broke
ground on redeveloping
our corporate campus
in San Diego.
21
Directors
Bradley H. Feldmann
Chairman, President and
Chief Executive Officer
Prithviraj Banerjee
Independent Director
Bruce G. Blakley
Independent Director
Maureen Breakiron-Evans
Independent Director
Denise L. Devine
Independent Director
Carolyn A. Flowers
Independent Director
Janice M. Hamby
Independent Director
David F. Melcher
Lead Independent Director
Steven J. Norris
Independent Director
John H. Warner, Jr., Ph.D.
Independent Director
22
Senior Officers
Bradley H. Feldmann
Chairman, President and
Chief Executive Officer
Anshooman Aga
Executive Vice President,
Chief Financial Officer
Matthew J. Cole
Former Senior Vice President,
President of Cubic
Transportation Systems
Michael Knowles
Senior Vice President, President
of Cubic Global Defense
Michael R. Twyman
Senior Vice President, President
of Cubic Mission Solutions
Kevin Eagen
Senior Vice President,
Chief Digital Officer
Hilary L. Hageman
Senior Vice President,
General Counsel and
Corporate Secretary
Mark A. Harrison
Senior Vice President and
Chief Accounting Officer
Grace G. Lee
Senior Vice President,
Chief Human Resources and
Diversity Officer
Rhys V. Williams
Vice President, Treasurer
23
Shareholder Information
STOCK PERFORMANCE GRAPH (1)
63 MONTH CUMULATIVE TOTAL RETURN (2)
(% RETURN)
(% RETURN)
$200
$180
$160
$140
$120
$100
$80
$60
$40
$20
67%
55%
48%
$200
$180
$160
$140
$120
$100
$80
$60
$40
$20
63%
37%
2014
2015
2016
2017
2018
2019
06/30
2014
09/30
2014
09/30
2015
09/30
2016
09/30
2017
09/30
2018
09/30
2019
Cubic Corporation
S&P 500
Russell 2000
(1) The graph assumes an investment of $100 on October 1, 2014 and illustrates the cumulative total shareholder return over the last five years of Cubic’s
common stock, the S&P 500 Index, and the Russell 2000 Index. The Company has chosen the Russell 2000 as a comparative index of issuers with similar
market capitalizations as there is not a published industry index or peer group that appropriately represents Cubic’s unique and diverse sales mix. The return
on investment represents the change in the fiscal year-end stock price plus reinvested dividends.
(2) The graph reflects the company’s cumulative total shareholder return since Brad Feldmann became President and Chief Executive Officer of Cubic Corporation.
The graph assumes an investment of $100 on July 1, 2014 and illustrates the cumulative total shareholder return of Cubic Corporation and the Russell 2000
Index. The return on investment represents the change in the stock price plus reinvested dividends.
Annual Meeting
The 2020 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 17, 2020, 11:00 a.m. Pacific Time
Shareholders of record on December 19, 2019 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
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:
TRANSFER AGENT
Broadridge Corporate Issuer Solutions, Inc.
P.O. Box 1342
Brentwood, NY 11717
1-877-830-4936
1-720-378-5591
shareholder@broadridge.com
www.shareholder.broadridge.com
Cubic Corporation
For shareholder questions on other matters related to Cubic, contact:
BY REGULAR MAIL
Cubic Corporation
Kirsten Nielsen
Vice President Investor Relations
9333 Balboa Avenue
San Diego, California 92123
BY E-MAIL
investor.relations@cubic.com
BY TELEPHONE
Investor Line: (858) 505-2222
Cubic will furnish its 2019 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.
Auditors
Ernst & Young LLP
Stock Listing
New York Stock Exchange
Ticker symbol: CUB
24
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, 2019
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission File Number 001-08931
CUBIC CORPORATION
Exact Name of Registrant as Specified in its Charter
Delaware
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
CUB
Trading Symbol(s)
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. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes 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. Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such
files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or
an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company,” and “emerging growth
company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) ☐ Yes No
The aggregate market value of 22,695,571 shares of common stock held by non-affiliates of the registrant was: $1,274,404,537, as of March 31, 2019,
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 1, 2019 including shares held by affiliates is: 31,274,052 (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 2020 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, 2019.
CUBIC CORPORATION
ANNUAL REPORT ON FORM 10-K
For the Year Ended September 30, 2019
TABLE OF CONTENTS
Page
No.
3
16
37
37
38
38
39
40
42
66
68
131
131
132
135
135
135
135
135
136
139
139
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
Item 16.
Form 10-K Summary
SIGNATURES
Part IV
2
Item 1. BUSINESS.
PART I
GENERAL
CUBIC CORPORATION (Cubic) is a technology-driven, market-leading global provider of innovative, mission-critical
solutions that reduce congestion and increase operational readiness and effectiveness through increased situational
understanding. Cubic designs, integrates and operates systems, products and services focused in the transportation,
command, control, communication, computers, intelligence, surveillance and reconnaissance (C4ISR), and training
markets. We offer integrated payment and information systems, expeditionary communications, cloud-based computing
and intelligence delivery, as well as state-of-the-art training and readiness solutions. We believe that we have significant
transportation and defense industry expertise which, combined with our innovative technology capabilities, contributes
to our leading market positions and allows us to deepen and further expand each of our business segments in key
markets. Headquartered in San Diego, California, we had approximately 6,200 employees working on 4 continents and
in 19 countries as of September 30, 2019.
We operate in three reportable business segments: Cubic Transportation Systems (CTS), Cubic Mission Solutions
(CMS), and Cubic Global Defense Systems (CGD). All of our business segments share a common mission of increasing
situational awareness to create enhanced value for our customers worldwide through common technologies. Our
transportation customers benefit from enhanced efficiency and reduced congestion, while our defense customers benefit
from increased readiness and mission effectiveness.
CTS provided 57% of our sales in fiscal year 2019. CTS specializes in the design, development, production, installation,
maintenance and operation of automated fare payment, traffic management and enforcement solutions, real-time
information systems, and revenue management infrastructure and technologies for transportation agencies. As part of our
turnkey solutions, CTS also provides these customers with a comprehensive suite of business process outsourcing (BPO)
services and expertise, such as card and payment media management, central systems and application support, retail
network management, customer call centers and financial clearing and settlement support. As transportation authorities
seek to optimize their operations by outsourcing bundled systems and services, CTS has transformed itself from a
provider of automated fare collection (AFC) systems into a systems integrator and services company focused on the
intelligent transportation market.
CMS provided 22% of our sales in fiscal year 2019. CMS provides networked C4ISR capabilities for defense,
intelligence, security and commercial missions. CMS’ core competencies include protected wide-band communications
for space, aircraft, Unmanned Aerial Vehicle (UAV), and terrestrial applications. It provides Rugged Internet of Things
(IoT) cloud solutions, interoperability gateways, and artificial intelligence/machine learning (AI/ML) based Command
and Control, intelligence, Surveillance and Reconnaissance (C2ISR) applications for video situational understanding.
CMS is also building UAV systems to provide intelligence, surveillance and reconnaissance (ISR) -as-a-service.
CGD provided 21% of our sales in fiscal year 2019. CGD is a leading diversified supplier of live, virtual, constructive
and game-based training solutions to the U.S. Department of Defense (DoD), other U.S. government agencies and allied
nations. We offer a full range of training solutions for military and security forces. Our customized systems and services
accelerate combat readiness in the air, on the ground and at sea while meeting the demands of evolving operations
globally.
We have a broad customer base across our businesses, with approximately 63% of our fiscal year 2019 sales generated
from U.S. federal, state and local governments. Approximately 2% of these 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
2019 sales were attributable to sales to foreign government and foreign municipal agencies. Sales to countries outside the
U.S. amounted to 43%, 54% and 2% of the total sales of CTS, CGD and CMS, respectively, for fiscal year 2019. In
fiscal year 2019, 68% of our total sales were derived from products, with services sales accounting for the remaining
32%.
3
In pursuing our business strategy, we routinely evaluate and selectively pursue acquisition opportunities that will expand
or complement our existing products and services, or customer base, at attractive valuations. From fiscal 2015 through
2019 we acquired GATR, DTECH, TeraLogics, Vocality, MotionDSP, Shield Aviation, and Nuvotronics in connection
with our strategic efforts to build and expand our C4ISR business. These businesses collectively provide wideband ultra-
portable expeditionary satellite communication terminal solutions, secure video delivery, real time processing and
enhancement, exploitation and dissemination of full motion video in the cloud, computer vision analytics, deployable
secure computing tactical cloud and networking solutions equipment, and communication gateways. In 2017 we acquired
Deltenna, a wireless infrastructure company that designs and manufactures cutting-edge integrated wireless products and
enhances our tactical communication and training capabilities. In 2019 we acquired Trafficware and GRIDSMART in
our CTS segment which, when combined with our existing transportation capabilities, enhance our ability to offer
compelling solutions to reduce urban congestion using their intelligent, data-rich intersection management technology.
Generally, our business acquisitions are dilutive to earnings in the short-term due to acquisition-related costs, integration
costs, retention 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 mid-term.
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 innovative solutions, 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 more effective solution. To the extent our business and contracts
include operations in countries outside the U.S., other risks are introduced into our business, including changing
economic conditions, fluctuations in relative currency rates, regulation by foreign countries, and the potential for
deterioration of political relations.
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 (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 18 to the Consolidated Financial Statements for the year ended September 30,
2019. 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.
Cubic 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. Our NextBus business provides transit passengers with accurate, real-
time predictive arrival information about buses, subways and trains, and includes real-time management and dispatch
tools that enable transit operators to effectively manage their systems. Our Intelligent Transport Management Solutions
(ITMS) business has a portfolio of information-based solutions for transportation agency customers and provides traffic
management systems technology, traffic and road enforcement and the maintenance of traffic signals, emergency
equipment and other critical road and tunnel infrastructure. Our Trafficware and GRIDSMART businesses provide a
4
combination of hardware, software and sensor technology to optimize the flow of people and vehicles through
intersections, corridors and urban grids. 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 3,100 employees working in major transportation markets worldwide. As an
established partner with transportation authorities and operators, we have installed systems in over 40 markets and
currently serve over 41 million users a day, which in total process approximately 14 billion revenue-related transactions
per year, generating more than $16 billion of revenue per year for such transportation authorities and operators. Products
accounted for 58% of the segment’s fiscal year 2019 sales, with services accounting for 42%.
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. 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 New York region (Metrocard/OMNY), the Chicago region (Ventra), the San
Francisco Bay Area (Clipper), the Los Angeles region (TAP), the Washington D.C. region (Smartrip), the Vancouver
region (Compass), the Sydney region (Opal Card) and the Brisbane region (Go Card). In fiscal 2018, we were awarded: a
contract by the New York Metropolitan Transportation Authority (MTA) to replace the MetroCard system with a New
Fare Payment System (NFPS) and now branded as OMNY; a contract by the Massachusetts Bay Transit Authority
(MBTA) to provide the CharlieCard system with a next-generation fare payment system; a contract by the Queensland
Department of Transportation & Main Roads to provide a next-generation ticketing system for the state of Queensland,
Australia; and a contract by the San Francisco Bay Area’s Metropolitan Transportation Commission (MTC) to deliver
next-generation fare payment technology and operational services to the Clipper smart card system serving the Bay Area.
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.
We are currently designing and building major new systems in New York, Boston, Brisbane, and the San Francisco Bay
Area. Profit margins during the design and build phase of major projects can be slightly 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. Also, during the operate-and-maintain phase, revenues and costs are typically more predictable.
Through our NextBus, ITMS, Trafficware and GRIDSMART businesses, we provide advanced transportation
operational management capabilities and related services to hundreds of customers including organizations such as
Transport for London, Transport Scotland, Highways England, Transport for Greater Manchester, Los Angeles Metro,
San Francisco Muni and the Toronto Transit Commission. In August 2018, we were awarded an Intelligent Congestion
Management Platform contract by Transport for New South Wales to provide Sydney, Australia with one of the world’s
most advanced transport management systems. The new system will enhance monitoring and management of the road
network across New South Wales, coordinate the public transport network across all modes, improve management of
clearways, planning of major events and improve incident clearance times, while providing real-time information and
advice to the public about disruptions.
We also provide a modern tolling and road user charging alternative that uses state-of-the-art tools that are flexible and
modular compared to the proprietary, legacy systems that the industry views as their only option.
Most of our sales in CTS for fiscal year 2019 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. For certain CTS contracts for which we develop a system for a customer and
subsequently operate and maintain the customer’s system, the contract specifies that we will not be paid during system
development, but rather we will be paid over the period that we operate and maintain the system.
5
Industry Overview
We define our addressable transportation market as multi-modal transportation revenue management systems (e.g. public
transit fare collection, toll revenue collection, congestion charging), 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 refreshment and advancement which will lead to system 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 in excess of $16 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.
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 further extend the acceptance of payment media from smart cards, to contactless bank cards
and Near Field Communication (NFC) enabled smartphones.
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.
Some customers have responded to the current market environment by seeking financing for their projects from the
system supplier or from other sources. An example of this is our contract with the MBTA, which was awarded in early
2018 to develop, build, operate, and maintain a next-generation fare payment system in Boston. Under this contract, the
MBTA required that we and a financing partner, John Laing, establish a public-private partnership (P3) in order to
finance the design and build phase of the payment system. MBTA does not begin making payments until the ten-year
operate and maintain phase of the contract, which will span from 2021 through 2031.
Backlog
Total backlog of CTS at September 30, 2019 and 2018 amounted to $2.953 billion and $3.545 billion, respectively. We
expect that approximately $729 million of the September 30, 2019 backlog will be converted into sales by September 30,
2020.
Cubic Mission Solutions Segment
CMS provides C4ISR capabilities for defense, intelligence, security and commercial missions. CMS’ core competencies
include protected wide-band communication for space, aircraft, UAV, and terrestrial applications. It provides Rugged
IoT cloud solutions, interoperability gateways, and AI/ML based C2ISR applications for video situational understanding.
CMS is also building UAV systems to provide ISR-as-a-service. With the acquisition of Nuvotronics, CMS will begin
providing space and 5G solutions in the defense and commercial markets.
From fiscal 2015 through 2019, CMS acquired DTECH, GATR, TeraLogics, Vocality, MotionDSP, Shield Aviation, and
Nuvotronics in connection with our strategic efforts to build and expand our C4ISR business. In fiscal 2019, CMS’
organic growth was 55% and total growth including the Nuvotronics acquisition was 59%. CMS customers include the
military services, principally the U.S. Army and U.S. Special Operations Command, various other government agencies
6
of the U.S. and other countries, and commercial customers. In fiscal 2019, U.S. government customers accounted for
96% of CMS’ sales, international customers accounted for 2% of CMS’ sales, and U.S. commercial and other customers
accounted for 2% of CMS’ sales. CMS is comprised of approximately 700 employees working primarily in the United
States.
CMS is engaged in the research, design, development, manufacture, integration, and upgrade of C4ISR solutions for
aircraft, UAVs, satellites, and related technologies. CMS’ major programs include:
• US Army Contracting Command NJ SBIR IDIQ with a contract ceiling value of $963 million.
•
In fiscal 2019, CMS was awarded a total of $135 million to deliver satellite communication systems supporting
U.S. Army, Navy, Marines, and Air Force units. Of the $135 million awarded, major program awards include
the Army Transportable Tactical Command Communications (T2C2) full rate production, spares, engineering
services for $58 million, and Urgent Operational Needs (ONS) full rate production, spares, and training for $70
million. These systems provide expeditionary satellite communication systems at up to 80% less Size, Weight,
and Power (SWaP) than competing systems.
• US Special Operations Command SOF Deployable Node SBIR IDIQ with a contract ceiling value of $175
million. In fiscal 2019, CMS was awarded $32 million to provide satellite systems and Tactical
Cloud/command post solutions.
• Defense Information Systems Agency Unified Video Dissemination System. In fiscal 2019, CMS received
bookings totaling $11 million to provide global, real-time video dissemination to enable the US Airborne ISR
architecture.
In fiscal 2019, CMS received initial awards on three weapon system franchise programs.
•
o CMS was awarded a contract from the Naval Air Systems Command (NAVAIR) to provide a Full
Motion Video (FMV) system for the U.S. Navy’s MH-60S Multi-Mission Helicopter Program. The
contract includes ability to purchase up to 80 systems and associated integration kits.
o CMS was awarded an $8.3 million development contract to provide wide-band SATCOM and line-of-
sight communications for Boeing’s US Navy MQ-25 program.
o CMS was awarded a $17.6 million contract to develop a video datalink system for the F-35 aircraft.
The contract includes the ability to order up to 800 production systems, with potential to grow to the
full F-35 buy, which is estimated to be 3,000 aircraft.
Industry Overview
We estimate that the Protected Communications, Ruggedized IoT and C2ISR markets within our CMS business have a
total addressable market of approximately $3 billion annually. We believe that our products and technologies address
mission critical requirements such as integrated communications suites for UAVs, 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.
Backlog
Funded and total backlog of CMS at September 30, 2019 was $104 million compared to $77 million at September 30,
2018. We expect that approximately $93 million of the September 30, 2019 backlog will be converted into sales by
September 30, 2020.
Cubic Global Defense Segment
CGD is a market leader in live, virtual, constructive (LVC) and game-based training solutions to the DoD, other U.S.
government agencies and allied nations. We design and manufacture realistic, high-fidelity air, ground, and surface
instrumentation, visualization and data analytic systems that support LVC training in high fidelity environments. Our
customized systems and services accelerate combat readiness in the air, on the ground and at sea while meeting the
demands of evolving operations globally.
7
Training systems provided by CGD include customized military range instrumentation systems, multi-domain LVC
instrumentation, laser and non-laser based ground training systems, live-fire range design, virtual simulation systems,
game-based synthetic training environments and advanced data visualization and analytics solutions.
CGD’s training systems 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 high fidelity threat representative environments that are used to create 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.
CGD also provides software and services that take the data and information generated in instrumented training ranges
and provides advanced data visualization and data analytics that allow for training, proficiency and readiness assessment.
Our products and systems help our customers to retain operational, tactical, and technological superiority with cost-
effective solutions. We also provide ongoing support services for systems we have built for several of our international
customers. Our training business portfolio is currently organized into air training, ground training, and synthetic/digital
solutions. CGD is comprised of approximately 1,300 employees working in 13 nations on 4 continents providing training
systems to the DoD and allied nations.
Our established international footprint in 35 allied nations is a key element of our strategy. Our global footprint helps to
mitigate possible shifts or downturns in DoD spending. Sales to international customers of CGD accounted for 51% of
sales in 2019. In addition, new innovative technologies such as LVC training systems and potential expansion into
adjacent markets provides us the means to add scale to our business. Strategically, we believe CGD is very well
positioned to lead the increasing trend to fully integrated solutions that connect LVC and game-based training in multi-
domain environments.
Fixed-price contracts accounted for 92% of CGD’s revenue for fiscal year 2019. Fixed-price contracts create both the
risk of cost growth and the opportunity to increase margins if we are able to reduce our costs.
Air Training Solutions
In air training, Cubic was the initial developer and supplier of Air Combat Maneuvering Instrumentation (ACMI)
capability during the Vietnam War. The ACMI product line has progressed through five generations of technologies and
capabilities. The latest generation, the P5 Combat Training System, provides advanced air combat training capability to
the U.S. Air Force, Navy and Marine Corps, as well as allied nations which has solidified Cubic’s global market leading
position. We have been awarded a series of contracts to produce and enhance ACMI for the F-35 Joint Strike Fighter.
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. We are constantly evolving our air combat training solutions to achieve full-spectrum LVC
training systems. Cubic was the industry system integrator for the U.S. Air Force Research Lab’s Secure LVC Advanced
Training Environment (SLATE) and Advanced Technology Demonstration (ATD). SLATE ATD validated production
ready LVC with National Security Agency certified multi-level encryption and a newly developed 5th generation
advanced training waveform. The LVC system was verified operationally in both tethered and untethered LVC training
scenarios. SLATE is a combination of protocols, standards, hardware and software that are joint, interoperable and
supports advanced multi-domain warfighting concepts.
Ground Training Solutions
CGD 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
8
and urban operation training centers to uniformed military and security forces in the United States and allied nations
around the world. Our ground combat training systems operate at over 90 combat training centers (CTCs) worldwide.
Our laser-based tactical engagement simulation systems, widely known as Multiple Integrated Laser Engagement
Systems (MILES), are used to enable realistic training without live ammunition. Cubic MILES are being utilized by
multiple 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. The
business continues to deliver innovative ground-based training solutions with the introduction of non-laser based
solutions and synthetic overlay to live training environments
Synthetic/Digital Solutions
The Littoral Combat Ship (LCS) courseware contract win in 2013 has opened a large new market for CGD. 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 matters. The experiential
learning environment can be augmented with intelligent tutoring and assessment tools increasing the value of this
approach. The acquisition of Intific in 2014 brought enhanced software, data visualization and data analytics capabilities
that provide in depth training analysis for customers.
As the blend of LVC training creates broader higher fidelity training environments the data generated creates significant
opportunity to capitalize on our advanced synthetic and digital capabilities to deliver greater insight into customer
training effectiveness.
Industry Overview
CGD’s market is relatively large and stable. According to the 2018 Global Military Simulation and Virtual Training
Market report, the value of the global military simulation and virtual training programs market was $10.2 billion in
2018.
Backlog
Funded and total backlog of CGD at September 30, 2019 was $344 million compared to $443 million at September 30,
2018. We expect that approximately $183 million of the September 30, 2019 backlog will be converted into sales by
September 30, 2020.
Additional Defense Industry Considerations
The U.S. government continues to focus on discretionary spending, tax, and other initiatives to control spending, debt
and the deficit. More than 40 years since the Budget Act created the existing budget framework. Congress has rarely
followed the required process and deadlines. Regular order has not been fully followed since fiscal year 1995—the last
time Congress passed a budget conference agreement followed by all 12 appropriations bills before the beginning of the
new fiscal year. The trend over the past decades has been reliance on continuing resolutions.
Since 2011, we’ve experienced a constrained fiscal environment imposed by the Budget Control Act (BCA) and various
ensuing Bipartisan Budget Acts (BBA). Budgetary considerations have put downward pressure on growth in the defense
industry from 2011-2017 but under the BBA of 2018, defense budgets in 2018 and 2019 have shown substantial
increases from previous years.
In 2019, we were encouraged by the President’s proposed near-record defense spending of $750 billion for fiscal year
2020 and the U.S. Congress’ passage of a new BBA 2019 covering fiscal years 2020 and 2021 officially ending the
threat of sequestration under the BCA. Unfortunately, even with the passage of BBA 2019, funding uncertainty endures
as Congress has once again failed to pass all 12 appropriations bills for fiscal year 2020 and has relied on a continuing
9
resolution to temporarily fund the government and avoid a government shutdown. Nonetheless, beyond 2021, 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. If enacted, significant reductions in defense spending levels could have a
materially adverse effect on our consolidated financial position. Regardless of the political outcomes and budgetary
constraints, we believe that much of our business is well positioned in the DoD’s areas of focus for defense spending
designed 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.
Regarding international markets, an important revenue source, global defense expenditures were again on the rise in
2018 reaching their highest level since the end of the Cold War at approximately $1.67 trillion in 2018. Defense
spending increased by approximately 3.3% in 2018 - the fastest rate of growth in a decade - driven by the largest year-
on-year increase in U.S. defense spending since 2008. The increase in defense spending reflects improved global
economic conditions coupled with continuing instability in several key regions.
COMPETITIVE ENVIRONMENT
Our businesses operate in highly competitive markets. CTS is one of several companies specializing in the transportation
systems and services market. Our competitors in various market segments include among others Accenture, Conduent,
Econolite, IBM, Indra, Init, Intelight, Kapsch, Kimley-Horn, McCain, Flowbird, Roper Technologies, Scheidt &
Bachmann, Siemens, Thales, Trapeze and Vix. 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, innovation, past contract performance, systems quality and reliability, experience
in the industry and long-term customer relationships.
CMS competes with numerous companies, large and small, including Boeing, General Dynamics, L3Harris, Lockheed
Martin, and Northrop Grumman, 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.
CGD competes with many of the same companies as CMS including Boeing, General Dynamics, L3 Harris, Lockheed
Martin, Northrop Grumman and Saab Training Systems, as well as other smaller companies. Similarly to CMS, 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.
BUSINESS STRATEGY
Goal 2020 reflects our vision of Cubic’s continued growth path to help generate superior returns for our shareholders.
We believe our growth will be fueled by continually innovating in our markets to build leadership positions, accelerated
with strategic acquisitions, led by our talented and dedicated employees. We will enhance value creation by building
technology-driven market-leading businesses and providing our global customers with mission-critical solutions that
reduce transportation congestion and increase military readiness and effectiveness. To achieve Goal 2020, we are
focused on our winning proposition and the five key priorities of Winning the Customer, Building NextCity Globally,
Building Next-Mission Globally, Building NextTraining Globally and Living One Cubic.
Our strategy remains guided by our objective of Winning the Customer to create market-leading positions, delivering
superior operational performance, developing customer-centric innovations and investing our capital and talent to
enhance our market-leading businesses. We will accelerate our growth by being innovative, responsive, connected and,
10
ultimately, indispensable to our customers. We will be good listeners, understand our customers’ perspective and find
solutions together.
In CTS, 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. In Building NextCity Globally, we will create transportation
payment and information solutions in cities to help our customers increase efficiency and reduce congestion. We will
focus on integrating transportation payments more efficiently and leveraging transportation data more effectively than
anyone else. We will endeavor to increase our product reusability, innovate faster, use our superior global footprint to
our advantage, and have a competitive cost structure. We will continue to grow our portfolio beyond fare collection to
include industries such as tolling/road user charging, analytics and traffic management and design our solutions to scale
to all cities, large and small.
In CMS, over the past three years we acquired DTECH, GATR, TeraLogics, Deltenna, Motion DSP, Shield Aviation and
Nuvotronics in connection with our strategic efforts to build and expand our NextMission Strategy. The CMS business
unit combines and integrates our C4ISR and secure communications operations. In building C4ISR globally, we will
become a leader in Communications-on-the-Move, Joint Aerial Layer Network and C2ISR cloud transformation
markets. We will provide superb technology-leading mission solutions at optimal SWaP (size, weight, and power) for
our global customers’ most challenging problems at market-based prices.
In CGD, we have developed our vision for NextTraining. At its core, NextTraining will identify and quickly integrate
highly valued, cutting-edge technical solutions that accelerate training proficiency for our customers. We will assist our
customers in defining future training requirements while leveraging market conditions to generate competitive
differentiation and cost synergies. In Building NextTraining Globally, we will provide superior value, cost effective all-
domain readiness solutions built on an integrated, adaptable architecture to enable performance-based customer training
solutions designed to exacting operational readiness standards.
Lastly, Goal 2020 is supported by our Living One Cubic key priority of sharing resources across the company to help
achieve superior talent management, absolute customer focus, innovation, collaboration, cost-effective enterprise
systems and impeccable ethics.
As part of our strategic planning process, we routinely conduct portfolio reviews and are reshaping our portfolio to help
allow us to grow sales, improve profitability and deliver attractive returns. Our acquisition approach remains focused on
opportunities that align with our strategy to build technology-driven, market-leading businesses in NextCity,
NextMission and NextTraining.
Long-Term Customer Relationships
We seek to build leadership positions in our core markets by ensuring all our businesses are customer focused, thereby
maintaining our long-term relationships with our customers. The length of relationship with many of our customers
exceeds 30 years and further supports our industry-wide leadership and technological capabilities. As a result of
11
maintaining a high level of performance, we continue to provide a combination of services and upgrades for our long-
term customers. Such long-term relationships include the following:
Segment & Business Area
CTS - Automated Fare
Collection
CGD - Air Training
CGD - Ground Training
CMS - Expeditionary
Satellite Communication
Terminals
Customer Relationships
• Since 1972, provided ticket encoding and vending technology to the San
Francisco Bay Area’s MTC, which includes Bay Area Rapid Transit (BART).
We are in process of delivering next-generation fare payment technology and
operational services to the Clipper smart card system
• Since 1985, provided the London Underground (the Tube) with new fare gates
•
•
•
and standardized ticketing machines.
In 1973, supplied first “Top Gun” Air Combat Maneuvering Instrumentation
system for the Marine Corps Air Station at Yuma, AZ.
In 1990, pioneered the world’s first turnkey ground combat-instrumentation
system at Hohenfels, Germany for the U.S. Army.
In 2008, GATR’s technology was made an evolutionary component of the U.S.
Special Operations Command Deployable Node family of SATCOM terminals.
Strategic Innovation-focused Investment of Capital
We target markets that have the potential for above-average growth and profit margins 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 priority markets and help ensure market leading positions to drive long-term shareholder return.
We are committed to using innovation and technology to address our 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 included in our Consolidated Statements of Operations are as follows (in
thousands):
Company-Sponsored Research and Development
Expense:
Cubic Transportation Systems
Cubic Mission Solutions
Cubic Global Defense
Unallocated corporate expenses
Total company-sponsored research and development
expense
2019
Years Ended September 30,
2018
2017
$
$
10,948
27,111
10,573
1,500
$
13,394
22,745
16,259
—
26,308
11,949
14,395
—
$
50,132
$
52,398
$
52,652
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In addition to internally funded R&D, a significant portion of our new product development occurs in conjunction with
the performance of work on our contracts. These costs are included in cost of sales in our Consolidated Statements of
Operations as they are directly related to contract performance. The cost of contract R&D activities included in our cost
of sales are as follows (in thousands):
Cost of Contract Research and Development Activities:
Cubic Transportation Systems
Cubic Mission Solutions
Cubic Global Defense
$
Total cost of contract research and development activities
$
2019
Years Ended September 30,
2018
2017
39,640
11,568
27,232
78,440
$
$
28,967
8,999
31,625
69,591
$
$
26,173
6,182
35,599
67,954
Pursue Strategic Acquisitions
We have developed an acquisition strategy that focuses our technology-driven, market-leading business strategy. We are
focused on finding attractive acquisitions that enhance our market positions through technology, provide expansion into
complementary growth markets and ensure sustainable long-term profitability and return on invested capital. Over the
last several years, we have completed multiple acquisitions that have diversified our customer base and expanded our
systems and services offerings. For example, from fiscal 2015 through fiscal 2019 we acquired GATR, DTECH,
TeraLogics, Vocality, MotionDSP, Shield Aviation and Nuvotronics in connection with our strategic efforts to build and
expand our C4ISR business. In fiscal 2019 we acquired GRIDSMART and Trafficware to complement our integrated
traffic solutions business.
Enhance Services Business
We view services tied to our technologies as a core element of our business and we are working to expand our service
offerings and customer base. In aggregate, approximately 32% of our sales in fiscal year 2019, 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 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 have
transitioned from a supplier to a systems integration 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, we primarily provide services for products for which we are the Original Equipment Manufacturer. Our
services on OEM equipment drive value for our customers and allow us to earn higher margins. 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’s 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 business segments. CTS has delivered over 500 projects in 40 major
markets on 4 continents to date. Approximately 43% of the CTS segment’s fiscal year 2019 sales were attributable to
international customers. In fiscal 2018, CTS was selected by the Queensland Department of Transport & Main Roads
(DTMR) in Australia to design, build and operate a new ticketing system for the state and signed a contract with
13
Transport for New South Wales in Australia to build an Intelligent Congestion Management Platform. In 2017, CTS
signed a contract with Transport for London (TfL) for a three-year extension of services to London’s Oyster and
contactless ticketing system to extend the contract for these services from 2022 to 2025.
CGD has delivered systems in more than 35 allied nations. In fiscal year 2019, approximately 51% of CGD sales were to
allied foreign governments and an additional 5% of CGD sales were to 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 Middle-East in response to growing opportunities. These complement a well-established and
sound presence in Singapore, Australia, New Zealand, and Italy.
Our CMS products are designed to address the needs of numerous international defense and civil applications. Our ISR
data links are used by a number of international allied forces. In early fiscal 2018, CMS was awarded an order to provide
satellite communication solutions for the New Zealand Defence Force (NZDF) under which we are supplying inflatable
satellite antennas with supporting hardware and equipment training for the NZDF Network Enabled Army program. In
addition, in late fiscal 2018 Australia’s Ministry of Defense procured CMS Atlas Strike kits that provide
communications capability and situational awareness for Australia’s Joint Tactical Air Controllers. In fiscal 2019, CMS
was awarded a contract from the New Zealand Ministry of Defence to deliver Command and Control (C2) capabilities to
support the Network Enabled Army (NEA) program's Tactical Network (TNet) project. The NEA program is a
transformational program to be delivered in four tranches over 12 years and will benefit the New Zealand Army's Land
Forces and Special Operations Forces. The TNet contract is a framework agreement allowing multiple awards over the
life of the contract to address current, emerging and future requirements through support of the four tranches.
The executive officers of Cubic as of November 1, 2019 are as follows:
EXECUTIVE OFFICERS
Bradley H. Feldmann, 58. Mr. Feldmann is Chairman of the Board of Directors, Chief Executive Officer (CEO), and
President of Cubic. He was appointed to the Board of Directors in May 2014 and was elected as Chairman of the Board
in February 2018. He has served as CEO of Cubic since July 2014, and as President since January 2013. He also served
as Chief Operating Officer of Cubic from January 2013 to July 2014. Prior to that, he was President of the companies
comprising the Cubic Defense Systems segment, a role he assumed in 2008. He previously worked at Cubic Defense
Systems from 1989 to 1999. Prior to rejoining Cubic in 2008, Mr. Feldmann held senior leadership positions at
OMNIPLEX World Services Corporation and ManTech International. He is a Board Leadership Fellow of the National
Association of Corporate Directors, a member of the Aerospace Industries Association Board of Governors and serves
on its Executive Committee and is a member of the Board of the National Defense Industrial Association, and serves on
their Executive Committee and as Chair of the Finance Committee. He also serves on the Board of UrbanLife, a non-
profit organization, as Chair of the Finance Committee.
Anshooman Aga, 44. Mr. Aga is Executive Vice President and Chief Financial Officer (CFO) of Cubic. He joined
Cubic in July 2017 as Executive Vice President and assumed the role of CFO in October 2017. In this role, Mr. Aga is
responsible for all aspects of the Company's financial strategies, processes and operations, including corporate
development, risk management, investor relations, real estate, and global manufacturing and procurement. Prior to
joining Cubic, Mr. Aga served at AECOM since June 2015, where he was senior vice president and CFO of their multi-
billion-dollar Design and Consulting Services business in the Americas. He also held a series of financial leadership
positions at Siemens from July 2006 to May 2015, including CFO of the Energy Automation business based in
Nuremburg, Germany, in addition to similar CFO roles for Siemen's Rail Electrification and TurboCare business units.
Matthew. J. Cole, 40. Mr. Cole is Senior Vice President of Cubic and President of the companies comprising the CTS
segment, a position he has held since October 2015. Prior to that he held a variety of increasingly responsible roles at
CTS since he joined in 2003, most recently serving as Executive Vice President/Deputy for Strategy, Business
Development and Diversification and in key roles worldwide including in Australia and the U.K. Before joining Cubic,
Mr. Cole held various financial positions with large public and private companies such as British Airways,
Schlumberger, First Choice and Endemol.
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Hilary L. Hageman, 51. Hilary Hageman is Senior Vice President, General Counsel and Corporate Secretary for Cubic,
a position she has held since October 2019. She is responsible for managing the legal department as well as overseeing
ethics, contracts, global trade compliance and security. Ms. Hageman is a business leader with extensive legal
experience. Prior to joining Cubic, she was the senior vice president and deputy general counsel for SAIC. She has also
held senior legal counsel roles at CACI, the U.S. Intelligence Community and Department of Defense.
Mark A. Harrison, 62. Mr. Harrison is Senior Vice President and Chief Accounting Officer of Cubic. He was appointed
to the position in June 2019. His prior roles at Cubic include, Senior Vice President and Corporate Controller from 2012
to June 2019, Vice President and Corporate Controller from 2004 to June 2012, Vice President – Financial Planning and
Accounting from 2000 to 2004, and Assistant Corporate Controller and Director of Financial Planning from 1991 to
2000. Since 1983, Mr. Harrison has held a variety of financial positions with Cubic. From 1980 to 1983 he was a Senior
Auditor with Ernst & Young.
