Note 2 — New Accounting Standards Implemented

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. The adoption of ASC 606 primarily impacted certain (i) multiple-element transportation contracts that previously deferred the recognition of all revenue and related costs during the design and build phase, as the collection of payment occurred during the subsequent operate and maintain phase, and (ii) contracts previously covered by contract accounting standards that recognized revenue using the units-of-delivery method. Under ASC 606, we now recognize sales on these contracts over time by using the cost-to-cost method.

Based on contracts in process at September 30, 2018, upon adoption of ASC 606 we recorded a net increase to retained earnings of $24.5 million, which includes the acceleration of net sales of approximately $114.9 million and the related cost of sales. The adjustment to retained earnings 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 required. In addition, the adjustment to retained earnings 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 Condensed Consolidated Statements of Income (Loss) 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 as reported under ASC 605, which included unbilled contract receivables, 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.

The table below presents the cumulative effect of the changes made to our Condensed Consolidated Balance Sheet as of October 1, 2018 due to the adoption of ASC 606 (in thousands):


			Adjustments		October 1, 2018
	September 30,		Due to		As Adjusted
	2018		ASC 606		Under ASC 606
ASSETS
Current assets:
Cash and cash equivalents	$	111,834	$	—	$	111,834
Cash in consolidated VIE		374		—		374
Restricted cash		17,400		—		17,400
Restricted cash in consolidated VIE		10,000		—		10,000
Accounts receivable, net		392,367		(236,743)		155,624
Contract assets		—		272,210		272,210
Recoverable income taxes		91		—		91
Inventories		84,199		(22,511)		61,688
Assets held for sale		8,177		—		8,177
Other current assets		43,705		—		43,705
Total current assets		668,147		12,956		681,103

Long-term contracts receivables		6,134		(6,134)		—
Long-term contracts financing receivables		—		56,228		56,228
Long-term contracts financing receivables in consolidated VIE		—		38,990		38,990
Long-term capitalized contract costs		84,924		(84,924)		—
Long-term capitalized contract costs in consolidated VIE		1,258		(1,258)		—
Property, plant and equipment, net		117,546		—		117,546
Deferred income taxes		4,713		389		5,102
Goodwill		333,626		—		333,626
Purchased intangibles, net		73,533		—		73,533
Other assets		14,192		—		14,192
Other noncurrent assets in consolidated VIE		810		—		810
Total assets	$	1,304,883	$	16,247	$	1,321,130

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Short-term borrowings	$	—	$	—	$	—
Trade accounts payable		125,414		(3,011)		122,403
Trade accounts payable in consolidated VIE		165		—		165
Contract liability		—		70,127		70,127
Customer advances		75,941		(75,941)		—
Accrued compensation and other current liabilities		118,233		583		118,816
Income taxes payable		8,586		—		8,586
Total current liabilities		328,339		(8,242)		320,097

Long-term debt		199,793		—		199,793
Long-term debt in consolidated VIE		9,056		—		9,056
Other long-term liabilities		43,486		—		43,486
Other long-term liabilities in consolidated VIE		13		—		13

Shareholders’ equity:
Common stock		45,008		—		45,008
Retained earnings		801,834		19,834		821,668
Accumulated other comprehensive loss		(110,643)		—		(110,643)
Treasury stock at cost		(36,078)		—		(36,078)
Shareholders’ equity related to Cubic		700,121		19,834		719,955
Noncontrolling interest in VIE		24,075		4,655		28,730
Total shareholders’ equity		724,196		24,489		748,685
Total liabilities and shareholders’ equity	$	1,304,883	$	16,247	$	1,321,130

The table below presents how the adoption of ASC 606 affected certain line items on our Condensed Consolidated Statements of Income (Loss) for the three months ended December 31, 2018 (in thousands):


	Three months ended December 31, 2018
					As Reported
	Under		Effect of		Under
	ASC 605		ASC 606		ASC 606
Net sales:
Products	$	152,562	$	29,691	$	182,253
Services		124,262		(1,256)		123,006
		276,824		28,435		305,259
Costs and expenses:
Products		100,544		24,941		125,485
Services		92,785		—		92,785
Selling, general and administrative expenses		62,823		163		62,986
Research and development		12,012		—		12,012
Amortization of purchased intangibles		10,565		—		10,565
Restructuring costs		1,992		—		1,992
		280,721		25,104		305,825

Operating loss		(3,897)		3,331		(566)

