Goal 2020
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the Fiscal Year Ended
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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 2021 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, 2020.
CUBIC CORPORATION
ANNUAL REPORT ON FORM 10-K
For the Year Ended September 30, 2020
TABLE OF CONTENTS
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PART I
Item 1. BUSINESS.
OVERVIEW
CUBIC CORPORATION (“we,” “us,” the “Company” and “Cubic”) efficiently provides our global customers with innovative, mission-critical solutions to reduce congestion and increase operational readiness and effectiveness through superior situational understanding. Cubic serves transportation, defense command, control, communication, computers, intelligence, surveillance and reconnaissance (C4ISR), and defense training customers globally. 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.
Our recently launched NextCUBIC strategy focuses on growth, operational excellence and culture, and is founded on our winning proposition – we solve our customers’ most critical challenges through innovative, mission-critical solutions, services and platforms. NextCUBIC, which is underpinned by a thorough outside-in assessment, launches a full-scale program to drive a step change in value creation and deliver sustainable financial improvement through both functional and cultural transformation in the way we work.
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. All of our businesses share a common mission with supporting technologies to increase our customers’ situational awareness so they can make better decisions. Our transportation customers benefit from enhanced efficiency and reduced congestion, while our defense customers benefit from increased readiness and mission effectiveness. Headquartered in San Diego, California, we do business on five continents and we had approximately 6,100 employees working in 17 countries as of September 30, 2020.
In recent history we’ve managed our business in three separate business segments: Cubic Transportation Systems (CTS), Cubic Mission Solutions (CMS), and Cubic Global Defense Systems (CGD). In the fourth quarter of fiscal 2020 we combined our CMS and CGD segments to form a new Cubic Mission and Performance Solutions (CMPS) segment. This new segment will continue to deliver solutions to C4ISR and training customers worldwide. This streamlined organizational structure is designed to:
| ● | Leverage our world class talent and common technologies across the combined defense business |
| ● | Enhance collaboration and customer intimacy globally |
| ● | Reduce complexity and cost, and |
| ● | Increase organizational efficiency to support customer and shareholder value creation. |
Notwithstanding our recent realignment of our defense business, we are still required to report our segment financial results based upon our legacy reportable business segments in fiscal year 2020. However, in fiscal 2021 the defense businesses will be combined into CMPS, a single reportable segment.
We have a broad customer base across our businesses, with approximately 61% of our fiscal year 2020 sales generated from U.S. federal, state and local governments. Approximately 3% 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 2020 sales were attributable to sales to foreign government and foreign municipal agencies. In fiscal year 2020, 64% of our total sales were derived from products, with services sales accounting for the remaining 36%.
BUSINESS SEGMENTS
For the year ended September 30, 2020, the distribution of our sales across our three legacy business segments was as follows:
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See Note 16 to our Consolidated Financial Statements for additional information related to disaggregation of revenues by customer location, contract type, deliverable type and revenue recognition method for each of our reportable business segments.
As of September 30, 2020, the distribution of backlog across our three legacy business segments was as follows (in millions):
We estimate that approximately $771.8 million, $134.3 million, and $171.6 million of the September 30, 2020 backlog for CTS, CMS, and CGD, respectively, will be converted into sales by September 30, 2021.
Sales type for each of our legacy business segments was as follows in fiscal year 2020:
Cubic Transportation Systems
CTS is a leading integrator of payment, information technology and services for intelligent travel solutions. We specialize 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
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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.
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 on four continents. While the COVID-19 pandemic has reduced transit ridership, our systems were serving over 41 million users a day, processing approximately 14 billion revenue-related transactions per year, which were generating more than $16 billion of revenue per year for such transportation authorities and operators at pre-pandemic activity levels.
We hold the leading market position in large-scale automated fare payment and revenue management systems and services for major metropolitan areas such as London (Oyster/Contactless Payment), the New York region (Metrocard/OMNY), the Chicago region (Ventra), the San Francisco Bay Area (Clipper), the Vancouver region (Compass), the Sydney region (Opal Card) and the Brisbane region (Go Card). We are currently designing and building major new systems in New York, Boston, Brisbane, and the San Francisco Bay Area.
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. 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.
Transportation 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. 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.
Cubic Mission and Performance Solutions
CMPS serves defense C4ISR and training customers globally. We offer expeditionary communications, cloud-based computing and intelligence delivery, as well as state-of-the-art training, readiness and performance solutions. We provide our global customers with innovative, mission-critical solutions to increase operational readiness, effectiveness and performance.
Cubic Mission Solutions
CMS provides C4ISR capabilities for defense, intelligence, security and commercial missions.
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Our rugged IoT solutions provide a wide range of deployable and tactical communications products to meet the diverse mission requirements of our military, government, first-responder and civilian customers. Our protected communications products also include RF data links, search and rescue avionics and customized radio products. We offer a wide range of Command and Control, Intelligence, Surveillance and Reconnaissance (C2ISR) products and solutions to support expeditionary and tactical needs of our military and allied forces. We support the collection, processing, analysis and dissemination of information across the full spectrum of the Department of Defense and Intelligence Community’s mission. Additionally, we have developed UAV systems which will provide affordable ISR-as-a-service, and our airborne collection solutions will be complemented by complete flight services and ongoing sustainment and logistics support.
CMS customers include the military services, principally the U.S. Army and U.S. Special Operations Command, various other government agencies of the U.S. and other countries, and commercial customers. In fiscal 2020, U.S. government customers accounted for 95% of CMS sales, international customers accounted for 1% of sales, and U.S. commercial and other customers accounted for 4% of CMS sales. CMS is comprised of approximately 800 employees working primarily in the United States.
Our major CMS programs include:
| ● | US Army Contracting Command NJ SBIR IDIQ with a contract ceiling value of $963 million. |
| ● | In fiscal 2020, we received the following significant awards: |
| o | A follow-on, single-award, IDIQ contract with a ceiling of $172 million from United States Special Operations Command (USSOCOM) to deliver GATR inflatable satellite communications terminals and baseband communications equipment in support of SOF communications requirements. |
| o | A contract worth $38 million to deliver a Joint Aerial Layer Network (JALN) High Capacity Backbone (HCB) prototype for the U.S. Air Force (USAF). The HCB is a critical element of the JALN, designed to maintain network connectivity among joint forces across the aerial layer and a critical enabler for Joint All-Domain Command and Control (JADC2) capability. Our offering for the USAF will consist of integrated capabilities across our C2ISR portfolios. |
Cubic Global Defense
CGD is a market leader in live, virtual, constructive (LVC) and game-based training solutions to the U.S. Department of Defense (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.
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 does business on five continents and is comprised of approximately 1,200 employees working in 12 nations providing training systems to the DoD and allied nations.
Our established international footprint in 34 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 accounted for 60% of CGD sales in 2020. 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 we are very well positioned to lead the increasing trend to fully integrated solutions that connect LVC and game-based training in multi-domain environments.
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 latest ACMI generation, the P5 Combat Training System, provides advanced air combat training capability to the USAF, Navy and Marine Corps, as well as allied nations which has solidified Cubic’s
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global market leading position. 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.
Ground Training Solutions
We are a leading provider of realistic, easy-to-use, high-fidelity, reliable, and cost-effective tactical engagement simulation systems that minimize user set-up time and increase training effectiveness. Our leadership role in instrumented training was established during the 1990s when Cubic provided turnkey systems for U.S. Army training centers including the Joint Readiness Training Center (JRTC) at Fort Polk, Louisiana, and the Combat Maneuver Training Center (CMTC) at Hohenfels, Germany, now known as the Joint Multinational Readiness Center. Since the completion of these original contracts, we have significantly expanded our market footprint with the sale of fixed, mobile and urban operation training centers to uniformed military and security forces in the 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.
Synthetic/Digital Solutions
Our synthetic/digital solutions integrate instructional material into a gaming environment, thus dramatically reducing instructor costs and providing 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.
As the blend of LVC training creates broader higher fidelity training environments, the data generated creates a significant opportunity to capitalize on our advanced synthetic and digital capabilities to deliver greater insight into customer training effectiveness.
Defense Industry Overview
Our CMS markets, including protected communications, ruggedized IoT and C2ISR have a total addressable market of approximately $5 billion annually. We believe that our CMS 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.
Our training 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.
The U.S. national debt now exceeds $27 trillion, and now surpasses the U.S.’s Gross Domestic Product, with recent growth in large part due to the response to the current coronavirus pandemic. In this era of deficit spending, the U.S. government has momentarily paused its focus on discretionary spending, tax, and other initiatives to control spending, debt and the deficit. As the economic effects of the pandemic recede, it is likely pressure will mount on controlling discretionary spending but there are presently no indications of reductions to current, near-term defense budgets as the defense industry is identified as essential, nor is there an indication of rising interest rates as Federal Reserve officials expect to leave interest rates near zero for years — through at least 2023 — as they try to coax the economy back to full strength after the coronavirus pandemic-induced recession.
Our defense portfolio is well aligned to support the U.S. national defense strategy. Because of the re-emergence of long-term, strategic competition with China and Russia, the National Defense Strategy priorities are likely to remain in place regardless if there is a change in presidential administrations, and will drive relatively stable defense budgets. We’ve seen strong bipartisan support for national security funding as indicated by the $740 billion FY 2021 defense appropriation. There is also bipartisan support for transportation infrastructure spending, including support for intelligent transportation and congestion management systems, in the next surface authorization act. Beyond FY21 legislation we expect, given the likely prospect of a “divided” government, that Congress will keep the current tax structure in place,
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expand infrastructure spending and maintain defense spending at the record highs. 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 and balance decisions regarding defense, homeland security, and other federal spending priorities.