Michael Knowles, 52. Mr. Knowles was named Senior Vice President of Cubic and President of the companies
comprising our CGD business segment, as of October 1, 2018. Previously, Mr. Knowles served as Vice President and
General Manager of the Air Ranges business unit for CGD since July 2014. In this role, Mr. Knowles was responsible
for the strategic direction and business management of air ranges, air training, Air Combat Maneuvering Instrumentation
and LVC business initiatives. Before joining Cubic, Mr. Knowles served as the senior director of Air Transport and
Mission Solutions at Rockwell Collins where he was employed from 2004 until he joined Cubic. He also held a series of
program management and engineering roles at Photon Research Associates and Lockheed Martin. Mr. Knowles also
served as a Naval Flight Officer, flight test engineer and aerospace engineering duty officer in the United States Navy
where he retired as a Commander.
Michael R. Twyman, 59. Mr. Twyman is Senior Vice President of Cubic and President of the companies comprising the
CMS segment, a position he has held since May 2016. He joined Cubic as Senior Vice President of air training and
secure communications in June 2014. Prior to that he held a variety of executive leadership positions spanning more than
30 years at Northrup Grumman including sector Vice President and General Manager of the defense systems division
and Vice President of integrated C3I systems.
Rhys V. Williams, 50. Mr. Williams is Vice President and Treasurer of Cubic, a position he has held since March 2018.
Prior to joining Cubic, Mr. Williams led the treasury function at Ancestry, the largest online resource for family history
and consumer genomics, as its Treasurer since October 2013. Prior to that, Mr. Williams was the Director of Treasury
from April 2009 to October 2013, at Life Technologies, a biotechnology company which was later acquired by Thermo
Fisher Scientific, responsible for overseeing all facets of the capital markets function. He also held treasury and business
development roles at Callaway Golf Company, and Gateway, Inc.
RAW MATERIALS
The principal raw materials used in our products include sheet aluminum and steel, copper electrical wire and castings,
fabrics, purchased electronic subcomponents, cabling to include electrical wiring, connectors and harnesses, injection
molded plastics, and composite products. A significant portion of our end products are composed of purchased electronic
components and subcontracted parts and supplies that we procure from third-party suppliers. In general, supplies of raw
materials and purchased parts are adequate to meet our requirements.
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.
15
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
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 that such laws and regulations
will not have a material effect on our business in the future.
OTHER MATTERS
We do not generally 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 more holidays in the first quarter, compared to other
quarters of the year. The U.S. government’s fiscal year ends on September 30 of each year. It is not uncommon for U.S.
government agencies to award extra tasks or complete other contract actions in the weeks before the end of a fiscal year
in order to avoid the loss of unexpended funds. These are not necessarily consistent patterns and depend upon actual
activities in any given year.
We employed approximately 6,200 persons at September 30, 2019.
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
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 2019. 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
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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.
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:
•
•
budget constraints affecting government spending generally, or specific departments or agencies such as U.S. or
foreign defense and transportation agencies and regional transportation 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;
• 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;
•
•
•
•
•
•
•
•
•
•
•
•
•
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;
if Congress does not agree on a budget or continuing resolution, it may result in a partial shutdown of the U.S.
government 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 require us 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.
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 compete 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 limitations on our ability to bid on
contracts or to perform 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.
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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
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 an increased emphasis on awarding contracts to small businesses 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 re-competing 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.
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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terminate our existing contracts;
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;
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
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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 transportation 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 transportation agencies will continue to outsource operations and services. Should these assumptions not hold true,
our transportation business could experience a material loss of business.
The use of ride sharing, microtransit, and other shared mobility services and the development of autonomous vehicles
could erode the demand for traditional public transit.
Ride sharing, microtransit, and other shared mobility services are creating options for public transit patrons which may
be leading to the decline of ridership in some markets. The development and acceptance of autonomous vehicles could
also lead to a decline in ridership for public transit systems. If these trends accelerate or expand, public transit agencies
may decide to defer or reduce plans to upgrade their fare collection systems and our prospects for growth in our
transportation business could diminish.
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;
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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.
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.
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, contract costs, indirect rates and pricing practices, and compliance with applicable contracting and
procurement laws, regulations and standards. Based on the results of such audits, the relevant government agency could
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adjust our contract costs, and any costs found to be unreasonable, improperly allocated, or unallowable under
government cost accounting standards or contractual provisions will not be reimbursed. The government could also
potentially refuse to agree to our proposed unit prices if the auditing agency does not find them to be “fair and
reasonable.” The government may also demand that we refund what the government claims are any excess proceeds we
received on particular items where the government claims we did not properly disclose required information in
negotiating the 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
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, debarred, proposed for debarment, or otherwise 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;
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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;
increased risk of cyber or other security threats;
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;
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 impacts of the United Kingdom’s proposed 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. In
March 2017, the United Kingdom formally notified the European Union of its intention to withdraw pursuant to Article
50 of the Lisbon Treaty. The referendum was advisory, and the terms of any withdrawal are subject to a negotiation
period that is ongoing with a possible further extension to January 31, 2020. The referendum has created significant
uncertainty about the future relationship between the United Kingdom and the EU with a number of outcomes still
possible.
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 have been and may continue to be 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. For example, our total sales to customers in the United Kingdom accounted for $218.2 million,
$240.7 million and $219.4 million of our consolidated sales in 2019, 2018 and 2017, respectively. If the United Kingdom
and the EU are unable to negotiate acceptable withdrawal terms, 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.
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Our business and stock price may be adversely affected if our internal control over financial reporting is not effective.
The accuracy of our financial reporting is dependent on the effectiveness of our internal controls. We are required to
provide a report from management to our shareholders on our internal control over financial reporting that includes an
assessment of the effectiveness of these controls. Internal control over financial reporting has inherent limitations,
including human error, the possibility that controls could be circumvented or become inadequate because of changed
conditions, and fraud. Because of these inherent limitations, internal control over financial reporting might not prevent or
detect all misstatements or fraud. If we cannot maintain and execute adequate internal control over financial reporting or
implement required new or improved controls that provide reasonable assurance of the reliability of the financial
reporting and preparation of our financial statements for external use, we could suffer harm to our reputation, incur
incremental compliance costs, fail to meet our public reporting requirements on a timely basis, be unable to properly
report on our business and our results of operations, or be required to restate our financial statements, and our results of
operations, our share price and our ability to obtain new business could be materially adversely affected.
We are subject to new and evolving laws and regulations governing personal data privacy both in the United States
and internationally, which may expose us to legal claims, penalties, increased costs of business, and other harm to
our business.
The changing legal landscape in the area of data privacy may affect the way we do business or impose increased costs.
As an example, the EU’s General Data Protection Regulation (GDPR) was implemented in May 2018 and has created a
variety of new compliance obligations as well as increased financial penalties for noncompliance (which include fines up
to 4% of global turnover of the preceding financial year or €20 million, whichever is greater, for serious violations).
While there is still significant uncertainty around the United Kingdom’s exit from the EU, the United Kingdom privacy
obligations will remain substantially similar to those in the GDPR. Noncompliance with such laws could result in fines,
legal claims, loss of contracts and reputational harm.
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.
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
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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 97% of our revenues in fiscal year 2019 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, 2019, our total backlog was approximately $3.4 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 businesses must comply with and are affected by various U.S. government and foreign 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 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;
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;
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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, the U.K. Bribery Act, and similar anti-bribery and anti-corruption laws in other
countries in which we operate;
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, the Equal Pay Act and similar state wage and hour laws;
• Title VII of the Civil Rights Act of 1964 and similar state and federal employment laws in the U.S., and in other
countries in which we operate;
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tax laws and regulations in the U.S. and in other countries in which we operate;
privacy laws in the U.S. and in other countries in which we operate, such as the California Consumer Privacy Act,
the GDPR and any attendant European country legislation:
the civil False Claims Act, which provides for substantial civil penalties and treble damages for violations, including
for submission of a false or fraudulent claim to the U.S. government for payment or approval, and allows private
litigants to pursue violations as “whistleblower” or qui tam actions on behalf of the U.S. government;
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 re-competition. 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 their contracts with us or decide
not to renew such contracts upon their 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.
In addition, in our transportation business, we frequently need to recruit new highly skilled people into technical roles in
order to perform our contractual obligations. An inability to recruit such people and quickly integrate them into the
business may cause us to not be able to meet contractual deadlines which could lead to the imposition of liquidated
damages or termination of our contracts for default in certain cases.
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. However, because of the evolving nature and
sophistication of security threats, which can be difficult to detect, there can be no assurance that our policies, procedures
and controls have detected or will detect or prevent any of these threats and we cannot predict the full impact of any such
past or future incident.
In addition, we could be impacted by cyber security threats or other disruptions or vulnerabilities found in products we
use or in the systems of our customers, suppliers, subcontractors and joint venture partners that are used in connection
with our business. Although we work cooperatively with these third parties 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.
Internal system or service failures could disrupt our business and impair our ability to effectively provide our services
and products to our customers, which could damage our reputation and adversely affect our revenues and
profitability.
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Any system or service disruptions, if not anticipated and appropriately mitigated, could have a material adverse effect on
our business. We are also subject to systems failures, including network, software or hardware failures, whether caused
by us, our customers, suppliers, subcontractors or joint venture partners, cybersecurity threats, malicious insiders, power
shortages, terrorist acts or other events, which could cause loss of data and interruptions or delays in our business, cause
us to incur remediation costs, subject us to claims and damage our reputation. In addition, the failure or disruption of our
systems or services, or those of our customers, suppliers, subcontractors or joint venture partners, could cause us to
interrupt or suspend our operations or otherwise adversely affect our business. Our insurance may be inadequate to
compensate us for all losses that may occur as a result of any system or operational failure or disruption and, as a result,
our revenues and profitability could be adversely affected.
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
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 U.S. government, and the DoD in particular, 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. The
U.S. government generally takes the position that it has the right to royalty-free use of technologies that are developed
under U.S. government contracts. Those rights include, but are not limited to, 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. Thus, we may not have the right to prohibit the U.S. government from using certain technologies
developed by us, and we may not be able to prohibit third party companies, including our competitors, from using those
technologies in providing products and services to the U.S. government.
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.
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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 may lead 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 and our contract for a fare payment system in Boston), we may need to compete
more heavily on the basis of our financial strength or alternate financial structures, which may limit the contracts we can
service at any one time.
The terms of our financing arrangements may restrict our financial and operational flexibility, including our ability
to invest in new business opportunities.
At September 30, 2019 we had $200.0 million of senior unsecured notes payable to a group of insurance companies. We
also have a committed revolving credit agreement with a group of financial institutions in the amount of $800.0 million
which is scheduled to expire in April 2024 (Revolving Credit Agreement). The available line of credit is reduced by any
letters of credit issued under the Revolving Credit Agreement. As of September 30, 2019, there were $195.5 million of
borrowings under this agreement and there were letters of credit outstanding totaling $31.5 million, which reduce the
available line of credit to $573.0 million. The $31.5 million of letters of credit includes both financial letters of credit and
performance guarantees.
Our revolving credit agreement and note purchase and private shelf agreement each contain a number of customary
covenants, including requirements for us to maintain certain interest coverage and leverage ratios and restrictions on our
and certain of our subsidiaries’ abilities to, among other things, incur additional debt, create liens, consolidate or merge
with any other entity, or transfer or sell substantially all of their assets, in each case subject to certain exceptions and
limitations.
The occurrence of any event of default under these agreements may result in all of the indebtedness then outstanding
becoming immediately due and payable, or the increase of the coupon rate for such indebtedness. For example, at
March 31, 2017 we did not maintain the required leverage ratio. Therefore, in May 2017 certain terms and conditions of
the Revolving Credit Agreement and note purchase and private shelf agreement were further revised to allow us to maintain
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a higher level of leverage as of March 31, 2017 and for the remainder of the 2017 fiscal year. The revisions to the
agreements did not impact the required leverage ratios in fiscal 2018 or subsequent years.
Additionally, we may continue to use alternative financing structures in order to fund certain projects related to the
redevelopment of our corporate campus. Any such financing arrangements may further restrict our financial and
operational flexibility.
Our corporate campus redevelopment plan may be subject to certain unanticipated financial, environmental,
regulatory, and construction risks that are beyond the scope of our typical business activities.
We are in the process of developing our corporate campus in San Diego and this redevelopment project may be subject
to various risks associated with real property development including but not limited to financing, compliance with
environmental laws and regulations, obtaining permits and other governmental approvals, regulatory compliance,
changes in market conditions, labor and material shortages, legal claims, delays in completion, distracting management’s
and employees’ attention and resources, natural disasters, cost overruns, socio-political risks, and construction defects.
Any of the abovementioned risks, or other risks generally associated with real property development, could increase our
operational expenses, expose us to fines and penalties, disrupt our business operations, require us to expend additional
resources, or expose us to other unanticipated liabilities that are not encountered in our typical business activities.
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.
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 third parties to supply certain products or components we
use. While we use care in selecting our suppliers, 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 suppliers arising from, among other things,
the quality of products and services or customer concerns about the supplier. If any of our suppliers 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 supplier’s ability to manufacture or deliver products. Further,
suppliers 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, customer relationships and reputation. Additionally, our suppliers
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.
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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 re-procurement 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:
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identify emerging technological trends and business models 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, and in some cases transition to a product-oriented approach as opposed to our historical, project oriented
approach, all of 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 3% to 5% 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
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.
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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, systems 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 from 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, from fiscal 2015 through fiscal 2019 we
acquired GATR, DTECH, TeraLogics, Vocality, MotionDSP, Shield Aviation and Nuvotronics in connection with our
strategic efforts to build and expand our C4ISR business. In fiscal 2019 we acquired GRIDSMART and Trafficware to
complement our integrated traffic solutions business.
We may not 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 acquisitions 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. Acquisitions also could result in dilutive issuances of equity securities or the incurrence of debt,
which could adversely affect our operating results. In addition, we may not achieve the anticipated benefits from any
acquisition, in which case our results of operations, business, and financial condition may suffer.
Changes in future business or other market conditions could cause business acquisitions or 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 have in the past acquired, and expect to continue to acquire, from time to time, businesses, or
a minority or majority interest in a business. These acquisitions or investments are made upon 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.
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A significant portion of the purchase price of companies we acquire may be allocated to acquired goodwill. 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. Any goodwill 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.
Our employees or third-party contractors 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 and third-party contractor fraud or other misconduct. Employee and third-party
contractor 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 and third-party contractor 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, or offering something of value, 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 or third-party contractor 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 or third-party contractor
misconduct could result in investigations or prosecutions of employees or third-party contractors 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.
Continued narrowing of the definition of a “commercial item” for federal government contracting purposes could
affect our profitability.
If the federal government continues to narrow of the definition of a “commercial item” for government contracting
purposes and increases the aggressiveness in challenging our assertions that items we furnish to the government as
“commercial items” our profitability on the affected contracts could be reduced.
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Changes in accounting principles and guidance, or their interpretation, could result in unfavorable accounting
charges or effects, including changes to previously filed financial statements, which could cause our stock price to
decline.
We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the
United States. These principles are subject to interpretation by the SEC and various bodies formed to create and interpret
appropriate accounting principles and guidance. A change in these principles or guidance, or in their interpretations, may
have a significant effect on our reported results, as well as our processes and related controls, and may retroactively
affect previously reported results.
For example, in May 2014, the Financial Accounting Standards Board issued Accounting Standards Update (ASU)
2014-09, Revenue from Contracts with Customers, as amended (commonly referred to as ASC 606). We adopted ASC
606 effective October 1, 2018 using the modified retrospective transition method. The adoption of ASC 606 resulted in a
change in our significant accounting policy regarding revenue recognition and resulted in changes in our accounting
policies regarding contract estimates, backlog, inventory, contract assets, long-term capitalized contract costs, and
contract liabilities. The cumulative effect of applying the standard was an increase of $24.5 million to shareholders’
equity as of October 1, 2018. However, the adoption of ASC 606 or any other new or revised accounting standard could
adversely affect our financial position or operating results in the future or may retroactively adversely affect previously
reported results, which could cause our stock price to decline.
For a discussion of the impact that the adoption of ASC 606 has had and is expected to have on our consolidated
financial statements and related disclosures, see “Recently Adopted Accounting Pronouncements” in Note 1 of the
Consolidated Financial Statements of this Form 10-K.
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
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.
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
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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, anti-trust,
breach of contract, labor, wage and hour, 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,
debarment, or being proposed for 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:
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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;
failure to meet the expectations of research analysts:
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;
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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.
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 Amended and Restated 2015 Incentive Award
Plan or shares of our authorized but unissued preferred stock. For example, in December 2018, we completed the sale of
approximately 3.8 million shares of our common stock in an underwritten public offering. 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
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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prior to the date of the transaction, an affirmative vote of the holders of at least the majority 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 the majority 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.
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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 2019, we paid $8.4 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.
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, Goal 2020 and our five key priorities, 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: 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 effects of potential sequestration on our contracts; our assumptions covering behavior by public
transit authorities; our ability to successfully integrate new companies into our business and to properly assess the effects
of such integration on our financial condition; the U.S. government’s increased emphasis on awarding contracts to small
businesses, and our ability to retain existing contracts or win new contracts under competitive bidding processes;
negative audits by the U.S. government; the effects of politics and economic conditions on negotiations and business
dealings in the various countries in which we do business or intend to do business; competition and technology changes
in the defense and transportation industries; 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; unanticipated issues related to the restatement
of our financial statements; our ability to monitor and evaluate the effectiveness of new processes and procedures we
36
have implemented to remediate the material weaknesses that existed in our internal control over financial reporting; 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 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 2.0 million square feet of both owned and leased properties located in the
United States and foreign countries. We own approximately 22% of the square footage, including about 265,000 square
feet in San Diego, CA, 101,000 square feet in Tullahoma, TN, and 69,000 square feet in Salfords, Surrey, UK. All other
properties are leased. In fiscal 2019, we entered into agreements related to the construction and leasing of two buildings
on our existing corporate campus in San Diego, California. Under these agreements, a financial institution will own the
buildings, and we will lease the property for a term of five years upon their completion. In fiscal 2019 we also sold the
land and buildings comprising our separate CTS campus in San Diego. We have entered into a lease with the buyer of
this campus and CTS employees will continue to occupy this separate campus until the new buildings on our corporate
campus are ready for occupancy in fiscal 2021. In addition we also sold land and buildings in Orlando, Florida in fiscal
2019 and we are entering a lease for new space in Orlando to accommodate our employees and operations in Orlando.
All owned and leased properties are considered in good condition and adequately utilized. As of September 30, 2019 we
had significant properties at the following locations:
Corporate: Arlington, VA; Orlando, FL; and San Diego, CA.
Investment Properties: Terterboro, NJ.
CTS: Amherst, NY; Amsterdam, Netherlands; Atlanta, GA; Balcatta, Australia; Boston, MA; Brisbane, Australia;
Burnaby, BC, Canada; Cheshire, UK; Chicago, IL; Concord, CA; Concord, NH; Concord, Ontario, Canada;
Cumbernauld, Scotland; Greenford, UK; Hamburg, Germany; Hyderabad, India; Kingswinford, UK; Knoxville, TN;
London, UK; Los Angeles, CA; Malden, MA; Mallusk, Ireland; Malmo, Sweden; New York, NY; Norwalk, CA;
Oakland, CA; Portsmouth, NH; Queensland, Australia; Quincy, MA; Rozelle, Australia; San Francisco, CA; Silverwater,
Australia; Stockton-on-Tees, UK; Sugar Land, TX; Surrey, UK; Sydney, Australia; Tullahoma, TN; and West Sussex,
UK.
CMS: Aberdeen, MD; Ashburn, VA; Blacksburg, VA; Dallas, TX; Durham, NC; Fayetteville, NC; Hanover, MD;
Huntsville, AL; Pendleton, OR; Radford, VA; San Diego, CA; and Tampa, FL; Woburn, MA.
37
CGD: Abu Dhabi, UAE; Amesbury, UK; Auckland, New Zealand; Austin, TX; Beavercreek, OH; Chippenham
Wilshire, UK; Fyschwyck, Australia; Helsinger, Denmark; Orlando, FL; Riyadh, Saudi Arabia; Rome, Italy;
Shackleford, UK; Singapore, Asia; Tijuana, Mexico; and Townsville, Australia.
Item 3. LEGAL PROCEEDINGS.
In August 2019, a transit authority asserted loss of revenue due to alleged accidental undercharging of their customers
for specific transactions by a fare system which we operate for them and has requested a corresponding recoupment from
us. Based upon our investigation into this matter, we believe this matter will not have a materially adverse effect on our
financial position, results of operations, or cash flows. No liability for this claim has been recorded as of September 30,
2019.
We consider all other current legal matters to be ordinary proceedings incidental to our business. We believe the
outcome of these proceedings will not have a materially adverse effect on our financial position, results of operations, or
cash flows.
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
Sales Price of Common Shares
Fiscal 2019
Fiscal 2018
Dividends per Share
Quarter
First
Second
Third
Fourth
High
Low
High
Low
$ 72.29 $ 50.85 $ 63.00 $ 51.90
65.25
64.48
73.00
53.09
53.43
63.36
65.65
71.85
76.85
Fiscal 2019 Fiscal 2018
—
0.14
—
0.14
—
0.14 $
—
0.14 $
54.05 $
59.80
65.90 $
On November 1, 2019, the closing price of our common stock on the New York Stock Exchange was $74.26. There were
495 shareholders of record of our common stock as of November 1, 2019.
Performance Graph
The following graph illustrates the cumulative total shareholder return over the last five years of Cubic's common stock,
the S&P 500 Index, and the Russell 2000 Index. The graph assumes an investment of $100 on October 1, 2014.
Comparison of 5 Year Cumulative Total Return
September 30, 2019
Assumes Initial Investment of $100
200.00
180.00
160.00
140.00
120.00
100.00
80.00
60.00
40.00
20.00
0.00
2014
2015
2016
2017
2018
2019
Cubic Corporation
Russell 2000
S&P 500 Index
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.
2019 (3)
Years Ended September 30,
2017
2016
2018
2015
$ 1,496,475 $ 1,202,898 $ 1,107,709 $ 1,070,601 $ 1,028,899
729,179
1,065,060
835,392
779,323
766,477
270,064
50,132
42,106
20,453
11,040
258,644
52,398
27,064
10,424
7,093
240,196
52,652
30,245
15,027
14,658
253,163
31,976
29,356
11,199
(14,357)
195,752
17,992
19,860
4,400
46,626
41,306
7,793
(25,740)
(12,080)
10,170
(1,423)
4,243
14,531
13,815
12,744
49,694
12,310
(11,209)
1,735
22,885
Results of Operations:
Sales
Cost of sales
Selling, general and administrative
expenses (2)
Research and development
Amortization of purchased intangibles
Interest expense
Income taxes (1)
Net income (loss) from continuing
operations (1) (2)
Net income (loss) from discontinued
operations
Net income (loss) attributable to Cubic
(1) (2)
Per Share Data:
Net income (loss) per share:
Basic
Continuing operations (1) (2)
Discontinued operations
Basic earnings per share (1) (2)
Diluted
Continuing operations (1) (2)
Discontinued operations
Diluted earnings per share (1) (2)
$
$
$
$
$
$
1.68 $
(0.05) $
1.63 $
0.30 $
0.16 $
0.45 $
(0.95) $
0.54 $
(0.41) $
(0.45) $
0.51 $
0.06 $
1.67 $
(0.05) $
1.62 $
0.29 $
0.16 $
0.45 $
(0.95) $
0.54 $
(0.41) $
(0.45) $
0.51 $
0.06 $
0.38
0.47
0.85
0.38
0.47
0.85
0.27
Cash dividends
0.27
0.27
0.27
0.27
Shares used in calculating net income
(loss) per share:
Basic
Diluted
Balance Sheet Data:
Shareholders’ equity related to Cubic
Equity per share, basic
Total assets
Short-term borrowings
Long-term debt
30,495
30,606
27,229
27,351
27,106
27,106
26,976
26,976
26,872
26,938
$
961,649 $
31.53
1,847,170
195,500
199,824
700,121 $
25.71
1,304,883
—
199,793
689,631 $
25.44
1,336,285
55,000
199,761
689,896 $
25.57
1,504,408
240,000
200,741
756,288
28.14
1,300,276
60,000
126,705
40
(1) Fiscal 2019 tax provision primarily resulted from tax on foreign earnings and state income tax, partially offset by
$6.6 million of tax benefits in connection with acquisitions involving significant U.S. deferred tax liabilities which
resulted in a release of deferred tax valuation allowance. Fiscal 2018 tax provision includes a one-time tax benefit of
$7.1 million related to U.S. Tax Reform. Fiscal 2017 pretax loss totaled $11.1 million while the income tax
provision totaled $14.7 million. The provision primarily resulted from tax on foreign earnings and U.S. tax expense
related to the amortization of indefinite lived intangible assets, partially offset by tax benefit related to the release of
reserves for uncertain tax positions due to the positions being effectively settled. Fiscal 2016 tax provision included
$6.3 million of expense related to nondeductible acquisition-related compensation, as well as $23.8 million of tax
benefit in connection with an acquisition involving significant U.S. deferred tax liabilities which allowed for a
subsequent release of deferred tax valuation allowance. Fiscal 2015 tax provision included the effect of establishing
a deferred tax valuation allowances on U.S. deferred tax assets totaling $35.8 million.
(2) Results of the year ended September 30, 2016 included an $18.5 million charge related to a business acquisition
purchase accounting charge, before applicable income taxes.
(3) We adopted Accounting Standards Update 2014-09, Revenue from Contracts with Customers (commonly known as
Accounting Standards Codification (ASC) 606), effective October 1, 2018 using the modified retrospective
transition method. Results for reporting periods beginning after September 30, 2018 are presented under ASC 606,
while prior period comparative information has not been restated and continues to be reported in accordance with
ASC 605, the accounting standard in effect for periods ending prior to October 1, 2018. Based on contracts in
process at September 30, 2018, upon adoption of ASC 606 we recorded a net increase to shareholders’ equity
of $24.5 million, which includes the acceleration of net sales of approximately $114.9 million and the related cost of
sales of $90.4 million. In accordance with the modified retrospective transition provisions of ASC 606, we will not
recognize any of the accelerated net sales and related cost of sales through October 1, 2018 in our Consolidated
Statements of Operations for any historical or future period. For more information on the impact of our adoption of
ASC 606, see Note 2 to the Consolidated Financial Statements in Item 8 of this Form 10-K.
41
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
Business Overview
Cubic is a technology-driven, market-leading global provider of innovative, mission-critical solutions that reduce
congestion and increase operational readiness and effectiveness through superior situational understanding. Cubic
designs, integrates and operates systems, products and services focused in the transportation, command, control,
communication, computers, intelligence, surveillance and reconnaissance (C4ISR), and training markets. We offer
integrated payment and information systems, expeditionary communications, cloud-based computing and intelligence
delivery, as well as state-of-the-art training and readiness solutions. We operate in three reportable business segments:
Cubic Transportation Systems (CTS), Cubic Mission Solutions (CMS), and Cubic Global Defense Systems (CGD).
For more information on our business, see our discussion in Item 1 of this Form 10-K.
FISCAL 2019 RESULTS COMPARED WITH FISCAL 2018 RESULTS
CONSOLIDATED RESULTS
Fiscal 2019
Fiscal 2018
% Change
Sales
Operating income
Net income from continuing operations attributable to Cubic
Diluted earnings per share from continuing operations attributable to
Cubic
Adjusted EBITDA
Adjusted Net Income
Adjusted EPS
$
(in millions, except per share data)
1,202.9
24.4
8.1
1,496.5
86.2
51.1
$
1.67
146.6
95.6
3.13
0.29
104.6
60.0
2.19
24 %
253
534
466
40
59
43
Note on non-GAAP measures: Throughout the following results of operations discussion, we disclose certain non-
GAAP financial measures, including Adjusted EBITDA, Adjusted Net Income and Adjusted EPS. For an explanation
and reconciliation of such measures, see the section titled ‘Non-GAAP Financial Information’ below.
Note on comparability of fiscal 2019 and 2018 results: We adopted Accounting Standards Update (ASU)
2014-09, Revenue from Contracts with Customers (commonly known as Accounting Standards Codification (ASC) 606),
effective October 1, 2018 using the modified retrospective transition method. In accordance with the modified
retrospective transition method, fiscal 2019 is presented under ASC 606, while fiscal 2018 is presented under ASC
605, Revenue Recognition, the accounting standard in effect for periods ending prior to October 1, 2018. The cumulative
effect of the change in accounting for periods prior to October 1, 2018 was recognized through shareholders’ equity at
the date of adoption.
42
The table below quantifies the impact of adopting ASC 606 on sales, operating income, net income from continuing
operations attributable to Cubic, for the year ended September 30, 2019 (in millions):
Sales:
Cubic Transportation Systems
Cubic Mission Solutions
Cubic Global Defense
Total sales
Operating income:
Cubic Transportation Systems
Cubic Mission Solutions
Cubic Global Defense
Unallocated corporate expenses
Total operating income
Under
ASC 605
Fiscal 2019
Effect of
ASC 606
As Reported
Under
ASC 606
788.0 $
327.2
272.1
1,387.3 $
61.8 $
1.6
45.8
109.2 $
849.8
328.8
317.9
1,496.5
65.9 $
7.3
19.9
(21.8)
71.3 $
11.3 $
0.5
3.1
—
14.9 $
77.2
7.8
23.0
(21.8)
86.2
$
$
$
$
Net income from continuing operations attributable to Cubic $
42.3 $
8.8 $
51.1
Sales: Our sales increased 24% to $1.496 billion in fiscal year 2019 from $1.203 billion in 2018. The increases in sales
for CTS and CMS of 27% and 59%, respectively, were partially offset by a decrease in CGD sales of 2%. Sales from
businesses we acquired in 2019 and 2018 amounted to $83.3 million and $0.6 million for fiscal years 2019 and 2018,
respectively. The average exchange rates between the prevailing currencies in our foreign operations and the U.S. dollar
between 2018 and 2019 had a negative impact on sales of $25.3 million, which was 2% of 2019 sales. The impacts of
changes in foreign currency exchange rates on sales from 2018 to 2019 predominantly affected our CTS segment results.
See the segment discussions below for further analysis of segment sales.
Gross Margin: Our gross margin percentage from product sales was 28% in 2019, compared to 33% in 2018. The
decrease in product sales gross margins was primarily due to sales mix. The gross margin on service sales was 31% in
2019 compared to 27% in 2018. The increase in service sales gross margins was primarily caused by an increase in
service sales by CGD, which has a higher average margin percentage on services sales than our other business segments.
Selling, General, and Administrative: SG&A expenses increased to $270.1 million in 2019, compared to $258.6 million
in 2018. However, as a percentage of sales SG&A decreased to 18% in 2019 compared to 22% in 2018. The increase in
SG&A expense was primarily due to $29.2 million of SG&A expenses incurred by three businesses we acquired in fiscal
2019 including the impacts of business acquisition accounting which is further described in the segment discussions
below. These increases in SG&A expenses were partially offset by the results of cost reduction activities undertaken in
fiscal 2019 as well as reduced strategic and IT system resource expenses which totaled $8.2 million in 2019 compared to
$24.1 million in 2018.
Amortization of Purchased Intangibles: Amortization of purchased intangibles totaled $42.1 million in 2019 compared
to $27.1 million in 2018. The increase is due to the amortization of purchased intangibles for companies acquired by
Cubic in fiscal year 2019.
Gain on the Sale of Fixed Assets: In line with our One Cubic strategic objective, in fiscal 2019, we entered into
agreements related to the construction and leasing of two buildings on our existing corporate campus in San Diego,
California that will allow us to co-locate our San Diego-based employees on a single modern campus to foster innovation
and collaboration across our business. Under these agreements, a financial institution will own the buildings, and we will
lease the facilities for a term of five years commencing upon their completion. In the third quarter of fiscal 2019, we sold
land and buildings comprising our separate CTS campus in San Diego. We have entered into a lease with the buyer of
this campus and CTS employees will continue to occupy this separate campus until the new buildings on our corporate
43
campus are ready for occupancy in fiscal 2021. In the third quarter of fiscal 2019, we also sold land and buildings in
Orlando, Florida and we are entering a lease for new space with a smaller footprint in Orlando to accommodate our
employees and operations in Orlando. In connection with the sale of these real estate campuses we received total net
proceeds of $44.9 million and recognized net gains on the sales totaling $32.5 million within operating income.
Research & Development: Company-sponsored R&D spending totaled $50.1 million in 2019 compared to $52.4 million
in 2018. For fiscal 2019 there was a shift in the mix of R&D expenditures between our business segments with CMS
increasing its portion of our total R&D spend and CTS and CGD decreasing. In fiscal 2019 CMS’ R&D expenditures
were driven by the development of secure communications and ISR-as-a-service technologies and CTS continued to
make R&D investments in new transportation product development, including fare collection technologies, real-time
passenger information and development of intelligent transport systems and analytic technologies. CGD’s R&D
expenditures focused on next generation live, virtual and constructive training systems.
In addition to company-sponsored R&D, a significant portion of our new product development occurs in conjunction
with the performance of work on our contracts. These costs are included in cost of sales in our Consolidated Statements
of Operations as they are directly related to contract performance. The cost of contract R&D activities included in our
cost of sales were $78.4 million in fiscal 2019 compared to $69.6 million in fiscal 2018. The increase in contract R&D
activities is primarily due to significant development on CTS contracts in New York, Boston, San Francisco Bay Area
and Brisbane.
Operating Income: Operating income increased to $86.2 million in 2019 compared to $24.4 million in 2018 driven by
improvements in profitability from all three of our businesses. CTS operating income increased by 28% to $77.2 million
in 2019 compared to $60.4 million in 2018, primarily due to increased volumes on contracts in New York, Boston, San
Francisco Bay Area and Brisbane. CMS generated operating income of $7.8 million in fiscal 2019 compared to an
operating loss of $0.1 million in 2018. The increase in CMS profitability was driven by broad increases in sales volume
across all of its major product lines. CGD’s operating income increased 39% to $23.0 million in 2019 compared to $16.6
million in 2018 primarily due to the results of cost reduction efforts and reduced R&D expenditures. Businesses acquired
in 2019 and 2018 generated operating losses of $22.9 million in 2019 compared to $3.5 million in 2018, including
acquisition-related costs totaling $9.7 million in 2019 and $1.0 million in 2018, and including amortization of purchased
intangible assets of $22.0 million in 2019 and $0.5 million in 2018. Excluding the gain on sale of fixed assets noted
above, the unallocated corporate and other costs were $54.3 million in 2019 compared to $52.5 million in 2018, and
included expenses related to strategic and IT system resource planning as part of our One Cubic initiative totaling $8.2
million in 2019 and $24.1 million in 2018. Unallocated corporate costs also include restructuring charges of $8.9 million
and $3.1 million in fiscal years 2019 and 2018, respectively. 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 $3.7 million in
2019 compared to 2018. See the segment discussions below for further analysis of segment operating income.
Interest and Dividend Income and Interest Expense: Interest and dividend income was $6.5 million in 2019 compared
to $1.6 million in 2018. The increase in interest income in fiscal 2019 was primarily due to the interest income recorded
on long-term contracts financing receivables in our consolidated balance sheet. Under ASC 606, in fiscal year 2019 we
recognized interest income on such receivables. Interest expense was $20.5 million in 2019 compared to $10.4 million in
2018. The change in interest expense generally reflected the increase in our average outstanding debt balances. The
average outstanding borrowings under our revolving credit agreement increased during fiscal 2019 primarily to finance
the acquisition of three businesses.
Other Income (Expense): Other income (expense) netted to expense of $20.0 million in fiscal 2019 and $0.7 million in
fiscal 2018. The nonoperating expense in fiscal 2019 included unrealized losses of $21.6 million caused by the change in
the fair value of an interest rate swap held by a variable interest entity (VIE) that is consolidated by Cubic. The 90
percent noncontrolling interest in the net loss of the consolidated VIE, which is comprised primarily of the VIE’s loss on
its interest rate swap, is added back to our net income to arrive at net income attributable to Cubic.
Income Tax Provision: Our income tax provision totaled $11.0 million (effective rate of 21%) for fiscal 2019, compared
to an income tax provision of $7.1 million (effective rate of 48%) for fiscal 2018. The fiscal 2019 tax provision
primarily resulted from tax on foreign earnings and state income tax, partially offset by tax benefits in connection with
44
acquisitions involving significant U.S. deferred tax liabilities which allowed for a subsequent release of deferred tax
valuation allowance. The fiscal 2018 tax provision, as a result of the Tax Cuts and Jobs Act of 2017 (Tax Act), includes
a one-time non-cash tax benefit of $7.1 million, primarily related to the re-measurement of certain U.S. deferred tax
liabilities and the impact of the utilization of indefinite lived deferred tax liabilities as a source of future taxable income
when assessing the realizability of indefinite lived deferred tax assets. The change in the valuation allowance does not
have any impact on our consolidated operations or cash flows, nor does such an allowance preclude us from using loss
carryforwards or other deferred tax assets in the future. 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.
