Note 11 - Stockholders’ Equity

Long-Term Equity Incentive Plan

In 2013, the Executive Compensation Committee of the Board of Directors (Compensation Committee) approved a long-term equity incentive award program. To date, the Compensation Committee has approved three general categories of grant awards: RSUs with time-based vesting, RSUs with performance-based vesting, and RSUs with performance and market-based vesting. Through December 31, 2018, the Compensation Committee has granted 1,285,560 RSUs with time-based vesting, 1,173,766 RSUs with performance-based vesting, and 219,890 RSUs with performance and market-based vesting under this program.

Each RSU with time-based vesting or performance-based vesting represents a contingent right to receive 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 when and as dividends are paid on our common stock and vest proportionately with the RSUs to which they relate. Vested shares are delivered to the recipient following each vesting date.

The RSUs granted with time-based vesting generally vest in four equal installments on each of the four October 1 dates following the grant date, subject to the recipient’s continued service through such vesting date.

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 one of three types of vesting criteria over the performance period, including revenue growth targets, earnings growth targets, and return on equity targets. The level at which Cubic performs against scalable targets over the performance periods will determine the percentage of the RSUs that will ultimately vest.

In fiscal 2019, the Compensation Committee granted RSUs with performance and market-based vesting criteria. The performance and market-based RSUs granted to participants vest over three-year performance periods based on Cubic’s achievement of revenue growth targets and earnings growth targets subject to the recipient’s continued service through the end of the respective performance periods. The level at which Cubic performs against scalable targets over the performance periods impact the percentage of the RSUs that will ultimately vest. For these RSUs, Cubic’s relative total stock return (TSR) as compared to the Russell 2000 Index (Index) over the performance period will result in a multiplier for the number of RSUs that will vest. If the our TSR performance exceeds the performance of the Index based on a scale established by the Compensation Committee, the multiplier will result in up to an additional 25% of RSUs vesting at the end of the performance period. If the TSR performance is below the performance of the Index based on a scale established by the Compensation Committee, the multiplier could result in a reduction of up to 25% of these RSUs vesting at the end of the performance 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 in the first quarter of fiscal 2019:



		RSU's granted during the three
		months ended December 31, 2018

Date of grant		November 21, 2018
Closing average share value (mean)	$	68.56
Performance period begins		October 1, 2018
Performance period ends		September 30, 2021
Risk-free interest rate		2.8%
Expected volatility		34%

As a result of the valuation analysis, the fair value of the RSUs with performance and market-based vesting granted in the first quarter of fiscal 2019 was calculated at $67.40 per RSU.

At December 31, 2018, 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 331,181 RSUs with time-based vesting, 129,907 RSUs with performance-based vesting, and 152,570 RSUs with performance and market-based vesting.

The following table summarizes our RSU activity:


	Unvested Restricted Stock Units
		Weighted-Average
	Number of Shares	Grant-Date Fair Value
Unvested at September 30, 2018	366,460	$	52.31
Granted	195,033		64.33
Vested	(128,949)		50.61
Forfeited	(15,391)		50.04
Unvested at December 31, 2018	417,153	$	58.54


	Unvested Restricted Stock Units with Performance Based Vesting
		Weighted-Average
	Number of Shares	Grant-Date Fair Value
Unvested at September 30, 2018	635,628	$	50.11
Granted	—		—
Vested	—		—
Forfeited	(295,759)		43.86
Unvested at December 31, 2018	339,869	$	55.54


	Unvested Restricted Stock Units with Performance and Market Based Vesting
		Weighted-Average
	Number of Shares	Grant-Date Fair Value
Unvested at September 30, 2018	—	$	—
Granted	219,890		67.40
Vested	—		—
Forfeited	—		—
Unvested at December 31, 2018	219,890	$	67.40

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


	Three Months Ended
	December 31,
	2018		2017
Cost of sales	$	313	$	156
Selling, general and administrative		2,407		1,471
	$	2,720	$	1,627

As of December 31, 2018, there was $52.0 million of unrecognized compensation cost related to unvested RSUs. Based upon the expected forfeitures and the expected vesting of performance based RSUs, the aggregate fair value of RSUs expected to ultimately vest is $37.5. million. This amount is expected to be recognized over a weighted-average period of 1.6 years.

We estimate forfeitures at the time of grant and revise those estimates in subsequent periods on a cumulative basis in the period the estimated forfeiture rate changes for all stock-based awards when significant events occur. We consider our historical experience with employee turnover as the basis to arrive at our estimated forfeiture rate. The forfeiture rate was estimated to be 12.5% per year as of December 31, 2018. To the extent the actual forfeiture rate is different from what we have estimated, stock-based compensation related to these awards will be different from our expectations.