AVAILABLE INFORMATION
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).
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.
CMPS competes with large companies, including Boeing, General Dynamics, L3Harris, Lockheed Martin, Northrop Grumman, and Saab Training Systems, as well as numerous smaller companies. In many cases, we have also teamed with several of these companies, in both prime and subcontractor roles, on specific bid opportunities.
While we are generally smaller than our principal competitors, we believe our competitive advantages include an outstanding record of past performance, strong incumbent relationships, the ability to control operating costs and rapidly focus technology and innovation to solve our customer’s toughest problems.
BUSINESS STRATEGY
To improve the economics of the company, we’ve launched NextCUBIC, a Cubic-led transformation founded on a thorough independent diligence outside-in assessment. NextCUBIC resets our trajectory, redefines the full potential of our business, develops the transformation plan (initiatives and financials), and launches a full-scale effort to drive value to the bottom-line and sustain the impact of these improvements. Our NextCUBIC Strategy for fiscal years 2021 through 2025 is focused on efficiently building technology-driven, market-leading businesses guided by our five Key Priorities of Winning the Customer Obsession, Building NextCity Globally, Building NextMission & NextPerformance Globally, Improving Financial Performance and Living One Cubic.
In this strategy, we accelerate our winning proposition by solving our customer’s most critical challenges through innovative, mission-critical solutions, services and platforms. For cities, we increase the quality of urban life by reducing congestion through intelligent transportation. For our national defenders and first responders, we ensure operational readiness and effectiveness through superior, secure situational understanding. For our military and operators of the world’s most advanced machines, we enable optimal performance, safety and productivity through intelligent training systems that maximize readiness.
Implementing this strategy will improve Cubic’s competitive advantage to deliver exceptional value to our customers as well as superior returns to our shareholders. We create customer value by serving as a trusted partner, maximizing reusability, reliability and the user experience while minimizing size, weight, power and cost, executing customer-
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aligned technology roadmaps and designing modern digital, information-rich platforms with scalability, reliability and security.
We leverage our market leadership position, provide value-based solutions and develop subscription-based revenue models, and improve our financial performance by leveraging our One Cubic scale, driving continuous improvement and leveraging a real-time, data-driven, digital performance management system. We are driving efficiency and reducing costs by optimizing facilities, manufacturing and engineering and aligning human capital and talent with our specific businesses and markets.
Our NextCUBIC strategy and digital pivot set the stage for greater differentiation, market expansion, profitability and value creation. Implementing this strategy will improve Cubic’s competitive advantage to deliver exceptional value to our customers as well as superior returns to our shareholders.
Our strategy remains guided by our Winning the Customer Obsession 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, ultimately, indispensable to our customers.
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.
Our NextMission and NextPerformance strategy is focused on solving our customer’s most critical challenges through innovative, mission-critical solutions, services and platforms. For our national defenders and first responders, we ensure operational readiness and effectiveness through superior, secure situational understanding. For our military and operators of the world’s most advanced machines, we enable optimal performance, safety and productivity through intelligent training systems. Our digital initiatives harness data, cloud and mobile platforms to create new business models, accelerate innovation cycles, improve operational efficiency, and equip our employees, customers, and partners with real-time insight and knowledge.
In providing networked C4ISR capabilities for defense, intelligence, security and commercial missions, we are committed to continuous innovation to ensure our customers are prepared for their Next Mission. Today, as a leading C4ISR innovator, we provide integrated mission capabilities in protected communications, ruggedized tactical cloud computing, secure networking, autonomous systems and C2ISR. Our resilient, scalable and secure solutions enable our customers to conduct operations in the most challenging and degraded environments. Our solutions provide rapid and continuous situational understanding that provides the knowledge needed to make timely decisions to achieve desired effects.
In providing advanced training systems and readiness solutions for the U.S. and allied forces in more than 35 nations, we are committed to building upon the core strategic training business and continue to lead the market in LVC Air and Ground Combat Training. Our approach pivots from instrumenting aircraft, vehicles and individuals to instrumenting human performance. This transforms our customer experience by providing actionable knowledge, after action feedback into individual and collective performance, and deep insights across multiple data sources.
Digital operating excellence and the creation of new digital offerings and platforms is an essential underpinning of our strategy, key priorities and investment choices. We established Cubic digital platforms to accelerate innovation cycles and place us on a path to higher profit margins. Our digital pivot initiative harnesses data, cloud and mobile platforms to create new business models, accelerate innovation cycles, improve operational efficiency and equip our employees,
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customers and partners with real-time insight and knowledge. Our Digital Pivot will grow Cubic revenue and margins by creatively designing, building and delivering technology and new offerings to solve our customers’ most difficult challenges.
Lastly, our strategy 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.
Long-Term Customer Relationships
We seek to build leadership positions in our core markets by building and maintaining 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 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 |
| Customer Relationships |
CTS - Automated Fare Collection | ● 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. | ||
CGD - Air Training | ● In 1973, supplied first “Top Gun” Air Combat Maneuvering Instrumentation system for the Marine Corps Air Station at Yuma, AZ. | |
CGD - Ground Training | ● In 1990, pioneered the world’s first turnkey ground combat-instrumentation system at Hohenfels, Germany for the U.S. Army. | |
CMS - Expeditionary Satellite Communication Terminals | ● 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 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. During fiscal 2020 we prudently reduced lower-priority company-sponsored R&D due to the environment caused by the COVID-19 pandemic, but we plan to increase investment in R&D going forward.
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.
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The cost of company-sponsored R&D activities included in our Consolidated Statements of Operations and the cost of contract R&D activities included in our cost of sales are as follows (in thousands):
Years Ended September 30, | ||||||||||
| 2020 |
| 2019 |
| 2018 |
| ||||
Company-Sponsored Research and Development Expense: | ||||||||||
Cubic Transportation Systems | $ | 8,669 | $ | 10,948 | $ | 13,394 | ||||
Cubic Mission Solutions | 30,060 |
| 27,111 |
| 22,745 | |||||
Cubic Global Defense Systems |
| 5,845 |
| 10,573 |
| 16,259 | ||||
Unallocated corporate expenses |
| — |
| 1,500 |
| — | ||||
Total company-sponsored research and development expense | 44,574 | 50,132 | 52,398 | |||||||
Cost of Contract Research and Development Activities: | ||||||||||
Cubic Transportation Systems | 59,395 | 59,589 | 44,222 | |||||||
Cubic Mission Solutions | 41,930 | 30,416 | 18,077 | |||||||
Cubic Global Defense Systems | 34,749 | 34,698 | 32,695 | |||||||
Total cost of contract research and development activities | 136,074 | 124,703 | 94,994 | |||||||
Total Company-Sponsored Research and Development Expense and Contract Research and Development Activities | $ | 170,823 | $ | 159,401 | $ | 127,689 | ||||
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 36% of our sales in fiscal year 2020, 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 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 (OEM). 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 41% of the CTS segment’s fiscal year 2020 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 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.
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CGD has delivered systems in more than 34 allied nations. In fiscal year 2020, approximately 56% of CGD sales were to allied foreign governments and an additional 10% 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.
EXECUTIVE OFFICERS
The executive officers of Cubic as of November 1, 2020 are as follows:
Bradley H. Feldmann, 59. Mr. Feldmann is Chairman of the Board of Directors (Board), Chief Executive Officer (CEO), and President of Cubic. He was appointed to the Board 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, a security services provider, and ManTech International, a defense contracting firm (Nasdaq: MANT). He is a Board Leadership Fellow of the National Association of Corporate Directors, a member of the Aerospace Industries Association Board of Governors and is a member of the Board of the National Defense Industrial Association (NDIA), serving on NDIA’s Executive Committee and as Chair of the Finance Committee. He also serves on the board of directors of UrbanLife, a non-profit organization, as Chair of the Finance Committee.
Anshooman Aga, 45. 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, procurement and IT. Prior to joining Cubic, Mr. Aga served at AECOM, a multinational engineering firm (NYSE: ACM) from June 2015 to July 2017, where he was senior vice president and chief financial officer of their multi-billion-dollar Design and Consulting Services business in the Americas. He also held a series of financial leadership positions at Siemens, a multinational industrial manufacturing company, from July 2006 to May 2015, including chief financial officer of the Energy Automation business based in Nuremburg, Germany, in addition to similar financial roles for Siemen's Rail Electrification and TurboCare business units.
Hilary L. Hageman, 52. Ms. Hageman is Senior Vice President, General Counsel and Corporate Secretary of Cubic, a position she has held since October 2019. She is responsible for managing Cubic’s legal department as well as overseeing ethics, contracts, global trade compliance, security and environmental, social and governance (ESG). 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 Science Applications International Corporation, a government services and information technology provider (NYSE: SAIC), from August 2016 to September 2019. She also held senior legal counsel roles at CACI International Inc., a multinational professional services and information technology company (NYSE: CACI), from 2007 to 2016, and the U.S. Department of Defense from 1995 to 2007.
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Mark A. Harrison, 63. 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 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 LLP, a multinational accounting and professional services provider.