As of September 30, 2019, a total valuation allowance of $69.1 million has been established against U.S. deferred tax
assets, certain foreign operating losses and other foreign assets. During fiscal 2019, the valuation allowance decreased by
$12.7 million, of which $10.0 million was recorded as a net tax benefit in our Consolidated Statement of Operations,
offset by amounts recorded through acquisition accounting, retained earnings and other components of income. 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.
Net Income from Continuing Operations attributable to Cubic: Our net income from continuing operations attributable
to Cubic was $51.1 million ($1.67 per share) in 2019, compared to $8.1 million ($0.29 per share) in 2018. The increase
in net income was primarily related to the increase in operating profits including the gain on the sale of fixed assets,
partially offset by the increase in interest expense and the increase in our income tax provision, all of which are
described above.
Net Income (Loss) from Discontinued Operations: Our net loss from discontinued operations was $1.4 million in fiscal
2019 compared to net income from discontinued operations of $4.2 million in fiscal 2018. In fiscal 2018, net income
from discontinued operations included the results of the operations of Cubic Global Defense Services (CGD Services)
through the date of the sale as well as a loss on the sale of CGD Services of $6.1 million, which was calculated as the
excess of the carrying value of the net assets of CGD Services at the sale date over the sales price, less estimated selling
costs of $4.5 million. In fiscal 2019, we revised certain estimates related to the working capital settlement and reduced
the receivable from the purchaser of CGD Services by $1.4 million and recognized a loss on the sale of CGD Services in
the second quarter of fiscal 2019.
Adjusted EBITDA: Adjusted EBITDA increased 40% to $146.6 million in 2019 compared to $104.6 million in 2018 and
included increases in Adjusted EBITDA for all three business segments as described in the segment disclosures below.
The increase in Adjusted EBITDA was primarily due to the same factors that drove the increase in operating income
described above, excluding the changes in amortization expense, acquisition transaction costs, and restructuring costs as
such items are excluded from Adjusted EBITDA. In addition, Adjusted EBITDA increased by $5.9 million in 2019 as a
result of the adoption of the new revenue recognition standard. Adjusted EBITDA is a non-GAAP financial measure.
Adjusted Net Income: Adjusted Net Income increased 59% to $95.6 million in 2019 compared to $60.0 million in 2018.
The increase in Adjusted Net Income was primarily due to the same factors that drove the increase in net income from
continuing operations attributable to Cubic described above including margin growth on increased sales, but excludes the
changes in amortization expense, the gain on sale of fixed assets, acquisition transaction costs, restructuring costs,
acquisition related costs, and nonoperating losses as such items are excluded from Adjusted Net Income. In addition,
Adjusted Net Income increased by $9.1 million in 2019 as a result of the adoption of the new revenue recognition
standard. Adjusted Net Income is a non-GAAP financial measure.
Adjusted EPS: Adjusted EPS increased 43% to $3.13 in 2019 compared to $2.19 in 2018. The increase in Adjusted EPS
was due to the same factors that impacted Adjusted Net Income noted above. In addition, Adjusted EPS increased by
45
$0.30 in 2019 as a result of the adoption of the new revenue recognition standard. Adjusted EPS is a non-GAAP
financial measure.
SEGMENT RESULTS
Cubic Transportation Systems
Sales
Operating income
Adjusted EBITDA
Fiscal 2019
Fiscal 2018
% Change
$
(in millions)
$
849.8
77.2
110.5
670.7
60.4
73.3
27 %
28
51
Sales: CTS sales increased 27% to $849.8 million in 2019 compared to $670.7 million in 2018, including the impact of
the adoption of ASC 606. The increase in sales was primarily driven by growth in both organic and inorganic business in
North America. Sales in 2019 were higher in the U.S. primarily due to system development on contracts in New York,
Boston, and the San Francisco Bay Area. Businesses acquired by CTS during fiscal year 2019, whose operations are all
located in the U.S., had sales of $74.4 million in fiscal year 2019. Sales increased slightly in Australia between fiscal
years 2018 and 2019 as increased system development work on a contract in Brisbane was partially offset by the
negative impact of foreign currency exchange rates as well as a decrease in service sales. Sales were lower in the UK
primarily due to a decrease in system development work in London and the negative impact of currency exchange rates.
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 $22.2 million for 2019 compared to 2018, primarily due to the strengthening of the U.S. dollar
against the British pound and Australian dollar.
Amortization of Purchased Intangibles: Amortization of purchased intangibles included in the CTS operating results
totaled $22.0 million in 2019 and $5.2 million in 2018. The increase is due to the amortization of purchased intangibles
for companies acquired by CTS in fiscal year 2019.
Operating Income: CTS operating income increased 28% in 2019 to $77.2 million compared to $60.4 million in 2018.
The increase in operating income was primarily caused by higher margins on increased work on development projects in
New York, Boston, the San Francisco Bay Area and Brisbane, as well as the impact of the adoption of ASC 606. These
increases in operating income were partially offset by operating losses incurred by businesses acquired by CTS in fiscal
2019 as well as the negative impact of changes in foreign currency exchange rates. Businesses acquired by CTS in fiscal
years 2019 incurred operating losses of $10.1 million in fiscal 2019, which included acquisition transaction costs of $8.1
million and amortization of intangible assets totaling $19.3 million. The average exchange rates between the prevailing
currency in our foreign operations and the U.S. dollar resulted in a decrease in CTS operating income of $3.6 million for
2019 compared to 2018.
Adjusted EBITDA: CTS Adjusted EBITDA increased 51% to $110.5 million in 2019 compared to $73.3 million in
2018. The increase in Adjusted EBITDA was primarily driven by the same factors that drove the increase in operating
income described above excluding the increases in amortization of purchased intangibles and acquisition transaction
costs which are excluded from Adjusted EBITDA. Adjusted EBITDA for CTS increased by $2.3 million in 2019 as a
result of the adoption of the new revenue recognition standard.
46
Cubic Mission Solutions
Sales
Operating income (loss)
Adjusted EBITDA
Fiscal 2019
Fiscal 2018
% Change
$
(in millions)
$
328.8
7.8
34.4
207.0
(0.1)
26.2
59 %
n/a
31
Sales: CMS sales increased 59% to $328.8 million in fiscal 2019 compared to $207.0 million in 2018. The increase in
sales resulted from increased product deliveries in all of our CMS product lines, and particularly expeditionary satellite
communications products and secure network products. Businesses acquired during fiscal years 2019 and 2018 whose
operations are included in our CMS operating segment had sales of $8.9 million and $0.6 million for fiscal years 2019
and 2018, respectively.
Amortization of Purchased Intangibles: Amortization of purchased intangibles included in the CMS results amounted
to $19.5 million in 2019 and $20.8 million in 2018.
Operating Income: CMS had operating income of $7.8 million in 2019 compared to an operating loss of $0.1 million in
2018. The improvement in operating results was primarily from higher sales from expeditionary satellite
communications products and secure networks products. The improvements in operating profits was partially offset by
operating losses incurred by businesses that CMS acquired during fiscal 2019 and 2018. Businesses acquired by CMS in
fiscal years 2019 and 2018 incurred operating losses of $12.8 million in fiscal 2019 compared to $3.5 million in fiscal
2018. Included in the operating loss incurred by acquired businesses are acquisition transaction costs of $1.6 million and
$1.0 million incurred in fiscal years 2019 and 2018, respectively. In addition, the increase in operating profits was
partially offset by an increase of $4.4 million in R&D expenditures from fiscal 2018 to fiscal 2019 related primarily to
the development of secure communications and ISR-as-a-service technologies.
Adjusted EBITDA: CMS Adjusted EBITDA increased 31% to $34.4 million in 2019 compared to $26.2 million in 2018.
The increase in CMS Adjusted EBITDA was primarily due to the same factors that drove the increase in operating
income described above, excluding the changes in amortization expense and acquisition transaction costs as such items
are excluded from Adjusted EBITDA. Adjusted EBITDA for CMS increased by $0.5 million in 2019 as a result of the
adoption of the new revenue recognition standard. The increase in Adjusted EBITDA was partially offset by the increase
in R&D expenditures described above.
Cubic Global Defense
Sales
Operating income
Adjusted EBITDA
Fiscal 2019
Fiscal 2018
% Change
$
(in millions)
$
317.9
23.0
32.8
325.2
16.6
26.3
(2)%
39
25
Sales: CGD sales decreased 2% to $317.9 million in 2019 compared to $325.2 million in 2018. The timing of sales
recognition was impacted by the adoption of ASC 606. Under ASC 606, a number of our CGD contracts, most
significantly in air combat training and ground live training, for which revenue was historically recorded upon delivery
of products to the customer, are now accounted for on the percentage-of-completion cost-to-cost method of revenue
recognition. For fiscal 2019, sales were lower from air combat training systems, simulation product development
contracts, and international services contracts, partially offset by higher sales from ground combat training systems. The
average exchange rates between the prevailing currencies in our foreign operations and the U.S. dollar resulted in a
decrease in CGD sales of $3.2 million for 2019 compared to 2018.
47
Amortization of Purchased Intangibles: Amortization of purchased intangibles included in the CGD results amounted
to $0.6 million in 2019 and $1.1 million in 2018.
Operating Income: CGD operating income increased by 39% to $23.0 million in 2019 compared to $16.6 million in
2018. For fiscal 2019, operating profits improved primarily due to the results of cost reduction efforts, including
headcount reductions designed to optimize our cost position, and reduced R&D expenditures. Operating profits were
higher from increased sales of ground combat training system sales but were lower on decreased sales from air combat
training systems, simulation product development contracts, and international services contracts. The average exchange
rates between the prevailing currency in our foreign operations and the U.S. dollar had no significant impact on CGD
operating income between 2018 and 2019.
Adjusted EBITDA: CGD Adjusted EBITDA was $32.8 million in 2019 compared to $26.3 million in 2018. The increase
in Adjusted EBITDA was primarily driven by the same factors that drove the increase in operating income described
above. Adjusted EBITDA for CGD increased by $3.1 million in 2019 as a result of the adoption of the new revenue
recognition standard.
FISCAL 2018 RESULTS COMPARED WITH FISCAL 2017 RESULTS
CONSOLIDATED RESULTS
Fiscal 2018
Fiscal 2017
% Change
Sales
Operating income
Net income (loss) from continuing operations
Diluted earnings per share from continuing operations attributable to
Cubic
Adjusted EBITDA
Adjusted Net Income
Adjusted EPS
$
(in millions, except per share data)
1,107.7
2.6
(25.7)
1,202.9
24.4
8.1
$
0.29
104.6
60.0
2.19
(0.95)
87.5
43.9
1.62
9 %
838
n/a
n/a
20
37
35
Sales: Our sales increased 9% to $1.203 billion in fiscal year 2018 from $1.108 billion in 2017. The increases in sales
for CTS and CMS of 16% and 23%, respectively, were partially offset by a decrease in CGD sales of 10%. The average
exchange rates between the prevailing currencies in our foreign operations and the U.S. dollar between 2017 and 2018
had a positive impact on sales of $11.9 million, which was 1% of 2018 sales. The impacts of changes in foreign currency
exchange rates on sales from 2017 to 2018 predominantly affected our CTS segment results. See the segment discussions
below for further analysis of segment sales.
Gross Margin: Our gross margin percentage from product sales was 33% in 2018, compared to 31% in 2017. The
increase in product sales gross margins was primarily due to supply chain cost savings and improved sales mix of higher-
margin products including secure networks and expeditionary satellite communications products. In addition, we drove
improved profitability on certain larger CTS development contracts. The gross margin on service sales was 27% in 2018
compared to 28% in 2017. The slight decrease in gross margins on service sales was primarily driven by a change in mix
in our service contracts.
Selling, General, and Administrative: SG&A expenses increased to $258.6 million or 22% of sales in 2018, compared
to $240.2 million or 22% of sales in 2017. The increase in total SG&A expense was primarily due to increases in bid and
proposal costs on new business pursuits and a $4.9 million increase in expense related to contingent consideration for
recent business acquisitions between these periods. SG&A expense also increased as a result of the SG&A expenses of
businesses acquired in fiscal 2018 and 2017. These increases in SG&A expenses were partially offset by a decrease in
expenses related to strategic and IT system resource planning as part of our One Cubic initiative, which totaled $24.1
million in 2018 compared to $34.4 million in 2017.
48
Amortization of Purchased Intangibles: Amortization of purchased intangibles totaled $27.1 million in 2018 compared
to $30.2 million in 2017. The decrease in amortization expense is related to purchased intangible assets that are
amortized based upon accelerated methods.
Research & Development: Company-sponsored R&D spending totaled $52.4 million in 2018 compared to $52.7 million
in 2017. Company-sponsored R&D spending for CTS was $13.4 million in 2018 and $26.3 million in 2017. R&D
expenses for CTS in 2017 included $6.4 million of expenses related to our contract with the New York Metropolitan
Transit Authority that was awarded in early fiscal 2018; expenses incurred in 2018 are classified as cost of sales. CTS
also continues to make significant R&D investments in new transportation product development, including fare
collection technologies, real-time passenger information and development of tolling, Intelligent Traffic Systems and
analytic technologies. Company-sponsored R&D spending for CGD was $16.3 million in 2018 and $14.4 million in
2017. The increase in CGD’s R&D expenditures was caused by the acceleration of our development of next generation
live, virtual, constructive, and game-based training systems. Company-sponsored R&D spending for CMS was $22.7
million in 2018 and $11.9 million in 2017. The increase in CMS R&D expenses was largely related to the acceleration of
our development of our software definable antenna technology.
In addition to company-sponsored R&D, a significant portion of our new product development occurs in conjunction
with the performance of work on our contracts. These costs are included in cost of sales in our Consolidated Statements
of Operations as they are directly related to contract performance. The cost of contract R&D activities included in our
cost of sales were $69.6 million in fiscal 2018 compared to $68.0 million in fiscal 2017.
Operating Income: Operating income increased to $24.4 million in 2018 compared to $2.6 million in 2017 driven by
improved profitability in our CTS and CMS businesses. CTS operating income increased by 52% to $60.4 million in
2018 compared to $39.8 million in 2017, primarily due to increased volumes, disciplined execution, the transition of
investments to contracts and cost improvements that were realized following prior year investments in cost reduction
activities. CMS had an operating loss of $0.1 million in fiscal 2018 compared to an operating loss of $9.3 million in
2017 driven by higher volume including the T2C2 Full Rate Production. CGD’s operating income decreased 41% to
$16.6 million in 2018 compared to $28.1 million in 2017. CGD’s 2017 results included a one-time positive impact for a
Request for Equitable Adjustment of $8.0 million. Businesses acquired in 2018 and 2017 generated operating losses of
$4.6 million in 2018 compared to $3.1 million in 2017. Unallocated corporate and other costs were $52.5 million in 2018
compared to $56.0 million in 2017, and included expenses related to strategic and IT system resource planning as part of
our One Cubic initiative totaling $24.1 million in 2018 and $34.4 million in 2017. The average exchange rates between
the prevailing currencies in our foreign operations and the U.S. dollar resulted in an increase in operating income of $2.1
million in 2018 compared to 2017. See the segment discussions below for further analysis of segment operating income
(loss).
Interest and Dividend Income and Interest Expense: Interest and dividend income was $1.6 million in 2018 compared
to $1.0 million in 2017. The increase in interest income in fiscal 2018 was primarily due to income on notes receivable
from Shield Aviation that we held for a portion of fiscal year 2018 prior to our acquisition of that company. Interest
expense was $10.4 million in 2018 compared to $15.0 million in 2017. The change in interest expense generally
reflected the change in our average outstanding debt balances for these years, including the reduction in outstanding debt
in 2018 caused by the use of proceeds from the sale of CGD Services to repay short-term borrowings in the third quarter
of fiscal 2018.
Other Income (Expense): Other income (expense) netted to expense of $0.7 million in fiscal 2018 and $0.4 million in
fiscal 2017. 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.
Income Tax Provision: Our income tax provision totaled $7.1 million (effective rate of 48%) for fiscal 2018, compared
to an income tax provision of $14.7 million (effective rate of negative 132%) for fiscal 2017. As a result of the Tax Act,
tax expense for fiscal 2018 includes a one-time non-cash tax benefit of $7.1 million, primarily related to the re-
measurement of certain U.S. deferred tax liabilities and the impact of the utilization of indefinite lived deferred tax
liabilities as a source of future taxable income when assessing the realizability of indefinite lived deferred tax assets. The
expense for income taxes in fiscal 2017 primarily results from tax on foreign earnings and U.S. tax expense related to the
49
amortization of indefinite lived intangible assets, partially offset by a benefit related to the release of reserves for
uncertain tax positions due to the positions being effectively settled. Generally, the year-over-year comparison of
effective tax rates is not meaningful due to the impact of applying the accounting guidance provided by Accounting
Standards Codification (ASC) 740-20-45-7, which requires allocation of tax expense amongst all components of income
in certain situations and the impact of the U.S. deferred tax asset valuation allowance. 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. As of September 30, 2018, a total valuation
allowance of $81.8 million has been established against U.S. deferred tax assets, certain foreign operating losses and
other foreign assets. For fiscal 2018, the valuation allowance was increased by $24.7 million, of which $21.1 million was
recorded as a net tax expense in our Consolidated Statement of Operations, offset by amounts recorded to other
components of income. 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.
Net Income (Loss) from Continuing Operations Attributable to Cubic: Our net income from continuing operations
attributable to Cubic was $8.1 million ($0.29 per share) in 2018, compared to a net loss from continuing operations
attributable to Cubic of $25.7 million ($0.95 per share) in 2017. The change in net income (loss) was primarily related to
the changes in operating income (loss) and the changes in tax expense (benefit) described above.
Net Income from Discontinued Operations: Our net income from discontinued operations was $4.2 million in fiscal
2018 and $14.5 million in fiscal 2017. In fiscal 2018, net income from discontinued operations includes a loss on the sale
of CGD Services of $6.1 million, which was calculated as the excess of the carrying value of the net assets of CGD
Services at the sale date over the sales price, less estimated selling costs of $4.5 million. Earnings from discontinued
operations before income taxes totaled $14.2 million in fiscal 2018 and $14.9 million in fiscal 2017. The increase in the
average monthly earnings from discontinued operations before income taxes between 2017 and 2018 was attributable to
increased readiness and training exercises. The income tax provision for discontinued operations was $1.6 million in
fiscal 2018 and $0.4 million in fiscal 2017 based upon the application of accounting guidance.
Adjusted EBITDA: Adjusted EBITDA increased 20% to $104.6 million in 2018 compared to $87.5 million in 2017. The
increases in Adjusted EBITDA in 2018 for CTS and CMS were partially offset by a decrease in Adjusted EBITDA for
CGD. The increase in Adjusted EBITDA was primarily due to the same factors that drove the increase in operating
income described above, excluding the changes in amortization expense, acquisition transaction costs, and restructuring
costs as such items are excluded from Adjusted EBITDA.
Adjusted Net Income: Adjusted Net Income increased 37% to $60.0 million in 2018 compared to $43.9 million in 2017.
The increase in Adjusted Net Income was primarily due to the same factors that drove the increase in net income from
continuing operations attributable to Cubic described above including margin growth on increased sales, but excludes the
changes in amortization expense, acquisition transaction costs, restructuring costs, acquisition related costs, and
nonoperating losses as such items are excluded from Adjusted Net Income.
Adjusted EPS: Adjusted EPS increased 35% to $2.19 in 2018 compared to $1.62 in 2017. The increase in Adjusted EPS
was due to the same factors that impacted Adjusted Net Income above.
50
SEGMENT RESULTS
Cubic Transportation Systems
Sales
Operating income
Adjusted EBITDA
Fiscal 2018
Fiscal 2017
% Change
$
(in millions)
$
670.7
60.4
73.3
578.6
39.8
48.8
16 %
52
50
Sales: CTS sales increased 16% to $670.7 million in 2018 compared to $578.6 million in 2017 and were higher in North
America and the U.K., but were slightly lower in Australia. Sales in 2018 were higher in the U.S. primarily due to
system development on the New York New Fare Payment System contract, which was awarded in October 2017.
Increased work on both development and service contracts, including work on new change orders in London also
increased CTS sales for the year. Sales were also positively impacted in the U.K. and Australia due to the impact of
exchange rates. The average exchange rates between the prevailing currencies in our foreign operations and the U.S.
dollar resulted in an increase in CTS sales of $12.4 million for 2018 compared to 2017, primarily due to the
strengthening of the British Pound against the U.S. dollar.
Amortization of Purchased Intangibles: Amortization of purchased intangibles included in the CTS operating results
totaled $5.2 million in 2018 and $5.7 million in 2017.
Operating Income: CTS operating income increased 52% in 2018 to $60.4 million compared to $39.8 million in 2017.
For 2018, operating income was higher from increased volumes of system development work and services, including
work on new projects and change orders, primarily in North America and the U.K. Operating income was also higher
due to operational efficiencies and reductions in R&D spending. R&D expenses for CTS in 2017 included $6.4 million
of system development expenses related to our anticipated contract with the New York Metropolitan Transit Authority
that was awarded in early fiscal 2018; such expenses incurred in 2018 on this contract are classified as cost of sales.
During the first quarter of fiscal year 2018 CTS implemented our new enterprise resource planning (ERP) system, and as
a result began depreciating the cost of certain capitalized software into its operating results. This resulted in a decrease in
operating income of $4.2 million between fiscal 2017 and fiscal 2018. The average exchange rates between the
prevailing currency in our foreign operations and the U.S. dollar resulted in an increase in CTS operating income of $2.2
million for 2018 compared to 2017.
Adjusted EBITDA: CTS Adjusted EBITDA increased 50% to $73.3 million in 2018 compared to $48.8 million in 2017
primarily due to the same items described in the operating income section above. The increase in Adjusted EBITDA was
primarily driven by the same factors that drove the increase in operating income described above excluding the increase
in depreciation and decrease in amortization which are excluded from Adjusted EBITDA.
Cubic Mission Solutions
Sales
Operating loss
Adjusted EBITDA
Fiscal 2018
Fiscal 2017
% Change
$
(in millions)
$
207.0
(0.1)
26.2
168.9
(9.3)
14.4
23 %
(99)
82
Sales: CMS sales increased 23% to $207.0 million in fiscal 2018 compared to $168.9 million in 2017. The increase in
sales was primarily due to increased orders and shipments of expeditionary satellite communications products, tactical
networking products, and Command and Control, Intelligence, Surveillance and Reconnaissance (C2ISR) products and
services. Businesses acquired during fiscal years 2018 and 2017 whose operations are included in our CMS operating
segment had sales of $5.6 million and $1.5 million for fiscal years 2018 and 2017, respectively.
51
Amortization of Purchased Intangibles: Amortization of purchased intangibles included in the CMS results amounted
to $20.8 million in 2018 and $23.6 million in 2017. The $2.8 million decrease in amortization expense is related to
purchased intangible assets that are amortized based upon accelerated methods.
Operating Income: CMS had an operating loss of $0.1 million in 2018 compared to $9.3 million in 2017. CMS realized
increased profits from expeditionary satellite communications products, tactical networking products, and C2ISR
products and services. As mentioned above, amortization of purchased intangibles decreased to $20.8 million in 2018
compared to $23.6 million in 2017. CMS increased R&D expenditures between 2017 and 2018 by $10.8 million,
primarily driven by development of new antenna technologies. Businesses acquired by CMS in fiscal years 2018 and
2017 incurred operating losses of $4.7 million in fiscal 2018 compared to $2.9 million in fiscal 2017. Included in the
operating loss incurred by acquired businesses are acquisition transaction costs of $1.6 million and $1.8 million incurred
in fiscal years 2018 and 2017, respectively.
Adjusted EBITDA: CMS Adjusted EBITDA increased 82% to $26.2 million in 2018 compared to $14.4 million in 2017.
The increase in CMS Adjusted EBITDA was primarily due to the same items described in the operating income section
above, excluding the changes in amortization expense and acquisition transaction costs discussed above as such items are
excluded from Adjusted EBITDA.
Cubic Global Defense
Sales
Operating income
Adjusted EBITDA
Fiscal 2018
Fiscal 2017
% Change
$
(in millions)
$
325.2
16.6
26.3
360.2
28.1
39.4
(10)%
(41)
(33)
Sales: CGD sales decreased 10% to $325.2 million in 2018 compared to $360.2 million in 2017. The year-over-year
comparative sales and operating income were significantly impacted by an $8.0 million gain recognized on an equitable
contract adjustment in fiscal 2017 for our littoral combat ship virtual training contract with the U.S. Navy. Sales were
lower in fiscal 2018 on virtual training sales, air combat training system sales, and ground combat training system sales,
while sales of international training support services increased between fiscal 2017 and 2018. The average exchange
rates between the prevailing currency in our foreign operations and the U.S. dollar had no significant impact on CGD
sales between 2017 and 2018.
Amortization of Purchased Intangibles: Amortization of purchased intangibles included in the CGD results amounted
to $1.1 million in 2018 and $0.9 million in 2017.
Operating Income: CGD had operating income of $16.6 million in 2018 compared to $28.1 million in 2017. The
decrease in operating income was primarily caused by the gain of $8.0 million recognized in fiscal 2017 due to the
approval of a contract adjustment with the U.S. Navy described above. In fiscal 2018 an arbitrator awarded $1.7 million
to a former reseller of our air combat training systems in the Far East, which was recorded as SG&A expense by CGD in
2018. In addition, CGD’s R&D expenditures increased approximately $1.8 million year-over-year. The increase in R&D
expenditures is indicative of the acceleration of our development of next generation live, virtual, constructive, and game-
based training systems. These decreases in operating income in fiscal 2018 were partially offset by increased operating
income from ground combat training systems, which was higher primarily due to improvements in expected total costs
for the development of two ground combat training system contracts in the Far East. The average exchange rates
between the prevailing currency in our foreign operations and the U.S. dollar had no significant impact on CGD
operating income between 2017 and 2018.
Adjusted EBITDA: CGD Adjusted EBITDA was $26.3 million in 2018 compared to $39.4 million in 2017. The
decrease in Adjusted EBITDA was primarily driven by the same factors that drove the decrease in operating income
described above excluding the increase in amortization which is excluded from Adjusted EBITDA.
52
Non-GAAP Financial Information
In addition to results reported under GAAP, this Annual Report on Form 10-K also contains non-GAAP measures. These
non-GAAP measures consist of Adjusted EBITDA, Adjusted Net Income, and Adjusted EPS. We believe that these non-
GAAP measures provide additional insight into our ongoing operations and underlying business trends, facilitate a
comparison of our results between current and prior periods, and facilitate the comparison of our operating results with
the results of other public companies that provide non-GAAP measures. We use Adjusted EBITDA internally to evaluate
the operating performance of our business, for strategic planning purposes, and as a factor in determining incentive
compensation for certain employees. These non-GAAP measures facilitate company-to-company operating comparisons
by excluding items that we believe are not part of our core operating performance. Adjusted net income is defined as
GAAP net income (loss) from continuing operations attributable to Cubic excluding amortization of purchased
intangibles, restructuring costs, acquisition related expenses, strategic and IT system resource planning expenses, gains
or losses on the disposal of fixed assets, other non-operating expense (income), tax impacts related to acquisitions, and
the impact of U.S. Tax Reform. Adjusted EPS is defined as Adjusted Net Income on a per share basis using the weighted
average diluted shares outstanding. Adjusted EBITDA is defined as GAAP net income (loss) from continuing operations
attributable to Cubic before interest expense (income), income taxes, depreciation and amortization, other non-operating
expense (income), acquisition related expenses, strategic and IT system resource planning expenses, restructuring costs,
and gains or losses on the disposal of fixed assets. Strategic and IT system resource planning expenses consists of
expenses incurred in the development of our ERP system and the redesign of our supply chain which include internal
labor costs and external costs of materials and services that do not qualify for capitalization. Acquisition related expenses
include business acquisition expenses including retention bonus expenses, due diligence and consulting costs incurred in
connection with the acquisitions, and expenses recognized related to the change in the fair value of contingent
consideration for acquisitions.
These non-GAAP measures are not measurements of financial performance under GAAP and should not be considered
as measures of discretionary cash available to the company or as alternatives to net income as a measure of performance.
In addition, other companies may define these non-GAAP measures differently and, as a result, our non-GAAP measures
may not be directly comparable to the non-GAAP measures of other companies. Furthermore, non-GAAP financial
measures have limitations as an analytical tool and you should not consider these measures in isolation, or as a substitute
for analysis of our results as reported under GAAP. Investors are advised to carefully review our GAAP financial results
that are disclosed in our SEC filings.
We reconcile Adjusted EBITDA and Adjusted Net Income to GAAP net income, which we consider to be the most
directly comparable GAAP financial measure. We reconcile Adjusted EPS to GAAP EPS, which we consider to be the
most directly comparable GAAP financial measure. The following tables reconcile these non-GAAP measures to their
most directly comparable GAAP financial measure. On May 31, 2018 Cubic sold the CGD Services business. The
operating results of this business and loss on sale have been excluded from the figures for all periods presented.
53
Adjusted Net Income Reconciliation
2019
Years Ended September 30,
2018
(in millions, except per share data)
2017
$
GAAP EPS
GAAP Net income (loss) from continuing operations attributable to Cubic $
Noncontrolling interest in the loss of the VIE
Amortization of purchased intangibles
Gain on sale of fixed assets
Restructuring costs
Acquisition related expenses, excluding amortization
Strategic and IT system resource planning expenses
Other non-operating expense (income), net
Noncontrolling interest in Adjusted Net Income of VIE
Tax impact related to acquisitions1
Impact of US Tax Reform
Tax impact related to non-GAAP adjustments2
Adjusted net income
Adjusted EPS
$
$
1.67 $
51.1 $
(9.8)
42.1
(32.5)
15.4
13.4
8.3
20.0
(9.7)
(6.6)
—
3.9
95.6 $
3.13 $
0.29 $
8.1 $
(0.3)
27.1
—
5.0
4.5
24.1
0.7
—
(1.2)
(7.0)
(1.0)
60.0 $
2.19 $
(0.95)
(25.7)
—
30.2
0.4
2.3
(0.2)
34.4
(0.4)
—
(0.1)
—
3.0
43.9
1.62
Weighted Average Diluted Shares Outstanding (in thousands)
30,606
27,351
27,173
1 Represents the tax accounting impact of significant discrete items recorded at the time of acquisition.
2 The tax effect of the non-GAAP adjustments is generally based on the statutory tax rate of the jurisdiction of the event.
54
Adjusted EBITDA Reconciliation
($ In Millions)
Cubic Transportation Systems
Sales
Operating income
Depreciation and amortization
Noncontrolling interest in income of VIE
Acquisition related expenses, excluding amortization
Restructuring costs
Adjusted EBITDA
Adjusted EBITDA margin
Cubic Mission Solutions
Sales
Operating income (loss)
Depreciation and amortization
Acquisition related expenses, excluding amortization
Restructuring costs
Adjusted EBITDA
Adjusted EBITDA margin
Cubic Global Defense
Sales
Operating income
Depreciation and amortization
Acquisition related expenses, excluding amortization
Gain on sale of fixed assets
Restructuring costs
Adjusted EBITDA
Adjusted EBITDA margin
$
$
$
$
$
$
$
$
$
Cubic Consolidated
Sales
$
Net income (loss) from continuing operations attributable to Cubic $
Noncontrolling interest in loss of VIE
Provision for income taxes
Interest expense, net
Other non-operating expense (income), net
Operating income
Depreciation and amortization
Noncontrolling interest in EBITDA of VIE
Acquisition related expenses, excluding amortization
Strategic and IT system resource planning expenses
(Gain) loss on sale of fixed assets
Restructuring costs
Adjusted EBITDA
Adjusted EBITDA margin
$
$
55
Years Ended September 30,
2019
2018
2017
849.8 $
77.2 $
30.7
(8.9)
8.3
3.2
110.5 $
13.0%
670.7 $
60.4 $
12.0
-
0.5
0.4
73.3 $
10.9%
578.6
39.8
8.8
-
(0.2)
0.4
48.8
8.4%
Years Ended September 30,
2019
2018
2017
328.8 $
7.8 $
23.3
3.3
-
34.4 $
10.5%
207.0 $
(0.1) $
22.4
3.7
0.2
26.2 $
12.7%
168.9
(9.3)
23.8
(0.1)
-
14.4
8.5%
Years Ended September 30,
2019
2018
2017
317.9 $
23.0 $
6.8
1.7
(2.0)
3.3
32.8 $
10.3%
325.2 $
16.6 $
8.5
(0.1)
-
1.3
26.3 $
8.1%
Years Ended September 30,
2019
1,496.5 $
51.1 $
(9.8)
11.0
13.9
20.0
86.2 $
64.7
(8.9)
13.4
8.3
(32.5)
15.4
146.6 $
9.8%
2018
1,202.9 $
8.1 $
(0.3)
7.1
8.8
0.7
24.4 $
46.6
-
4.5
24.1
-
5.0
104.6 $
8.7%
360.2
28.1
10.4
-
-
0.9
39.4
10.9%
2017
1,107.7
(25.7)
-
14.6
14.1
(0.4)
2.6
48.0
-
(0.2)
34.4
0.4
2.3
87.5
7.9%
Liquidity and Capital Resources
Operating activities from continuing operations used cash of $31.9 million in fiscal 2019, provided cash of $8.6 million
in fiscal 2018, and used cash of $3.0 million in fiscal 2017. As further described below, our operating cash flows have
been significantly impacted by uses of cash related to our investment in software systems, accounting for recent business
acquisitions, the payment terms on some of our larger customer contracts, and by the impacts of our consolidation of a
VIE.
Cash used in connection with the design and development of our new ERP system as well as information technology
process and supply chain redesign totaled $16.1 million in fiscal 2019. 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 assets.
Costs incurred outside of the application development stage, or that do not meet the capitalization requirements, are
expensed as incurred. Of the $16.1 million of cash used in 2019 in these efforts, $8.2 million was recognized as expense
and is reflected in our 2019 cash flows used in operations, while $7.9 million was capitalized and is included in 2019
purchases of property, plant and equipment in investing cash flows. Cash used in connection with ERP design and
development and information technology and supply chain redesign totaled $33.6 million in 2018. Of this amount, $24.1
million was recognized as expense and is reflected in our 2018 cash flows from operations, and $9.5 million was
capitalized and is included in 2018 purchases of property, plant and equipment in investing cash flows. Cash used in
connection with ERP design and development and information technology and supply chain redesign totaled $51.1
million in 2017. Of this amount, $34.4 million was recognized as expense and is reflected in our 2017 cash flows from
operations, and $16.7 million was capitalized and is included in 2017 purchases of property, plant and equipment in
investing cash flows.
Under purchase accounting rules, certain cash flows for business 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
acquisition costs expensed in fiscal 2019 and fiscal 2018 totaled $13.4 million and $4.4 million, respectively. There were
no significant net business acquisition costs expensed in 2017.
The changes in operating cash flows between 2017, 2018 and 2019 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. 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, passing specific system design reviews with the customer, or other events defined by the contracts. These
milestone payments can vary significantly based upon the negotiated terms of the contracts. Changes in the amount of
unbilled accounts receivable and contract assets are reflective of the difference between when costs are incurred and
when we are entitled to receive milestone payments.
Investing activities from continuing operations used cash of $458.8 million in 2019, $47.1 million in 2018 and $43.7
million in 2017. In 2019, cash used in investing activities from continuing operations included $237.2 million of cash
paid related to the acquisition of Trafficware and $86.8 million of cash paid related to the acquisition of GRIDSMART
in our CTS segment, $61.9 million of cash paid related to the acquisition of Nuvotronics in our CMS segment, and $8.0
million of payments of holdback amounts made to the former owners of DTECH. We also invested $60.7 million in non-
marketable equity securities including $50.0 million in Pixia, a private software company based in Herndon, Virginia, in
2019. In the third quarter of fiscal 2019 we received net proceeds on the sale of land and buildings in San Diego,
California and Orlando, Florida totaling $44.9 million. In 2019, cash used in investing activities included capital
expenditures of $49.1 million, including $7.9 million of capitalized software costs described above.
