Note 12 — 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 Systems and CTS operating segments, which were also our reportable segments. In 2016, we formalized the structure of our CMS business unit within our CGD Systems 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.

Business segment financial data is as follows (in millions):


	Six Months Ended				Three Months Ended
	March 31,				March 31,
	2018		2017		2018		2017
Sales:
Cubic Transportation Systems	$	313.5	$	271.5	$	167.0	$	139.6
Cubic Global Defense Systems		144.3		158.3		75.5		79.7
Cubic Mission Solutions		69.2		62.6		36.1		28.7
Total sales	$	527.0	$	492.4	$	278.6	$	248.0

Operating income (loss):
Cubic Transportation Systems	$	24.1	$	17.5	$	14.2	$	7.8
Cubic Global Defense Systems		6.7		8.1		5.3		4.8
Cubic Mission Solutions		(16.7)		(13.0)		(7.8)		(9.2)
Unallocated corporate expenses		(27.7)		(24.3)		(13.4)		(9.5)
Total operating loss	$	(13.6)	$	(11.7)	$	(1.7)	$	(6.1)

Depreciation and amortization:
Cubic Transportation Systems	$	6.2	$	4.4	$	3.0	$	2.0
Cubic Global Defense Systems		3.2		3.8		1.5		1.8
Cubic Mission Solutions		11.1		12.7		5.2		5.9
Corporate		3.0		3.1		1.4		1.9
Total depreciation and amortization	$	23.5	$	24.0	$	11.1	$	11.6

Unallocated corporate costs in the second quarter of 2018 include costs of strategic and IT system resource planning as part of our One Cubic Initiatives, which totaled $5.7 million compared to $6.0 million in the second quarter of last year. Unallocated corporate costs included $13.7 million of costs incurred in the first half of 2018 for strategic and IT system resource planning compared to $14.6 million in the first half of last year. As described in Note 2, the operating results of CGD Services have been classified as discontinued operations in the condensed consolidated statements of income (loss) for all periods presented. In the application of the accounting requirements for discontinued operations, corporate overhead is not allocated to discontinued operations. Therefore, certain corporate overhead costs that had previously been allocated to the CGD Services segment have been included in the unallocated corporate expenses amounts above. Such amounts totaled $1.9 million and $2.0 million in the second quarter of fiscal 2018 and fiscal 2017, respectively, and totaled $3.9 million for the first half of both years.

Changes in estimates on contracts for which revenue is recognized using the cost-to-cost-percentage-of-completion method decreased our operating loss by $0.3 million and increased our operating loss by $2.2 million for the three and six months ended March 31, 2018, respectively, and decreased our operating loss by $3.4 million and increased our operating loss by $1.3 million for the three and six months ended March 31, 2017, respectively. These adjustments decreased our net loss from continuing operations by $0.3 million ($0.01 per share) and increased our net loss from continuing operations by $1.6 million ($0.06 per share) for the three and six months ended March 31, 2018, respectively, and increased our net income from continuing operations by $2.3 million ($0.09 per share) and decreased our net income from continuing operations by $0.6 million ($0.02 per share) for the three and six months ended March 31, 2017, respectively.

CMS Investment in Private Start-Up Company

As of March 31, 2018 our CMS segment had total secured loans outstanding of $3.7 million to a thinly capitalized private start-up company in the U.S. that develops technologies for unmanned aircraft systems. The loans are secured by virtually all of the intellectual property owned by the investee. CMS also obtained warrants in the investee in connection with this debt financing, with a carrying value of $0.7 million at March 31, 2018. The note receivable matures on June 30, 2018 and is classified within other current assets and the warrants are classified within non-current other assets on our Condensed Consolidated Balance Sheets. The note receivable is held at amortized cost and the warrants are held at their historical cost.

On a quarterly basis we consider whether any portion of the value of the warrants or note receivable may have been impaired. The investee will need additional liquidity to continue to invest in their operations and repay our note when it matures. However, we believe that the assets, including intellectual property that secure our investments exceed the carrying value of our investment balances, thus no impairments were identified during the quarter ended March 31, 2018. However, if the technologies owned by the investee are determined to be more difficult to commercialize than we currently anticipate, we could be required to recognize impairments in the future.

CTS Contract with Public-Private Partnership

In March 2018, CTS 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. HoldCo. is 90% owned by John Laing and 10% owned by CTS. Collectively, HoldCo. and OpCo. are referred to as the P3 Venture.

MBTA will make estimated payments of $664 million to OpCo. in connection with the contract to implement the fare payment system and to operate and maintain the system over ten years. All of OpCo.’s contractual responsibilities regarding the design and development and the operation and maintenance of the fare system over the ten year period have been subcontracted to CTS. CTS will receive estimated payments of $510 million 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 an equity bridge loan. The loan carries a 2.5% interest rate and matures when the fare system contract reaches a service milestone which is expected to occur in 2021. CTS issued a letter of credit for $2.7 million to HoldCo. in accordance with CTS’s equity funding responsibilities. HoldCo. is able to draw on the CTS letter of credit in certain liquidity instances but no amounts have been drawn on this letter of credit as of March 31, 2018.

OpCo. has entered into a long term debt agreement with a group of financial institutions that it will use to pay CTS during the first three years of its subcontract to design and build the fare system for the MBTA. The maximum amount of OpCo.’s financing facility is $212.4 million, and OpCo. will repay the debt over the ten year period of the operations and maintenance contract. The debt bears interest at a variable rate of LIBOR plus 1.3%. Through March 31, 2018 OpCo. has received proceeds from debt issuances of $3.3 million. The P3 Venture has incurred deferred financing costs totaling $9.0 million. OpCo.’s debt is nonrecourse with respect to Cubic and its subsidiaries.

A summary of the consolidated net assets and liabilities of OpCo. and HoldCo. follows:


	March 31,		September 30,
	2018		2017
	(in thousands)
Current assets	$	11,137	$	—
Noncurrent assets		8,407		—
Total assets	$	19,544	$	—

Current liabilities	$	957	$	—
Noncurrent liabilities		18,587		—
Total liabilities		19,544		—
Total Cubic equity		—
Noncontrolling interests		—		—
Total liabilities and owners' equity	$	19,544	$	—

OpCo. and HoldCo had no material operating activities for the three months ended March 31, 2018.

The net assets, results of operations, and cash flows of these entities are immaterial to our Condensed Consolidated Financial Statements and have not been consolidated as of and for the three and six months ended March 31, 2018.