Michael Knowles, 53. Mr. Knowles has served as Senior Vice President of Cubic and President of Cubic’s CMPS business segment since August 2020. Previously, Mr. Knowles served as President of Cubic’s former CGD business segment from October 2018 to August 2020, and Vice President and General Manager of CGD’s Air Ranges business unit from July 2014 to October 2018. Before joining Cubic, Mr. Knowles served as the senior director of Air Transport and Mission Solutions at Rockwell Collins, a former avionics and information technology systems and services provider, where he was employed from 2004 until 2014. Mr. Knowles 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.
Grace G. Lee, 52. Ms. Lee is Senior Vice President, Chief Human Resources and Diversity Officer of Cubic, a position she has held since October 2018. Ms. Lee is responsible for the strategic leadership of global human resources for Cubic, as well as overseeing the development and advancement of Cubic’s diversity strategy. Ms. Lee’s diversity and inclusion strategy has earned her recognition as one of the top chief diversity officers from the National Diversity Council and Cubic as a top employer for diversity from Forbes. Prior to joining Cubic, Ms. Lee was senior vice president of global human resources for Charles River Laboratories, a biotechnology company (NYSE: CRL), from June 2016 to October 2018. Ms. Lee was senior vice president of human resources and communications for Beckman Coulter, a biomedical operating company of Danaher Corporation (NYSE: DHR), from December 2014 to June 2016. She also previously held the head human resources position at TTM Technologies, a global printed circuit board manufacturer (Nasdaq: TTMI) from November 2010 to December 2014 and IMI Severe Service (now IMI Critical Engineering), a leading provider of critical flow control technologies, from June 2007 to November 2010. Since August 2020, Ms. Lee has served as a member of the board of directors of Asure Software, a human capital management software and services company (Nasdaq: ASUR).
Jeffrey Lowinger, 59. Mr. Lowinger joined Cubic in April 2020 as Senior Vice President of Cubic and President of CTS. Prior to joining Cubic, Mr. Lowinger was president of the eMobility segment for Eaton Corporation, a multinational power management company (NYSE: ETN), from March 2018 to April 2020. Prior to leading eMobility, Mr. Lowinger served as senior vice president of engineering and chief technology officer for Eaton Corporation’s industrial sector from September 2013 to February 2018. Mr. Lowinger had a 25-year career at The Boeing Company, a multinational aerospace company (NYSE: BA), where he held several engineering leadership roles managing complex hardware/software development programs for all key rotorcraft programs. He was also the executive vice president of engineering at Bell Helicopter, an aerospace manufacturer and a division of Textron (NYSE: TXT), where he oversaw the $1.5 billion global commercial business in addition to leading innovation and technology for Bell’s Xworx organization.
Rhys V. Williams, 51. 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 from October 2013 to March 2018. 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, a global sporting goods company, and Gateway, Inc., a computer hardware company.
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.
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INTELLECTUAL PROPERTY
We seek to protect our proprietary technology and inventions through patents and other proprietary-right protection, and also rely on trademark laws to protect our brand. However, we do not regard ourselves as materially dependent on patents for the maintenance of our competitive position. We also rely on trade secrets, proprietary know-how and continuing technological innovation to remain competitive.
REGULATION
Our businesses must comply with and are affected by various government regulations that impact our operating costs, profit margins and our internal organization and operation of our businesses. We deal with numerous U.S. government agencies and entities, including all branches of the U.S. military and the DoD. Therefore, we must comply with and are affected by laws and regulations relating to the formation, administration, and performance of U.S. government and other contracts. These laws and regulations, among other things, include the Federal Acquisition Regulations and all department and agency supplements, which comprehensively regulate the formation, administration and performance of U.S. government contracts. These and other federal regulations require certification and disclosure of cost or pricing data in connection with contract negotiations for certain types of contracts, define allowable and unallowable costs, govern reimbursement rights under cost-based contracts, and restrict the use, dissemination and exportation of products and information classified for national security purposes. For additional discussion of government contracting laws and regulations and related matters, see “Risk Factors” and “Business—Industry Considerations” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies, Estimates and Judgments—Revenue Recognition” with respect to pricing and revenue under government contracts.
Our business is subject to a range of foreign, federal, state and local laws and regulations regarding environmental protection and employee health and safety, including those that govern the emission and discharge of hazardous or toxic materials into the environment and the generation, storage, treatment, handling, use, transportation and disposal of such 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 6,100 persons at September 30, 2020.
Our domestic products and services are sold almost entirely by our employees. Overseas sales are made either directly or through representatives or agents.
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Item 1A. RISK FACTORS.
Risks relating to our business, operations and industry
The COVID-19 pandemic may adversely affect our business, operating results and financial condition, has negatively affected our stock price, and may do so in the future.
In March 2020, COVID-19 was categorized as a pandemic by the World Health Organization. The outbreak and preventative or protective actions that governments, corporations, individuals or we may take to contain the virus may result in a period of reduced operations and business disruption for us and our suppliers, subcontractors, customers and other third parties with which we do business. The effects of the outbreak and related actions, including if significant portions of our or our suppliers’ workforce are unable to work effectively due to facilities closures, illnesses, quarantines, government actions or other restrictions, may therefore hinder or delay our production capabilities and otherwise impede our ability to perform on our obligations to our customers, and may also result in increased costs to us. Any costs associated with the COVID-19 outbreak may not be fully recoverable or adequately covered by insurance. The outbreak and related actions may also result in reduced customer demand or limit the ability of customers to perform, including making timely payments to us. Our transportation agency customers are experiencing reduced revenue and funding from multiple sources which could disrupt or delay future orders. The vast majority of revenue from our CTS businesses is earned under fixed-price contracts. However, a portion of our CTS revenue is earned based upon transit ridership. As such, reductions in ridership caused by COVID-19 have negatively impacted our operating results and will continue to do so until ridership levels return to those prevalent prior to the outbreak. Any of these factors, depending on the severity and duration of the outbreak and its effects, could have a material adverse effect on our business, results of operations and financial condition.
In addition, the COVID-19 outbreak and resulting actions have negatively affected, and may continue to negatively affect, our stock price and the U.S. and global financial markets generally.
The total financial impact of these factors cannot be reasonably estimated at this time but may materially affect our financial condition and results of operations.
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 2020. As a result of the concentration of business with governmental agencies, we are vulnerable to adverse changes in our revenues, income and cash flows if a significant number of our government contracts, subcontracts or prospects are delayed or canceled for budgetary or other reasons.
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 or government appropriations delays; |
| ● | 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 of the U.S. government may reach an impasse on increasing the national debt limit or passing the fiscal year budget, which could result in a full or partial shutdown of the U.S. government, restrict the U.S. government’s ability to pay contractors for prior work, cause the termination or suspension of our contracts with the U.S. government, provide for automatic cuts to the U.S. defense budget, require us to furlough affected employees for an indefinite time, terminate or suspend subcontracts, or incur contract wind-down costs; |
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| ● | 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 delaying their ability to contract. Future delays and uncertainties in funding could impose additional business risks on us; |
| ● | curtailment of governments’ use of outsourced service providers and governments’ in-sourcing of certain services; |
| ● | 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; |
| ● | the adoption of new laws or regulations pertaining to government procurement; |
| ● | suspension or prohibition from contracting with or impairment of our reputation or relationships with the government or any significant agency with which we conduct business; |
| ● | 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; |
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.
Our contracts with government agencies may be unilaterally 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:
| ● | terminate or reduce the value of our existing contracts; |
| ● | modify the terms and conditions in our existing contracts; |
| ● | control and potentially prohibit the export of our products; |
| ● | cancel, delay or decline to exercise an option to extend existing multi-year contracts and related orders if the necessary funds for contract performance for any subsequent year are not appropriated; and |
| ● | claim rights in technologies and systems invented, developed or produced by us. |
Many 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.
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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.
Failure to retain existing contracts or obtain 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:
| ● | 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 substantial period of time; |
| ● | 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; 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. |
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.
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 could be adversely affected.
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Government audits of our contracts could result in a material change 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, 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. This could lead to adjustments to 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 could adversely affect our business, results of operations and financial condition.
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.
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 95% of our revenues in fiscal year 2020 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. 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.
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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 executives, and terrorist acts, as well as the potential for business disruptions associated with information technology or internal system failures (including network, software or hardware failures), damaging weather or other acts of nature, and pandemics or other public health crises (including the current COVID-19 outbreak), 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’s 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. Such events 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, 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 or criminal liabilities.
Our results of operations have historically fluctuated and may continue to fluctuate significantly in the future, which could adversely affect our financial position or 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. 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 terms of our financing arrangements may restrict our financial and operational flexibility, including our ability to invest in new business opportunities.
On March 27, 2020, we executed a Fifth Amended and Restated Credit Agreement (the “Credit Facility”) with a group of financial institutions. The Credit Facility provided for a new term loan in the aggregate amount of $450.0 million (the “Term Loan”) and increased our existing revolving line of credit limit (the “Revolving Line of Credit”) from $800.0 million to $850.0 million. The commitments under the Credit Facility will mature on March 27, 2025. At September 30, 2020, we had $444.4 million of borrowings under our Term Loan and $209.0 million of borrowings under our Revolving Line of Credit. Letters of credit outstanding under the Credit Facility totaled $93.1 million at September 30, 2020, which reduced our available line of credit to $547.9 million. The $93.1 million of letters of credit includes both financial letters of credit and performance guarantees.