56
Cash used in investing activities during fiscal 2018 included $16.3 million in purchase consideration paid for
acquisitions of businesses in our CMS segment, and capital expenditures of $31.7 million, including $7.5 million of
capitalized software costs described above.
Cash used in investing activities during fiscal 2017 included $16.8 million in purchase consideration paid for
acquisitions of businesses, and capital expenditures of $36.9 million, including $16.7 million of capitalized software
costs described above. Cash used in investing activities in 2017 was partially offset by $12.7 million of net proceeds
from sales or maturities of marketable securities.
Financing activities provided cash of $448.5 million in 2019 and used cash of $31.7 million and $196.1 million in 2018
and 2017, respectively. Financing activities for fiscal year 2019 included the proceeds of net short-term borrowings of
$195.5 million as well as the borrowings on the non-recourse debt of our consolidated VIE described below. Financing
activities in 2019 also included $215.8 million of net proceeds from our underwritten public offering of 3,795,000 shares
of our common stock at a price to the public of $60.00 per share, which we completed in December 2018. We used the
net proceeds from the offering to repay a portion of our outstanding borrowings under our revolving credit agreement,
which was used to finance the acquisition of Trafficware, and the remainder for general corporate purposes. Financing
activities for fiscal year 2018 and 2017 consisted primarily of net principal repayments of $55.0 million and $185.0
million, respectively, on short-term borrowings. Also, as further described below, because we consolidate Boston AFC
2.0 OpCo. LLC (OpCo) into Cubic’s financial statements, any payments from OpCo to Cubic are excluded from our
cash flows provided by operating activities in our Consolidated Statements of Cash Flows.
In March 2018, Cubic and John Laing, an unrelated company that specializes in contracting under public-private
partnerships (P3), jointly formed Boston AFC 2.0 HoldCo LLC (HoldCo). Also in March 2018, HoldCo created a wholly
owned entity, OpCo which entered into a contract with the Massachusetts Bay Transit Authority (MBTA) for the
financing, development, and operation of a next-generation fare payment system in Boston (the MBTA Contract). We
have consolidated OpCo into our financial statements.
The MBTA Contract consists of a design and build phase of approximately three years and an operate and maintain
phase of approximately ten years. The design and build phase is planned to be completed in 2021 and the operate and
maintain phase will span from 2021 through 2031. MBTA will make fixed payments of $558.5 million, adjusted for
incremental transaction-based fees, inflation, and performance penalties, to OpCo in connection with the MBTA
Contract over the ten-year operate and maintain phase. All of OpCo’s contractual responsibilities regarding the design
and development and the operation and maintenance of the fare system have been subcontracted to Cubic by OpCo.
Cubic will receive fixed payments of $427.6 million, adjusted for incremental transaction-based fees, inflation, and
performance penalties under its subcontract with OpCo.
Upon creation of the P3 Venture, OpCo entered into a credit agreement with a group of financial institutions (the OpCo
Credit Agreement) which includes a long-term debt facility and a revolving credit facility. The long-term debt facility
allows for draws up to a maximum amount of $212.4 million; draws may only be made during the design and build
phase of the MBTA Contract. The long-term debt facility, including interest and fees incurred during the design and
build phase, is required to be repaid on a fixed monthly schedule over the operate and maintain phase of the MBTA
Contract. At September 30, 2019, the outstanding balance on the long-term debt facility was $62.0 million, which is
presented net of unamortized deferred financing costs of $8.8 million. OpCo’s borrowings are reflected as cash used in
financing activities in our Consolidated Statements of Cash Flows.
The OpCo Credit Agreement contains a number of covenants which require that OpCo and Cubic maintain progress on
the delivery of the MBTA Contract within a specified timeline and budget and provide regular reporting on such
progress. The OpCo Credit Agreement also contains a number of customary events of default including, but not limited
to, the delivery of a customized fare collection system to MBTA by a pre-determined date. Failure to meet such delivery
date will result in OpCo, and Cubic via its subcontract with OpCo, incurring penalties due to the lenders.
In 2019, 2018 and 2017, respectively, we repurchased $3.7 million, $2.4 million and $2.4 million of common stock in
connection with our stock-based compensation plan. Dividends paid to shareholders amounted to $8.4 million ($0.27
cents per share) in 2019 and $7.3 million ($0.27 cents per share) in 2018 and 2017.
57
The change in exchange rates between foreign currencies and the U.S. dollar resulted in a decrease of $1.8 million to our
cash balance as of September 30, 2019 compared to September 30, 2018, a decrease of $2.9 million to our cash balance
as of September 30, 2018 compared to September 30, 2017, and an increase of $9.7 million to our cash balance as of
September 30, 2017 compared to September 30, 2016.
We have a committed revolving credit agreement with a group of financial institutions in the amount of $800.0 million
which is scheduled to expire in April 2024 (Revolving Credit Agreement). Under the terms of the Revolving Credit
Agreement, the company may elect that the debts comprising each borrowing bear interest generally at a rate equal to
(i) London Interbank Offer Rate (“LIBOR”) based upon tenor plus a margin that fluctuates between 1.00% and 2.00%,
as determined by the company’s Leverage Ratio (as defined in the Revolving Credit Agreement) as set forth in the
company’s most recently delivered compliance certificate or (ii) the Alternate Base Rate (defined as a rate equal to the
highest of (a) the Prime Rate (b) the NYFRB rate plus 0.50% (c) the Adjusted LIBOR Rate plus 1.00%), plus a margin
that fluctuates between 0.00% and 1.00%, as determined by the company’s Leverage Ratio as set forth in its most
recently delivered compliance certificate. The available line of credit is reduced by any letters of credit issued under the
Revolving Credit Agreement. As of September 30, 2019, there were $195.5 million of borrowings under this agreement
and there were letters of credit outstanding totaling $31.5 million, which reduce the available line of credit to $573.0
million.
As of September 30, 2019, we had letters of credit and bank guarantees outstanding totaling $39.9 million, which
includes the $31.5 million of letters of credit on the Revolving Credit Agreement described above and $8.4 million of
letters of credit issued under other facilities. The total of $39.9 million of letters of credit and bank guarantees includes
$34.4 million that guarantees either our performance or customer advances under certain contracts and financial letters of
credit of $5.5 million which primarily guarantee our payment of certain self-insured liabilities.
Our Revolving Credit Agreement and note purchase and private shelf agreement each contain a number of customary
covenants, including requirements for Cubic to maintain certain interest coverage and leverage ratios and restrictions on
Cubic’s and certain of its subsidiaries’ abilities to, among other things, incur additional debt, create liens, consolidate or
merge with any other entity, or transfer or sell substantially all of their assets, in each case subject to certain exceptions
and limitations. These agreements also contain customary events of default, including, without limitation: (a) failure by
Cubic to pay principal or interest on the Notes when due; (b) failure by Cubic or certain of its subsidiaries to comply
with the covenants in the agreements; (c) failure of the representations and warranties made by Cubic or certain of its
subsidiaries to be correct in any material respect; (d) cross-defaults with other indebtedness of Cubic or certain of its
subsidiaries resulting in the acceleration of the maturity thereof; (e) certain bankruptcy and insolvency events with
respect to Cubic or certain of its subsidiaries; (f) failure by Cubic or certain of its subsidiaries to satisfy certain final
judgments when due; and (g) a change in control of Cubic, in each case subject to certain exceptions and limitations. The
occurrence of any event of default under these agreements may result in all of the indebtedness then outstanding
becoming immediately due and payable.
We maintain a cash account with a bank in the U.K. for which the funds are restricted as to use. The account is required
to secure the customer’s interest in cash deposited in the account to fund our activities related to our performance under a
fare collection services contract in the United Kingdom. The balance in the account as of September 30, 2019 was $19.5
million and is classified as restricted cash in our Consolidated Balance Sheets.
The accumulated deficit in other comprehensive loss increased a total of $29.1 million in 2019 primarily due to an
increase in the recorded liability for our pension plans. Unrealized translation adjustments contributed $11.3 million of
this deficit but these increases were partially offset by $1.7 million of changes in the fair value of cash flow hedges.
Our financial condition remains strong with net working capital of $195.2 million and a current ratio of 1.4 to 1 at
September 30, 2019. We expect that cash on hand and our Revolving Credit Agreement will be adequate to meet our
working capital requirements for the foreseeable future. Our total debt to capital ratio at September 30, 2019 was 20%.
Our cash is invested primarily in highly liquid bank deposits and government instruments in the U.S., U.K., New
Zealand and Australia.
58
In the normal course of our business, we may sell trade receivables to financial institutions as a cash management
technique. We do not retain financial or legal obligations for these receivables that would result in material losses. Our
ongoing involvement is limited to the remittance of customer payments to the financial institutions with respect to the
sold trade receivables; therefore, our sold trade receivables are not included in our Consolidated Balance Sheet in any
period presented. As of September 30, 2019, we sold $31.1 million of outstanding trade receivables to financial
institutions. The cash received for the sale of trade receivables is included in cash provided by operating activities in our
Consolidated Statements of Cash Flows.
As of September 30, 2019, virtually all of the $85.3 million of our cash, cash equivalents and restricted cash, excluding
cash held by our consolidated VIE, was held by our foreign subsidiaries, primarily in the U.K., New Zealand and
Australia.
The following is a schedule of our contractual obligations outstanding as of September 30, 2019:
Short-term borrowings
Long-term debt, including current portion
Interest payments
Operating leases
Deferred compensation
Less than 1
Total
Year
1 - 3 years
(in millions)
4 - 5 years
After 5 years
$
$
195.5 $
200.0
25.3
113.9
12.2
546.9 $
195.5 $
10.7
7.0
18.1
1.3
232.6 $
— $
71.4
11.1
32.3
2.6
117.4 $
— $
71.4
5.9
25.6
1.9
104.8 $
—
46.5
1.3
37.9
6.4
92.1
As of September 30, 2019, we had approximately $0.9 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 are 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. For more
information on our uncertain tax positions, see Note 13 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 15 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, 2019, the maximum
future contingent consideration that would be payable if all such goals were met is $27.3 million. However, we are
unable to make a reasonable estimate as to the timing and magnitude of such future payments.
Backlog
Total backlog
Cubic Transportation Systems
Cubic Mission Solutions
Cubic Global Defense
Total
September 30,
2019
September 30,
2018
(in millions)
$
$
2,953.3
103.7
344.0
3,401.0
$
$
3,544.9
77.0
442.6
4,064.5
As reflected in the table above, total backlog decreased $663.5 million from September 30, 2018 to September 30, 2019.
The decrease in backlog is primarily due to progression of work in 2019 on four large contracts awarded to CTS in fiscal
2018. In addition, we recorded a net decrease to backlog of $104.5 million on October 1, 2018 for the impact of the
adoption of ASC 606. Changes in exchange rates between the prevailing currency in our foreign operations and the U.S.
dollar as of September 30, 2019 decreased backlog by $79.7 million compared to September 30, 2018.
59
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
See “Recent Accounting Pronouncements” in Note 1 of the Consolidated Financial Statements in Item 8 of this
Form 10-K, which are hereby incorporated by reference.
Critical Accounting Policies, Estimates and Judgments
Our financial statements are prepared in accordance with accounting principles that are generally accepted in the United
States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported
amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements,
and the reported amounts of revenues and expenses during the reporting period. We continually evaluate our estimates
and judgments, the most critical of which are those related to revenue recognition, income taxes, valuation of goodwill,
purchased intangibles, accounting for business combinations, and pension costs. We base our estimates and judgments
on historical experience and other factors that we believe to be reasonable under the circumstances. Materially different
results can occur as circumstances change and additional information becomes known.
Besides the estimates identified above that are considered critical, we make many other accounting estimates in
preparing our financial statements and related disclosures. All estimates, whether or not deemed critical, affect reported
amounts of assets, liabilities, revenues and expenses, as well as disclosures of contingent assets and liabilities. These
estimates and judgments are also based on historical experience and other factors that are believed to be reasonable under
the circumstances. Materially different results can occur as circumstances change and additional information becomes
known, even for estimates and judgments that are not deemed critical.
Revenue Recognition
We adopted Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (commonly known
as ASC 606), effective October 1, 2018 using the modified retrospective transition method. In accordance with the
modified retrospective transition method, our Consolidated Statement of Operations for the year ended September 30,
2019 and our Consolidated Balance Sheet as of September 30, 2019 are presented under ASC 606, while our
Consolidated Statement of Operations for the years ended September 30, 2018 and 2017 and our Consolidated Balance
Sheet as of September 30, 2018 are presented under ASC 605, Revenue Recognition, the accounting standard in effect
for periods ending prior to October 1, 2018. The cumulative effect of the change in accounting for periods prior to
October 1, 2018 was recognized through retained earnings at the date of adoption.
We generate revenue from the sale of integrated solutions such as mass transit fare collection systems, air and ground
combat training systems, and products with C4ISR capabilities. A significant portion of our revenues are generated from
long-term fixed-price contracts with customers that require us to design, develop, manufacture, modify, upgrade, test and
integrate complex systems according to the customer’s specifications. We also generate revenue from services we
provide, such as the operation and maintenance of fare systems for mass transit customers and the support of specialized
military training exercises mainly for international customers. Our contracts are primarily with the U.S. government,
state and local municipalities, international government customers, and international local municipal transit agencies. We
classify sales as products or services in our Consolidated Statements of Operations based on the attributes of the
underlying contracts.
We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified,
payment terms are identified, the contract has commercial substance and collectability of consideration is probable. For
certain contracts that meet the foregoing requirements, primarily international direct commercial sale contracts, we are
required to obtain certain regulatory approvals. In these cases where regulatory approval is required in addition to
60
approval from both parties, we recognize revenue based on the likelihood of obtaining timely regulatory approvals based
upon all known facts and circumstances.
To determine the proper revenue recognition method, we evaluate each contractual arrangement to identify all
performance obligations. A performance obligation is a promise in a contract to transfer a distinct good or service to the
customer. The majority of our contracts have a single performance obligation because the promise to transfer the
individual good or service is not separately identifiable from other promises within the contract and is, therefore, not
distinct. These contractual arrangements either require the use of a highly specialized engineering, development and
manufacturing process to provide goods according to customer specifications or represent a bundle of contracted goods
and services that are integrated and together represent a combined output, which may include the delivery of multiple
units.
Some of our contracts have multiple performance obligations, primarily (i) related to the provision of multiple goods or
services or (ii) due to the contract covering multiple phases of the product lifecycle (for instance: development and
engineering, production, maintenance and support). For contracts with more than one performance obligation, we
allocate the transaction price to the performance obligations based upon their relative standalone selling prices. For such
contracts we evaluate whether the stated selling prices for the products or services represent their standalone selling
prices. In cases where a contract requires a customized good or service, our primary method used to estimate the
standalone selling price is the expected cost plus a margin approach. In cases where we sell a standard product or service
offering, the standalone selling price is based on an observable standalone selling price. A number of our contracts with
the U.S. government, including contracts under the U.S. Department of Defense’s Foreign Military Sales program (FMS
Contracts), are subject to the Federal Acquisition Regulations (FAR) and the price is typically based on estimated or
actual costs plus a reasonable profit margin. As a result of these regulations, the standalone selling price of products or
services in our contracts with the U.S. government and FMS Contracts are typically equal to the selling price stated in
the contract. Therefore, we typically do not need to allocate (or reallocate) the transaction price to multiple performance
obligations in our contracts with the U.S. government.
The majority of our sales are from performance obligations satisfied over time. Sales are recognized over time when
control is continuously transferred to the customer during the contract or the contracted good does not have alternative
use to us. For U.S. government contracts, the continuous transfer of control to the customer is supported by contract
clauses that provide for (i) progress or performance-based payments or (ii) the unilateral right of the customer to
terminate the contract for its convenience, in which case we have the right to receive payment for costs incurred plus a
reasonable profit for products and services that do not have alternative uses to us. Our contracts with international
governments and local municipal transit agencies contain similar termination for convenience clauses, or we have a
legally enforceable right to receive payment for costs incurred and a reasonable profit for products or services that do not
have alternative uses to us.
For those contracts for which control transfers over time, revenue is recognized based on the extent of progress towards
completion of the performance obligation. The selection of the method to measure progress towards completion requires
judgment and is based on the nature of the products or services to be provided. For our design and build type contracts,
we generally use the cost-to-cost measure of progress because it best depicts the transfer of control to the customer
which occurs as we incur costs on our contracts. Under the cost-to-cost measure of progress, the extent of progress
towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of
the performance obligation. Revenues, including estimated fees or profits, are recorded proportionally as costs are
incurred. Contract costs include material, labor and subcontracting costs, as well as an allocation of indirect costs, and
are generally expensed as incurred for these contracts. For contracts with the U.S. government, general and
administrative costs are included in contract costs; however, for purposes of revenue measurement, general and
administrative costs are not included in contract costs for any other customers.
Sales from performance obligations satisfied at a point in time are typically for standard goods and are recognized when
the customer obtains control, which is generally upon delivery and acceptance. Costs of sales are recorded in the period
in which revenue is recognized.
61
We record sales under cost-reimbursement-type contracts as we incur the costs. For cost-reimbursement-type contracts
with the U.S. government, the FAR provides guidance on the types of costs that will be reimbursed in establishing the
contract price.
Sales under service contracts are generally recognized as services are performed or value is provided to our customers.
We measure the delivery of value to our customers using a number of metrics including ridership, units of work
performed, and costs incurred. We determine which metric represents the most meaningful measure of value delivery
based on the nature of the underlying service activities required under each individual contract. In certain circumstances
we recognize revenue based on the right to bill when such amounts correspond to the value being delivered in a billing
cycle. Certain of our transportation systems service contracts contain service level penalties or bonuses, which we
recognize in each period incurred or earned. These contract penalties or bonuses are generally incurred or earned on a
monthly basis; however, certain contracts may be based on a quarterly or annual evaluation. Sales under service
contracts that do not contain measurable units of work performed are recognized on a straight-line basis over the
contractual service period, unless evidence suggests that the revenue is earned, or obligations fulfilled, in a different
manner. Costs incurred under these service contracts are generally expensed as incurred.
Due to the nature of the work required to be performed on many of our performance obligations, the estimation of total
revenue and cost at completion is complex, subject to many variables and requires significant judgment. It is common for
our long-term contracts to contain bonuses, penalties, transactional variable based fees, or other provisions that can either
increase or decrease the transaction price. These variable amounts generally are incurred or earned upon certain
performance metrics, program milestones, transactional based activities and other similar contractual events. We
estimate variable consideration at the most likely amount to which we expect to be entitled. We include estimated
amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized
will not occur when the uncertainty associated with the variable consideration is resolved. Our estimates of variable
consideration and determination of whether to include estimated amounts in the transaction price are based largely on an
assessment of our anticipated performance and all information (historical, current and forecasted) that is reasonably
available to us.
Billing timetables and payment terms on our contracts vary based on a number of factors, including the contract type.
Typical payment terms under fixed-price design and build type contracts provide that the customer pays either
performance-based payments based on the achievement of contract milestones or progress payments based on a
percentage of costs we incur. For the majority of our service contracts, we generally bill on a monthly basis which
corresponds with the satisfaction of our monthly performance obligation under these contracts. We recognize a liability
for payments received in excess of revenue recognized, which is presented as a contract liability on the balance sheet.
The portion of payments retained by the customer until final contract settlement is not considered a significant financing
component because the intent is to protect the customer from our failure to adequately complete some or all of the
obligations under the contract. Payments received from customers in advance of revenue recognition are not considered
to be significant financing components because they are used to meet working capital demands that can be higher in the
early stages of a contract. For certain of our multiple-element arrangements, the contract specifies that we will not be
paid upon the delivery of certain performance obligations, but rather we will be paid when subsequent performance
obligations are satisfied. Generally, in these cases we have determined that a separate financing component exists as a
performance obligation under the contract. In these instances, we allocate a portion of the transaction price to this
financing component. We determine the value of the embedded financing component by discounting the repayment of
the financed amount over the implied repayment term using the effective interest method. This discounting methodology
uses an implied interest rate which reflects the credit quality of the customer and represents an interest rate that would be
similar to what we would offer the customer in a separate financing transaction. Unpaid principal and interest amounts
associated with the financed performance obligation and the value of the embedded financing component are presented
as long-term contracts financing receivables in our consolidated balance sheet. We recognize the allocated transaction
price of the financing component as interest income over the implied financing term.
For fixed-price and cost-reimbursable contracts, we present revenues recognized in excess of billings as contract assets
on the balance sheet. Amounts billed and due from our customers under both contract types are classified as receivables
on the balance sheet.
62
We only include amounts representing contract change orders, claims or other items in the contract value when we
believe the rights and obligations become enforceable. Contract modifications routinely occur to account for changes in
contract specifications or requirements. In most cases, contract modifications are for goods or services that are not
distinct and, therefore, are accounted for as part of the existing contract. Transaction price estimates include additional
consideration for submitted contract modifications or claims when we believe there is an enforceable right to the
modification or claim, the amount can be reliably estimated, and its realization is reasonably assured. Amounts
representing modifications accounted for as part of the existing contract are included in the transaction price and
recognized as an adjustment to sales on a cumulative catch-up basis.
In addition, we are subject to audits of incurred costs related to many of our U.S. government contracts. These audits
could produce different results than we have estimated for revenue recognized on our cost-based contracts with the U.S.
government; however, our experience has been that our costs are acceptable to the government.
Contract Estimates
Use of the cost-to-cost or other similar methods of revenue recognition requires us to make reasonably dependable
estimates regarding the revenue and cost associated with the design, manufacture and delivery of our products and
services. Revisions or adjustments to estimates of the transaction price, estimated costs at completion and estimated
profit or loss of a performance obligation are often required as work progresses under a contract, as experience is gained,
as facts and circumstances change and as new information is obtained, even though the scope of work required under the
contract may not change. In determining the estimated costs at completion, 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. Revisions or adjustments to our estimated transaction price and
estimated costs at completion may also be required if contract modifications occur. The revisions in contract estimates, if
significant, can materially affect our results of operations and cash flows, and in some cases result in liabilities to
complete contracts in a loss position. 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 97% of our sales for
2019. 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
2019 operating income would have increased or decreased by approximately $6.5 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.
The aggregate impact of net changes in contract estimates are presented in the table below (amounts in thousands).
Years Ended September 30,
2018
2019
2017
5,737
3,208
0.12
Operating income (loss)
Net income (loss) from continuing operations
Diluted earnings per share
$ (2,235) $ (6,986) $
(5,146)
(0.19)
(2,351)
(0.08)
63
For other information on accounting policies we have in place for recognizing sales and profits and the impact of our
adoption of ASC 606, see our discussion under “Revenue Recognition” in Note 1 to the Consolidated Financial
Statements.
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 pursuant to relevant accounting
guidance. 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 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.
Prior to the Tax Act, we provided deferred taxes on all undistributed foreign earnings, as we did not consider these
amounts permanently reinvested. Under the transition to a modified territorial tax system, all previously untaxed
undistributed foreign earnings are subject to a transition tax charge at reduced rates and future repatriations of foreign
earnings will generally be exempt from U.S. tax. We will continue to provide applicable deferred taxes based on the tax
liability or withholding taxes that would be due upon repatriation of the undistributed foreign earnings.
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
2019 amortization expense would have increased by approximately $2.0 million.
64
Valuation of Goodwill
Goodwill balances by reporting unit are as follows:
September 30,
Cubic Transportation Systems
Cubic Mission Solutions
Cubic Global Defense
Total goodwill
2019
2017
2018
(in millions)
$ 254.6 $ 49.8 $ 50.9
—
138.1
270.7
145.7
$ 578.1 $ 333.6 $ 321.6
181.4
142.1
Goodwill represents the purchase price paid in excess of the fair value of net tangible and intangible assets acquired.
Goodwill is not amortized but is subject to an impairment test at a reporting unit level on an annual basis and when
circumstances indicate that an impairment is more-likely-than-not. Such circumstances that might indicate an impairment
is more-likely-than-not include a significant adverse change in the business climate for one of our reporting units or a
decision to dispose of a reporting unit or a significant portion of a reporting unit. The test for goodwill impairment is a
two-step process. The first step of the test is performed by comparing the fair value of each reporting unit to its carrying
amount, including recorded goodwill. If the carrying amount of a reporting unit exceeds its fair value, the second step is
performed to measure the amount of the impairment, if any, by comparing the implied fair value of goodwill to its
carrying amount. Any resulting impairment would be recorded in the current period.
Determining the fair value of a reporting unit for purposes of the goodwill impairment test or for changes in our
operating structure 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.
We evaluate our reporting units when changes in our operating structure occur, and if necessary, reassign goodwill using
a relative fair value allocation approach. As described in Note 18 to our Consolidated Financial Statements in Item 8 of
this Form 10-K, beginning on October 1, 2017, we concluded that CMS became a separate operating segment. In
conjunction with the changes to reporting units, we reassigned goodwill between CGD and CMS based on their relative
fair values as of October 1, 2017. We estimated the fair value of CGD and CMS at October 1, 2017 based upon market
multiples from publicly traded comparable companies in addition to discounted cash flows models for CMS and for a
combination of CGD and CMS based on discrete financial forecasts developed by management for planning purposes.
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 discrete financial forecasts. For the
October 1, 2017 valuations, future cash flows were discounted to present value using a discount rate of 13% for our CMS
reporting unit and 11% for the combination of our CGD and CMS reporting units.
For the first step of our fiscal 2019 annual impairment test, we estimated the fair value of CTS based upon market
multiples from publicly traded comparable companies and for CGD and CMS, we estimated the fair value based upon a
combination of market multiples from publicly traded comparable companies and discounted cash flow models. The
discounted cash flows were based on discrete three-year financial forecasts developed by management for planning
purposes. 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 15% for CGD and 12.5% for CMS. The
results of our 2019 annual impairment test indicated that the estimated fair value for our CTS and CGD reporting units
exceeded their carrying amounts by over 100%, while the estimated fair value of our CMS reporting unit exceeded its
carrying amount by over 60%.
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
65
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.
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 2019 net
earnings would have increased or decreased by approximately $0.6 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
2019 would increase or decrease net earnings for 2020 by approximately $0.5 million, and would have decreased or
increased the amount of the benefit obligation recorded at September 30, 2019, by approximately $9.9 million.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
At times 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. and U.K. which are also tied to short-term rates (the U.S. dollar LIBOR rate and the Bank of England Base
Rate). We also have senior unsecured notes payable to insurance companies which have fixed coupon interest rates. See
Note 11 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. and
U.K. 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
66
affected by changes in any interest rate because it is fixed. 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 an equivalent value of $50,000 by using foreign
currency 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, 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.
Investments in our foreign subsidiaries in the U.K., Australia, New Zealand and Canada are not hedged. 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.
67
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
CUBIC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share data)
Years Ended September 30,
2018
2017
2019
Net sales:
Products
Services
Costs and expenses:
Products
Services
Selling, general and administrative expenses
Research and development
Amortization of purchased intangibles
(Gain) loss on sale of property, plant and equipment
Restructuring costs
Operating income
Other income (expenses):
Interest and dividend income
Interest expense
Other income (expense), net
$ 1,011,069 $
485,406
1,496,475
704,941 $
497,957
1,202,898
681,559
426,150
1,107,709
732,137
332,923
270,064
50,132
42,106
(32,510)
15,386
1,410,238
472,698
362,694
258,644
52,398
27,064
—
5,018
1,178,516
473,670
305,653
240,196
52,652
30,245
405
2,260
1,105,081
86,237
24,382
2,628
6,519
(20,453)
(19,957)
1,615
(10,424)
(687)
953
(15,027)
364
Income (loss) from continuing operations before income taxes
52,346
14,886
(11,082)
Income tax provision
Income (loss) from continuing operations
Net income (loss) from discontinued operations
Net income (loss)
Less noncontrolling interest in loss of VIE
Net income (loss) attributable to Cubic
Amounts attributable to Cubic:
Net income (loss) from continuing operations
Net income (loss) from discontinued operations
Net income (loss) attributable to Cubic
Net income (loss) per share:
Basic
Continuing operations attributable to Cubic
Discontinued operations
Basic earnings per share attributable to Cubic
Diluted
Continuing operations attributable to Cubic
Discontinued operations
Diluted earnings per share attributable to Cubic
Weighted average shares used in per share calculations:
Basic
Diluted
See accompanying notes.
11,040
7,093
14,658
41,306
(1,423)
39,883
7,793
4,243
12,036
(25,740)
14,531
(11,209)
(9,811)
(274)
—
$
49,694 $
12,310 $
(11,209)
$
$
$
$
$
$
$
51,117
(1,423)
49,694 $
8,067
4,243
12,310 $
(25,740)
14,531
(11,209)
1.68 $
(0.05) $
1.63 $
0.30 $
0.16 $
0.45 $
1.67 $
(0.05) $
1.62 $
0.29 $
0.16 $
0.45 $
(0.95)
0.54
(0.41)
(0.95)
0.54
(0.41)
30,495
30,606
27,229
27,351
27,106
27,106
68
CUBIC CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Net income (loss)
Other comprehensive income (loss):
$
Years Ended September 30,
2018
2019
39,883 $ 12,036 $ (11,209)
2017
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 income (loss)
Total comprehensive income
Noncontrolling interest in comprehensive loss of consolidated VIE, net of
tax
Comprehensive income attributable to Cubic, net of tax
(19,481)
(11,286)
5,540
(8,126)
13,180
1,440
3,103
34
(1,071)
(1,386)
929
(358)
1,717
(29,050)
10,833
963
(1,623)
10,413
(1,429)
13,191
1,982
(9,811)
20,644 $ 10,687 $
(274)
—
1,982
$
See accompanying notes.
69
CUBIC CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
Current assets:
Cash and cash equivalents
Cash in consolidated VIE
Restricted cash
Restricted cash in consolidated VIE
Accounts receivable:
Long-term contracts
Allowance for doubtful accounts
Contract assets
Recoverable income taxes
Inventories
Assets held for sale
Other current assets
Other current assets in consolidated VIE
Total current assets
Long-term contracts receivables
Long-term contracts financing receivables
Long-term contracts financing receivables in consolidated VIE
Long-term capitalized contract costs
Long-term capitalized contract costs in consolidated VIE
Property, plant and equipment, net
Deferred income taxes
Goodwill
Purchased intangibles, net
Other assets
Other assets in consolidated VIE
Total assets
See accompanying notes.
September 30,
2019
2018
$
65,800 $
347
19,507
9,967
111,834
374
17,400
10,000
127,406
(1,392)
126,014
349,559
7,754
106,794
—
38,534
33
724,309
393,691
(1,324)
392,367
—
91
84,199
8,177
43,705
—
668,147
—
36,285
115,508
—
—
144,969
4,098
578,097
165,613
76,872
1,419
6,134
—
—
84,924
1,258
117,546
4,713
333,626
73,533
14,192
810
$ 1,847,170 $ 1,304,883
70
CUBIC CORPORATION
CONSOLIDATED BALANCE SHEETS—continued
(in thousands)
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Short-term borrowings
Trade accounts payable
Trade accounts payable in consolidated VIE
Contract liabilities
Customer advances
Accrued compensation
Other current liabilities
Other current liabilities in consolidated VIE
Income taxes payable
Current portion of long-term debt
Current liabilities of discontinued operations
Total current liabilities
Long-term debt
Long-term debt in consolidated VIE
Accrued pension liability
Deferred compensation
Income taxes payable
Deferred income taxes
Other noncurrent liabilities
Other noncurrent liabilities in consolidated VIE
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
40,124 issued and 31,178 outstanding at September 30, 2019
36,201 issued and 27,255 outstanding at September 30, 2018
Retained earnings
Accumulated other comprehensive loss
Treasury stock at cost - 8,945 shares
Shareholders’ equity related to Cubic
Noncontrolling interest in VIE
Total shareholders’ equity
$
September 30,
2019
2018
195,500 $
180,773
25
46,170
—
58,343
36,670
191
773
10,714
—
529,159
189,110
61,994
25,386
11,040
937
4,554
22,817
21,605
—
125,414
165
—
75,941
65,277
52,956
—
8,586
—
—
328,339
199,793
9,056
7,802
11,476
2,406
2,689
19,113
13
—
—
274,472
862,948
(139,693)
(36,078)
961,649
18,919
980,568
45,008
801,834
(110,643)
(36,078)
700,121
24,075
724,196
Total liabilities and shareholders’ equity
$ 1,847,170 $ 1,304,883
See accompanying notes.
71
CUBIC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Operating Activities:
Net income (loss)
Net (income) loss from discontinued operations
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization
Share-based compensation expense
Change in fair value of contingent consideration
(Gain) loss on sale of property, plant and equipment
Gain on sale of investment in real estate
Deferred income taxes
Net pension benefit
Excess tax benefits from equity incentive plans
Changes in operating assets and liabilities, net of effects from acquisitions
Accounts receivable
Contract assets
Inventories
Prepaid expenses and other current assets
Long-term financing receivables
Long-term capitalized contract costs
Accounts payable and other current liabilities
Contract liabilities
Income taxes
Other items, net
Years Ended September 30,
2018
2017
2019
$
39,883 $
1,423
12,036 $
(4,243)
(11,209)
(14,531)
64,742
15,488
(1,005)
(32,510)
—
(3,363)
(1,337)
—
44,473
(83,697)
(31,544)
5,317
(56,575)
—
27,792
(15,359)
(17,268)
11,689
46,600
7,515
1,029
—
(1,474)
(6,860)
(2,770)
—
(34,762)
—
3,023
(15,455)
—
(29,552)
30,423
21,566
(361)
(18,126)
48,045
5,012
(3,878)
405
—
(917)
(1,046)
(35)
(45,443)
—
(18,867)
7,286
—
8,911
13,389
7,383
8,240
(5,756)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES FROM
CONTINUING OPERATIONS
NET CASH PROVIDED BY OPERATING ACTIVITIES FROM DISCONTINUED
OPERATIONS
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
(31,851)
8,589
(3,011)
—
(31,851)
10,376
18,965
27,747
24,736
Investing Activities:
Acquisition of businesses, net of cash acquired
Purchases of marketable securities
Proceeds from sales or maturities of marketable securities
Proceeds from sale of property, plant and equipment
Purchases of property, plant and equipment
Proceeds from sale of investment in real estate
Purchase of non-marketable debt and equity securities
NET CASH USED IN INVESTING ACTIVITIES FROM CONTINUING OPERATIONS
NET CASH PROVIDED BY INVESTING ACTIVITIES FROM DISCONTINUED
OPERATIONS
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
Financing Activities:
Proceeds from short-term borrowings
Principal payments on short-term borrowings
Principal payments on long-term debt
Proceeds from long-term borrowings in consolidated VIE
Deferred financing fees
Deferred financing fees in consolidated VIE
Proceeds from stock issued under employee stock purchase plan
Purchase of common stock
(393,908)
—
—
44,891
(49,084)
—
(60,694)
(458,795)
(16,322)
—
—
—
(31,696)
2,400
(1,500)
(47,118)
(16,830)
(19,121)
31,868
—
(36,916)
—
(2,700)
(43,699)
—
(458,795)
133,795
86,677
1,217
(42,482)
898,000
(702,500)
—
50,162
(1,907)
—
1,832
(3,688)
269,770
(324,770)
—
13,196
—
(4,778)
1,517
(2,449)
130,780
(315,780)
(978)
—
—
—
2,234
(2,444)
72
Dividends paid
Excess tax benefits from equity incentive plans
Contingent consideration payments related to acquisitions of businesses
Equity contribution from Boston VIE partner
Proceeds from equity offering, net
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
Effect of exchange rates on cash
(8,414)
—
(820)
—
215,832
448,497
(7,355)
—
(1,156)
24,349
—
(31,676)
(7,341)
35
(2,625)
—
—
(196,119)
(1,838)
(2,935)
9,667
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(43,987)
71,031
(204,198)
Cash, cash equivalents and restricted cash at the beginning of the period
139,608
68,577
272,775
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT THE END OF THE
PERIOD
$
95,621 $ 139,608 $
68,577
Supplemental disclosure of non-cash investing and financing activities:
Liability recognized in connection with the acquisition of Nuvotronics, net
Liability recognized in connection with the acquisition of Shield Aviation, net
Liability recognized in connection with the acquisition of Deltenna, net
Liability recognized in connection with the acquisition of Vocality, net
$
$
$
$
4,900 $
— $
— $
— $
— $
6,248 $
— $
— $
—
—
1,327
271
See accompanying notes.