Other income (expenses):
Interest and dividend income		56		1,178		1,234
Interest expense		(4,032)		—		(4,032)
Other income (expense), net		(4,753)		—		(4,753)

Loss from continuing operations before income taxes		(12,626)		4,509		(8,117)

Income tax provision		2,473		24		2,497

Net loss		(15,099)		4,485		(10,614)

Less noncontrolling interest in loss of VIE		(5,981)		1,954		(4,027)

Net loss attributable to Cubic	$	(9,118)	$	2,531	$	(6,587)

Net income (loss) per share:
Basic earnings per share attributable to Cubic	$	(0.32)	$	0.09	$	(0.23)
Diluted earnings per share attributable to Cubic	$	(0.32)	$	0.09	$	(0.23)

The table below quantifies the impact of adopting ASC 606 on segment net sales and operating income (loss) for the three months ended December 31, 2018 (in thousands):


	Three months ended December 31, 2018
					As Reported
	Under		Effect of		Under
	ASC 605		ASC 606		ASC 606
Sales:	(in thousands)
Cubic Transportation Systems	$	172,728	$	9,079	$	181,807
Cubic Mission Solutions		45,363		1,030		46,393
Cubic Global Defense		58,733		18,326		77,059
Total sales	$	276,824	$	28,435	$	305,259

Operating income (loss):
Cubic Transportation Systems	$	9,186	$	1,790	$	10,976
Cubic Mission Solutions		(5,191)		251		(4,940)
Cubic Global Defense		1,607		1,290		2,897
Unallocated corporate expenses		(9,499)		—		(9,499)
Total operating income (loss)	$	(3,897)	$	3,331	$	(566)

The table below presents how the impact of the adoption of ASC 606 affected certain line items on our Condensed Consolidated Balance Sheet at December 31, 2018 (in thousands):


					As Reported
	Under		Effect of		Under
	ASC 605		ASC 606		ASC 606
ASSETS
Current assets:
Cash and cash equivalents	$	75,174	$	—	$	75,174
Cash in consolidated VIE		421		—		421
Restricted cash		17,889		—		17,889
Restricted cash in consolidated VIE		10,000		—		10,000
Accounts receivable, net		390,855		(272,564)		118,291
Contract assets		—		320,277		320,277
Recoverable income taxes		1,086		235		1,321
Inventories		121,223		(29,022)		92,201
Assets held for sale		8,177		—		8,177
Other current assets		40,924		—		40,924
Total current assets		665,749		18,926		684,675

Long-term contracts receivables		4,064		(4,064)		—
Long-term contracts financing receivables		—		44,936		44,936
Long-term contracts financing receivables in consolidated VIE		—		52,996		52,996
Long-term capitalized contract costs		95,894		(95,894)		—
Long-term capitalized contract costs in consolidated VIE		1,551		(1,551)		—
Property, plant and equipment, net		125,298		—		125,298
Deferred income taxes		4,298		389		4,687
Goodwill		484,329		—		484,329
Purchased intangibles, net		137,201		—		137,201
Other assets		13,871		—		13,871
Other noncurrent assets in consolidated VIE		962		—		962
Total assets	$	1,533,217	$	15,738	$	1,548,955

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Short-term borrowings	$	64,500	$	—	$	64,500
Trade accounts payable		111,310		(2,216)		109,094
Trade accounts payable in consolidated VIE		205		—		205
Contract liability		—		69,713		69,713
Customer advances		80,993		(80,993)		—
Accrued compensation and other current liabilities		82,323		—		82,323
Income taxes payable		6,512		259		6,771
Total current liabilities		345,843		(13,237)		332,606

Long-term debt		199,801		—		199,801
Long-term debt in consolidated VIE		15,357		—		15,357
Other long-term liabilities		43,838		—		43,838
Other long-term liabilities in consolidated VIE		6,146		—		6,146

Shareholders’ equity:
Common stock		260,141		—		260,141
Retained earnings		792,717		22,366		815,083
Accumulated other comprehensive loss		(112,642)		—		(112,642)
Treasury stock at cost		(36,078)		—		(36,078)
Shareholders’ equity related to Cubic		904,138		22,366		926,504
Noncontrolling interest in VIE		18,094		6,609		24,703
Total shareholders’ equity		922,232		28,975		951,207
Total liabilities and shareholders’ equity	$	1,533,217	$	15,738	$	1,548,955