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The terms of the Credit Facility contain financial covenants setting a maximum total ratio of debt to adjusted earnings before interest, taxes, depreciation and amortization and a minimum interest coverage ratio. In addition, the terms contain covenants that restrict, among other things, our ability to sell assets, incur indebtedness, make investments, grant liens, pay dividends and make other restricted payments. As of September 30, 2020, we were in compliance with all covenants under the Credit Facility.
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.
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. 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 4% 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 could be harmed, revenue from, and market acceptance of, our products and systems could 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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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.
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.
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
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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 could 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 or invest in other companies, which could increase our costs or liabilities or be disruptive to our business.
Part of our strategy involves the acquisition of or investment in other companies and businesses. 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.
As a result, 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; |
| ● | 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.
Risks relating to our international operations
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 buying or selling products or services in foreign countries, including:
| ● | 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 compliance with requirements of foreign governments in order to operate in the territory or own the subsidiary including the need to form joint ventures with local in-country partners, expend a portion of the contract locally, offset requirements and others; |
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| ● | 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-money laundering laws and sanctions, including the difficulty of ensuring that our foreign representatives, consultants and partners comply with such laws and sanctions; |
| ● | export control regulations, trade sanctions, and related policies which govern our ability to supply foreign customers and operate in jurisdictions other than the United States; |
| ● | the complexity and necessity of using foreign representatives and consultants or being prohibited from such use; |
| ● | 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.
Risks relating to legal, regulatory and tax matters
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:
| ● | the Federal Acquisition Regulations 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 International Traffic in Arms Regulations, which control the export of items on the U.S. Munitions Control List administered by the U.S. Department of State; |
| ● | the Export Administration Regulations which control commercial, dual-use and select defense related articles; |
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| ● | the Bureau of Alcohol, Tobacco, Firearms and Explosives regulations that control the manufacture, possession and sale of firearms and explosive devices and materials; |
| ● | laws, regulations and executive orders restricting the use and dissemination of information classified for national security purposes and the exportation of certain products and technical data; |
| ● | regulations of state and regional agencies and foreign governments similar to those described above; |
| ● | the trade sanctions laws and regulations administered by the U.S. Department of the Treasury’s Office of Foreign Assets Control; |
| ● | the Sherman Act and Clayton Act, which proscribe unlawful, anti-competitive conduct and business practices; |
| ● | the Foreign Corrupt Practices Act, the UK 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; |
| ● | 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 EU’s General Data Protection Regulation 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.
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. 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 could adversely affect our business, results of operations and financial condition.
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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 or cash flows.
Risks relating to our human capital
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 for our transportation business or 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. 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. To the extent we are not able to obtain facility security clearances or engage employees with the required security clearances for a particular contract, we will be unable to perform that contract and we may not be able to compete for or win new awards for similar work.
Our 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 Bribery Act or similar laws in other countries.
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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.
Risks relating to our intellectual property
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. 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. We generally control and limit access to our product documentation and other proprietary information, but other parties may independently develop our know-how or otherwise obtain access to our technology, which could adversely affect our businesses’ prospects and competitive position.
Assertions by third parties that we violate their intellectual property rights could have a material adverse effect on our business, financial condition and results of operations.
Third parties may claim that we, our customers, licensees or parties indemnified by us are infringing upon or otherwise violating their intellectual property rights. Such claims may be made by competitors seeking to obtain a competitive advantage or by other parties. Additionally, in recent years, individuals and groups have begun purchasing intellectual property assets for the purpose of making claims of infringement and attempting to extract settlements from companies like ours.
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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.
Risks relating to our common stock
The price of our common stock may fluctuate significantly.
An active, liquid and orderly market for our common stock may not be sustained, which could depress the trading price of our common stock.
Volatility in the market price of our common stock may prevent you from being able to sell your shares at or above the price you paid for your shares or at all. The market price of our common stock could fluctuate significantly for various reasons, which include:
| ● | our quarterly or annual earnings or those of our competitors; |
| ● | the public’s reaction to our press releases, our other public announcements and our filings with the SEC; |
| ● | changes in earnings estimates or recommendations by research analysts who track our common stock or the stocks of our competitors; |
| ● | 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; |
| ● | 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, particularly during the COVID-19 pandemic. 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.
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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:
| ● | 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.
As a result of the rapid accumulation of our stock by an investor, our board of directors adopted a shareholder rights plan which may impair a takeover attempt and speculation regarding potential transactions or our failure to enter into any transaction at all may cause significant fluctuations in our share price.
On September 20, 2020, in response to the rapid accumulation of our stock by an investor, our board of directors adopted a shareholder rights plan (Rights Plan) and declared a dividend of one preferred stock purchase right for each outstanding share of our common stock to shareholders of record on October 1, 2020. The dividend distribution was made to such shareholders on October 1, 2020. In general terms, and subject to certain exceptions, the Rights Plan restricts any person or group of affiliated or associated persons from acquiring, or obtaining the right to acquire, beneficial ownership of 15% (20% in the case of a Passive Institutional Investor, as such term is defined in Rights Plan) or more of shares of our common stock (including certain synthetic equity positions created by derivative securities) (an Acquiring Person), and any person or group of affiliated or associated persons from making a tender offer or exchange offer, the consummation of which would result in a person or group becoming an Acquiring Person. The Rights Plan could make it more difficult for a third party to acquire the Company or a large block of our shares of common stock without the approval of our board of directors. The rights will expire on September 19, 2021. With respect to approaches by third parties, there can be no assurance that we will engage in a transaction or take other actions as a result. Speculation regarding the possibility of such a transaction or actions by us may cause our share price to fluctuate significantly. Our failure to engage with such parties, enter into a transaction with any of them or take other actions they request may adversely affect our share price.
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 year 2020, we paid an aggregate of $8.4 million of cash dividends to our shareholders.
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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 Annual Report on Form 10-K, 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 thereby. Any statements about our expectations, beliefs, plans, objectives, assumptions, future events or our future financial or operating performance, including those concerning new programs and growth in the markets in which we do business, increases in demand for our products and for fully integrated systems, retention of existing contracts and receipt of new contracts, the development of new products, systems and services, expansion of our automated payment and fare collection systems and services, maintenance of long-term relationships with our existing customers, expansion of our service offerings and customer base for services, maintenance of a diversified business mix, expansion of our international footprint, strategic acquisitions, the uncertainty regarding the scope, duration and impact of COVID-19, 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” in Part I, Item 1A of this Annual Report on Form 10-K and elsewhere throughout this Annual Report on Form 10-K 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:
| ● | the impact of the COVID-19 outbreak or future epidemics on our business, including the potential for facility closures or work stoppages; supply chain disruptions; program delays; our ability to recover our costs under contracts; changing government funding and acquisition priorities and payment policies and regulations; and potential impacts to the fair value of our assets; |
| ● | 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, payment and technology changes in the defense and transportation industries; |
| ● | 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; |
| ● | unforeseen problems with the implementation and maintenance of our information systems; |
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| ● | business disruptions due to cyber security threats, physical threats, terrorist acts, acts of nature and public health crises; |
| ● | our involvement in litigation, including litigation related to patents, proprietary rights and employee misconduct; |
| ● | our reliance on subcontractors and on a limited number of third parties to manufacture and supply our products; |
| ● | our ability to comply with our development contracts and to successfully develop, introduce and sell new products, systems and services in current and future markets; |
| ● | defects in, or a lack of adequate coverage by insurance or indemnity for, our products and systems; |
| ● | changes in U.S. and foreign tax laws, exchange rates or our economic assumptions regarding our pension plans; and |
| ● | other factors discussed elsewhere in this Annual Report on Form 10-K. |
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 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 applicable 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 1.8 million square feet of both owned and leased properties located in the United States and foreign countries. We own approximately 24% 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 and entered into a lease with the buyer until the new buildings on our corporate campus are ready for occupancy in fiscal 2021.
All owned and leased properties are considered in good condition and adequately utilized. As of September 30, 2020 we had significant properties at the following locations:
Corporate: Arlington, VA; Orlando, FL; and San Diego, CA.
CTS: Amherst, NY; 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; Malden, MA; Mallusk, Ireland; New York, NY; Norwalk, CA; Portsmouth, NH; Queensland, Australia; Quincy, MA; Rozelle, Australia; San Diego, CA; San Francisco, CA; Silverwater, Australia; Stockton-on-Tees, UK; Sugar Land, TX; Surrey, UK; Sydney, Australia; Tullahoma, TN; and West Sussex, UK.
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CMS: Aberdeen, MD; Ashburn, VA; Blacksburg, VA; Dallas, TX; Durham, NC; Fayetteville, NC; Hanover, MD; Herdon, VA; Huntsville, AL; Nis, Serbia; Pendleton, OR; San Diego, CA; Tampa, FL; and Woburn, MA.
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; San Diego, CA; Shackleford, UK; Singapore; Tijuana, Mexico; and Townsville, Australia.
Item 3. LEGAL PROCEEDINGS.
We consider all 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.
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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. There were 469 shareholders of record of our common stock as of November 2, 2020.
The dividend information per share of our common stock for the quarterly periods during the past two fiscal years, is as follows:
| |||||||
Dividends per Share |
| ||||||
Quarter |
| Fiscal 2020 |
| Fiscal 2019 |
| ||
First | — |
| — | ||||
Second | $ | 0.14 | $ | 0.14 | |||
Third |
| — |
| — | |||
Fourth | $ | 0.14 | $ | 0.14 | |||
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, 2015.