73
CUBIC CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(in thousands, except per share amounts)
Accumulated
Other
Noncontrolling Number
Common
Stock
Retained
Earnings
Comprehensive Treasury
Loss
Stock
Interest in
VIE
of Shares
Outstanding
October 1, 2016
$
32,756 $ 813,035 $
(119,817) $ (36,078) $
—
26,992
Net loss
Other comprehensive income, net of
tax
Stock issued under equity incentive
plans
Stock issued under employee stock
purchase plan
Purchase of common stock
Stock-based compensation
Tax expense from equity incentive
plans
Cash dividends paid -- $.27 per share
of common stock
—
(11,209)
—
—
—
2,234
(2,444)
5,269
35
—
—
—
—
—
—
—
(7,341)
13,191
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
158
32
(55)
—
—
—
September 30, 2017
37,850
794,485
(106,626)
(36,078)
—
27,127
Net income (loss)
Other comprehensive loss, net of tax
Stock issued under equity incentive
plans
Stock issued under employee stock
purchase plan
Purchase of common stock
Stock-based compensation
Equity contribution of noncontrolling
interest
Cumulative effect of accounting
standard adoption
Cash dividends paid -- $.27 per share
of common stock
—
—
—
1,517
(2,449)
8,090
—
—
—
12,310
—
—
(1,623)
—
—
—
—
—
—
—
—
—
—
2,394
(2,394)
(7,355)
—
—
—
—
—
—
—
—
—
—
(274)
—
—
—
—
—
24,349
—
—
—
—
158
26
(56)
—
—
—
—
September 30, 2018
45,008
801,834
(110,643)
(36,078)
24,075
27,255
49,694
—
—
(29,050)
Net income (loss)
Other comprehensive loss, net of tax
Stock issued under equity incentive
plans
Stock issued under employee stock
purchase plan
Purchase of common stock
Stock-based compensation
Cumulative effect of accounting
standard adoption
Stock issued under equity offering, net
Cash dividends paid -- $.27 per share
of common stock
—
—
—
1,832
(3,688)
15,488
—
—
—
—
—
215,832
19,834
—
—
(8,414)
—
—
—
—
—
—
—
—
—
(9,811)
—
—
—
—
—
—
—
145
32
(49)
—
4,655
—
—
3,795
—
—
—
—
—
—
—
—
—
September 30, 2019
$ 274,472
$ 862,948
$
(139,693) $ (36,078) $
18,919
31,178
See accompanying notes.
74
CUBIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of the Business: We design, integrate and operate systems, products and services focused in the
transportation, command, control, communication, computers, intelligence, surveillance and reconnaissance (C4ISR),
and training markets. We offer integrated payment and information systems, expeditionary communications, cloud-based
computing and intelligence delivery, as well as training and readiness solutions.
Through September 30, 2017 our principal lines of business were transportation systems and services, defense systems,
and defense services. On May 31, 2018, we sold the Cubic Global Defense Services (CGD Services) business. In
March 2018, all of the criteria were met for the classification of CGD Services as a discontinued operation. As a result,
the operating results, assets, liabilities, and cash flows of CGD Services have been classified as discontinued operations
and have been excluded from amounts described below. In addition, we concluded that Cubic Mission Solutions became
a separate operating and reportable segment beginning on October 1, 2017. As a result, we now operate in three
reportable business segments: Cubic Transportation Systems (CTS), Cubic Global Defense Systems (CGD), and Cubic
Mission Solutions (CMS).
Refer to “Note 3 – Acquisitions and Divestitures” for additional information about the sale of CGD Services and the
related discontinued operation classification and “Note 18 – Business Segment Information” for additional information
on the separate disclosure of operating and reportable segment information for CMS.
Principles of Consolidation: The consolidated financial statements include the accounts of Cubic Corporation,
subsidiaries we control, and variable interest entities (VIEs) 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 Operations 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. 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 Operations as a component of other income (expense). Total transaction gains and losses,
which are related primarily to advances to foreign subsidiaries and advances between foreign subsidiaries amounted to a
gain of $0.7 million in 2019, a loss of $2.2 million in 2018, and a gain of $0.7 million in 2017.
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 and contingent consideration
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.
Revenue Recognition: Effective October 1, 2018, we adopted Accounting Standards Update (ASU) 2014-09, Revenue
from Contracts with Customers, as amended (commonly known as ASC 606), using the modified retrospective transition
75
method. The adoption of ASC 606 resulted in a change in our significant accounting policy regarding revenue
recognition, and resulted in changes in our accounting policies regarding contract estimates, backlog, inventory, contract
assets, long-term capitalized contract costs, and contract liabilities as described below.
The cumulative effect of applying the standard was an increase of $24.5 million to shareholders' equity as of October 1,
2018. In accordance with the modified retrospective transition method, our Consolidated Statement of Operations for the
year ended September 30, 2019 and our Consolidated Balance Sheet as of September 30, 2019 are presented under ASC
606, while our Consolidated Statement of Operations for the years ended September 30, 2018 and 2017 and our
Consolidated Balance Sheet as of September 30, 2018 are presented under ASC 605, Revenue Recognition, the
accounting standard in effect for periods ending prior to October 1, 2018. See Note 2 for disclosure of the impact of the
adoption of ASC 606 on our Consolidated Statements of Operations for the year ended September 30, 2019 and our
Consolidated Balance Sheets as of October 1, 2018 and September 30, 2019.
We generate revenue from the sale of integrated solutions such as mass transit fare collection systems, air and ground
combat training systems, and products with C4ISR capabilities. A significant portion of our revenues are generated from
long-term fixed-price contracts with customers that require us to design, develop, manufacture, modify, upgrade, test and
integrate complex systems according to the customer’s specifications. We also generate revenue from services we
provide, such as the operation and maintenance of fare systems for mass transit customers and the support of specialized
military training exercises mainly for international customers. Our contracts are primarily with the U.S. government,
state and local municipalities, international government customers, and international local municipal transit agencies. We
classify sales as products or services in our Consolidated Statements of Operations based on the attributes of the
underlying contracts.
We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified,
payment terms are identified, the contract has commercial substance and collectability of consideration is probable. For
certain contracts that meet the foregoing requirements, primarily international direct commercial sale contracts, we are
required to obtain certain regulatory approvals. In these cases where regulatory approval is required in addition to
approval from both parties, we recognize revenue based on the likelihood of obtaining timely regulatory approvals based
upon all known facts and circumstances.
To determine the proper revenue recognition method, we evaluate each contractual arrangement to identify all
performance obligations. A performance obligation is a promise in a contract to transfer a distinct good or service to the
customer. The majority of our contracts have a single performance obligation because the promise to transfer the
individual good or service is not separately identifiable from other promises within the contract and is therefore, not
distinct. These contractual arrangements either require the use of a highly specialized engineering, development and
manufacturing process to provide goods according to customer specifications or represent a bundle of contracted goods
and services that are integrated and together represent a combined output, which may include the delivery of multiple
units.
Some of our contracts have multiple performance obligations, primarily (i) related to the provision of multiple goods or
services or (ii) due to the contract covering multiple phases of the product lifecycle (for instance: development and
engineering, production, maintenance and support). For contracts with more than one performance obligation, we
allocate the transaction price to the performance obligations based upon their relative standalone selling prices. For such
contracts we evaluate whether the stated selling prices for the products or services represent their standalone selling
prices. In cases where a contract requires a customized good or service, our primary method used to estimate the
standalone selling price is the expected cost plus a margin approach. In cases where we sell a standard product or service
offering, the standalone selling price is based on an observable standalone selling price. A number of our contracts with
the U.S. government, including contracts under the U.S. Department of Defense’s Foreign Military Sales program (FMS
Contracts), are subject to the Federal Acquisition Regulations (FAR) and the price is typically based on estimated or
actual costs plus a reasonable profit margin. As a result of these regulations, the standalone selling price of products or
services in our contracts with the U.S. government and FMS Contracts are typically equal to the selling price stated in
the contract. Therefore, we typically do not need to allocate (or reallocate) the transaction price to multiple performance
obligations in our contracts with the U.S. government.
76
The majority of our sales are from performance obligations satisfied over time. Sales are recognized over time when
control is continuously transferred to the customer during the contract or the contracted good does not have alternative
use to us. For U.S. government contracts, the continuous transfer of control to the customer is supported by contract
clauses that provide for (i) progress or performance-based payments or (ii) the unilateral right of the customer to
terminate the contract for its convenience, in which case we have the right to receive payment for costs incurred plus a
reasonable profit for products and services that do not have alternative uses to us. Our contracts with international
governments and local municipal transit agencies contain similar termination for convenience clauses, or we have a
legally enforceable right to receive payment for costs incurred and a reasonable profit for products or services that do not
have alternative uses to us.
For those contracts for which control transfers over time, revenue is recognized based on the extent of progress towards
completion of the performance obligation. The selection of the method to measure progress towards completion requires
judgment and is based on the nature of the products or services to be provided. For our design and build type contracts,
we generally use the cost-to-cost measure of progress because it best depicts the transfer of control to the customer
which occurs as we incur costs on our contracts. Under the cost-to-cost measure of progress, the extent of progress
towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of
the performance obligation. Revenues, including estimated fees or profits, are recorded proportionally as costs are
incurred. Contract costs include material, labor and subcontracting costs, as well as an allocation of indirect costs, and
are generally expensed as incurred for these contracts. For contracts with the U.S. government, general and
administrative costs are included in contract costs; however, for purposes of revenue measurement, general and
administrative costs are not considered contract costs for any other customers.
Sales from performance obligations satisfied at a point in time are typically for standard goods and are recognized when
the customer obtains control, which is generally upon delivery and acceptance. Costs of sales are recorded in the period
in which revenue is recognized.
We record sales under cost-reimbursement-type contracts as we incur the costs. For cost-reimbursement-type contracts
with the U.S. government, the FAR provides guidance on the types of costs that will be reimbursed in establishing the
contract price.
Sales under service contracts are generally recognized as services are performed or value is provided to our customers.
We measure the delivery of value to our customers using a number of metrics including ridership, units of work
performed, and costs incurred. We determine which metric represents the most meaningful measure of value delivery
based on the nature of the underlying service activities required under each individual contract. In certain circumstances
we recognize revenue based on the right to bill when such amounts correspond to the value being delivered in a billing
cycle. Certain of our transportation systems service contracts contain service level penalties or bonuses, which we
recognize in each period incurred or earned. These contract penalties or bonuses are generally incurred or earned on a
monthly basis; however, certain contracts may be based on a quarterly or annual evaluation. Sales under service
contracts that do not contain measurable units of work performed are recognized on a straight-line basis over the
contractual service period, unless evidence suggests that the revenue is earned, or obligations fulfilled, in a different
manner. Costs incurred under these service contracts are generally expensed as incurred.
Due to the nature of the work required to be performed on many of our performance obligations, the estimation of total
revenue and cost at completion is complex, subject to many variables and requires significant judgment. It is common for
our long-term contracts to contain bonuses, penalties, transactional variable based fees, or other provisions that can either
increase or decrease the transaction price. These variable amounts generally are incurred or earned upon certain
performance metrics, program milestones, transactional based activities and other similar contractual events. We
estimate variable consideration at the most likely amount to which we expect to be entitled. We include estimated
amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized
will not occur when the uncertainty associated with the variable consideration is resolved. Our estimates of variable
consideration and determination of whether to include estimated amounts in the transaction price are based largely on an
assessment of our anticipated performance and all information (historical, current and forecasted) that is reasonably
available to us.
77
Billing timetables and payment terms on our contracts vary based on a number of factors, including the contract type.
Typical payment terms under fixed-price design and build type contracts provide that the customer pays either
performance-based payments based on the achievement of contract milestones or progress payments based on a
percentage of costs we incur. For the majority of our service contracts, we generally bill on a monthly basis which
corresponds with the satisfaction of our monthly performance obligation under these contracts. We recognize a liability
for payments received in excess of revenue recognized, which is presented as a contract liability on the balance sheet.
The portion of payments retained by the customer until final contract settlement is not considered a significant financing
component because the intent is to protect the customer from our failure to adequately complete some or all of the
obligations under the contract. Payments received from customers in advance of revenue recognition are not considered
to be significant financing components because they are used to meet working capital demands that can be higher in the
early stages of a contract. For certain of our multiple-element arrangements, the contract specifies that we will not be
paid upon the delivery of certain performance obligations, but rather we will be paid when subsequent performance
obligations are satisfied. Generally, in these cases we have determined that a separate financing component exists as a
performance obligation under the contract. In these instances, we allocate a portion of the transaction price to this
financing component. We determine the value of the embedded financing component by discounting the repayment of
the financed amount over the implied repayment term using the effective interest method. This discounting methodology
uses an implied interest rate which reflects the credit quality of the customer and represents an interest rate that would be
similar to what we would offer the customer in a separate financing transaction. Unpaid principal and interest amounts
associated with the financed performance obligation and the value of the embedded financing component are presented
as long-term contracts financing receivables in our consolidated balance sheet. We recognize the allocated transaction
price of the financing component as interest income over the implied financing term.
For fixed-price and cost-reimbursable contracts, we present revenues recognized in excess of billings as contract assets
on the balance sheet. Amounts billed and due from our customers under both contract types are classified as receivables
on the balance sheet.
We only include amounts representing contract change orders, claims or other items in the contract value when we
believe the rights and obligations become enforceable. Contract modifications routinely occur to account for changes in
contract specifications or requirements. In most cases, contract modifications are for goods or services that are not
distinct and, therefore, are accounted for as part of the existing contract. Transaction price estimates include additional
consideration for submitted contract modifications or claims when we believe there is an enforceable right to the
modification or claim, the amount can be reliably estimated, and its realization is reasonably assured. Amounts
representing modifications accounted for as part of the existing contract are included in the transaction price and
recognized as an adjustment to sales on a cumulative catch-up basis.
In addition, we are subject to audits of incurred costs related to many of our U.S. government contracts. These audits
could produce different results than we have estimated for revenue recognized on our cost-based contracts with the U.S.
government; however, our experience has been that our costs are acceptable to the government.
Contract Estimates: Use of the cost-to-cost or other similar methods of revenue recognition requires us to make
reasonably dependable estimates regarding the revenue and cost associated with the design, manufacture and delivery of
our products and services. Revisions or adjustments to estimates of the transaction price, estimated costs at completion
and estimated profit or loss of a performance obligation are often required as work progresses under a contract, as
experience is gained, as facts and circumstances change and as new information is obtained, even though the scope of
work required under the contract may not change. Revisions or adjustments may also be required if contract
modifications occur. The impact of revisions in profit or loss estimates are recognized on a cumulative catch-up basis in
the period in which the revisions are made. The revisions in contract estimates, if significant, can materially affect our
results of operations and cash flows, and in some cases result in liabilities to complete contracts in a loss position. The
aggregate impact of net changes in contract estimates are presented in the table below (amounts in thousands).
78
Operating income (loss)
Net income (loss) from continuing operations
Diluted earnings per share
$ (2,235) $ (6,986) $
(5,146)
(0.19)
(2,351)
(0.08)
2017
5,737
3,208
0.12
Years Ended September 30,
2018
2019
Backlog: Backlog (i.e., unfulfilled or remaining performance obligations) represents the sales we expect to recognize for
our products and services for which control has not yet transferred to the customer. It is comprised of both funded
backlog (firm orders for which funding is authorized and appropriated) and unfunded backlog. Unexercised contract
options and indefinite delivery indefinite quantity (IDIQ) contracts are not included in backlog until the time the option
or IDIQ task order is exercised or awarded. For our cost-reimbursable and fixed-priced-incentive contracts, the estimated
consideration we expect to receive pursuant to the terms of the contract may exceed the contractual award amount. The
estimated consideration is determined at the outset of the contract and is continuously reviewed throughout the contract
period. In determining the estimated consideration, we consider the risks related to the technical, schedule and cost
impacts to complete the contract and an estimate of any variable consideration. Periodically, we review these risks and
may increase or decrease backlog accordingly. As of September 30, 2019, our ending backlog was $3.401 billion. We
expect to recognize approximately 30% of our September 30, 2019 backlog over the next 12 months and
approximately 45% over the next 24 months as revenue, with the remainder recognized thereafter.
Disaggregation of Revenue: See Note 18 for information regarding our sales by customer type, contract type and
geographic region for each of our segments. We believe those categories best depict how the nature, amount, timing and
uncertainty of our revenue and cash flows are affected by economic factors.
Cash Equivalents: We consider highly liquid investments with maturity of three months or less when purchased to be
cash equivalents. Cash and cash equivalents excludes $29.5 million and $27.4 million of restricted cash at September 30,
2019 and 2018, respectively, which for purposes of our consolidated statements of cash flows, is included in cash, cash
equivalents and restricted cash.
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 noncurrent, depending upon the date of the lapse of the respective restriction.
Accounts Receivable: Receivables consist of billed amounts due from our customers. Due to the nature of our customers,
we generally do not require collateral. We have limited exposure to credit risk as we have historically collected
substantially all of our receivables. We generally require minimal allowance for doubtful accounts for our customers,
which amounted to $1.4 million and $1.3 million as of September 30, 2019 and September 30, 2018, respectively.
Contract Assets: Contract assets include unbilled amounts typically resulting from sales under contracts when the
percentage-of-completion cost-to-cost method of revenue recognition is utilized and revenue recognized exceeds the
amount billed to the customer. Contract assets are classified as current assets and, in accordance with industry practice,
include amounts that may be billed and collected beyond one year due to the long-cycle nature of many of our contracts.
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. Any inventoried costs in excess of estimated realizable
value are immediately charged to cost of sales.
Long-term capitalized contract costs: Through September 30, 2018, and prior to the adoption of ASC 606 long-term
capitalized contract costs included costs incurred on contracts to develop and manufacture transportation systems for
customers for which customer payments and revenue recognition did not begin until the customers began operating the
systems. Upon adoption of ASC 606, revenue recognition and cost recognition are no longer deferred in these situations
and therefore we no longer have long-term capitalized contract costs.
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
79
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 depreciated on a
straight-line basis over the estimated useful life of the software, which ranges from three to seven years. No depreciation
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 amount may not be recoverable. The test is performed by comparing the fair
value of each of our reporting units to its carrying amount, including recorded goodwill. If the carrying amount exceeds
the fair value, we measure impairment by comparing the implied fair value of goodwill to its carrying amount, and any
impairment determined would be recorded in the current period. Our purchased intangible assets are subject to
amortization. In cases that we determine that a pattern in which the intangible asset will be consumed can be reliably
determined we use an amortization method that best matches that expected pattern. If we believe that such a pattern
cannot be reliably determined, we use a straight-line method of amortization.
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, 2019, 2018 or 2017.
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. Adjustments to deferred revenue are based on the fair value of the deferred
revenue and amortized into income over the underlying deferred revenue period. 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.
Contract Liabilities: Contract liabilities (formerly referred to as customer advances prior to the adoption of ASC 606)
include advance payments and billings in excess of revenue recognized. Contract liabilities are classified as current
based on our contract operating cycle and reported on a contract-by-contract basis, net of revenue recognized, at the end
of each reporting period.
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
80
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
(loss) 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 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 as other comprehensive income (loss).
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 (RSUs) are granted to eligible employees and directors and represent
rights to receive shares of common stock at a future date if vesting occurs. We have three general categories of awards:
RSUs with time-based vesting, RSUs with performance-based vesting, and RSUs with performance and market-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. See Note 16 for further information on our stock based
compensation plans.
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. After the enactment of the Tax Cuts and Jobs Act of 2017 (Tax Act), we have provided for
deferred taxes on unremitted earnings, as applicable. We include interest and penalties related to income taxes, including
unrecognized tax benefits, within the income tax provision. Accounting Standards Codification (ASC) 740-20 requires
total income tax expense or benefit to be allocated among continuing operations, discontinued operations, extraordinary
items, other comprehensive income and items charged directly to shareholders’ equity.
Net Income (Loss) Per Share: Basic net income (loss) per share (EPS) is computed by dividing the net income (loss)
attributable to Cubic for the period by the weighted average number of common shares outstanding during the period,
including vested RSUs.
81
In periods with a net income from continuing operations attributable to Cubic, diluted EPS is computed by dividing the
net income for the period by the weighted average number of common and common equivalent shares outstanding
during the period. Common equivalent shares consist of dilutive RSUs. Dilutive RSUs are calculated based on the
average share price for each fiscal period using the treasury stock method. For RSUs with performance-based vesting, no
common equivalent shares are included in the computation of diluted EPS until the related performance criteria have
been met. For RSUs with performance and market-based vesting, no common equivalent shares are included in the
computation of diluted EPS until the performance criteria have been met, and once the criteria are met the dilutive
restricted stock units are calculated using the treasury stock method, modified by the multiplier that is calculated at the
end of the accounting period as if the vesting date was at the end of the accounting period. The multiplier on RSUs with
performance and market-based vesting is further described in Note 16.
In periods with a net loss from continuing operations attributable to Cubic, common equivalent shares are not included in
the computation of diluted EPS, because to do so would be anti-dilutive.
The weighted-average number of shares outstanding used to compute net income (loss) per common share were as
follows (in thousands):
Years Ended September 30,
2018
2017
2019
Weighted average shares - basic
Effect of dilutive securities
Weighted average shares - diluted
30,495
111
30,606
27,229
122
27,351
27,106
—
27,106
Number of anti-dilutive securities
—
—
967
Recent Accounting Pronouncements:
Recently Adopted Accounting Pronouncements
On December 22, 2017 the U.S. government enacted the Tax Act. Due to the complexity of the Tax Act, the SEC issued
guidance in Staff Accounting Bulletin (SAB) 118 which clarified the accounting for income taxes under ASC 740 if
certain information was not yet available, prepared or analyzed in reasonable detail to complete the accounting for
income tax effects of the Tax Act. SAB 118 provided for a measurement period of up to one year after the enactment of
the Tax Act, during which time the required analyses and accounting must be completed. During fiscal year 2018, we
recorded provisional amounts for the income tax effects of the changes in tax law and tax rates, as reasonable estimates
were determined by management during this period. The SAB 118 measurement period subsequently ended on
December 22, 2018. Although we no longer consider these amounts to be provisional, the determination of the Tax Act’s
income tax effects may change following future legislation or further interpretation of the Tax Act based on the
publication of recently proposed U.S. Treasury regulations and guidance from the Internal Revenue Service and state tax
authorities.
In November 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-18, Restricted Cash, which
requires amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash
equivalents when reconciling the total beginning and ending amounts for the periods shown on the statement of cash
flows. ASU 2016-18 was adopted by us beginning October 1, 2018. The application of this ASU did not impact our
Consolidated Statements of Operations or our Consolidated Balance Sheets, but resulted in a retrospective change in the
presentation of restricted cash, including the inclusion of our restricted cash balances within the beginning and ending
amounts of cash and cash equivalents in our Statements of Cash Flows. In addition, changes in the total of cash, cash
equivalents and restricted cash are now reflected in our Statements of Cash Flows for all periods presented.
Recent Accounting Pronouncements – Not Yet Adopted
In February 2016, the FASB issued ASU 2016-02, Leases. Under the new guidance, lessees will be required to recognize
the following for all leases (with the exception of short-term leases) at the commencement date: (a) a lease liability,
82
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 and 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 expect to elect the practical expedients which provide that entities need not reassess whether
existing contracts contain a lease, lease classification of existing leases, or the treatment of initial direct costs on existing
leases. We are substantially complete with our review of lease contracts, evaluating other contracts for potentially
embedded leases, implementing a new lease accounting and administration software solution, and establishing new
processes and internal controls. Upon adoption, we expect to record a right of use asset of approximately $80 million and
a lease liability of approximately $88 million. We do not expect material changes to the recognition of lease expense in
our consolidated statements of income.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to
Accounting for Hedging Activities, which aims to improve the financial reporting of hedging relationships to better
portray the economic results of an entity’s risk management activities in its financial statements. The amendments in this
ASU are intended to better align an entity’s risk management activities and financial reporting for hedging relationships
through changes to both the designation and measurement guidance for qualifying hedging relationships and the
presentation of hedge results. To satisfy that objective, the amendments expand and refine hedge accounting for both
non-financial and financial risk components, and align the recognition and presentation of the effects of the hedging
instrument and the hedged item in the financial statements. Additionally, the amendments (1) permit hedge accounting
for risk components in hedging relationships involving non-financial risk and interest rate risk; (2) change the guidance
for designating fair value hedges of interest rate risk and for measuring the change in fair value of the hedged item in fair
value hedges of interest rate risk; (3) continue to allow an entity to exclude option premiums and forward points from the
assessment of hedge effectiveness; and (4) permit an entity to exclude the portion of the change in fair value of a
currency swap that is attributable to a cross-currency basis spread from the assessment of hedge effectiveness. The
amendments in this ASU are effective for us in our annual period beginning October 1, 2019 and interim periods within
that year. We do not expect the adoption of this standard to have a significant impact on our consolidated financial
statements.
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. This standard removes
the second step of the goodwill impairment test, where a determination of the fair value of individual assets and
liabilities of a reporting unit was needed to measure the goodwill impairment. Under this updated standard, goodwill
impairment will now be the amount by which a reporting unit’s carrying amount exceeds its fair value, not to exceed the
carrying amount of goodwill. The guidance will be effective for us in our fiscal year beginning October 1, 2020 with
early adoption permitted. Adoption of ASU 2017-04 will have no immediate impact on our consolidated financial
statements and would only have the potential to impact the amount of any goodwill impairment recorded after the
adoption of the ASU. We are currently evaluating whether to adopt the guidance early.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement - Disclosure Framework (Topic 820). The
updated guidance modifies the disclosure requirements on fair value measurements. The amendments in this accounting
standard update are effective for us in our annual period beginning October 1, 2020 and interim periods within that
annual period. Early adoption is permitted for any removed or modified disclosures. We do not expect the adoption of
this standard to have a significant impact on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-14, Defined Benefit Plan - Disclosure Framework (Topic 715), which
modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement benefit
plans. The guidance removes disclosures that are no longer considered cost beneficial, clarifies the specific requirements
of disclosures and adds disclosure requirements identified as relevant. The amendments in this accounting standard
update are effective for us in our annual period beginning October 1, 2020. Early adoption is permitted. We do not
expect the adoption of this standard to have a significant impact on our consolidated financial statements.
83
NOTE 2—IMPLEMENTATION OF THE NEW REVENUE RECOGNITION STANDARD
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, as amended (commonly referred
to as ASC 606), which replaces numerous requirements in U.S. GAAP, including industry-specific requirements, and
provides companies with a single revenue recognition model for recognizing revenue from contracts with customers and
significantly expands the disclosure requirements for revenue arrangements. The new standard, as amended, was
effective for us beginning on October 1, 2018.
As discussed in Note 1, we adopted ASC 606 using the modified retrospective transition method. Results for reporting
periods beginning after September 30, 2018 are presented under ASC 606, while prior period comparative information
has not been restated and continues to be reported in accordance with ASC 605, the accounting standard in effect for
periods ending prior to October 1, 2018.
Based on contracts in process at September 30, 2018, upon adoption of ASC 606 we recorded a net increase to
shareholder’s equity of $24.5 million, which includes the acceleration of net sales of approximately $114.9 million and
the related cost of sales of $90.4 million. The adjustment to shareholder’s equity primarily relates to multiple element
transportation contracts that previously required the deferral of revenue and costs during the design and build phase, as
the collection of all customer payments occurs during the subsequent operate and maintain phase. Under ASC 606,
deferral of such revenue and costs is not appropriate. In addition, the adjustment to shareholder’s equity is attributed to
contracts previously accounted for under the units-of-delivery method, which are now recognized under ASC 606 earlier
in the performance period as costs are incurred, as opposed to when the units are delivered under ASC 605. In
accordance with the modified retrospective transition provisions of ASC 606, we will not recognize any of the
accelerated net sales and related cost of sales through October 1, 2018 in our Consolidated Statements of Operations for
any historical or future period.
We made certain presentation changes to our Consolidated Balance Sheet on October 1, 2018 to comply with ASC 606.
The component of accounts receivable that consisted of unbilled contract receivables as reported under ASC 605 has
been reclassified as contract assets under ASC 606, after certain adjustments described below. The adoption of ASC 606
resulted in an increase in unbilled contract receivables (referred to as contract assets under ASC 606) primarily from
converting contracts previously applying the units-of-delivery method to the cost-to-cost method with a corresponding
reduction in inventoried contract costs. Additionally, the adoption of ASC 606 resulted in an increase in unbilled
receivables from converting multiple element transportation contracts that previously deferred all revenue and costs
during the design and build phase, with a corresponding reduction in long-term capitalized contract costs. Advance
payments and deferred revenue, previously primarily classified in customer advances, are now presented as contract
liabilities.
84
The table below presents the cumulative effect of the changes made to our Consolidated Balance Sheet as of October 1,
2018 due to the adoption of ASC 606 (in thousands):
September 30,
2018
Under ASC 605
Adjustments
Due to
ASC 606
October 1, 2018
As Adjusted
Under ASC 606
ASSETS
Current assets:
Cash and cash equivalents
Cash in consolidated VIE
Restricted cash
Restricted cash in consolidated VIE
Accounts receivable, net
Contract assets
Recoverable income taxes
Inventories
Assets held for sale
Other current assets
Total current assets
Long-term contracts receivables
Long-term contracts financing receivables
Long-term contracts financing receivables in consolidated VIE
Long-term capitalized contract costs
Long-term capitalized contract costs in consolidated VIE
Property, plant and equipment, net
Deferred income taxes
Goodwill
Purchased intangibles, net
Other assets
Other assets in consolidated VIE
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Short-term borrowings
Trade accounts payable
Trade accounts payable in consolidated VIE
Contract liabilities
Customer advances
Accrued compensation and other current liabilities
Income taxes payable
Total current liabilities
Long-term debt
Long-term debt in consolidated VIE
Accrued pension liability
Deferred compensation
Income taxes payable
Deferred income taxes
Other noncurrent liabilities
Other noncurrent liabilities in consolidated VIE
Shareholders’ equity:
Common stock
Retained earnings
Accumulated other comprehensive loss
Treasury stock at cost
Shareholders’ equity related to Cubic
Noncontrolling interest in VIE
Total shareholders’ equity
Total liabilities and shareholders’ equity
85
$
$
$
$
$
$
111,834
374
17,400
10,000
392,367
—
91
84,199
8,177
43,705
668,147
6,134
—
—
84,924
1,258
117,546
4,713
333,626
73,533
14,192
810
1,304,883
—
125,414
165
—
75,941
118,233
8,586
328,339
199,793
9,056
7,802
11,476
2,406
2,689
19,113
13
$
$
$
—
—
—
—
(236,743)
272,210
—
(22,511)
—
—
12,956
(6,134)
56,228
38,990
(84,924)
(1,258)
—
389
—
—
—
—
16,247
—
(3,011)
—
70,127
(75,941)
583
—
(8,242)
—
—
—
—
—
—
—
—
111,834
374
17,400
10,000
155,624
272,210
91
61,688
8,177
43,705
681,103
—
56,228
38,990
—
—
117,546
5,102
333,626
73,533
14,192
810
1,321,130
—
122,403
165
70,127
—
118,816
8,586
320,097
199,793
9,056
7,802
11,476
2,406
2,689
19,113
13
45,008
801,834
(110,643)
(36,078)
700,121
24,075
724,196
1,304,883
$
$
—
19,834
—
—
19,834
4,655
24,489
16,247
$
45,008
821,668
(110,643)
(36,078)
719,955
28,730
748,685
1,321,130
The table below presents how the adoption of ASC 606 affected our Consolidated Statement of Operations for the twelve
months ended September 30, 2019 (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
Gain on sale of fixed assets
Restructuring costs
Operating income
Other income (expenses):
Interest and dividend income
Interest expense
Other income (expense), net
Twelve months ended September 30, 2019
Under
ASC 605
Effect of
ASC 606
As Reported
Under
ASC 606
$
902,913 $
484,363
1,387,276
108,156 $
1,043
109,199
1,011,069
485,406
1,496,475
638,621
332,923
269,266
50,132
42,106
(32,510)
15,386
1,315,924
93,516
—
798
—
—
—
—
94,314
732,137
332,923
270,064
50,132
42,106
(32,510)
15,386
1,410,238
71,352
14,885
86,237
394
(20,453)
(19,957)
6,125
—
—
6,519
(20,453)
(19,957)
Income from continuing operations before income taxes
31,336
21,010
52,346
Income tax provision (benefit)
Income from continuing operations
Net loss from discontinued operations
Net income
11,059
20,277
(1,423)
18,854
(19)
11,040
21,029
—
21,029
41,306
(1,423)
39,883
Less noncontrolling interest in loss of VIE
(22,076)
12,265
(9,811)
Net income attributable to Cubic
$
40,930 $
8,764 $
49,694
Amounts attributable to Cubic:
Net income from continuing operations
Net loss from discontinued operations
Net income attributable to Cubic
Net income per share:
Basic earnings per share attributable to Cubic
Diluted earnings per share attributable to Cubic
42,353
(1,423)
40,930 $
8,764
—
8,764 $
51,117
(1,423)
49,694
1.34 $
1.34 $
0.29 $
0.29 $
1.63
1.62
$
$
$
86
The table below quantifies the impact of adopting ASC 606 on segment net sales and operating income (loss) for the
twelve months ended September 30, 2019 (in thousands):
Sales:
Cubic Transportation Systems
Cubic Mission Solutions
Cubic Global Defense
Total sales
Operating income:
Cubic Transportation Systems
Cubic Mission Solutions
Cubic Global Defense
Unallocated corporate expenses
Total operating income
Twelve months ended September 30, 2019
Under
ASC 605
Effect of
ASC 606
As Reported
Under
ASC 606
$
$
$
$
787,936
327,139
272,201
1,387,276
65,974
7,244
19,858
(21,724)
71,352
$
$
$
$
61,843
1,632
45,724
109,199
11,259
515
3,111
—
14,885
$
$
$
$
849,779
328,771
317,925
1,496,475
77,233
7,759
22,969
(21,724)
86,237
87
The table below presents how the impact of the adoption of ASC 606 affected certain line items on our Consolidated
Balance Sheet at September 30, 2019 (in thousands):
ASSETS
Current assets:
Cash and cash equivalents
Cash in consolidated VIE
Restricted cash
Restricted cash in consolidated VIE
Accounts receivable, net
Contract assets
Recoverable income taxes
Inventories
Assets held for sale
Other current assets
Other current assets in consolidated VIE
Total current assets
Long-term contracts receivables
Long-term contracts financing receivables
Long-term contracts financing receivables in consolidated VIE
Long-term capitalized contract costs
Long-term capitalized contract costs in consolidated VIE
Property, plant and equipment, net
Deferred income taxes
Goodwill
Purchased intangibles, net
Other assets
Other assets in consolidated VIE
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Short-term borrowings
Trade accounts payable
Trade accounts payable in consolidated VIE
Contract liabilities
Customer advances
Accrued compensation
Other current liabilities
Other current liabilities in consolidated VIE
Income taxes payable
Current portion of long-term debt
Total current liabilities
Long-term debt
Long-term debt in consolidated VIE
Accrued pension liability
Deferred compensation
Income taxes payable
Deferred income taxes
Other noncurrent liabilities
Other noncurrent liabilities in consolidated VIE
Shareholders’ equity:
Common stock
Retained earnings
Accumulated other comprehensive loss
Treasury stock at cost
Shareholders’ equity related to Cubic
Noncontrolling interest in VIE
Total shareholders’ equity
Total liabilities and shareholders’ equity
88
Under
ASC 605
Effect of
ASC 606
As Reported
Under
ASC 606
$
$
$
65,800
347
19,507
9,967
399,639
—
6,725
158,713
—
38,534
33
699,265
3,077
—
—
136,804
2,545
144,969
4,098
578,097
165,613
76,872
1,419
1,812,759
195,500
182,671
25
—
56,001
58,343
36,670
191
152
10,714
540,267
189,110
61,994
25,386
11,040
937
4,554
22,817
21,605
$
$
$
—
—
—
—
(273,625)
349,559
1,029
(51,919)
—
—
—
25,044
(3,077)
36,285
115,508
(136,804)
(2,545)
—
—
—
—
—
—
34,411
—
(1,898)
—
46,170
(56,001)
—
—
—
621
—
(11,108)
—
—
—
—
—
—
—
—
$
$
$
65,800
347
19,507
9,967
126,014
349,559
7,754
106,794
—
38,534
33
724,309
—
36,285
115,508
—
—
144,969
4,098
578,097
165,613
76,872
1,419
1,847,170
195,500
180,773
25
46,170
—
58,343
36,670
191
773
10,714
529,159
189,110
61,994
25,386
11,040
937
4,554
22,817
21,605
274,472
834,349
(139,693)
(36,078)
933,050
1,999
935,049
1,812,759
$
$
—
28,599
—
—
28,599
16,920
45,519
34,411
274,472
862,948
(139,693)
(36,078)
961,649
18,919
980,568
1,847,170
$
NOTE 3—ACQUISITIONS AND DIVESTITURES
Sale of CGD Services
On April 18, 2018, we entered into a stock purchase agreement with Nova Global Supply & Services, LLC (Purchaser),
an entity affiliated with GC Valiant, LP, under which we agreed to sell our CGD Services business to the Purchaser. We
concluded that the sale of the CGD Services business met all of the required conditions for discontinued operations
presentation in the second quarter of fiscal 2018. Consequently, in the second quarter of fiscal 2018, we recognized a
$6.9 million loss within discontinued operations, which was calculated as the excess of the carrying value of the net
assets of CGD Services less the estimated sales price in the stock purchase agreement less estimated selling costs.