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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.
| Years Ended September 30, |
| ||||||||||||||
| 2020 |
| 2019 (1) |
| 2018 |
| 2017 |
| 2016 |
| ||||||
Results of Operations: | ||||||||||||||||
Sales | $ | 1,476,235 | $ | 1,496,475 | $ | 1,202,898 | $ | 1,107,709 | $ | 1,070,601 | ||||||
Cost of sales |
| 1,019,647 |
| 1,065,060 |
| 835,392 |
| 779,323 |
| 766,477 | ||||||
Selling, general and administrative expenses |
| 274,701 |
| 270,064 |
| 258,644 |
| 240,196 |
| 253,163 | ||||||
Research and development |
| 44,574 |
| 50,132 |
| 52,398 |
| 52,652 |
| 31,976 | ||||||
Amortization of purchased intangibles | 59,309 | 42,106 | 27,064 | 30,245 | 29,356 | |||||||||||
Interest expense |
| 27,685 |
| 20,453 |
| 10,424 |
| 15,027 |
| 11,199 | ||||||
Income tax provision (benefit) |
| (6,380) |
| 11,040 |
| 7,093 |
| 14,658 |
| (14,357) | ||||||
Net income (loss) from continuing operations | 2,935 | 41,306 | 7,793 | (25,740) | (12,080) | |||||||||||
Net income (loss) from discontinued operations | 436 | (1,423) | 4,243 | 14,531 | 13,815 | |||||||||||
Net income (loss) attributable to Cubic |
| (3,221) |
| 49,694 |
| 12,310 |
| (11,209) |
| 1,735 | ||||||
Per Share Data: | ||||||||||||||||
Net income (loss) per share: | ||||||||||||||||
Basic | ||||||||||||||||
Continuing operations | $ | (0.12) | $ | 1.68 | $ | 0.30 | $ | (0.95) | $ | (0.45) | ||||||
Discontinued operations | $ | 0.01 | $ | (0.05) | $ | 0.16 | $ | 0.54 | $ | 0.51 | ||||||
Basic earnings per share | $ | (0.10) | $ | 1.63 | $ | 0.45 | $ | (0.41) | $ | 0.06 | ||||||
Diluted | ||||||||||||||||
Continuing operations | $ | (0.12) | $ | 1.67 | $ | 0.29 | $ | 0.95 | $ | 0.45 | ||||||
Discontinued operations | $ | 0.01 | $ | (0.05) | $ | 0.16 | $ | 0.54 | $ | 0.51 | ||||||
Diluted earnings per share | $ | (0.10) | $ | 1.62 | $ | 0.45 | $ | (0.41) | $ | 0.06 | ||||||
Cash dividends |
| 0.27 |
| 0.27 |
| 0.27 |
| 0.27 |
| 0.27 | ||||||
Shares used in calculating net income (loss) per share: | ||||||||||||||||
Basic |
| 31,299 |
| 30,495 |
| 27,229 |
| 27,106 |
| 26,976 | ||||||
Diluted |
| 31,299 |
| 30,606 |
| 27,351 |
| 27,106 |
| 26,976 | ||||||
Non-GAAP Measures: | ||||||||||||||||
Adjusted EBITDA (2) | $ | 158.3 | $ | 146.6 | $ | 104.6 | $ | 87.5 | $ | 93.4 | ||||||
Adjusted EPS (2) | 3.32 | 3.13 | 2.19 | 1.62 | 2.54 | |||||||||||
Balance Sheet Data: | ||||||||||||||||
Shareholders’ equity related to Cubic | $ | 960,777 | $ | 961,649 | $ | 700,121 | $ | 689,631 | $ | 689,896 | ||||||
Equity per share, basic |
| 30.70 |
| 31.53 |
| 25.71 |
| 25.44 |
| 25.57 | ||||||
Total assets |
| 2,324,221 |
| 1,847,170 |
| 1,304,883 |
| 1,336,285 |
| 1,504,408 | ||||||
Short-term borrowings | 215,716 | 195,500 | — | 55,000 | 240,000 | |||||||||||
Long-term debt |
| 441,365 |
| 199,824 |
| 199,793 |
| 199,761 |
| 200,741 | ||||||
33
| (1) | 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. |
| (2) | Adjusted EBITDA and Adjusted EPS are non-GAAP financial measures. For an explanation and reconciliation of such measures, see the section titled “Non-GAAP Financial Information” within Item 7 of this Form 10-K. |
34
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. In recent history we’ve managed our business in three business segments: Cubic Transportation Systems (CTS), Cubic Mission Solutions (CMS), and Cubic Global Defense Systems (CGD). In the fourth quarter of fiscal 2020 we combined our CMS and CGD segments to form a new Cubic Mission and Performance Solutions (CMPS) segment. This new streamlined organization structure is designed to leverage technologies, enhance collaboration and customer intimacy, reduce complexity and cost, and increase organizational efficiency. CMPS will continue to deliver solutions to C4ISR and training customers worldwide. Notwithstanding this realignment, we are still required to report our segment financial results based upon our legacy reportable business segments.
Fiscal 2020 Highlights
| ● | Sales of $1.476 billion, down 1% year-over-year |
| ● | Net loss from continuing operations attributable to Cubic of $3.7 million, or $0.12 per share, compared to net income from continuing operations attributable to Cubic of $51.1 million, or $1.67 per share in fiscal 2019; prior year included a $32.5 million gain on sale of fixed assets |
| ● | Adjusted EPS of $3.32, up 6% year-over-year |
| ● | Record full year Adjusted EBITDA of $158.3 million, up 8% year-over-year; Adjusted EBITDA margin of 10.7% increased 90 basis points year-over-year |
| ● | Year-end backlog of $3.7 billion, up 8% year-over-year; book-to-bill ratio of 1.1 in all segments |
35
COVID-19 Update
The COVID-19 pandemic has presented challenges and impacts on each of our businesses, including delays of customer orders, slowdown of certain projects and impacts due to travel restrictions and remote work. We have taken proactive measures in order to reduce the potential impacts of the pandemic. To date we have not experienced significant disruptions in our supply chain, nor have we experienced any significant disruptions at our manufacturing facilities.
The vast majority of revenue from our CTS businesses is earned under fixed-price contracts. However, approximately 2% of our annual revenue is directly tied to the level of transit ridership. While transit ridership levels have improved from the lows of the pandemic, they remain significantly below normal levels impacting our transit agency customer’s revenue, with uncertainty surrounding the pace and timing of recovery. While we continue to believe that CTS’s backlog is largely insulated from the impacts of COVID-19 due to the critical service of fare collection, there could be potential delays in the award of new business. While the U.S. National Defense Strategy continues to drive demand, our CGD and CMS businesses have experienced some delays in timing of orders and shipments due to the COVID-19 pandemic.
We believe that the fundamentals of our Company remain strong in the midst of the global pandemic. We expect to have sufficient liquidity on hand to continue business operations during this volatile period and we have taken a number of steps to strengthen liquidity and manage cash flow. These steps include long-term debt restructuring and an increase in limits on our revolving credit facility as further described in the “Liquidity and Capital Resources” section below.
The extent to which COVID-19 will adversely impact our business depends on future developments, which are highly uncertain and unpredictable, including the severity and duration of the outbreak and the effectiveness of actions to contain or mitigate its effects. While we expect the pandemic to continue to negatively impact our results, the current level of uncertainty over the economic and operational impacts of COVID-19 could lead to variability in results.
FISCAL 2020 RESULTS COMPARED WITH FISCAL 2019 RESULTS
CONSOLIDATED RESULTS
Fiscal 2020 |
| Fiscal 2019 |
| % Change | |||||||
(in millions, except per share data) | |||||||||||
Sales | $ | 1,476.2 | $ | 1,496.5 | (1) | % | |||||
Operating income |
| 61.6 |
| 86.2 |
| (29) | % | ||||
Net income (loss) from continuing operations attributable to Cubic |
| (3.7) |
| 51.1 |
| nm | |||||
Diluted earnings (loss) per share from continuing operations attributable to Cubic | (0.12) | 1.67 | nm | ||||||||
Adjusted EBITDA |
| 158.3 |
| 146.6 |
| 8 | % | ||||
Adjusted Net Income |
| 103.8 |
| 95.6 |
| 9 | % | ||||
Adjusted EPS | 3.32 | 3.13 | 6 | % | |||||||
nm - not meaningful | |||||||||||
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.
Sales: Our sales decreased 1% to $1.476 billion in fiscal 2020 (2020) from $1.496 billion in fiscal 2019 (2019). Sales from CGD and CTS decreased by 6% and 1%, respectively, while CMS sales increased by 3% from 2019. Sales in 2020 were negatively impacted by COVID-19 due to a decrease in sales resulting from lower transit ridership and delayed orders across all three of our business segments. Sales generated by businesses we acquired during 2020 and 2019 totaled $122.4 million in 2020, compared to $81.8 million in 2019. See the segment discussions below for further analysis of segment sales. The average exchange rates between the prevailing currencies in our foreign operations and the U.S. dollar had a net unfavorable impact on sales of $4.5 million in 2020 compared to 2019.
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Gross Margin: Our gross margin percentage on products sales was 28% in 2020 and 2019. Margins in 2020 were negatively impacted in CMS due to lower sales of high margin expeditionary satellite communications products and investment in secure communications development contracts, offset by higher margins in CTS driven by contract mix and, the impact of cost savings initiatives. Our gross margin percentage on service sales increased to 36% in 2020 from 31% in 2019. The increase was primarily driven by the impact of productivity initiatives in CTS, as well as services sales mix.
Selling, General, and Administrative: SG&A expenses increased to $274.7 million in 2020 from $270.1 million in 2019. As a percentage of sales, SG&A expenses were 19% in 2020 compared to 18% in 2019. The increase in SG&A expenses was driven by a $5.7 million increase in share-based compensation expense and a $9.0 million increase from additional SG&A expenses incurred by businesses we acquired during 2020 and 2019. These increases were partially offset by cost reduction initiatives.
Restructuring: Restructuring expenses increased to $16.6 million in 2020 compared to $15.4 million in 2019. Restructuring expenses in 2020 include consulting and other costs incurred in connection with our NextCUBIC transformation initiatives to restructure the way we work and operate as a business, as well as costs related to the realignment of our defense businesses into CMPS. Restructuring expenses in fiscal 2020 and 2019 also include consulting and employee severance expenses related to performance enhancement and cost savings measures including the redesign of our supply chain strategy.
Research & Development:
Internally funded company-sponsored research and development (“R&D”) expenses included in our Consolidated Statements of Operations are as follows (in thousands):
Years Ended September 30, | |||||||
| 2020 |
| 2019 |
| |||
Company-Sponsored Research and Development Expense: | |||||||
Cubic Transportation Systems | $ | 8,669 | $ | 10,948 | |||
Cubic Mission Solutions | 30,060 |
| 27,111 | ||||
Cubic Global Defense Systems |
| 5,845 |
| 10,573 | |||
Unallocated corporate expenses |
| — |
| 1,500 | |||
Total company-sponsored research and development expense | $ | 44,574 | $ | 50,132 | |||
Company-sponsored R&D expense decreased $5.6 million in 2020 due to the timing of certain planned R&D projects at CTS and CGD. In 2020, 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. CMS’ R&D investments included secure communications and ISR-as-a-service technologies, and 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 are as follows (in thousands):
| Years Ended September 30, |
| |||||
2020 |
| 2019 | |||||
Cost of Contract Research and Development Activities: | |||||||
Cubic Transportation Systems | $ | 59,395 | $ | 59,589 | |||
Cubic Mission Solutions | 41,930 |
| 30,416 | ||||
Cubic Global Defense Systems | 34,749 |
| 34,698 | ||||
Total cost of contract research and development activities | $ | 136,074 | $ | 124,703 | |||
The increase in contract R&D activities is primarily related to investments in new secure communication technologies at CMS.
37
Amortization of Purchased Intangibles: Amortization of purchased intangibles totaled $59.3 million in 2020 compared to $42.1 million in 2019. The increase in amortization expense was driven by the completion of our acquisitions of Delerrok Inc. (“Delerrok”) and PIXIA Corp. (“Pixia”) in January 2020, partially offset by lower amortization of purchased intangible assets that are amortized based upon accelerated methods.
Operating Income: Operating income decreased to $61.6 million in 2020 compared to $86.2 million in 2019. CTS operating income increased by 57% to $121.0 million in 2020 compared to $77.2 million in 2019. This increase was partially offset by CMS operating results as CMS generated an operating loss of $26.7 million in 2020 compared to operating income of $7.8 million in 2019. CGD’s operating income was flat at $22.9 million in 2020 compared to $23.0 million in 2019. Our operating results were impacted by the accounting for businesses we acquired in 2020 and 2019. On a consolidated basis, the businesses that we acquired during 2020 and 2019 generated operating losses of $21.4 million in 2020 compared to $17.0 million in 2019. The operating losses were driven by acquisition-related expenses, including amortization of intangible assets, of $47.9 million 2020 and $31.5 million in 2019. 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 $0.3 million in 2020 compared to 2019. See the segment discussions below for further analysis of segment operating income.
Unallocated corporate and other costs were $55.6 million in 2020 compared to $21.8 million in 2019. The change in unallocated corporate and other costs was driven by a $32.5 million gain recognized in 2019 related to the sale of land and buildings in San Diego and Orlando. Excluding the gain on sale, unallocated corporate and other costs increased by $1.4 million in 2020.
Interest and Dividend Income and Interest Expense: Interest and dividend income was $7.5 million in 2020 compared to $6.5 million in 2019. The increase in interest income was due to the interest income recorded on higher balances of our long-term contracts financing receivables. Interest expense was $27.7 million in 2020 compared to $20.5 million in 2019. The increase in interest expense was due to higher average debt balances in 2020 primarily as a result of the completion of our acquisitions of Pixia and Delerrok in January 2020, as well an increase in the average outstanding non-recourse debt balance of our consolidated variable interest entity (“VIE”). The 90% noncontrolling interest in the net income (loss) of the consolidated VIE, which includes the interest income and expense of such VIE, is added back to our net income (loss) to arrive at net income (loss) attributable to Cubic.
Loss on Extinguishment of Debt: In 2020, we repaid and extinguished our senior unsecured notes which resulted in a $16.1 million loss on extinguishment of debt. See the “Liquidity and Capital Resources” section below for further discussion.
Other Income (Expense): Other income (expense) netted to expense of $28.8 million in 2020 and $20.0 million in 2019. Changes in our non-operating expenses are primarily driven by the fair value of an interest rate swap held by our consolidated VIE, which recognized losses of $18.7 million and $21.6 million in 2020 and 2019, respectively. The 90% noncontrolling interest in the net income (loss) of the consolidated VIE, including the VIE’s loss on its interest rate swap, is added back to our net income (loss) to arrive at net income (loss) attributable to Cubic. The remaining non-operating expense in 2020 was 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 benefit totaled $6.4 million (effective tax rate of 186%) for fiscal 2020, compared to an income tax provision of $11.0 million (effective tax rate of 21%) for fiscal 2019. The fiscal 2020 tax provision primarily resulted from tax on foreign earnings, offset by $18.6 million of tax benefits in connection with acquisitions involving significant U.S. deferred tax liabilities and the ability to monetize acquired net operating losses which allowed for a subsequent release of deferred tax valuation allowance. The 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 allowed for a subsequent release of deferred tax valuation allowance.
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
38
for future periods will be offset by decreases or increases in the valuation allowance with no net effect on the consolidated statement of operations.
As of September 30, 2020, a total valuation allowance of $59.8 million has been established against U.S. federal deferred tax assets, certain state and foreign operating losses and other state and foreign assets. During fiscal 2020, the valuation allowance decreased by $9.3 million, of which $9.0 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 (loss) from Continuing Operations attributable to Cubic: Our net loss from continuing operations attributable to Cubic was $3.7 million or $(0.12) per share in 2020, compared to $51.1 million of net income or $1.67 per share in 2019. The change in net income (loss) in 2020 was primarily related to the $16.1 million loss on debt extinguishment incurred in 2020, changes in other income (expenses) resulting in $8.8 million of higher expense in 2020, a $32.5 million gain on the sale of fixed assets in 2019, in addition to the changes in segment operating income discussed above.
Adjusted EBITDA: Adjusted EBITDA increased 8% to $158.3 million in 2020 compared to $146.6 million in 2019 driven by an increase in CTS of $23.5 million, which was partially offset by a decrease in Adjusted EBITDA of $6.2 million at CMS. The increase in Adjusted EBITDA was primarily due to the same factors that drove the change in operating income described above, but excludes amortization expense, acquisition-related expenses, gain on sale of fixed assets, and restructuring costs.
Adjusted Net Income: Adjusted Net Income increased 9% to $103.8 million in 2020 from $95.6 million in 2019. The increase in Adjusted Net Income was primarily due to the same factors that drove the change in net income (loss) from continuing operations attributable to Cubic described above including improved margin at CTS, but excludes amortization expense, gain on sale of fixed assets, restructuring costs, loss on debt extinguishment, acquisition related costs, and non-operating gains and losses.
Adjusted EPS: Adjusted EPS increased 6% to $3.32 in 2020 compared to $3.13 in 2019 due to the same factors that impacted Adjusted Net Income noted above.
SEGMENT RESULTS
Cubic Transportation Systems
Fiscal 2020 |
| Fiscal 2019 |
| % Change | |||||||
(in millions) | |||||||||||
Sales | $ | 840.9 | $ | 849.8 | (1) | % | |||||
Operating income |
| 121.0 |
| 77.2 |
| 57 | % | ||||
Adjusted EBITDA |
| 134.0 |
| 110.5 |
| 21 | % | ||||
Sales: CTS sales decreased 1% to $840.9 million in 2020 compared to $849.8 million in 2019. Lower sales in the U.K. and Australia were partially offset by increased sales in North America. The decrease in sales in the U.K. was primarily caused by a reduction in work on fare system hardware while the decrease in sales in Australia was due to a reduction in fare system hardware deliveries, and lower revenue earned on service contracts due to lower transit ridership. In addition, 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 $3.3 million in 2020 compared to 2019. Sales were higher in North America primarily due to increased work on system development contracts in Boston and Chicago, which were partially offset by lower revenue on the system development contract in New York. Sales in 2020 were also negatively impacted in all regions by COVID-19 due to a decrease in sales resulting from lower transit ridership as described in the COVID-19 Update section above. Businesses acquired in 2020 and 2019 whose operations are included in our CTS operating segment had sales of $85.5 million and $74.4 million in 2020 and 2019, respectively.