The sale closed on May 31, 2018. In accordance with the terms of the stock purchase agreement, the Purchaser agreed to
pay us $135.0 million in cash upon the closing of the transaction, adjusted for the estimated working capital of CGD
Services at the date of the sale compared to a working capital target. In the third quarter of fiscal 2018, we received
$133.8 million in connection with the sale and we recorded a receivable from the Purchaser for the estimated amount due
related to the working capital settlement. The balance of this receivable was $3.7 million at September 30, 2018. During
fiscal 2019, we worked with the Purchaser and revised certain estimates related to the working capital settlement. In
connection with the revision of these estimates, we reduced the receivable from the Purchaser by $1.4 million and
recognized a corresponding loss on the sale of CGD Services in fiscal 2019. Certain remaining working capital
settlement estimates, primarily related to the fair value of accounts receivable, have not yet been settled with the
Purchaser.
In addition to the amounts described above, we are eligible to receive an additional cash payment of $3.0 million based
on the achievement of pre-determined earn-out conditions related to the award of certain government contracts. No
amount has been recorded as a receivable related to the potential achievement of earn-out conditions based upon our
assessment of the probability of achievement of the required conditions.
The operations and cash flows of CGD Services are reflected in our Consolidated Statements of Operations and
Consolidated Statements of Cash Flows as discontinued operations through May 31, 2018, the date of the sale. The
following table presents the composition of net income from discontinued operations, net of taxes (in thousands):
Net sales
Costs and expenses:
Cost of sales
Selling, general and administrative expenses
Amortization of purchased intangibles
Restructuring costs
Other income
Years Ended September 30,
2019
2018
2017
$
— $ 262,228 $ 378,152
—
—
—
—
—
235,279
11,365
1,373
7
(15)
342,819
17,487
2,752
208
(46)
Earnings from discontinued operations before income
taxes
Net loss on sale
Income tax provision
Net income (loss) from discontinued operations
—
1,423
—
$ (1,423) $
14,932
14,219
—
6,131
3,845
401
4,243 $ 14,531
89
Business Acquisitions
PIXIA Corp.
On June 27, 2019, we paid cash of $50.0 million to purchase 20% of the outstanding capital stock of PIXIA Corp (Pixia),
a private software company based in Herndon, Virginia, which provides high performance advanced data indexing,
warehousing, processing and dissemination software solutions for large volumes of imagery data within traditional or
cloud-based architectures.
We account for our investment in Pixia using the equity method of accounting. In accordance with ASC 323,
Investments – Equity Method and Joint Ventures, we accounted for the basis difference between the cost of our
investment in Pixia and our equity share of Pixia’s net assets as if Pixia was a consolidated subsidiary. At the date of our
investment, we calculated the fair value of our share of Pixia’s identifiable intangible assets as $17.0 million, which will
be amortized in other expense over a weighted average remaining useful life of approximately five years. The remaining
identifiable intangible assets subject to amortization was $15.4 million as of September 30, 2019. Our share of the
remaining basis difference of $32.3 million is identified as goodwill and will not be amortized.
We recognize our interest in Pixia’s operating results less the amortization of our share of Pixia’s intangible assets within
other income (expense) in our Consolidated Statements of Operations. The net amount we recognized in fiscal 2019 for
our interest in Pixia’s operating results less the amortization of our share of Pixia’s intangible assets was $1.2 million.
We also received a dividend of $2.0 million, which was recognized as a reduction in our investment in Pixia. At
September 30, 2019 our investment in Pixia amounted to $49.2 million and is recorded within other assets on our
Consolidated Balance Sheet.
Our purchase agreement with Pixia includes an option to purchase the remaining 80% of its capital stock for $200.0
million, which we exercised in November 2019. We expect our acquisition of the remaining capital stock of Pixia to
close in February 2020.
Delerrok Inc.
During fiscal years 2018 and 2019, we invested $1.5 million and $5.0 million, respectively, to purchase a total of 17.5%
of the outstanding common stock of Delerrok Inc. (Delerrok), a private technology company based in Vista, California,
that specializes in electronic fare collection systems. We elected the measurement alternative provided by ASC 321,
Investments – Equity Securities, and recorded our investment in Delerrok at cost, adjusted for observable price changes
or any impairments, within other assets on our Consolidated Balance Sheet. At September 30, 2019, our investment in
Delerrok amounted to $6.5 million. We did not recognize any income or loss from our investment in Delerrok in fiscal
2018 or fiscal 2019.
Our purchase agreement includes an option to purchase the remaining 82.5% of Delerrok’s common stock, which we
exercised in November 2019. We will pay cash of $36.4 million at closing which will be funded from borrowings under
Cubic’s existing credit facilities, and up to an additional $2.0 million if Delerrok’s sales exceed certain levels in the
future. We expect our acquisition of the remaining common stock of Delerrok to close in December 2019.
Consolidated Business Acquisitions
Each of the following acquisitions has been treated as a business combination for accounting purposes. The results of
operations of each acquired business has been included in our consolidated financial statements since the respective date
of each acquisition.
90
Nuvotronics, Inc.
In March 2019, we acquired all of the outstanding capital stock of Nuvotronics, Inc. (Nuvotronics), a provider of
microfabricated radio frequency (RF) products. Based in Durham, North Carolina, Nuvotronics’ patented PolyStrata
technology enables the design and production of uniquely packaged RF devices, such as antennas, filters, and combiners,
all of which are components in Cubic’s advanced technology product offerings. Nuvotronics is expected to provide
synergies from combining its capabilities with our existing CMS business.
Nuvotronics’ sales and results of operations included in our operating results were as follows (in millions):
Years Ended September 30,
2018
2017
2019
Sales
Operating loss
Net loss after taxes
$
7.4 $
(6.9)
(6.9)
— $
—
—
—
—
—
Nuvotronics’ operating results above included the following amounts (in millions):
Years Ended September 30,
2018
2017
2019
Amortization
Acquisition-related expenses
$
1.2 $
3.0
— $
—
—
—
The acquisition-date fair value of consideration is $66.8 million, which is comprised of net cash paid of $61.5 million,
plus the estimated fair value of contingent consideration of $4.9 million, plus a $0.4 million estimated payable due to the
sellers for the difference between the net working capital acquired and the targeted working capital amounts. The
acquisition was financed primarily with proceeds from draws on our line of credit. Under the purchase agreement, we
will pay the sellers up to $8.0 million of contingent consideration if Nuvotronics meets certain gross profit goals for the
12-month periods ended December 31, 2020 and December 31, 2021. The contingent consideration liability will be re-
measured to fair value at each reporting date until the contingencies are resolved and any subsequent changes in fair
value are recognized in earnings.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition
date (in millions):
Technology
Trade name
Backlog
Non-compete agreements
Customer relationships
Accounts receivable and contract assets
Fixed assets
Accounts payable and accrued expenses
Deferred taxes
Other net assets acquired (liabilities assumed)
Net identifiable assets acquired
Goodwill
Net assets acquired
$ 22.7
1.5
1.4
0.5
0.6
2.6
2.7
(1.8)
(3.2)
(0.6)
26.4
40.4
$ 66.8
The estimated fair values of assets acquired and liabilities assumed, including purchased intangibles, are preliminary
estimates pending the finalization of our valuation analyses and the receipt of further information from the seller
regarding its assets and liabilities. The estimated fair values of purchased intangibles were determined using the
valuation methodology deemed to be the most appropriate for each type of asset being valued. The trade name valuation
91
used the relief from royalty method, the customer relationships valuation used the with-and-without valuation method,
and the technology and backlog valuations used the excess earnings method.
The intangible assets are being amortized using straight-line methods based on the expected period of undiscounted cash
flows that will be generated by the assets, over an average useful life of nine years from the date of acquisition.
The goodwill resulting from the acquisition consists primarily of the synergies expected from combining the operations
of Nuvotronics with our existing CMS business, and strengthening our capability of developing and integrating products
in our CMS portfolio. The goodwill also includes the value of the assembled workforce that became our employees
following the close of the acquisition. The amount recorded as goodwill is allocated to our CMS segment and is not
expected to be deductible for tax purposes.
The estimated amortization expense related to the intangible assets recorded in connection with our acquisition of
Nuvotronics is as follows (in millions):
Year Ended
September 30,
2020
2021
2022
2023
2024
Thereafter
$
4.0
3.0
3.0
2.9
2.7
10.1
GRIDSMART Technologies, Inc.
In January 2019, we acquired all of the outstanding capital stock of GRIDSMART Technologies, Inc. (GRIDSMART), a
provider of differentiated video tracking solutions to the Intelligent Traffic Systems market. Based in Knoxville,
Tennessee, GRIDSMART specializes in video detection at the intersection utilizing advanced image processing,
computer vision modeling and machine learning along with a single camera solution providing best-in-class data for
optimizing the flow of people and traffic through intersections. GRIDSMART is expected to provide synergies from
combining its capabilities with our existing CTS business.
GRIDSMART’s sales and results of operations included in our operating results were as follows (in millions):
Years Ended September 30,
2018
2017
2019
Sales
Operating income
Net income after taxes
$
20.6 $
0.9
0.9
— $
—
—
—
—
—
GRIDSMART’s operating results above included the following amounts (in millions):
Years Ended September 30,
2018
2017
2019
Amortization
Acquisition-related expenses
$
4.0 $
2.9
— $
—
—
—
The acquisition-date fair value of consideration is $86.8 million. The acquisition was financed primarily with proceeds
from draws on our line of credit.
92
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition
date (in millions):
Technology
Customer relationships
Trade name
Inventory
Accounts receivable
Accounts payable and accrued expenses
Deferred taxes
Other net assets acquired
Net identifiable assets acquired
Goodwill
Net assets acquired
$ 25.7
3.6
2.4
4.3
1.7
(1.9)
(3.3)
0.6
33.1
53.7
$ 86.8
The estimated fair values of assets acquired and liabilities assumed, including purchased intangibles, are preliminary
estimates pending the finalization of our valuation analyses, including the filing of pre-acquisition income tax returns.
The estimated fair values of purchased intangibles were determined using the valuation methodology deemed to be the
most appropriate for each type of asset being valued. The trade name valuation used the relief from royalty method, the
customer relationships valuation used the with-and-without valuation method, and the technology and backlog valuations
used the excess earnings method.
The intangible assets are being amortized using straight-line methods based on the expected period of undiscounted cash
flows that will be generated by the assets, over an average useful life of approximately eight years from the date of
acquisition.
The goodwill resulting from the acquisition consists primarily of the synergies expected from combining the operations
of GRIDSMART with our existing CTS business, and strengthening our capability of developing and integrating
products in our CTS portfolio. The goodwill also includes the value of the assembled workforce that became our
employees following the close of the acquisition. The amount recorded as goodwill is allocated to our CTS segment and
is not expected to be deductible for tax purposes.
The estimated amortization expense related to the intangible assets recorded in connection with our acquisition of
GRIDSMART is as follows (in millions):
Year Ended
September 30,
2020
2021
2022
2023
2024
Thereafter
$
5.3
3.9
3.5
3.5
3.5
8.1
Advanced Traffic Solutions Inc.
In October 2018, we acquired all of the outstanding capital stock of Advanced Traffic Solutions Inc. (Trafficware), a
provider of intelligent traffic solutions for the transportation industry based in Sugar Land, Texas. Trafficware provides a
fully integrated suite of software, Internet of Things devices, and hardware solutions that optimize the flow of motorist
and pedestrian traffic. Trafficware is expected to provide synergies from combining its capabilities with our existing
CTS business.
93
Trafficware’s sales and results of operations included in our operating results were as follows (in millions):
Years Ended September 30,
2018
2017
2019
Sales
Operating loss
Net loss after taxes
$
53.8 $
(11.0)
(11.0)
— $
—
—
—
—
—
Trafficware’s operating results above included the following amounts (in millions):
Years Ended September 30,
2018
2017
2019
Amortization
Acquisition-related expenses
$
15.3 $
5.2
— $
—
—
—
The acquisition-date fair value of consideration is $237.2 million. The acquisition was financed primarily with proceeds
from draws on our line of credit.
The following table summarizes the fair values of the assets acquired and liabilities assumed at the acquisition date (in
millions):
Technology
Customer relationships
Backlog
Trade name
Accounts receivable
Inventory
Accounts payable and accrued expenses
Other net assets acquired (liabilities assumed)
Net identifiable assets acquired
Goodwill
Net assets acquired
$ 43.3
21.9
4.8
4.6
10.4
9.9
(8.9)
(2.0)
84.0
153.2
$ 237.2
The fair values of purchased intangibles were determined using the valuation methodology deemed to be the most
appropriate for each type of asset being valued. The trade name valuation used the relief from royalty method, the
customer relationships valuation used the with-and-without valuation method, and the technology and backlog valuations
used the excess earnings method.
The intangible assets are being amortized using straight-line methods based on the expected period of undiscounted cash
flows that will be generated by the assets, over an average useful life of seven years from the date of acquisition.
The goodwill resulting from the acquisition consists primarily of the synergies expected from combining the operations
of Trafficware with our existing CTS business, and strengthening our capability of developing and integrating products
in our CTS portfolio. The goodwill also includes the value of the assembled workforce that became our employees
following the close of the acquisition. The amount recorded as goodwill is allocated to our CTS segment and is not
expected to be deductible for tax purposes.
94
The estimated amortization expense related to the intangible assets recorded in connection with our acquisition of
Trafficware is as follows (in millions):
Year Ended
September 30,
Shield Aviation, Inc.
2020
2021
2022
2023
2024
Thereafter
$
11.4
11.4
11.4
6.4
5.9
12.9
In July 2018, we acquired the assets of Shield Aviation (Shield), based in San Diego, California, a provider of
autonomous aircraft systems (AAS) for intelligence, surveillance and reconnaissance services. The addition of Shield
expands our C4ISR portfolio for our CMS segment and will provide our customers with a rapidly deployable, medium
AAS that offers unique mission enabling capabilities. We already provide the data link as well as the command and
control link for the Shield AAS.
Shield’s sales and results of operations included in our operating results were as follows (in millions):
Years Ended September 30,
2018
2017
2019
Sales
Operating loss
Net loss after taxes
$
— $
(5.3)
(5.3)
— $
(0.8)
(0.6)
—
—
—
Shield’s operating results above included the following amounts (in millions):
Years Ended September 30,
2018
2017
2019
Amortization
Loss (gain) for changes in fair values of contingent
consideration
$
0.8 $
0.1 $
—
(1.8)
0.2
—
The acquisition-date fair value of consideration is $12.8 million, which is comprised of the fair value of contingent
consideration of $5.6 million, extinguishment of secured loans and warrants due from Shield of $5.2 million, cash paid
of $1.3 million, plus additional consideration to be paid in the future of $0.7 million. Under the purchase agreement, we
will pay the sellers up to $10.0 million of contingent consideration if Shield meets certain sales goals from the date of
acquisition through July 31, 2025. The contingent consideration liability will be re-measured to fair value at each
reporting date until the contingencies are resolved and any subsequent changes in fair value are recognized in earnings.
95
The acquisition of Shield was paid for with funds from existing cash resources. The following table summarizes the fair
values of the assets acquired and liabilities assumed at the acquisition date (in millions):
Technology
Other net assets acquired
Net identifiable assets acquired
Goodwill
Net assets acquired
$ 6.0
0.3
6.3
6.5
$ 12.8
The technology asset valuation used the excess earnings method and is being amortized using the straight-line method
over eight years, which is based on the expected period of cash flows that will be generated by the asset.
The goodwill resulting from the acquisition consists primarily of the synergies expected from combining the operations
of Shield with our existing CMS business, and strengthening our capability of developing and integrating products and
services in our CMS portfolio. The goodwill also includes the value of the assembled workforce that became our
employees following the close of the acquisition. The amount recorded as goodwill is allocated to our CMS segment and
is expected to be deductible for tax purposes.
The amortization expense related to the intangible assets recorded in connection with our acquisition of Shield is as
follows (in millions):
Year Ended
September 30,
MotionDSP
2020
2021
2022
2023
2024
Thereafter
$
0.8
0.8
0.8
0.8
0.8
1.4
In October 2017 we paid cash of $4.7 million to purchase 49% of the outstanding capital stock of MotionDSP, a private
artificial intelligence software company based in Burlingame, California, which specializes in real-time video
enhancement and computer vision analytics. On February 21, 2018, we paid net cash of $4.8 million to purchase the
remaining outstanding capital stock of MotionDSP. The addition of MotionDSP enhances the capabilities in real-time
video processing of our CMS business and expands our customer base in the public safety and other adjacent markets.
MotionDSP’s sales and results of operations included in our operating results since its consolidation in our financial
statements were as follows (in millions):
Years Ended September 30,
2018
2017
2019
Sales
Operating loss
Net loss after taxes
$
1.5 $
(0.6)
(0.6)
0.6 $
(2.7)
(1.9)
—
—
—
96
MotionDSP’s operating results above included the following amounts (in millions):
Years Ended September 30,
2018
2017
2019
Amortization
Acquisition-related expenses
$
0.7 $
0.4
0.4 $
0.8
—
0.2
The acquisition of MotionDSP was paid for with funds from existing cash resources. The following table summarizes the
fair values of the assets acquired and liabilities assumed at the acquisition date (in millions):
Customer relationships
Technology
Trade name
Accounts payable and accrued expenses
Other noncurrent liabilities
Other net liabilities assumed
Net identifiable assets acquired
Goodwill
Net assets acquired
$ 0.2
4.5
0.1
(0.3)
(0.8)
(0.9)
2.8
6.7
$ 9.5
The fair values of purchased intangibles were determined using the valuation methodology deemed to be the most
appropriate for each type of asset being valued. The trade name valuation used the relief from royalty method, the
customer relationships valuation used the with-and-without valuation method, and the technology valuation used the
excess earnings method.
The intangible assets are being amortized using straight-line methods based on the expected cash flows from the assets,
over a useful life of seven years from the date of acquisition.
The goodwill resulting from the acquisition was deemed to consist primarily of the synergies expected from combining
the operations of MotionDSP with our CMS operating segment, enhancing our capabilities in real-time video processing
and computer vision analytics of our CMS portfolio, as well as the value of the assembled workforce that became our
employees following the close of the acquisition. The amount recorded as goodwill in connection with the acquisition of
MotionDSP is not expected to be deductible for tax purposes.
The estimated amortization expense related to the intangible assets recorded in connection with our acquisition of
MotionDSP is as follows (in millions):
Year Ended
September 30,
2020
2021
2022
2023
2024
Thereafter
$
0.7
0.7
0.7
0.7
0.6
0.2
97
Pro forma information
The following unaudited pro forma information presents our consolidated results of operations as if Nuvotronics,
GRIDSMART, Trafficware, Shield, and MotionDSP had been included in our consolidated results since October 1, 2017
(in millions):
Net sales
Net income (loss)
Years Ended September 30,
2019
$ 1,510.8 $
45.1 $
$
2018
1,297.6
(5.0)
The pro forma information includes adjustments to give effect to pro forma events that are directly attributable to the
acquisitions and have a continuing impact on operations including the amortization of purchased intangibles and the
elimination of interest expense for the repayment of debt. No adjustments were made for transaction expenses, other
items that do not reflect ongoing operations or for operating efficiencies or synergies. The pro forma financial
information is not necessarily indicative of what the consolidated financial results of our operations would have been had
the acquisitions been completed on October 1, 2017, and it does not purport to project our future operating results.
NOTE 4—VARIABLE INTEREST ENTITIES
In accordance with ASC 810, Consolidation, we assess our partnerships and joint ventures at inception, and when there
are changes in relevant factors to determine if any meet the qualifications of a variable interest entity (VIE). We consider
a partnership or joint venture a VIE if it has any of the following characteristics: (a) the total equity investment is not
sufficient to permit the entity to finance its activities without additional subordinated financial support, (b) characteristics
of a controlling financial interest are missing (either the ability to make decisions through voting or other rights, the
obligation to absorb the expected losses of the entity or the right to receive the expected residual returns of the entity), or
(c) the voting rights of the equity holders are not proportional to their obligations to absorb the expected losses of the
entity and/or their rights to receive the expected residual returns of the entity, and substantially all of the entity's
activities either involve or are conducted on behalf of an investor that has disproportionately few voting rights.
We perform a qualitative assessment of each VIE to determine if we are its primary beneficiary. We conclude that we are
the primary beneficiary and consolidate the VIE if we have both (a) the power to direct the activities that most
significantly impact the VIE’s economic performance and (b) the obligation to absorb losses or the right to receive
benefits from the VIE that could potentially be significant to the VIE. We consider the VIE design, the contractual
agreements that define the ownership structure, distribution of profits and losses, risks, responsibilities, indebtedness,
voting rights and board representation of the respective parties in determining if we are the primary beneficiary. We also
consider all parties that have direct or implicit variable interests when determining whether we are the primary
beneficiary. As required by ASC 810, our primary beneficiary assessment is continuously performed.
In March 2018, Cubic and John Laing, an unrelated company that specializes in contracting under public-private
partnerships (P3), jointly formed Boston AFC 2.0 HoldCo LLC (HoldCo). Also in March 2018, HoldCo created a wholly
owned entity, Boston AFC 2.0 OpCo. LLC (OpCo) which entered into a contract with the Massachusetts Bay Transit
Authority (MBTA) for the financing, development, and operation of a next-generation fare payment system in Boston
(the MBTA Contract). HoldCo is 90% owned by John Laing and 10% owned by Cubic. Collectively, HoldCo and OpCo
are referred to as the P3 Venture. Based on our assessment under ASC 810, we have concluded that OpCo and HoldCo
are VIE’s and that we are the primary beneficiary of OpCo. Consequently, we have consolidated the financial statements
of OpCo within Cubic’s consolidated financial statements. We have concluded that we are not the primary beneficiary of
HoldCo, and thus we have not consolidated the financial statements of HoldCo within Cubic’s consolidated financial
statements.
The MBTA Contract consists of a design and build phase of approximately three years and an operate and maintain
phase of approximately ten years. The design and build phase is planned to be completed in 2021 and the operate and
maintain phase will span from 2021 through 2031. MBTA will make fixed payments of $558.5 million, adjusted for
incremental transaction-based fees, inflation, and performance penalties, to OpCo in connection with the MBTA
Contract over the ten-year operate and maintain phase. All of OpCo’s contractual responsibilities regarding the design
98
and development and the operation and maintenance of the fare system have been subcontracted to Cubic by OpCo.
Cubic will receive fixed payments of $427.6 million, adjusted for incremental transaction-based fees, inflation, and
performance penalties under its subcontract with OpCo.
Upon creation of the P3 Venture, John Laing made a loan to HoldCo of $24.3 million in the form of a bridge loan that is
intended to be converted to equity in the future in accordance with its equity funding responsibilities. Concurrently,
HoldCo made a corresponding equity contribution to OpCo in the same amount which is included within equity of
Noncontrolling interest in VIE in Cubic’s consolidated financial statements. Also, upon creation of the P3 Venture,
Cubic issued a letter of credit for $2.7 million to HoldCo in accordance with Cubic’s equity funding responsibilities.
HoldCo is able to draw on the Cubic letter of credit in certain liquidity instances, but no amounts have been drawn on
this letter of credit through September 30, 2019.
Upon creation of the P3 Venture, OpCo entered into a credit agreement with a group of financial institutions (the OpCo
Credit Agreement) which includes a long-term debt facility and a revolving credit facility. The long-term debt facility
allows for draws up to a maximum amount of $212.4 million; draws may only be made during the design and build
phase of the MBTA Contract. The long-term debt facility, including interest and fees incurred during the design and
build phase, is required to be repaid on a fixed monthly schedule over the operate and maintain phase of the MBTA
Contract. The long-term debt facility bears interest at variable rates of LIBOR plus 1.3% and LIBOR plus 1.55% over
the design and build and operate and maintain phases of the MBTA Contract, respectively. At September 30, 2019, the
outstanding balance on the long-term debt facility was $62.0 million, which is presented net of unamortized deferred
financing costs of $8.8 million. The revolving credit facility allows for draws up to a maximum amount of $13.9 million
and is only available to be drawn on during the operate and maintain phase of the MBTA Contract. OpCo’s debt is
nonrecourse with respect to Cubic and its subsidiaries. The fair value of the long-term debt facility approximates its
carrying amount.
The OpCo Credit Agreement contains a number of covenants which require that OpCo and Cubic maintain progress on
the delivery of the MBTA Contract within a specified timeline and budget and provide regular reporting on such
progress. The OpCo Credit Agreement also contains a number of customary events of default including, but not limited
to, the delivery of a customized fare collection system to MBTA by a pre-determined date. Failure to meet such delivery
date will result in OpCo, and Cubic via its subcontract with OpCo, to incur penalties due to the lenders.
OpCo has entered into pay-fixed/receive-variable interest rate swaps with a group of financial institutions to mitigate
variable interest rate risk associated with its long-term debt. The interest rate swaps contain forward starting notional
principal amounts which align with OpCo’s expected draws on its long-term debt facility. At September 30, 2019 and
2018, the outstanding notional principal amounts on open interest rate swaps were $137.4 million and $38.6 million,
respectively. The fair value of OpCo’s interest rate swaps was $21.6 million at September 30, 2019, and is recorded as a
liability in other long-term liabilities in our consolidated balance sheets. The interest rate swaps had no significant fair
value at September 30, 2018. OpCo’s interest rate swaps have not been designated as effective hedges, and as such
unrealized gains/losses are included in other income (expense), net. Unrealized losses as a result of changes in the fair
value of OpCo’s interest rate swaps totaled $21.6 million in fiscal 2019. There was no significant unrealized gain or loss
in fiscal 2018 related to the change in fair value of the interest rate swaps. See Note 5 for a description of the
measurement of fair value of derivative financial instruments, including OpCo’s interest rate swaps.
OpCo holds a restricted cash balance which is required by the MBTA Contract to allow for the delivery of future change
orders and unplanned expansions as directed by MBTA.
99
The assets and liabilities of OpCo that are included in our Consolidated Balance Sheets at September 30, 2019 and 2018
are as follows:
September 30,
Cash
Restricted cash
Other current assets
Long-term capitalized contract costs
Long-term contracts financing receivable
Other noncurrent assets
Total assets
Trade accounts payable
Accrued compensation and other current liabilities
Due to Cubic
Other long-term liabilities
Long-term debt
Total liabilities
Total Cubic equity
Noncontrolling interests
Total liabilities and owners' equity
2018
2019
(in thousands)
347 $
$
374
10,000
—
33,818
—
810
$ 127,274 $ 45,002
9,967
33
—
115,508
1,419
$
25 $
191
25,143
21,605
61,994
165
—
11,724
13
9,056
$ 108,958 $ 20,958
(304)
24,348
$ 45,002
(603)
18,919
$ 127,274
The assets of OpCo are restricted for OpCo’s use and are not available for the general operations of Cubic. OpCo’s debt
is non-recourse to Cubic. Cubic’s maximum exposure to loss as a result of its equity interest in the P3 Venture is limited
to the $2.7 million outstanding letter of credit, which will be converted to a cash contribution upon completion of the
design and build phase of the MBTA Contract.
Prior to the adoption of ASC 606, Cubic and OpCo were precluded from recognizing revenue on the MBTA Contract
because MBTA was not required to make payments to OpCo until the operate and maintain phase of the contract began.
During this time period Cubic and OpCo were capitalizing costs associated with designing and building the system for
MBTA. Upon the adoption of ASC 606, Cubic and OpCo are now permitted to recognize revenue related to the MBTA
contract and therefore costs are now recognized as incurred and are no longer capitalized.
The revenue, operating income, and other income (expense), net of OpCo that are included in our Consolidated
Statements of Operations are as follows (in thousands):
Revenue
Operating income
Other income (expense), net
Interest income
Interest expense
Years Ended September 30,
2018
2017
2019
$ 11,211 $
9,923
(21,592)
3,704
(2,946)
— $
—
—
—
—
—
—
—
—
—
NOTE 5—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.
100
• Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments
in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value
drivers are observable.
• Level 3 - Significant inputs to the valuation model are unobservable.
The following table presents assets and liabilities measured and recorded at fair value on our balance sheets on a
recurring basis (in thousands):
September 30, 2019
September 30, 2018
Level 1 Level 2 Level 3
Total
Level 1 Level 2 Level 3 Total
Assets
Cash equivalents
Current derivative assets
Noncurrent derivative assets
— $
$ — $
—
—
2,635
859
Total assets measured at fair value $ — $ 3,494 $
Liabilities
— $ 9,000 $
— $
—
—
— $ 3,494 $ 9,000 $ 2,117 $
1,803
314
2,635
859
—
—
— $
— $ 9,000
1,803
—
314
—
— $ 11,117
Current derivative liabilities
Noncurrent derivative liabilities
Contingent consideration to
seller of H4 Global
Contingent consideration to
seller of Deltenna
Contingent consideration to
seller of Shield
Contingent consideration to
seller of Nuvotronics
Contingent consideration to
seller of TeraLogics - revenue
targets
—
—
529
228
—
—
529
228
—
—
1,657
75
—
—
1,657
75
—
—
1,073
1,073
—
—
665
665
—
—
1,787
1,787
—
—
1,081
1,081
—
—
3,814
3,814
—
—
5,618
5,618
—
—
4,200
4,200
—
—
—
—
—
—
—
—
—
—
1,750
1,750
Total liabilities measured at fair
value
$ — $ 757 $ 10,874 $ 11,631 $
— $ 1,732 $ 9,114 $ 10,846
Derivative financial instruments are measured at fair value, the material portions of which are based on active or inactive
markets for identical or similar instruments or model-derived valuations whose inputs are observable. Where model-
derived valuations are appropriate, we use the applicable credit spread as the discount rate. Credit risk related to
derivative financial instruments is considered minimal and is managed by requiring high credit standards for
counterparties and through periodic settlements of positions.
The fair value of contingent consideration liabilities to the sellers of businesses that we have acquired are revalued to
their fair value each period and any increase or decrease is recorded into selling, general and administrative expense.
Any changes in the assumed timing and amount of the probability of payment scenarios could impact the fair value.
At September 30, 2019, we have the following remaining contingent consideration arrangements with the sellers of
companies which we acquired:
• H4 Global: Payments of up to $2.7 million of contingent consideration based upon the value of contracts
entered into over the five-year period ending September 30, 2020.
• Deltenna: Payments of up to $6.6 million of contingent consideration if Deltenna meets certain sales goals from
•
the date of acquisition through the fiscal year ending September 30, 2022.
Shield: Payments of up to $10.0 million of contingent consideration if Shield meets certain sales goals from the
date of acquisition through July 31, 2025.
• Nuvotronics: Payments of up to $8.0 million of contingent consideration if Nuvotronics meets certain gross
profit goals for the 12-month periods ended December 31, 2020 and December 31, 2021.
101
In addition, we have a contingent consideration arrangement with the Purchaser of our CGD Services business under
which we are eligible to receive a cash payment of $3.0 million if the Purchaser is awarded certain government contracts
in the future.
The maximum remaining payout to the sellers of H4 Global is $2.7 million at September 30, 2019, and is based upon the
value of contracts entered into over the five-year period ending September 30, 2020. The fair value of the H4 Global
contingent consideration was estimated using a probability weighted approach. Subject to the terms and conditions of the
H4 Global purchase agreement, contingent consideration will be paid over a five-year term that commenced on
October 1, 2015 and ends on September 30, 2020. The payments will be calculated based on the award of certain
contracts during the specified period. The fair value of the contingent consideration was determined by applying
probabilities to different scenarios and summing the present value of any future payments.
The fair value of Deltenna contingent consideration was primarily valued using the real option approach. Under this
approach, each payment was modeled using long digital options written on the underlying revenue metric. The strike
price for each option is the respective revenue as specified in the related agreement, and the spot price is calibrated to the
revenue forecast by calculating the present value of the corresponding projected revenues using a risk-adjusted discount
rate. The volatility for the underlying revenue metrics was based upon analysis of comparable guideline public
companies and was 36% as of September 30, 2019 and 53% as of September 30, 2018. The selected discount rate was
11% as of September 30, 2019 and 11.5% as of September 30, 2018.
The fair value of the Shield contingent consideration was estimated based on Monte Carlo simulations. Under the
purchase agreement, we will pay the sellers up to $10.0 million if Shield meets certain sales goals from the date of
acquisition through July 31, 2025. The fair value of the contingent consideration was determined based upon a
probability distribution of values based on 1,000,000 simulation trials. Key inputs for the simulation include projected
revenues, assumed discount rates for projected revenues and cash flows, and volatility. The volatility and revenue risk
adjustment factors were determined based on analysis of publicly traded comparable companies and as of September 30,
2019 were 18.0% and 13.1%, respectively, and as of September 30, 2018 were 20.0% and 14.5%, respectively. The
discount rate used was based on our expected borrowing rate under our financing arrangements, which was determined
to be 3.6% at September 30, 2019 and 3.9% at September 30, 2018.
The fair value of the Nuvotronics contingent consideration was estimated based on Monte Carlo simulations. Under the
purchase agreement, we will pay the sellers up to $8.0 million if Nuvotronics meets certain gross profit goals for the
12-month periods ended December 31, 2020 and December 31, 2021. The fair value of the contingent consideration was
determined based upon a probability distribution of values based on 1,000,000 simulation trials. Key inputs for the
simulation include projected gross profits, assumed discount rates for projected gross profits, and gross profit
volatility. The volatility factor used as of September 30, 2019 was 12.4% and was determined based on analysis of
publicly traded comparable companies. The discount rate used as of September 30, 2019 was 7.4%, which was based on
our risk-free rate of return adjusted for our gross profit required risk premium.
The inputs to each of the contingent consideration fair value models include significant unobservable inputs and
therefore represent Level 3 measurements within the fair value hierarchy. Significant judgment is employed in
determining the appropriateness of these assumptions as of the acquisition dates and each subsequent period.
102
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, 2019, the following table summarizes the change in fair value of our Level 3 contingent
consideration liabilities (in thousands):
Balance as of September 30, 2017
Initial measurement recognized at acquisition
Cash paid to seller
Total remeasurement (gain) loss recognized in
earnings
Balance as of September 30, 2018
Initial measurement recognized at acquisition
Cash paid to seller
Total remeasurement (gain) loss recognized in
earnings
Balance as of September 30, 2019
H4 Global Deltenna Shield
$
$
591
—
—
$ 1,376
—
—
—
5,618
—
$
74
665
—
(385)
(295)
$ 1,081
—
—
—
$ 5,618
—
—
$
$
Nuvotronics
TeraLogics
(Contract
Extensions)
TeraLogics
(Revenue
Targets)
Total
— $
—
—
800 $
—
(1,000)
2,450 $ 5,217
5,618
(2,750)
—
(1,750)
—
— $
4,900
—
200
— $
—
—
—
— $
1,050
1,029
1,750 $ 9,114
4,900
(2,135)
—
(1,750)
—
(1,005)
— $ 10,874
793
$ 1,073
706
$ 1,787
(1,804)
$ 3,814
$
(700)
4,200 $
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.
In fiscal 2019, we invested $5.0 million in Franklin Blackhorse, L.P., a limited partnership investment fund that invests
in early stage, privately owned companies in the military, commercial, and disruptive technology sectors. We account for
our investment using the equity method of accounting. For the year ended September 30, 2019, we recognized earnings
of $0.3 million representing our share of the fund’s operating results, which is included in other income (expense) in our
Consolidated Statements of Operations. We recorded a $5.3 million investment within other assets in our Consolidated
Balance Sheet at September 30, 2019.