39
Operating Income: CTS operating income increased 57% in 2020 to $121.0 million compared to $77.2 million in 2019. Operating income was higher in the U.S. primarily due to increased system development work on our contracts in Chicago and Boston including the impact from the contract amendment signed in 2020, and cost saving initiatives, which were partially offset by lower revenue on our New York contract. Additionally, CTS’s consolidated variable interest entity (VIE) recognized higher operating income due to the contract amendment with our Boston customer. Operating income in the U.K. was slightly higher in 2020 due to productivity measures achieved on service contracts. Operating income in the APAC region slightly decreased in 2020 due to lower profitability on Australian service contracts as a result of lower transit ridership. Operating losses incurred by businesses acquired by CTS during 2020 and 2019 totaled $2.4 million in 2020 and $10.1 million in 2019. These operating losses were driven by acquisition-related expenses, including amortization of intangible assets, totaling $20.7 million in 2020 and $27.3 million in 2019. The average exchange rates between the prevailing currency in our foreign operations and the U.S. dollar had no significant impact.
Adjusted EBITDA: CTS Adjusted EBITDA increased 21% to $134.0 million in 2020 compared to $110.5 million in 2019. The increase in Adjusted EBITDA was primarily driven by the same factors that drove the increase in operating income described above, excluding amortization of purchased intangibles and acquisition-related expenses. In addition, CTS is required to reflect 100% of the sales and operating income of its consolidated VIE in its operating results. However, because CTS only owns 10% of the consolidated VIE, the CTS Adjusted EBITDA reflects only 10% of the Adjusted EBITDA of the VIE.
Cubic Mission Solutions
Fiscal 2020 |
| Fiscal 2019 |
| % Change | |||||||
(in millions) | |||||||||||
Sales | $ | 337.1 | $ | 328.8 | 3 | % | |||||
Operating income (loss) |
| (26.7) |
| 7.8 |
| nm | |||||
Adjusted EBITDA |
| 28.2 |
| 34.4 |
| (18) | % | ||||
nm - not meaningful | |||||||||||
Sales: CMS sales increased 3% to $337.1 million in 2020 compared to $328.8 million in 2019. The increase in sales was driven by recently acquired businesses and higher sales of secure network products. Businesses acquired by CMS in 2020 and 2019 had sales of $36.9 million and $7.4 million in 2020 and 2019, respectively. Partially offsetting the increase in sales were lower product deliveries of expeditionary satellite communications products.
Operating Income: The CMS operating loss was $26.7 million in 2020 compared to operating income of $7.8 million in 2019. The operating loss was driven by lower deliveries of expeditionary satellite communications products, incremental investments in technologies being developed for certain secure communications contracts, higher R&D expense, and operating losses incurred by newly acquired businesses. Operating losses incurred by businesses acquired by CMS during 2020 and 2019 totaled $19.0 million in 2020, compared to $6.9 million of operating losses in 2019. These operating losses were driven by acquisition-related expenses, including amortization of intangible assets, totaling $27.2 million in 2020, compared to $4.2 million in 2019.
Adjusted EBITDA: CMS Adjusted EBITDA decreased 18% to $28.2 million in 2020 compared to $34.4 million in 2019. The decrease in CMS Adjusted EBITDA was primarily due to the same factors that drove the change in operating income (loss) described above, excluding amortization of purchased intangibles and acquisition-related expenses.
40
Cubic Global Defense
Fiscal 2020 |
| Fiscal 2019 |
| % Change | |||||||
(in millions) | |||||||||||
Sales | $ | 298.2 | $ | 317.9 | (6) | % | |||||
Operating income |
| 22.9 |
| 23.0 |
| (0) | % | ||||
Adjusted EBITDA |
| 32.9 |
| 32.8 |
| 0 | % | ||||
Sales: CGD sales decreased 6% to $298.2 million in 2020 compared to $317.9 million in 2019. The decrease in sales was due to decreased work on ground combat training system and digital solution contracts based primarily on the timing of delayed orders, partially offset by an increase in air combat training systems work. 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 $1.2 million for 2020 compared to 2019.
Operating Income: CGD operating income of $22.9 million in 2020 was essentially flat with operating income of $23.0 million in 2019. During 2020, CGD generated higher operating income from higher system development work on air combat training systems, decreased R&D expenditures and lower SG&A costs as a result of productivity and cost saving initiatives were offset by lower income from digital and ground combat training system development 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 2019 and 2020.
Adjusted EBITDA: CGD Adjusted EBITDA was $32.9 million in 2020 compared to $32.8 million in 2019. The change in Adjusted EBITDA was primarily driven by the same factors that drove the change in operating income described above.
FISCAL 2019 RESULTS COMPARED WITH FISCAL 2018 RESULTS
CONSOLIDATED RESULTS
Fiscal 2019 |
| Fiscal 2018 |
| % Change | |||||||
(in millions, except per share data) | |||||||||||
Sales | $ | 1,496.5 | $ | 1,202.9 | 24 | % | |||||
Operating income |
| 86.2 |
| 24.4 |
| 253 | % | ||||
Net income from continuing operations |
| 51.1 |
| 8.1 |
| 534 | % | ||||
Diluted earnings per share from continuing operations attributable to Cubic | 1.67 | 0.29 | 466 | % | |||||||
Adjusted EBITDA |
| 146.6 |
| 104.6 |
| 41 | % | ||||
Adjusted Net Income |
| 95.6 |
| 60.0 |
| 59 | % | ||||
Adjusted EPS | 3.13 | 2.19 | 43 | % | |||||||
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, 2019 is presented under ASC 606, while 2018 is presented under ASC 605, Revenue Recognition, the accounting standard in effect for periods ending prior to October 1, 2018.
41
The table below quantifies the impact of adopting ASC 606 on sales, operating income and net income from continuing operations attributable to Cubic, for the year ended September 30, 2019 (in millions):
Twelve months ended September 30, 2019 | ||||||||||
As Reported | ||||||||||
Under | Effect of | Under | ||||||||
| ASC 605 |
| ASC 606 |
| ASC 606 |
| ||||
Sales: | ||||||||||
Cubic Transportation Systems | $ | 788.0 | $ | 61.8 | $ | 849.8 | ||||
Cubic Mission Solutions | 327.2 |
| 1.6 |
| 328.8 | |||||
Cubic Global Defense |
| 272.1 |
| 45.8 |
| 317.9 | ||||
Total sales | $ | 1,387.3 | $ | 109.2 | $ | 1,496.5 | ||||
Operating income: | ||||||||||
Cubic Transportation Systems | $ | 65.9 | $ | 11.3 | $ | 77.2 | ||||
Cubic Mission Solutions | 7.3 |
| 0.5 |
| 7.8 | |||||
Cubic Global Defense |
| 19.9 |
| 3.1 |
| 23.0 | ||||
Unallocated corporate expenses |
| (21.8) |
| — |
| (21.8) | ||||
Total operating income | $ | 71.3 | $ | 14.9 | $ | 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 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 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. 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 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 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.
Research & Development: Company-sponsored R&D spending totaled $50.1 million in 2019 compared to $52.4 million in 2018. For 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 driven by secure communications and ISR-as-a-service technologies and CTS and CGD decreasing.
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 was $124.7 million in 2019 compared to $95.0 million in 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.
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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 2019, we sold land and buildings comprising our separate CTS campus in San Diego and entered into a lease with the buyer until the new buildings on our corporate campus are ready for occupancy in fiscal 2021. In the third quarter of 2019, we also sold land and buildings in Orlando, Florida and entered a lease for new space with a smaller footprint in Orlando to accommodate our employees and operations there. 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.
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 which was driven by increases in sales across all 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 2019 was primarily due to the interest income recorded on long-term contracts financing receivables in our consolidated balance sheet. Under ASC 606, in 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 primarily due to the acquisition of three businesses.
Other Income (Expense): Other income (expense) netted to expense of $20.0 million in 2019 and $0.7 million in 2018. The nonoperating expense in 2019 included unrealized losses of $21.6 million caused by the change in the fair value of an interest rate swap held by a 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 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 (U.S. Tax Reform), includes a one-time non-cash tax benefit of $7.1 million, primarily related to the re-measurement of certain U.S. deferred tax
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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.
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.
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.
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 CGD Services through the date of the sale as well as a loss on the sale of CGD Services of $6.1 million. In fiscal 2019, we revised certain estimates related to the working capital settlement and recognized a loss on the sale of CGD Services of $1.4 million in connection with these revisions.
Adjusted EBITDA: Adjusted EBITDA increased 40% to $146.6 million in 2019 compared to $104.6 million in 2018 with increases in 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 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, but excludes the changes in amortization expense, the gain on sale of fixed assets, acquisition related costs, restructuring costs, and nonoperating losses. 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 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 $0.30 in 2019 as a result of the adoption of the new revenue recognition standard.
SEGMENT RESULTS
Cubic Transportation Systems
Fiscal 2019 |
| Fiscal 2018 |
| % Change | |||||||
(in millions) | |||||||||||
Sales | $ | 849.8 | $ | 670.7 | 27 | % | |||||
Operating income |
| 77.2 |
| 60.4 |
| 28 | % | ||||
Adjusted EBITDA |
| 110.5 |
| 73.3 |
| 51 | % | ||||
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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 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.