The fair value of long-term debt is calculated by discounting the value of the note based on market interest rates for
similar debt instruments, which is a Level 2 technique. The following table presents the estimated fair value and carrying
value of our long-term debt (in millions):
Fair value
Carrying value
September 30,
2018
2019
$ 203.3 $ 193.7
$ 200.0 $ 200.0
We did not have any significant non-financial assets or liabilities measured at fair value on a non-recurring basis in 2019,
2018, or 2017 other than assets and liabilities acquired in business acquisitions described in Note 3 and the restricted
stock units that were granted in the first quarter of fiscal 2019 that contain performance and market-based vesting criteria
described in Note 16.
103
NOTE 6—CONTRACT ASSETS AND LIABILITIES
Contract assets include unbilled amounts typically resulting from sales under contracts when the percentage-of-
completion cost-to-cost method of revenue recognition is utilized and revenue recognized exceeds the amount billed to
the customer. Contract liabilities (formerly referred to as customer advances prior to the adoption of ASC 606) include
advance payments and billings in excess of revenue recognized. Contract assets and contract liabilities were as follows
(in thousands):
Contract assets
Contract liabilities
$
$
349,559
46,170
$
$
272,210
70,127
September 30,
2019
October 1,
2018
Contract assets increased $77.3 million during the twelve months ended September 30, 2019, due to the recognition of
revenue related to the satisfaction or partial satisfaction of performance obligations during the twelve months ended
September 30, 2019 for which we have not yet billed. There were no significant impairment losses related to our contract
assets during the twelve months ended September 30, 2019.
Contract liabilities decreased $24.0 million during the twelve months ended September 30, 2019, due to revenue
recognition in excess of payments received on these performance obligations. During the twelve-month period
ended September 30, 2019, we recognized $62.4 million of our contract liabilities at October 1, 2018 as revenue. We
expect our contract liabilities to be recognized as revenue over the next twelve months.
NOTE 7—ACCOUNTS RECEIVABLE
The components of accounts receivable are as follows (in thousands):
September 30,
2019
2018
Accounts receivable
Billed
Unbilled
Allowance for doubtful accounts
Total accounts receivable
Less estimated amounts not currently due
Current accounts receivable
$
$
$
127,406
—
(1,392)
126,014
—
156,948
242,877
(1,324)
398,501
(6,134)
126,014 $ 392,367
Amounts billed include $60.3 million and $80.5 million due on U.S. federal government contracts at September 30, 2019
and 2018, respectively. As further described in Note 2, effective October 1, 2018, the component of accounts receivable
that consisted of unbilled contract receivables as reported under ASC 605 has been reclassified as contract assets under
ASC 606.
In our normal course of business, we may sell trade receivables to financial institutions as a cash management technique.
We do not retain financial or legal obligations for these receivables that would result in material losses. Our ongoing
involvement is limited to the remittance of customer payments to the financial institutions with respect to the sold trade
receivables; therefore, our sold trade receivables are not included in our Consolidated Balance Sheet in any period
presented. As of September 30, 2019, we sold $31.1 million of outstanding trade receivables to financial institutions.
104
NOTE 8—INVENTORIES
Inventories consist of the following (in thousands):
Finished products
Work in process and inventoried costs under long-term contracts
Materials and purchased parts
Customer advances
Net inventories
September 30,
2019
2018
$
10,905 $
46,951
48,938
—
$ 106,794 $
7,099
63,169
23,710
(9,779)
84,199
At September 30, 2019, work in process and inventoried costs under long-term contracts includes approximately $5.8
million in costs incurred outside the scope of work or in advance of a contract award compared to $0.9 million at
September 30, 2018. We believe it is probable that we will recover the costs inventoried at September 30, 2019, plus a
profit margin, under contract change orders or awards within the next year.
Costs we incur for certain U.S. federal government contracts include general and administrative costs as allowed by
government cost accounting standards. The amounts remaining in inventory at September 30, 2019 and 2018 were $0.5
million and $2.0 million, respectively.
NOTE 9—PROPERTY, PLANT AND EQUIPMENT
Significant components of property, plant and equipment are as follows (in thousands):
September 30,
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
$
2019
7,348 $
48,191
107,297
108,526
17,064
16,814
(160,271)
2018
13,132
57,959
81,727
84,631
11,991
12,888
(144,782)
$ 144,969 $ 117,546
In fiscal 2019, we entered into agreements related to the construction and leasing of two buildings on our existing
corporate campus in San Diego, California. Under these agreements, a financial institution will own the buildings, and
we will lease the property for a term of five years upon their completion.
In the third quarter of fiscal 2019 we sold the land and buildings comprising our separate CTS campus in San Diego. We
have entered into a lease with the buyer of this campus and CTS employees will continue to occupy this separate campus
until the new buildings on our corporate campus are ready for occupancy in fiscal 2021. In the third quarter of fiscal
2019 we also sold land and buildings in Orlando, Florida and we are entering a lease for new space in Orlando to
accommodate our employees and operations in Orlando. In connection with the sale of these real estate campuses we
received total net proceeds of $44.9 million and recognized net gains on the sales totaling $32.5 million.
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
105
capitalized as computer software costs. Costs incurred outside of the application development stage, or that are types of
costs that do not meet the capitalization requirements, are expensed as incurred. 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, 2019 we have incurred costs of $138.9 million related to the purchase and development of our
ERP system, including $3.1 million, $22.5 million, and $40.6 million of costs incurred during fiscal years 2019, 2018
and 2017, respectively. We have capitalized $1.6 million, $7.5 million, and $16.7 million of qualifying software
development costs as internal-use software development in progress during fiscal years 2019, 2018, and 2017,
respectively. We have recognized expense for $1.5 million, $15.0 million, and $23.9 million of these costs in fiscal years
2019, 2018, and 2017, 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 Operations.
Various components of our ERP system became ready for their intended use and were placed into service at various
times from fiscal 2016 through fiscal 2019. As each component became ready for its intended use, the component’s costs
were transferred into completed software and we began amortizing these costs over their seven-year estimated useful life
using the straight-line method. We continue to capitalize costs associated with the development of other ERP
components that are not yet ready for their intended use.
Our provisions for depreciation of plant and equipment and amortization of leasehold improvements and software
amounted to $22.6 million, $19.5 million and $17.8 million in 2019, 2018 and 2017, 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 typically use
accelerated methods (declining balance) for machinery and equipment and software other than our ERP system over
estimated useful lives ranging from 5 to 10 years.
106
NOTE 10—GOODWILL AND PURCHASED INTANGIBLE ASSETS
Changes in goodwill for the two years ended September 30, 2019 are as follows (in thousands):
Cubic Transportation
Systems
Cubic Mission
Solutions
Cubic Global
Defense
Total
$
Net balances at September 30, 2017
Reassignment on October 1, 2017
Acquisitions (see Note 2)
Foreign currency exchange rate changes
Net balances at September 30, 2018
Reassignment on April 1, 2019
Acquisitions
Foreign currency exchange rate changes
Net balances at September 30, 2019
$
50,870 $
—
—
(1,084)
49,786
—
206,988
(2,182)
254,592 $
—
125,321
13,085
(279)
138,127
3,428
40,392
(523)
181,424
$
$
270,692 $
(125,321)
665
(323)
145,713
(3,428)
—
(204)
142,081 $
321,562
—
13,750
(1,686)
333,626
—
247,380
(2,909)
578,097
As described in Note 18, we concluded that CMS became a separate operating segment beginning on October 1, 2017. In
conjunction with the changes to reporting units, we reassigned goodwill between CGD and CMS based on their relative
fair values on October 1, 2017.
In July 2017, we acquired Deltenna, a wireless infrastructure company specializing in the design and delivery of radio
and antenna communication solutions. Deltenna’s operations were included in our CGD reporting unit upon its
acquisition. On April 1, 2019, we reorganized our reporting structure to include Deltenna in our CMS reporting unit and
reassigned $3.4 million of goodwill from CGD to CMS based upon its relative fair value. Since its acquisition,
Deltenna’s sales, operating results, and cash flows have not been significant to our consolidated results. As such,
reportable segment information has not been restated for this change in the composition of our reportable segments.
We complete our annual goodwill impairment test each year as of July 1 separately for our CTS, CGD and CMS
reporting units.
The test for goodwill impairment is a two-step process. The first step of the test is performed by comparing the fair value
of each reporting unit to its carrying amount, including recorded goodwill. If the carrying amount of a reporting unit
exceeds its fair value, the second step is performed to measure the amount of the impairment, if any, by comparing the
implied fair value of goodwill to its carrying amount. Any resulting impairment determined would be recorded in the
current period.
For our 2019 impairment test, the estimated fair value of all three of our reporting units exceeded their respective
carrying amounts. As such, there was no impairment of goodwill in 2019.
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.
Although we believe our underlying assumptions supporting these assessments 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
interim analyses in fiscal 2020 that could expose us to material impairment charges in the future.
107
Purchased Intangible Assets: The table below summarizes our purchased intangible assets (in thousands):
September 30, 2019
September 30, 2018
Gross
Gross Carrying Accumulated Net Carrying
Amount
Amortization
Amount
Carrying
Amount
Accumulated Net Carrying
Amortization
Amount
Contract and program intangibles
Other purchased intangibles
Total
$
$
181,903 $ (138,497) $ 43,406 $ 151,965 $ (112,399) $ 39,566
155,608
33,967
337,511 $ (171,898) $ 165,613 $ 204,816 $ (131,283) $ 73,533
(33,401)
(18,884)
122,207
52,851
Total amortization expense for 2019, 2018 and 2017 was $42.1 million, $27.1 million and $30.2 million, respectively.
The table below shows our expected amortization of purchased intangibles as of September 30, 2019, for each of the
next five years and thereafter (in thousands):
2020
2021
2022
2023
2024
Thereafter
Transportation Cubic Mission
Systems
Solutions
Total
$
$
17,553 $
16,025
15,470
10,353
9,797
21,531
90,729 $
18,884 $ 36,437
30,454
14,429
26,774
11,304
19,504
9,151
7,179
16,976
35,468
13,937
74,884 $ 165,613
NOTE 11—FINANCING ARRANGEMENTS
Long-term debt consists of the following (in thousands):
September 30,
2019
2018
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%
Less unamortized debt issuance costs
Less current portion
$ 50,000 $ 50,000
50,000
50,000
25,000
25,000
75,000
200,000
(175)
(10,714)
75,000
200,000
(207)
—
$ 189,111 $ 199,793
Maturities of long-term debt for each of the five years in the period ending September 30, 2024, are as follows: 2020 —
$10.7 million; 2021 — $35.7 million; 2022 — $35.7 million; 2023 — $35.7 million; 2024 — $35.7 million.
In March 2013, we entered into a note purchase and private shelf agreement pursuant to which we issued $100.0 million
of senior unsecured notes, bearing interest at a rate of 3.35% and maturing on March 12, 2025. Pursuant to the
agreement, on July 17, 2015, we issued an additional $25.0 million of senior unsecured notes, bearing interest at a rate of
3.70% and maturing on March 12, 2025. Interest payments on the notes issued in 2013 and 2015 are due semi-annually
and principal payments are due from 2021 through 2025. On February 2, 2016 we revised the note purchase agreement
and we issued an additional $75.0 million of senior unsecured notes bearing interest at 3.93% and maturing on March 12,
2026. Interest payments on these notes are due semi-annually and principal payments are due from 2020 through 2026.
108
The agreement pertaining to the aforementioned notes also contained a provision that the coupon rate would increase by
a further 0.50% should the company’s leverage ratio exceed a certain level.
We have a committed revolving credit agreement with a group of financial institutions in the amount of $800.0 million
which is scheduled to expire in April 2024 (Revolving Credit Agreement). Under the terms of the Revolving Credit
Agreement, the company may elect that the debts comprising each borrowing bear interest generally at a rate equal to
(i) London Interbank Offer Rate (“LIBOR”) based upon tenor plus a margin that fluctuates between 1.00% and 2.00%,
as determined by the company’s Leverage Ratio (as defined in the Revolving Credit Agreement) as set forth in the
company’s most recently delivered compliance certificate or (ii) the Alternate Base Rate (defined as a rate equal to the
highest of (a) the Prime Rate (b) the NYFRB rate plus 0.50% (c) the Adjusted LIBOR Rate plus 1.00%), plus a margin
that fluctuates between 0.00% and 1.00%, as determined by the company’s Leverage Ratio as set forth in its most
recently delivered compliance certificate. At September 30, 2019, the weighted average interest rate on outstanding
borrowings under the Revolving Credit Agreement was 3.90%. Debt issuance and modification costs of $1.9 million
were incurred in connection with an April 2019 amendment to the Revolving Credit Agreement which increased
permitted borrowings from $400.0 million to $800.0 million. Costs incurred in connection with establishment of and
amendments to this credit agreement are recorded in other assets on our Consolidated Balance Sheets, and are being
amortized as interest expense using the effective interest method over the stated term of the Revolving Credit
Agreement. At September 30, 2019, our total debt issuance costs have an unamortized deferred financing balance of $1.2
million. The available line of credit is reduced by any letters of credit issued under the Revolving Credit Agreement. As
of September 30, 2019, there were $195.5 million of borrowings under this agreement and there were letters of credit
outstanding totaling $31.5 million, which reduce the available line of credit to $573.0 million. The $31.5 million of
letters of credit includes both financial letters of credit and performance guarantees.
Interest paid amounted to $16.8 million, $10.0 million and $14.8 million in fiscal 2019, 2018 and 2017, respectively.
As of September 30, 2019, we had letters of credit and bank guarantees outstanding totaling $39.9 million, which
includes the $31.5 million of letters of credit on the Revolving Credit Agreement described above and $8.4 million of
letters of credit issued under other facilities. The total of $39.9 million of letters of credit and bank guarantees includes
$34.4 million that guarantees either our performance or customer advances under certain contracts and financial letters of
credit of $5.5 million which primarily guarantee our payment of certain self-insured liabilities. We have never had a
drawing on a letter of credit instrument, nor are any anticipated; therefore, we estimate the fair value of these instruments
to be zero.
We have entered into a short-term borrowing arrangement in the U.K. in the amount of £20.0 million British pounds
(equivalent to approximately $24.6 million) to help meet the short-term working capital requirements of our subsidiary.
At September 30, 2019, no amounts were outstanding under this borrowing arrangement.
We maintain a cash account with a bank in the United Kingdom for which the funds are restricted as to use. The account
is required to secure the customer’s interest in cash deposited in the account to fund our activities related to our
performance under a fare collection services contract in the United Kingdom. The balance in the account as of
September 30, 2019 was $19.5 million and is classified as restricted cash in our Consolidated Balance Sheets.
The terms of certain of our lending and credit agreements include provisions that require and/or limit, among other
financial ratios and measurements, the permitted levels of debt, coverage of cash interest expense, and under certain
circumstances, payments of dividends or other distributions to shareholders. As of September 30, 2019, these agreements
have no restrictions on distributions to shareholders, subject to certain tests in these agreements.
In December 2018, we completed an underwritten public offering of 3,795,000 shares of our common stock, including
the exercise of the underwriters’ option to purchase additional shares. All shares were offered by us at a price to the
public of $60.00 per share. Net proceeds were $215.8 million, after deducting underwriting discounts and commissions
and offering expenses of $11.9 million. We used the net proceeds to repay a portion of our outstanding borrowings under
the Revolving Credit Agreement which was used to finance the acquisition of Trafficware and for general corporate
purposes.
109
Our self-insurance arrangements are limited to certain workers’ compensation plans, automobile liability and product
liability claims. Under these arrangements, we self-insure only up to the amount of a specified deductible for each claim.
Self-insurance liabilities included in accrued compensation and other current liabilities on the balance sheet amounted to
$7.4 million and $8.6 million as of September 30, 2019 and 2018, respectively.
NOTE 12—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 $0.2 million in 2019, $0.2
million in 2018 and $0.2 million in 2017) for all operating leases amounted to $13.3 million, $11.6 million and $10.5
million in 2019, 2018 and 2017, 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, 2019 (in thousands):
2020
2021
2022
2023
2024
Thereafter
NOTE 13—INCOME TAXES
$ 18,121
17,218
15,097
13,250
12,311
37,926
$ 113,923
On December 22, 2017, the U.S. government enacted the Tax Act, which includes provisions for Global Intangible Low-
Tax Income (GILTI) under which taxes on foreign income are imposed on the excess of a deemed return on tangible
assets of foreign subsidiaries. Consistent with accounting guidance, we have elected to account for the tax on GILTI as a
period cost and thus have not adjusted any net deferred tax assets of our foreign subsidiaries in connection with the Tax
Act.
Due to the complexity of the Tax Act, the Securities and Exchange Commission issued guidance in SAB 118 which
clarified the accounting for income taxes under ASC 740 if certain information was not yet available, prepared or
analyzed in reasonable detail to complete the accounting for income tax effects of the Tax Act. SAB 118 provided for a
measurement period of up to one year after the enactment of the Tax Act, during which time the required analyses and
accounting must be completed. During fiscal year 2018, we recorded provisional amounts for the income tax effects of
the changes in tax law and tax rates, as reasonable estimates were determined by management during this period. These
amounts did not change in fiscal year 2019.
The SAB 118 measurement period ended on December 22, 2018. Although we no longer consider these amounts to be
provisional, the determination of the Tax Act’s income tax effects may change following future legislation or further
interpretation of the Tax Act based on the publication of recently proposed U.S. Treasury regulations and guidance from
the Internal Revenue Service and state tax authorities.
Income (loss) from continuing operations before income taxes includes the following components (in thousands):
2019
Years Ended September 30,
2018
(in thousands)
2017
United States
Foreign
Total
110
$
(535) $ (51,049) $ (70,566)
59,484
$ 52,346 $ 14,886 $ (11,082)
65,935
52,881
Significant components of the provision (benefit) for income taxes from continuing operations are as follows:
2019
Years Ended September 30,
2018
(in thousands)
2017
Current:
Federal
State
Foreign
Total current
Deferred:
Federal
State
Foreign
Total deferred
Provision for income taxes
$
(710) $ (4,775) $ (4,070)
878
976
2,898
13,869
19,882
10,523
10,677
16,083
12,711
(4,553)
(135)
3,017
(1,671)
2,257
(7,874)
569
482
1,155
(1,598)
3,981
(8,990)
$ 11,040 $ 7,093 $ 14,658
The reconciliation of income tax computed at the U.S. federal statutory tax rate to income tax expense is as follows:
Tax expense at U.S. statutory rate
State income taxes, net of federal tax effect
Nondeductible expenses
Change in reserve for tax contingencies
Change in deferred tax asset valuation allowance
Foreign rate differential (1)
Tax credits
Impact of U.S. Tax Reform
Global Intangible Low-Tax Income
Stock Based Compensation
Non-controlling interest in equity arrangements
Other
Provision for income taxes
2019
2017
Years Ended September 30,
2018
(in thousands)
$ 10,992 $ 3,124 $ (3,877)
(923)
(185)
(4,435)
17,374
9,912
(3,459)
—
—
16
—
235
$ 11,040 $ 7,093 $ 14,658
1,416
1,720
(1,468)
(10,007)
2,149
(4,767)
—
8,182
(448)
1,802
1,469
(237)
1,186
(1,047)
8,784
5,684
(2,656)
(7,053)
—
59
99
(850)
(1) In 2018, we recorded $3.5 million of tax expense related to foreign earnings which were not permanently
reinvested prior to the enactment of the U.S. Tax Act. After enactment, certain foreign earnings are taxed at
higher statutory rates than the U.S. which results in $2.1 million of incremental tax expense in 2019. In 2017,
we provided for deferred taxes on all cumulative unremitted foreign earnings, as the earnings were no longer
considered permanently reinvested resulting in a charge of $9.5 million.
111
Significant components of our deferred tax assets and liabilities are as follows:
Deferred tax assets:
Accrued employee benefits
Allowances for loss contingencies
Deferred compensation
Intangible assets
Inventory valuation
Long-term contracts
Prepaid and accrued expenses
Retirement benefits
Tax credit carryforwards
Loss carryforwards
Other
Total gross deferred tax assets
Valuation allowance
Total deferred tax assets
Deferred tax liabilities:
Debt obligation basis difference
Deferred revenue
Intangible assets
Property, plant and equipment
Unremitted earnings
Other
Total deferred tax liabilities
Net deferred tax asset (liability)
September 30,
2019
2018
(in thousands)
$ 11,409 $ 8,285
3,518
3,272
1,361
1,154
7,751
1,229
1,398
35,137
29,097
264
92,466
(81,838)
10,628
3,561
3,071
—
8,036
6,995
1,816
4,967
33,118
36,248
818
110,039
(69,098)
40,941
(4,582)
(12,135)
(18,592)
(4,524)
(977)
(587)
(41,397)
—
(2,351)
—
(5,079)
(823)
(351)
(8,604)
(456) $ 2,024
$
The deferred tax assets and liabilities for fiscal 2019 and 2018 include amounts related to various acquisitions. The total
change in deferred tax assets and liabilities in fiscal 2019 includes changes that are recorded to other comprehensive
income (loss), retained earnings 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.
At September 30, 2019, we have federal and state income tax credit carryforwards (in thousands) which begin to expire
as follows:
U.S. foreign tax credits
U.S. research and development tax credits
State research and development tax credits
2027
$ 14,535
14,439
2035
25,748 Do not expire
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We have federal, state and foreign capital and net operating losses (in thousands) which begin to expire as follows:
U.S. net operating loss carryforwards
U.S. capital loss carryforwards
State loss carryforwards
State capital loss carryforwards
Foreign net operating loss carryforwards
2033
$ 127,013
2023
5,451
2021
55,619
23,038
2023
13,548 Do not expire
During 2015, we evaluated our net U.S. deferred income taxes, which included an assessment of the cumulative income
or loss over the prior three-year period and future periods and concluded that a valuation allowance was required. After
consideration of our recent history of U.S. losses, we continue to maintain a valuation allowance on net U.S. deferred tax
assets as of September 30, 2019.
As of September 30, 2019, a total valuation allowance of $69.1 million has been established against U.S. deferred tax
assets, certain foreign operating losses and other foreign assets. For fiscal 2019, the valuation allowance decreased by
$12.7 million, of which $10.0 million was recorded as a net tax benefit in our Consolidated Statement of Operations,
offset by amounts recorded through acquisition accounting and to other components of income.
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 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. 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.
Prior to the Tax Act, we provided deferred taxes on all undistributed foreign earnings, as we did not consider these
amounts permanently reinvested. Under the transition to a modified territorial tax system, all previously untaxed
undistributed foreign earnings are subject to a transition tax charge at reduced rates and future repatriations of foreign
earnings will generally be exempt from U.S. tax. We will continue to provide applicable deferred taxes based on the tax
liability or withholding taxes that would be due upon repatriation of the undistributed foreign earnings. As of
September 30, 2019, we have recorded a deferred tax liability of $1.0 million related to future taxes on our unremitted
foreign earnings.
Accounting for Uncertainty in Income Taxes
During fiscal 2019 and 2018, the aggregate changes in our total gross amount of unrecognized tax benefits are
summarized as follows:
Balance at beginning of year
Additions (reductions) for tax positions taken in prior years
Recognition of benefits from expiration of statutes
Additions for tax positions related to the current year
Reductions for tax positions related to acquisitions
Balance at end of year
September 30,
2018
2019
(in thousands)
$ 9,942 $ 13,248
(80)
(1,770)
713
(2,169)
$ 18,575 $ 9,942
8,458
(776)
951
—
At September 30, 2019 and 2018, the amount of unrecognized tax benefits that, if recognized, would affect the effective
tax rate was $0.7 million and $1.8 million, respectively. During fiscal year 2020, it is reasonably possible that resolution
of reviews by taxing authorities, both domestic and foreign, could be reached with respect to an immaterial amount of
net unrecognized tax benefits depending on the timing of examinations or expiration of statutes of limitations, either
because our tax positions are sustained or because we agree to the disallowance and pay the related income tax. We
113
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 fiscal 2019 and 2018 were not material.
We are subject to ongoing audits from various taxing authorities in the jurisdictions in which we do business. As of
September 30, 2019, the fiscal years open under the statute of limitations in significant jurisdictions include 2016
through 2019 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 $28.7 million, $15.7 million and $1.6 million in 2019,
2018 and 2017, respectively.
NOTE 14—DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In order to manage our exposure to fluctuations in interest and foreign currency exchange rates we utilize derivative
financial instruments such as forward starting swaps and foreign currency forwards for periods typically up to five years.
We do not use any derivative financial instruments for trading or other speculative purposes.
All derivatives are recorded at fair value, however, the classification of gains and losses resulting from changes in the
fair values of derivatives are dependent on the intended use of the derivative and its resulting designation. If a derivative
is designated as a fair value hedge, then a change in the fair value of the derivative is offset against the change in the fair
value of the underlying hedged item and only the ineffective portion of the hedge, if any, is recognized in earnings. If a
derivative is designated as a cash flow hedge, then the effective portion of a change in the fair value of the derivative is
recognized as a component of accumulated other comprehensive income (loss) until the underlying hedged item is
recognized in earnings, or the forecasted transaction is no longer probable of occurring. If a derivative does not qualify
as a highly effective hedge, any change in fair value is immediately recognized in earnings. We formally document all
hedging relationships for all derivative hedges and the underlying hedged items, as well as the risk management
objectives and strategies for undertaking the hedge transactions. We classify the fair value of all derivative contracts as
current or noncurrent assets or liabilities, depending on the realized and unrealized gain or loss position of the hedged
contract at the balance sheet date, and the timing of future cash flows. The cash flows from derivatives treated as hedges
are classified in the 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,
2019 and 2018 (in thousands):
Instruments designated as accounting hedges:
Foreign currency forwards
Interest rate swaps
Instruments not designated as accounting hedges:
Foreign currency forwards
Notional Principal
September 30, 2019 September 30, 2018
$
143,164 $
95,000
169,406
—
$
24,220 $
27,909
Included in the amounts not designated as accounting hedges at September 30, 2019 and 2018 were foreign currency
forwards with notional principal amounts of $14.0 million and $14.7 million, respectively, that have been designed to
manage exposure to foreign currency exchange risks, and for which the gains or losses of the changes in fair value of the
forwards has approximately offset an equal and opposite amount of gains or losses related to the foreign currency
exposure. Unrealized gains of $0.0 million and $0.2 million were recognized in other income (expense), net for the fiscal
years ended September 30, 2019 and 2018, respectively, related to foreign currency forward contracts not designated as
accounting hedges.
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During fiscal 2019, we entered into agreements related to the construction and leasing of two buildings on our existing
corporate campus in San Diego. This will allow us to consolidate virtually all of our San Diego operations in a single
location and accommodate the expected growth of our business. Under these agreements a financial institution will own
the buildings, and we will lease the property for a term of five years upon their completion. In conjunction with these
agreements, we entered into pay-variable/receive-fixed interest rate swaps with a group of financial institutions to
mitigate variable interest rate risk associated with these future lease obligations. The interest rate swaps contain forward
starting notional principal amounts which align with our expected lease payments. These interest rate swaps were
designated as effective cash flow hedges at September 30, 2019, and as such, unrealized gains/losses are included in
accumulated other comprehensive income (loss). Unrealized gains as a result of changes in the fair value of the interest
rate swaps were $0.2 million for the year ended September 30, 2019.
The notional principal amounts for outstanding derivative instruments provide one measure of the transaction volume
outstanding and do not represent the amount of our exposure to credit or market loss. Credit risk represents our gross
exposure to potential accounting loss on derivative instruments that are outstanding or unsettled if all counterparties
failed to perform according to the terms of the contract, based on then-current interest or currency exchange rates at each
respective date. Our exposure to credit loss and market risk will vary over time as a function of interest and currency
exchange rates. The amount of credit risk from derivative instruments and hedging activities was not material for the
fiscal years ended September 30, 2019 and 2018. Although the table above reflects the notional principal amounts of our
foreign exchange instruments, it does not reflect the gains or losses associated with the exposures and transactions that
the foreign exchange instruments are intended to hedge. The amounts ultimately realized upon settlement of these
financial instruments, together with the gains and losses on the underlying exposures, will depend on actual market
conditions during the remaining life of the instruments.
We generally enter into master netting arrangements, which reduce credit risk by permitting net settlement of
transactions with the same counterparty. We present our derivative assets and derivative liabilities at their gross fair
values. We did not have any derivative instruments with credit-risk related contingent features that would require us to
post collateral as of September 30, 2019 or 2018.
The table below presents the fair value of our derivative financial instruments that qualify for hedge accounting as well
as their classification in the Consolidated Balance Sheets (in thousands):
Asset derivatives:
Foreign currency forwards
Foreign currency forwards
Forward starting swap
Liability derivatives:
Foreign currency forwards
Foreign currency forwards
Total
Balance Sheet Location
Fair Value
September 30, 2019 September 30, 2018
Other current assets
Other assets
Other assets
$
$
Other current liabilities
Other noncurrent liabilities
$
$
2,635 $
619
240
3,494 $
529 $
228
757 $
1,803
314
—
2,117
1,657
75
1,732
The tables below present gains and losses recognized in other comprehensive income (loss) related to derivative financial
instruments designated as cash flow hedges, as well as the amount of gains and losses reclassified into earnings (in
thousands):
September 30, 2019
September 30, 2018
Derivative Type
Foreign currency forwards
Gains (losses)
recognized in
OCI
4,344 $
$
Gains (losses)
reclassified into
earnings -
Gains (losses)
Gains (losses)
reclassified into
earnings -
Effective Portion recognized in OCI Effective Portion
(1,239)
1,945 $
(45) $
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The amount of unrealized gains and losses from derivative instruments and hedging activities classified as not highly
effective did not have a material impact on the results of operations for the years ended September 30, 2019 or 2018. The
amount of estimated unrealized net gains from cash flow hedges which are expected to be reclassified to earnings in the
next twelve months is $1.5 million, net of income taxes.
NOTE 15—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 noncurrent liabilities in our
Consolidated Balance Sheets and totaled $11.0 million and $11.5 million at September 30, 2019 and 2018, respectively.
In the past we have made contributions to a rabbi trust to provide a source of funds for satisfying a portion of these
deferred compensation liabilities. The total carrying value of the assets set aside to fund deferred compensation liabilities
as of September 30, 2019 and 2018 were $6.6 million and $6.4 million, respectively, which were comprised entirely of
life insurance contracts. The carrying value of the life insurance contracts is based on the cash surrender value of the
policies. Changes in the carrying value of the deferred compensation liability, and changes in the carrying value of the
assets held in the rabbi trust are reflected in our Consolidated Statements of Operations.
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
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 $19.4 million, $16.8 million and $16.8 million in 2019,
2018 and 2017, respectively.
Employee Stock Purchase Plan
We sponsor a noncompensatory Employee Stock Purchase Plan, which allows eligible employees to purchase common
stock of the Company at a discount rate of 5% of the market price per share on the last trading day of the offering period.
Annual employee contributions are limited to $25,000, are voluntary, and made through a bi-weekly payroll deduction.
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.
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 European
116
plans, as of September 30, 2019, we expect to make contributions of approximately $6.1 million in 2020. September 30
is used as the measurement date for these plans.
Changes in actuarial assumptions of our defined benefit pension plans are recorded in accumulated other comprehensive
income (loss). 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. The unrecognized actuarial gain or loss included in accumulated other comprehensive income (loss) at
September 30, 2019 and expected to be recognized in net pension cost during fiscal 2020 is a loss of $4.0 million ($3.2
million net of income tax). The unrecognized actuarial loss incurred in fiscal year 2019 was $32.1 million, which was
primarily driven by a decrease in discount rates used in the calculation of the net benefit obligation. No plan assets are
expected to be returned to us in fiscal 2020.
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the defined benefit
pension plans were as follows (in thousands):
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
September 30,
2019
2018
$ 246,697 $ 222,332
222,332
214,530
246,697
221,311
117
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):
Change in benefit obligations:
Net benefit obligation at the beginning of the year
Service cost
Interest cost
Actuarial (gain) loss
Gross benefits paid
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
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
September 30,
2019
2018
$ 222,332 $ 235,097
606
7,529
(9,449)
(8,034)
(3,417)
222,332
590
7,617
32,067
(8,141)
(7,768)
246,697
214,530
17,794
4,842
(8,141)
(177)
(541)
(6,996)
221,311
209,722
11,998
5,117
(8,034)
(286)
(698)
(3,289)
214,530
(25,386)
70,095
(7,802)
48,081
$ 44,709 $ 40,279
$ (70,095) $ (48,081)
7,365
610
$ (59,600) $ (40,106)
11,667
(1,172)
The components of net periodic pension cost (benefit) were as follows (in thousands):
Years Ended September 30,
2018
2017
2019
$
590 $
606 $
617
7,091
(12,928)
3,700
474
$ (1,337) $ (2,770) $ (1,046)
7,529
(14,120)
2,777
438
7,617
(11,990)
2,098
348
Service cost
Interest cost
Expected return on plan assets
Amortization of actuarial loss
Administrative expenses
Net pension benefit
118
Years Ended September 30,
2018
2017
2019
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
2.5%
3.1%
3.6%
3.3%
3.3%
3.2%
3.6%
5.7%
3.3%
3.3%
6.8%
3.2%
3.0%
6.8%
3.1%
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, 2019 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. Our plans also invest in diversified growth funds that hold underlying
investments in equities, fixed-income securities, commodities, and real estate. The following table presents 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 5 for a description of each level within the fair value hierarchy.
All assets measured at the net asset value (NAV) practical expedient 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 NAV 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.
119
Plan assets held at fair value:
Cash equivalents
$ 2,908 $ — $ — $
2,908 $ 19,314 $ — $ — $ 19,314
Level 1
September 30, 2019
Level 2 Level 3
Total
Level 1
September 30, 2018
Level 2 Level 3
Total
Plan assets held at net asset value
practical expedient*:
Equity Funds
Fixed Income Funds
Diversified Growth Funds
Real Estate Funds
Total assets held at net asset value
practical expedient:
Total Plan Assets
100,302
105,651
8,886
3,564
$ 218,403
$ 221,311
107,424
73,533
14,259
—
$ 195,216
$ 214,530
* Plan assets measured at fair value using NAV (or its equivalent) as a practical expedient have not been categorized in
the fair value hierarchy.
The pension plans held no direct positions in Cubic Corporation common stock as of September 30, 2019 and 2018.
We expect to pay the following pension benefit payments (in thousands):
2020
2021
2022
2023
2024
2024-2028
NOTE 16—STOCKHOLDERS’ EQUITY
Long-Term Equity Incentive Plan
$
9,067
9,140
9,306
9,324
9,693
52,750
Under our long-term equity incentive program we have provided participants with three general categories of grant
awards: RSUs with time-based vesting, RSUs with performance-based vesting, and RSUs with performance and market-
based vesting.
Each RSU with time-based vesting or performance-based vesting represents a contingent right to receive one share of
our common stock. Each RSU with performance and market-based vesting represents a contingent right to receive up to
1.25 shares of our common stock. Dividend equivalent rights accrue with respect to the RSUs as dividends are paid on
our common stock and vest proportionately with the RSUs to which they relate. Vested shares are delivered to the
recipient following each vesting date.
The RSUs granted with time-based vesting generally vest in four equal installments on each of the four October 1 dates
following the grant date, subject to the recipient’s continued service through such vesting date.
The performance-based RSUs granted to participants vest over three-year performance periods based on Cubic’s
achievement of performance goals established by the Compensation Committee over the performance periods, subject to
the recipient’s continued service through the end of the respective performance periods. For the performance-based
RSUs granted prior to September 30, 2018, the vesting is contingent upon Cubic meeting vesting criteria over the
performance period, including revenue growth targets, earnings growth targets, and return on equity targets. The level at
120
which Cubic performs against scalable targets over the performance periods will determine the percentage of the RSUs
that will ultimately vest.
In fiscal 2019, the Compensation Committee granted RSUs which contained both performance and market-based vesting
criteria. The performance and market-based RSUs granted to participants vest over three-year performance periods based
on Cubic’s achievement of revenue growth targets and earnings growth targets subject to the recipient’s continued
service through the end of the respective performance periods. The level at which Cubic performs against scalable targets
over the performance periods impact the percentage of the RSUs that will ultimately vest. For these RSUs, Cubic’s
relative total stock return (TSR) as compared to the Russell 2000 Index (Index) over the performance period will result
in a multiplier for the number of RSUs that will vest. If the TSR performance exceeds the performance of the Index
based on a scale established by the Compensation Committee, the multiplier will result in up to an additional 25% of
RSUs vesting at the end of the performance period. If the TSR performance is below the performance of the Index based
on a scale established by the Compensation Committee, the multiplier would result in a reduction of up to 25% of these
RSUs vesting at the end of the performance period.
During fiscal 2019, the Compensation Committee amended the long-term equity incentive program to provide
accelerated vesting for retirement age participants. Under this amendment, participants who are 60 years of age, and
whose age plus years of service equals or exceeds 70 are eligible for accelerated vesting of their RSUs. Participants who
have reached the retirement age criteria must generally provide a one-year notice of retirement to the Company. For
participants who have reached the retirement age criteria, expense is recognized over the adjusted service period.
The grant date fair value of each RSU with time-based vesting or performance-based vesting is the fair market value of
one share of our common stock at the grant date.
The grant date fair value of each RSU with performance and market-based vesting was calculated using a Monte Carlo
simulation valuation method. Under this method, the prices of the Index and our common stock were simulated through
the end of the performance period. The correlation matrix between our common stock and the index as well as our stock
and the Index’s return volatilities were developed based upon an analysis of historical data. The following table includes
the assumptions used for the valuation of the RSUs with performance and market-based vesting that were granted during
fiscal 2019:
Date of grant
Grant date fair value
Performance period begins
Performance period ends
Risk-free interest rate
Expected volatility
RSUs granted during the year ended September 30, 2019
November 21, 2018
$67.40
November 21, 2018
September 30, 2021
2.8%
34%
April 1, 2019
$59.29
April 1, 2019
September 30,
2021
2.8%
34%
At September 30, 2019, the total number of unvested RSUs that are ultimately expected to vest, after consideration of
expected forfeitures and estimated vesting of performance-based RSUs, is 366,913 RSUs with time-based vesting,
112,942 RSUs with performance-based vesting, and 174,105 RSUs with performance and market-based vesting.
121
The following table summarizes our RSU activity:
Unvested at September 30, 2017
Granted
Vested
Forfeited
Unvested at September 30, 2018
Granted
Vested
Forfeited
Unvested at September 30, 2019
Unvested at September 30, 2017
Granted
Vested
Forfeited
Unvested at September 30, 2018
Granted
Vested
Forfeited
Unvested at September 30, 2019
Unvested at September 30, 2017
Granted
Vested
Forfeited
Unvested at September 30, 2018
Granted
Vested
Forfeited
Unvested at September 30, 2019
Unvested Restricted Stock Units with
Service-Based Vesting
Weighted Average
Number of Shares Grant-Date Fair Value
45.99
61.06
46.86
48.62
52.31
63.25
50.76
54.67
58.84
366,331 $
165,271
(147,832)
(17,310)
366,460 $
239,874
(145,409)
(38,831)
422,094 $
Unvested Restricted Stock Units with
Performance-Based Vesting
Weighted Average
Number of Shares Grant-Date Fair Value
46.59
61.40
—
48.46
50.11
—
—
44.63
55.67
678,856 $
179,162
—
(222,390)
635,628 $
—
—
(320,366)
315,262 $
Unvested Restricted Stock Units with
Performance and Market-Based Vesting
Weighted Average
— $
—
—
—
— $
Number of Shares Grant-Date Fair Value
—
—
—
—
—
66.79
—
67.40
66.77
237,616
—
(10,214)
227,402 $
As of September 30, 2019, approximately 1,637,274 shares remained available for future grants under our long-term
equity incentive plan. On October 1, 2019, 148,995 RSUs vested.
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We recorded non-cash compensation expense related to stock-based awards as follows (in thousands):
Cost of sales
Selling, general and administrative
$
2019
1,766 $
13,722
Years Ended September 30,
2018
1,096 $
6,419
7,515 $
2017
338
4,674
5,012
$ 15,488 $
As of September 30, 2019, there was $39.7 million of unrecognized compensation expense related to unvested RSUs.
Based upon the expected forfeitures and the expected vesting of performance-based RSUs, the aggregate fair value of
RSUs expected to ultimately vest is $40.0 million, which is expected to be recognized over a weighted-average period of
1.7 years and includes the RSUs that vested on October 1, 2019.
We estimate forfeitures at the time of grant and revise those estimates in subsequent periods on a cumulative basis in the
period the estimated forfeiture rate changes for all stock-based awards when significant events occur. We consider our
historical experience with employee turnover as the basis to arrive at our estimated forfeiture rate. The forfeiture rate was
estimated to be 12.5% per year as of September 30, 2019. To the extent the actual forfeiture rate is different from what
we have estimated, compensation expense related to these awards will be different from our expectations.
NOTE 17—LEGAL MATTERS
In August 2019, a transit authority asserted loss of revenue due to alleged accidental undercharging of their customers
for specific transactions by a fare system which we operate for them and has requested a corresponding recoupment from
us. Based upon our investigation into this matter, we believe this matter will not have a materially adverse effect on our
financial position, results of operations, or cash flows. No liability for this claim has been recorded as of September 30,
2019.
We consider all other current legal matters to be ordinary proceedings incidental to our business. We believe the
outcome of these proceedings will not have a materially adverse effect on our financial position, results of operations, or
cash flows.
NOTE 18—BUSINESS SEGMENT INFORMATION
We define our operating segments and reportable segments based on the way our chief executive officer, who we have
concluded is our chief operating decision maker, manages our operations for purposes of allocating resources and
assessing performance and we continually reassess our operating segment and reportable segment designation based
upon these criteria. Through September 30, 2017, our company was aligned in our CGD and CTS operating segments,
which were also our reportable segments. In 2016, we formalized the structure of our CMS business unit within our
CGD operating segment. CMS combines and integrates our C4ISR and secure communications operations. Through
September 30, 2017, we concluded that CMS was not a separate operating segment based upon factors including the
nature of information presented to our chief executive officer and Board of Directors and the consequential level at
which certain resource allocations and performance assessments were made. In the first quarter of fiscal 2018, we began
providing additional financial information to our chief executive officer and Board of Directors at the CMS level, which
allowed greater resource allocation decisions and performance assessments to be made at that level. As such, we
concluded that CMS became a separate operating segment beginning on October 1, 2017. Applicable prior period
amounts have been adjusted retrospectively to reflect the reportable segment change.
We evaluate performance and allocate resources based on total segment operating income or loss. The accounting
policies of the reportable segments are the same as those described in the summary of significant accounting policies.
Intersegment sales and transfers are immaterial and are eliminated in consolidation.
123
Our reportable segments are business units that offer different products and services. Operating results for each segment
are reported separately to senior corporate management to make decisions as to the allocation of corporate resources and
to assess performance.
Business segment financial data is as follows (in millions):
Sales:
Cubic Transportation Systems
Cubic Mission Solutions
Cubic Global Defense
Total sales
Operating income (loss):
Cubic Transportation Systems
Cubic Mission Solutions
Cubic Global Defense
Unallocated corporate expenses
Total operating income
Assets:
Cubic Transportation Systems
Cubic Mission Solutions
Cubic Global Defense
Corporate
Discontinued Operations
Total assets
Depreciation and amortization:
Cubic Transportation Systems
Cubic Mission Solutions
Cubic Global Defense
Corporate
Total depreciation and amortization
Capital expenditures:
Cubic Transportation Systems
Cubic Mission Solutions
Cubic Global Defense
Corporate
Total expenditures for long-lived assets
Years ended September 30,
Long-lived assets, net:
United States
United Kingdom
Other foreign countries
Total long-lived assets, net
2019
Years Ended September 30,
2018
2017
849.8
328.8
317.9
1,496.5
77.2
7.8
23.0
(21.8)
86.2
825.8
437.9
394.2
189.3
—
1,847.2
30.7
23.3
6.8
3.9
64.7
6.6
11.1
4.5
26.9
49.1
$
$
$
$
$
$
$
$
$
$
670.7 $
207.0
325.2
1,202.9 $
578.6
168.9
360.2
1,107.7
60.4 $
(0.1)
16.6
(52.5)
24.4 $
39.8
(9.3)
28.1
(56.0)
2.6
390.2 $
352.9
360.1
201.7
—
1,304.9 $
335.1
390.5
280.1
156.4
174.2
1,336.3
12.0 $
22.4
8.5
3.7
46.6 $
3.2 $
2.1
9.4
17.0
31.7 $
8.8
23.8
10.4
5.0
48.0
6.9
1.7
5.9
22.4
36.9
$
$
$
$
$
$
$
$
$
$
2019
2018
2017
$
$
128.4
5.9
10.7
145.0
$
$
106.7
5.7
12.0
124.4
$
$
100.6
11.7
7.3
119.6
124
CGD and CMS segment sales include $468.8 million, $365.8 million and $327.8 million in 2019, 2018 and 2017,
respectively, of sales to U.S. government agencies. CTS segment sales include $158.5 million and $147.3 million in
2018 and 2017, respectively, of sales under various contracts with our customer, Transport for London. No other
customer accounts for 10% or more of our revenues for any periods presented.
Disaggregation of Total Net Sales: We disaggregate our sales from contracts with customers by end customer, contract
type, deliverable type and revenue recognition method for each of our segments, as we believe these factors affect the
nature, amount, timing, and uncertainty of our revenue and cash flows.
Sales by Geographic Region (in millions):
United States
United Kingdom
Australia
Far East/Middle East
Other
Total sales
Years Ended September 30,
2019
2018
2017
$
$
956.6
218.2
163.5
74.0
84.2
1,496.5
$
$
627.8
240.7
166.7
86.4
81.3
1,202.9
$
$
522.8
219.4
175.6
112.7
77.2
1,107.7
Sales by End Customer: We are the prime contractor for the vast majority of our sales. The table below presents total net
sales disaggregated by end customer (in millions):
Years Ended September 30,
2019
2018
2017
U.S. Federal Government and State and Local Municipalities $
Other
Total sales
$
938.8
557.7
1,496.5
$
$
639.5
563.4
1,202.9
$
$
522.6
585.1
1,107.7
Sales by Contract Type: Substantially all of our contracts are fixed-price type contracts. Sales included in Other contract
types represent cost plus and time and material type contracts.
On a fixed-price type contract, we agree to perform the contractual statement of work for a predetermined sales price. On
a cost-plus type contract, we are paid our allowable incurred costs plus a profit which can be fixed or variable depending
on the contract’s fee arrangement up to predetermined funding levels determined by the customer. On a time-and-
material type contract, we are paid on the basis of direct labor hours expended at specified fixed-price hourly rates (that
include wages, overhead, allowable general and administrative expenses and profit) and materials at cost. The table
below presents total net sales disaggregated by contract type (in millions):
Fixed Price
Other
Total sales
Years Ended September 30,
2019
2018
2017
$
$
1,452.4
44.1
1,496.5
$
$
1,146.2
56.7
1,202.9
$
$
1,036.9
70.8
1,107.7
125
Sales by Deliverable Type: The table below presents total net sales disaggregated by the type of deliverable, which is
determined by us at the performance obligation level (in millions):
Product
Service
Total sales
2019
Years Ended September 30,
2018
2017
$
$
1,011.1
485.4
1,496.5
$
$
704.9
498.0
1,202.9
$
$
681.6
426.1
1,107.7
Revenue Recognition Method: The table below presents total net sales disaggregated based on the revenue recognition
method applied (in millions):
Point in Time
Over Time
Total sales
NOTE 19—RESTRUCTURING
September 30,
2019
$
$
347.4
1,149.1
1,496.5
In 2019, we initiated projects to restructure and modify our supply chain strategy, functional responsibilities, methods,
capabilities, processes and rationalize suppliers with the goal of reducing ongoing costs and increasing the efficiencies of
our worldwide procurement organization. The majority of the costs associated with these restructuring activities are
related to consultants that we have engaged in connection with these efforts, and such costs have been recognized by our
corporate entity. The total costs of this restructuring project are expected to exceed amounts incurred to date by $0.9
million and these efforts are expected to be completed early in fiscal 2020. Also, in fiscal 2019 our CTS and CGD
segments incurred restructuring charges, consisting primarily of employee severance costs related to headcount
reductions initiated to optimize our cost positions. The total costs of each of these restructuring plans initiated thus far
are not expected to be significantly greater than the charges incurred to date.
Our fiscal 2018 restructuring activities related primarily to expenses incurred by our corporate entity to establish a North
American shared services center. Our fiscal 2017 restructuring activities included corporate efforts to increase the
centralization and efficiency of our manufacturing processes, as well as restructuring charges incurred by our CGD
businesses related to the elimination of a level of management in the CGD simulator business.
Restructuring charges incurred by our business segments were as follows (in millions):
Years Ended September 30,
2017
2019
2018
$ 3.2 $ 0.4 $ 0.4
—
0.9
1.0
$ 15.4 $ 5.0 $ 2.3
0.2
1.3
3.1
—
3.3
8.9
Restructuring costs:
Cubic Transportation Systems
Cubic Mission Solutions
Cubic Global Defense
Unallocated corporate expenses
Total restructuring costs
126
The following table presents a rollforward of our restructuring liability as of September 30, 2019, which is included
within accrued compensation and other current liabilities within our Consolidated Balance Sheet, (in millions):
Restructuring Liability
Restructuring Liability
Balance as of October 1, 2017
Accrued costs
Cash payments
Balance as of September 30, 2018
$
Accrued costs
Cash payments
Balance as of September 30, 2019
$
Employee Separation and other Consulting Costs
$
$
1.0
4.2
(4.6)
0.6
7.5
(6.1)
2.0
$
$
—
0.8
(0.5)
0.3
7.9
(7.4)
0.8
Certain restructuring costs are based upon estimates. Actual amounts paid may ultimately differ from these estimates. If
additional costs are incurred or recognized amounts exceed costs, such changes in estimates will be recognized when
incurred.
NOTE 20—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, 2019 and
2018:
Year
Ended
Year
Ended
Fiscal 2019
September 30
March 31 December 31 September 30
Net sales
Operating income (loss)
Net income (loss)
Net income (loss) per share, basic
Net income (loss) per share, diluted
(in thousands, except per share data)
$ 471,198 $ 382,679 $ 337,339 $ 305,259 $ 1,496,475
86,237
49,694
1.63
1.62
34,725
23,910
0.77
0.77
58,619
41,763
1.39
1.38
(6,541)
(9,392)
(0.30)
(0.30)
(6,587)
(0.23)
(0.23)
(566)
Three Months Ended
June 30
Three Months Ended
June 30
Fiscal 2018
September 30
March 31 December 31 September 30
Net sales
Operating income (loss)
Net income (loss)
Net income (loss) per share, basic
Net income (loss) per share, diluted
(in thousands, except per share data)
$ 379,709 $ 296,212 $ 278,586 $ 248,391 $ 1,202,898
24,382
12,310
0.45
0.45
(11,902)
(9,786)
(0.36)
(0.36)
27,673
17,816
0.65
0.65
10,290
6,291
0.23
0.23
(1,679)
(2,011)
(0.07)
(0.07)
The following table summarizes the aggregate impact of net changes in contract estimates (amounts in thousands, except
per share data):
Operating income (loss)
Net income (loss) from continuing operations
Diluted earnings per share
Three Months Ended
September 30,
2019
2018
$
$
(1,420)
(1,615)
(0.05)
(4,162)
(3,149)
(0.12)
127
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Cubic Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Cubic Corporation as of September 30, 2019 and
2018, and the related consolidated statements of operations, comprehensive income (loss), cash flows and changes in
shareholders’ equity for each of the three years in the period ended September 30, 2019, and the related notes
(collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements
present fairly, in all material respects, the financial position of the Company as of September 30, 2019 and 2018, and the
results of its operations and its cash flows for each of the three years in the period ended September 30, 2019, 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) (PCAOB), the Company’s internal control over financial reporting as of September 30, 2019, 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 20, 2019, expressed an unqualified opinion
thereon.
Adoption of New Accounting Standard
As discussed in Notes 1 and 2 to the consolidated financial statements, the Company changed its method of accounting
for recognizing revenue from contracts with customers in the year ended September 30, 2019 due to the adoption of ASU
No. 2014-09, Revenue from Contracts with Customers, as amended (commonly known as Accounting Standards
Codification (ASC) 606). See below for discussion of our related critical audit matter related to the adoption of ASC
606.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an
opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the
PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material
misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
financial statements. Our audits also included evaluating the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits
provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial
statements that were communicated or required to be communicated to the audit committee and that: (1) relate to
accounts or disclosures that are material to the financial statements and (2) involved our especially challenging,
subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on
the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters
below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
128
Revenue Recognition – Percentage-of-Completion Method
Description of the Matter As more fully described in Note 1 of the financial statements, for those long-term fixed-price
contracts for which control transfers over time, revenue is recognized based on the extent of
progress towards completion of the performance obligation. The Company generally
accounts for these contracts using the cost-to-cost measure of progress. Under the cost-to-
cost measure of progress, the estimation of progress toward completion is subject to many
variables and requires significant judgment.
How We Addressed the
Matter in Our Audit
Auditing the Company’s estimate of total contract costs at completion is especially
challenging due to the judgmental and subjective nature of the estimation of remaining costs
to complete, including material, labor and subcontracting costs, among others, unique to each
revenue arrangement. In particular, the significant estimation relates to management’s
judgment in estimating contract costs and evaluating changes in the estimates of costs at
completion as circumstances change and as new information is received. The revisions in
contract estimates can materially affect the Company’s operating results.
We obtained an understanding, evaluated the design and tested the operating effectiveness of
controls over the Company’s revenue recognition review process including controls over
management’s review of the significant assumptions described above. For example, we
tested controls over the development of the estimated costs to complete and the review of the
estimates by management.
To test the estimate of contract costs to complete, our audit procedures included, among
others, testing significant components of the estimate noted above, assessing the
completeness of the cost estimates, reviewing changes in the estimates from previous periods
and testing underlying data used by management. For example, our procedures included
discussing program status with business segment personnel responsible for managing the
contractual arrangements, observing project review meetings, inspecting evidence to support
the assumptions made by management, performing analyses to compare estimates with
historical actuals from similar completed projects, and evaluating the key assumptions
utilized in development of the remaining contract costs to complete the arrangement. We also
reviewed documentation of management’s estimates through the reporting date for evidence
of changes that would impact estimates as of the balance sheet date.
Business Combinations – Valuation of Acquired Intangible Assets
Description of the Matter As more fully discussed in Note 3 to the consolidated financial statements, during the year
ended September 30, 2019 the Company completed its acquisitions of Advanced Traffic
Solutions Inc. (Trafficware), GRIDSMART Technologies, Inc. (GRIDSMART), and
Nuvotronics, Inc. (Nuvotronics) (collectively ‘the acquired entities’) for consideration of
$237.2 million, $86.8 million, and $66.8 million, respectively. The transactions were
accounted for as business combinations.
Auditing the Company’s accounting for its acquisitions of the acquired entities required
significant auditor judgment due to the significant estimation uncertainty in determining the
fair value of identified intangible assets, which primarily consisted of technology and
customer relationships. The significant estimation uncertainty was primarily due to the
complexity of the valuation models prepared by management to measure the fair value of the
intangible assets and the sensitivity of the respective fair values to the significant underlying
assumptions. The significant assumptions used to estimate the value of the intangible assets
included discount rates, terminal growth rates, the weighted average cost of capital, and
certain assumptions that form the basis of the internal rate of return (e.g., revenue growth
rates, expenses, customer attrition rates, and technology replacement rates). These significant
assumptions are especially challenging to audit as they are forward looking and could be
affected by future economic and market conditions.
129
How We Addressed the
Matter in Our Audit
We obtained an understanding, evaluated the design and tested the operating effectiveness of
the Company's internal controls over its valuation of acquired intangible assets. Our tests
included controls over the estimation process supporting the recognition and measurement of
technology and customer-related intangible assets. We also tested controls around
management’s review of assumptions used in the valuation models.
To test the estimated fair value of the technology and customer-related intangible assets, we
performed audit procedures that included, among other things, evaluating the Company's
selection of the valuation methodology, evaluating the methods and significant assumptions
used by the Company, and evaluating the completeness and accuracy of the underlying data
supporting the significant assumptions and estimates. We involved our valuation specialists
to assist with our evaluation of the methodology used by the Company and significant
assumptions included in the fair value estimates. For example, our valuation specialists
performed independent comparative calculations to estimate the acquired entity’s weighted
average cost of capital. Additionally, we compared the Company’s revenue growth rates to
historical actuals, to selected guideline company growth rates in the industry, and to third
party analyst expectations for the industry overall.
ASC 606 Revenue from Contracts with Customers Adoption
Description of the Matter As discussed above and in Notes 1 and 2 of the consolidated financial statements, the
Company adopted ASC 606 using the modified retrospective method as of October 1, 2018.
The adoption of ASC 606 resulted in a change in significant accounting policy regarding
revenue recognition and resulted in changes in accounting policies regarding contract
estimates, backlog, inventory, contract assets, long-term capitalized contract costs, and
contract liabilities. Implementation required the Company to re-evaluate each of its contracts
to determine if there was a change under the new standard.
Auditing the Company’s adoption of ASC 606 was especially challenging due to the
complex nature of the implementation. In particular, there was complexity resulting from the
number of contracts reviewed by management as part of the process and the judgments
required to be made during this review, and the materiality of the cumulative adjustment
recorded.
How We Addressed the
Matter in Our Audit
We obtained an understanding, evaluated the design and tested the operating effectiveness of
controls over the Company’s adoption of ASC 606 process including controls over
management’s identification of revenue streams, development of accounting policies for
each revenue stream, and computation of the transition adjustment.
To test the Company’s adoption of ASC 606, our audit procedures included, among others,
testing that revenue contracts were appropriately assigned into revenue streams to evaluate
the appropriate revenue recognition model for the transition adjustment by selecting a sample
of contracts and agreeing key terms to management’s analysis. Additionally, we tested
changes in the estimated transaction price, estimated costs, and revenue recognized due to
implementing the new standard by selecting a sample of contracts and reperforming
management’s assessment. Our procedures also included evaluating management’s
identification and assessment of variable consideration and product or service performance
obligations. Additionally, we recalculated the transition adjustment recorded by
management.
/s/ Ernst & Young LLP
We have served as the Company's auditor since 1959.
San Diego, CA
November 20, 2019
130
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, 2019, 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, 2019, 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.
As permitted by SEC rules, management’s assessment of and conclusion on the effectiveness of internal controls over
financial reporting excludes an evaluation of the design and operation of internal controls of Advanced Traffic Solutions,
GRIDSMART, and Nuvotronics, which we acquired in 2019 and are included in the 2019 consolidated financial
statements of the Company and constituted 5.1% and 2.8% of total and net assets, excluding the preliminary value of
goodwill and purchased intangibles, respectively, as of September 30, 2019 and 5.8% and 13.5% of revenues and net
income attributable to Cubic, respectively, for the year then ended.
131
Based on our evaluation, management has concluded that our internal control over financial reporting was effective as of
September 30, 2019.
The effectiveness of our internal control over financial reporting as of September 30, 2019 has been audited by Ernst &
Young LLP, an independent registered public accounting firm, as stated in their report which follows.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended September 30, 2019 that
have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
In the first quarter of fiscal 2020 we will adopt ASU 2016-02, Leases (commonly referred to as ASC 842), which was
issued by the Financial Accounting Standards Board in February 2016. ASC 842 outlines a comprehensive lease
accounting model and supersedes the current lease accounting guidance. Under the new guidance, lessees will be
required to recognize a right-of-use asset which represents the lessee’s right to use, or control the use of, a specific asset
and a lease liability which represents the obligation to make lease payments, for all leases for the lease term. Adoption of
the new guidance will affect the balance sheet presentation and expense recognition related to our leases. In fiscal 2019
we designed modifications to our existing internal controls infrastructure, as well as added other processes and internal
controls, in order to monitor the transition to the new lease accounting guidance and adherence with the guidance on an
ongoing basis. These process and control enhancements are being implemented in the first quarter of fiscal 2020.
Item 9B. OTHER INFORMATION
None.
132
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Cubic Corporation
Opinion on Internal Control over Financial Reporting
We have audited Cubic Corporation’s internal control over financial reporting as of September 30, 2019, 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). In our opinion, Cubic Corporation (the Company)
maintained in all material respects, effective internal control over financial reporting as of September 30, 2019, based on
the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the consolidated balance sheets of the Company as of September 30, 2019 and 2018, and the related
consolidated statements of operations, comprehensive income (loss), cash flows and changes in shareholders’ equity for
each of the three years in the period ended September 30, 2019, and the related notes, and our report dated November 20,
2019 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’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 are a public accounting firm registered with the PCAOB
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and
the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
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 Advanced Traffic Solutions, GRIDSMART or Nuvotronics, which are included in the 2019 consolidated
financial statements of the Company and constituted 5.2% and 2.8% of total and net assets, respectively, excluding the
preliminary value of goodwill and purchased intangibles, as of September 30, 2019 and 5.8% and 13.5% of revenues and
net income attributable to Cubic, respectively, for the year then ended. Our audit of internal control over financial
reporting of the Company also did not include an evaluation of the internal control over financial reporting of Advanced
Traffic Solutions, GRIDSMART or Nuvotronics.
We conducted our audit in accordance with the standards of the PCAOB. 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.
Definition and Limitations of Internal Control Over Financial Reporting
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
133
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.
/s/ Ernst & Young LLP
San Diego, California
November 20, 2019
134
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 2019 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.
135
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 Operations Years ended September 30, 2019, 2018
and 2017
Consolidated Statements of Comprehensive Income Years ended September 30,
2019, 2018 and 2017
Consolidated Balance Sheets September 30, 2019 and 2018
Consolidated Statements of Cash Flows Years ended September 30, 2019, 2018
and 2017
Consolidated Statements of Changes in Shareholders’ Equity Years ended
September 30, 2019, 2018 and 2017
Notes to Consolidated Financial Statements September 30, 2019
68
69
70
72
74
75
(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.
136
(b)
2.1
Exhibits:
Stock Purchase Agreement dated April 18, 2018, by and among Nova Global Supply & Services, LLC, Cubic
Corporation and Cubic Global Defense, Inc. Incorporated by reference to Form 8-K filed April 19, 2018, file
No. 001-08931, Exhibit 2.1.
3.1
Amended and Restated Certificate of Incorporation. Incorporated by reference to Form 8-K filed February 19,
2019, file No. 001-08931, Exhibit 3.1.
3.2
Amended and Restated Bylaws. Incorporated by reference to Form 8-K filed November 14, 2018, file
No. 001-08931, Exhibit 3.1.
4.1
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.
10.1* Amended and Restated Cubic Corporation 2015 Incentive Award Plan. Incorporated by reference to Appendix B
to the Definitive Proxy Statement on Schedule 14A filed on January 18, 2019, 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 (for awards granted prior to fiscal year 2020). Incorporated by
reference to Form 10-Q for the quarter ended December 31, 2016, file No. 001-08931, Exhibit 10.1.
10.4* Form of Performance-Based Vesting Restricted Stock Unit Award Grant Notice and Award Agreement under
the Cubic Corporation 2015 Incentive Award Plan (for awards granted during fiscal year 2019). Incorporated
by reference to Form 10-Q for the quarter ended December 31, 2018, file No. 001 08931, Exhibit 10.1.
10.5* Form of Non-Employee Director Restricted Stock Unit Award Grant Notice and Award Agreement under the
Cubic Corporation 2015 Incentive Award Plan (for awards granted prior to fiscal year 2020). Incorporated by
reference to Form 10-K for the fiscal year ended September 30, 2015, file No. 001-08931, Exhibit 10.5.
10.6* Form of Stock Payment Award under the Amended and Restated Cubic Corporation 2015 Incentive Award Plan.
Incorporated by reference to Form 10-Q for the quarter ended March 31, 2019, file No. 001-08931, Exhibit
10.2.
10.7* Amended Transition Protection Plan. Incorporated by reference to Form 10-K for the year ended September 30,
2015, file No. 001-08931, Exhibit 10.6.
10.8* Amendment to Transition Protection Plan, dated May 1, 2018. Incorporated by reference to Form 10-Q for the
quarter ended March 31, 2018, file No. 001-08931, Exhibit 10.2.
10.9* Management Incentive Bonus Plan. Incorporated by reference to Form 10-Q for the quarter ended December 31,
2018, file No. 001-08931, Exhibit 10.2.
10.10* 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.
10.11* Employment Offer Letter dated June 7, 2017, by and between Cubic Corporation and Anshooman Aga.
Incorporated by reference to Form 10-K for the year ended September 30, 2017, file No. 001-08931, Exhibit
10.24.
10.12* 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.
10.13* Indemnity Agreement. Incorporated by reference to Form 8-K filed May 6, 2010, file No. 001-08931,
Exhibit 10.1.
10.14 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.
10.15 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.
10.16 First Amendment of Second Amended and Restated Note Purchase and Private Shelf Agreement, dated as of
May 4, 2017, by and among Cubic Corporation, PGIM, Inc. and the other purchasers party thereto.
Incorporated by reference to Form 10-Q for the quarter ended March 31, 2017, file No. 001-08931, Exhibit
10.2.
137
10.17* Construction and Development Agreement, dated as of February 5, 2010, between Cubic Corporation and
Bankers Commercial Corporation. Incorporated by reference to Form 10-Q for the quarter ended March 31
2019, file No. 001-08931, Exhibit 10.3.
10.18 Ground Lease, dated as of February 5, 2019, between Cubic Corporation and Bankers Commercial Corporation.
Incorporated by reference to Form 10-Q for the quarter ended March 31, 2019, file No. 001-08931, Exhibit,
10.4.
10.19 Lease Agreement, dated as of February 5, 2019, between Cubic Corporation and Bankers Commercial
Corporation. Incorporated by reference to Form 10-Q for the quarter ended March 31, 2019, file
No. 001-08931, Exhibit, 10.5.
10.20 Participation Agreement, dated as of February 5, 2019, between Cubic Corporation and Bankers Commercial
Corporation, MUFG Bank, LTD and MUFG Union Bank, N.A. Incorporated by reference to Form 10-Q for
the quarter ended March 31, 2019, file No. 001-08931, Exhibit, 10.6.
10.21 Memorandum of Lease, Fee and Leasehold Deed of Trust, Assignment of Leases and Rents, Security Agreement
and Fixture Filing, dated as of February 5, 2019, by and among Cubic Corporation, Bankers Commercial
Corporation Chicago Title Company, as deed of trust trustee for the benefit of MUFG Union Bank, N.A.
Incorporated by reference to Form 10-Q for the quarter ended March 31, 2019, file No. 001-08931, Exhibit,
10.7.
10.22 Fourth Amended and Restated Credit Agreement, dated as of April 30, 2019, by and among Cubic Corporation,
JP Morgan Chase Bank, N.A (as administrative agent) and the other lenders party thereto. Incorporated by
reference to Form 10-Q for the quarter ended March 31, 2019, file No. 001-08931, Exhibit, 10.8.
10.23 Receivables Purchase Agreement, dated as of September 16, 2018, between Cubic Corporation and Bank of the
West.
10.24 Account Purchase Agreement, dated as of September 27, 2019 between GATR Technologies Inc. and Wells
Fargo Bank, N.A.
List of Subsidiaries.
21.1
23.1 Consent of Independent Registered Public Accounting Firm.
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350.
101
Financial statements from the Cubic Corporation Annual Report on Form 10-K for the year ended September 30,
2019, formatted in Inline Extensible Business Reporting Language (iXBRL): (i) Consolidated Statements of
Operations, (ii) Consolidated Statements of Comprehensive Income , (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.
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
104
* Indicates management contract or compensatory plan or arrangement
138
Item 16. FORM 10-K SUMMARY
None
SIGNATURES
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:
(Registrant)
CUBIC CORPORATION
11/20/19
Date
/s/ Bradley H. Feldmann
BRADLEY H. FELDMANN,
Chairman of the Board, 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:
11/20/19
Date
/s/ Bradley H. Feldmann
BRADLEY H. FELDMANN,
Chairman of the Board, President and
Chief Executive Officer, Director
(Principal Executive Officer)
11/20/19
Date
/s/ David F. Melcher
DAVID F. MELCHER,
Lead Independent Director
11/20/19
Date
/s/ Anshooman Aga
ANSHOOMAN AGA,
Executive Vice President and Chief
Financial Officer
(Principal Financial Officer)
11/20/19
/s/ Mark A. Harrison
MARK A. HARRISON,
Senior Vice President and Chief
Accounting Officer
(Principal Accounting Officer)
11/20/19
Date
/s/ Bruce G. Blakley
BRUCE G. BLAKLEY,
Director
11/20/19
Date
/s/ Janice M. Hamby
JANICE M. HAMBY,
Director
11/20/19
Date
/s/ Prithviraj Banerjee
PRITHVIRAJ BANERJEE,
Director
11/20/19
Date
/s/ Steven J. Norris
STEVEN J. NORRIS,
Director
11/20/19
Date
/s/ Maureen Breakiron-Evans
MAUREEN BREAKIRON-EVANS,
Director
11/20/19
Date
/s/ John H. Warner
JOHN H. WARNER,
Director
139
SUBSIDIARY CORPORATIONS OF CUBIC CORPORATION
PLACE OF INCORPORATION AND PERCENTAGE OWNED
EXHIBIT 21.1
Subsidiary
CTS — NORDIC AKTIEBOLAG
CUBIC (UK) LIMITED
CUBIC DE MEXICO, S.A de C.V.
CUBIC DEFENCE AUSTRALIA PTY LIMITED
Place of
Incorporation
Percentage
Owned
Sweden
100%
United
Kingdom
Mexico
Australia
CUBIC DEFENCE NEW ZEALAND LIMITED
New Zealand
CUBIC DEFENCE UK LTD
CUBIC DEFENSE APPLICATIONS, INC.
CUBIC DEFENSE WLL
CUBIC DEFENSE DOHA FOR TRADING AND CONTRACTING WLL
CUBIC FIELD SERVICES CANADA LIMITED
CUBIC HOLDINGS LTD.
CUBIC ITALIA S.R.L.
CUBIC ITS, INC.
CUBIC SURFACE TRANSPORTATION SYSTEMS LIMITED
CUBIC TECHNOLOGIES DENMARK APS
CUBIC TECHNOLOGIES SINGAPORE PTE LTD
United
Kingdom
California
Qatar
Qatar
Canada
New Zealand
Italy
Texas
United
Kingdom
Denmark
Singapore
CUBIC TRANSPORTATION SYSTEMS (AUSTRALIA) PTY LIMITED
Australia
CUBIC TRANSPORTATION SYSTEMS (DEUTSCHLAND) GmbH
Germany
CUBIC TRANSPORTATION SYSTEMS (INDIA) PVT LIMITED
CUBIC TRANSPORTATION SYSTEMS CANADA, LTD
CUBIC TRANSPORTATION SYSTEMS LIMITED
CUBIC TRANSPORTATION SYSTEMS, INC.
EMIRATES TRAINING TECHNOLOGY LLC
GATR TECHNOLOGIES, INC.
India
Canada
United
Kingdom
California
UAE
Alabama
100%
100%
100%
100%
100%
100%
49%
49%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
49%
100%
Subsidiary
GRIDSMART TECHNOLOGIES, INC.
ISR SYSTEMS, INC.
NUVOTRONICS, INC.
Place of
Incorporation
Percentage
Owned
Delaware
Delaware
Delaware
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-3 No. 333-226908) of Cubic Corporation,
(2)
(3)
Registration Statement (Form S-8 No. 333-233076) pertaining to the Cubic Corporation 2015 Incentive Award
Plan,
Registration Statement (Form S-8 No. 333-204615) pertaining to the Cubic Corporation 2015 Incentive Award
Plan and Cubic Corporation Employees Stock Purchase Plan,
(4) 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
(5) 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 20, 2019, 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, 2019.
San Diego, California
November 20, 2019
/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 20, 2019
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-
OXLEY ACT OF 2002
Exhibit 31.2
I, Anshooman Aga, 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/ Anshooman Aga
Anshooman Aga
Executive Vice President and Chief Financial Officer
Date: November 20, 2019
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, 2019, (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 20, 2019
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, 2019, (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/ Anshooman Aga
Anshooman Aga
Executive Vice President and Chief Financial Officer
Date: November 20, 2019
Trademarks
The Cubic logo, NextCity™, NextBus®, NextTraining™, and NextMission™ are trademarks of Cubic.
Annual Report Design
Kramer Design | kramerdesign.com
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.
9333 Balboa Avenue, San Diego, CA 92123
P.O. Box 85587, San Diego, CA 92186
cubic.com