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.
Cubic Mission Solutions
Fiscal 2019 |
| Fiscal 2018 |
| % Change | |||||||
(in millions) | |||||||||||
Sales | $ | 328.8 | $ | 207.0 | 59 | % | |||||
Operating income (loss) |
| 7.8 |
| (0.1) |
| nm | |||||
Adjusted EBITDA |
| 34.4 |
| 26.2 |
| 31 | % | ||||
nm - not meaningful | |||||||||||
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 higher product deliveries in all product lines. 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.
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 partially offset by an increase of $4.4 million in R&D expenditures and operating losses incurred by businesses 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.
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. Adjusted EBITDA for CMS increased by $0.5 million in 2019 as a result of the adoption of the new revenue recognition standard.
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Cubic Global Defense
Fiscal 2019 |
| Fiscal 2018 |
| % Change | |||||||
(in millions) | |||||||||||
Sales | $ | 317.9 | $ | 325.2 | (2) | % | |||||
Operating income |
| 23.0 |
| 16.6 |
| 39 | % | ||||
Adjusted EBITDA |
| 32.8 |
| 26.3 |
| 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 favorably by the adoption of ASC 606 as 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.
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. 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.
Non-GAAP Financial Information
In addition to results reported under U.S. generally accepted accounting principles (“GAAP”), this Annual Report on Form 10-K also contains non-GAAP measures as defined under Regulation G. 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, loss on extinguishment of debt, 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), loss on extinguishment of debt, 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 enterprise resource planning 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.
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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. A reconciliation of these non-GAAP measures to the most directly comparable GAAP measures is included below.
Adjusted Net Income Reconciliation
Years Ended September 30, | ||||||||||||||||
| 2020 |
| 2019 |
| 2018 | 2017 | 2016 | |||||||||
(in millions, except per share data) | ||||||||||||||||
GAAP EPS | $ | (0.12) | $ | 1.67 | $ | 0.29 | $ | (0.95) | $ | (0.45) | ||||||
GAAP Net income (loss) from continuing operations attributable to Cubic | $ | (3.7) | $ | 51.1 | $ | 8.1 | $ | (25.7) | $ | (12.1) | ||||||
Noncontrolling interest in the income (loss) of the VIE | 6.6 | (9.8) | (0.3) | — | — | |||||||||||
Amortization of purchased intangibles | 59.3 | 42.1 | 27.1 | 30.2 | 29.4 | |||||||||||
(Gain) loss on sale of fixed assets | (0.2) | (32.5) | — | 0.4 | — | |||||||||||
Restructuring costs | 16.6 | 15.4 | 5.0 | 2.3 | 1.3 | |||||||||||
Loss on extinguishment of debt | 16.1 | — | — | — | — | |||||||||||
Acquisition related expenses, excluding amortization | 13.0 | 13.4 | 4.5 | (0.2) | 28.7 | |||||||||||
Strategic and IT system resource planning expenses | 3.9 | 8.3 | 24.1 | 34.4 | 34.8 | |||||||||||
Other non-operating expense (income), net | 28.8 | 20.0 | 0.7 | (0.4) | 5.0 | |||||||||||
Noncontrolling interest in Adjusted Net Income of VIE | (24.6) | (9.7) | — | — | — | |||||||||||
Tax impact related to acquisitions1 | (12.4) | (6.6) | (1.2) | (0.1) | (17.6) | |||||||||||
Impact of US Tax Reform | 0.7 | — | (7.0) | — | — | |||||||||||
Tax impact related to non-GAAP adjustments2 | (0.3) | 3.9 | (1.0) | 3.0 | (0.7) | |||||||||||
Adjusted net income | $ | 103.8 | $ | 95.6 | $ | 60.0 | $ | 43.9 | $ | 68.8 | ||||||
Adjusted EPS | $ | 3.32 | $ | 3.13 | $ | 2.19 | $ | 1.62 | $ | 2.54 | ||||||
Weighted Average Diluted Shares Outstanding (in thousands) | 31,299 | 30,606 | 27,351 | 27,173 | 27,040 | |||||||||||
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.
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Adjusted EBITDA Reconciliation
(in millions, except margin data) | Years Ended September 30, | |||||||||||||||
Cubic Consolidated | 2020 | 2019 | 2018 | 2017 | 2016 | |||||||||||
Sales | $ | 1,476.2 | $ | 1,496.5 | $ | 1,202.9 | $ | 1,107.7 | $ | 1,070.6 | ||||||
Net income (loss) from continuing operations attributable to Cubic | $ | (3.7) | $ | 51.1 | $ | 8.1 | $ | (25.7) | $ | (12.1) | ||||||
Noncontrolling interest in income (loss) of VIE | 6.6 | (9.8) | (0.3) | - | - | |||||||||||
Provision for income taxes | (6.4) | 11.0 | 7.1 | 14.6 | (14.4) | |||||||||||
Interest expense, net | 20.2 | 13.9 | 8.8 | 14.1 | 9.8 | |||||||||||
Loss on extinguishment of debt | 16.1 | - | - | - | - | |||||||||||
Other non-operating expense (income), net | 28.8 | 20.0 | 0.7 | (0.4) | 5.0 | |||||||||||
Operating income (loss) | $ | 61.6 | $ | 86.2 | $ | 24.4 | $ | 2.6 | $ | (11.7) | ||||||
Depreciation and amortization | 88.5 | 64.7 | 46.6 | 48.0 | 40.3 | |||||||||||
Noncontrolling interest in EBITDA of VIE | (25.1) | (8.9) | - | - | - | |||||||||||
Acquisition related expenses, excluding amortization | 13.0 | 13.4 | 4.5 | (0.2) | 28.7 | |||||||||||
Strategic and IT system resource planning expenses | 3.9 | 8.3 | 24.1 | 34.4 | 34.8 | |||||||||||
Gain on sale of fixed assets | (0.2) | (32.5) | - | 0.4 | - | |||||||||||
Restructuring costs | 16.6 | 15.4 | 5.0 | 2.3 | 1.3 | |||||||||||
Adjusted EBITDA | $ | 158.3 | $ | 146.6 | $ | 104.6 | $ | 87.5 | $ | 93.4 | ||||||
Adjusted EBITDA margin | 10.7% | 9.8% | 8.7% | 7.9% | 8.7% | |||||||||||
(in millions, except margin data) | Years Ended September 30, | |||||||||
Cubic Transportation Systems | 2020 | 2019 | 2018 | |||||||
Sales | $ | 840.9 | $ | 849.8 | $ | 670.7 | ||||
Operating income | $ | 121.0 | $ | 77.2 | $ | 60.4 | ||||
Depreciation and amortization | 29.5 | 30.7 | 12.0 | |||||||
Noncontrolling interest in EBITDA of VIE | (25.1) | (8.9) | - | |||||||
Acquisition related expenses, excluding amortization | 6.6 | 8.3 | 0.5 | |||||||
Restructuring costs | 2.0 | 3.2 | 0.4 | |||||||
Adjusted EBITDA | $ | 134.0 | $ | 110.5 | $ | 73.3 | ||||
Adjusted EBITDA margin | 15.9% | 13.0% | 10.9% | |||||||
Years Ended September 30, | ||||||||||
Cubic Mission Solutions | 2020 | 2019 | 2018 | |||||||
Sales | $ | 337.1 | $ | 328.8 | $ | 207.0 | ||||
Operating income (loss) | $ | (26.7) | $ | 7.8 | $ | (0.1) | ||||
Depreciation and amortization | 47.8 | 23.3 | 22.4 | |||||||
Acquisition related expenses, excluding amortization | 4.8 | 3.3 | 3.7 | |||||||
Restructuring costs | 2.3 | - | 0.2 | |||||||
Adjusted EBITDA | $ | 28.2 | $ | 34.4 | $ | 26.2 | ||||
Adjusted EBITDA margin | 8.4% | 10.5% | 12.7% | |||||||
Years Ended September 30, | ||||||||||
Cubic Global Defense | 2020 | 2019 | 2018 | |||||||
Sales | $ | 298.2 | $ | 317.9 | $ | 325.2 | ||||
Operating income | $ | 22.9 | $ | 23.0 | $ | 16.6 | ||||
Depreciation and amortization | 7.2 | 6.8 | 8.5 | |||||||
Acquisition related expenses, excluding amortization | - | 1.7 | (0.1) | |||||||
Gain on sale of fixed assets | (0.2) | (2.0) | - | |||||||
Restructuring costs | 3.0 | 3.3 | 1.3 | |||||||
Adjusted EBITDA | $ | 32.9 | $ | 32.8 | $ | 26.3 | ||||
Adjusted EBITDA margin | 11.0% | 10.3% | 8.1% | |||||||
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Liquidity and Capital Resources
Operating activities from continuing operations used cash of $8.3 million and $31.9 million in 2020 and 2019, respectively, and provided cash of $8.6 million in 2018. Our operating cash flows have been significantly impacted by our consolidated VIE, which used cash of $112.5 million, $50.2 million, and $22.4 million in 2020, 2019, and 2018, respectively. Excluding the impact of our consolidated VIE, cash flows from operating activities improved by $85.9 million in 2020 as compared to 2019, driven by higher billings and collections on our long-term 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. Changes in the amount of contract assets are reflective of the difference between when costs are incurred and when we are able to bill for milestone payments. In 2020, contract assets decreased by $80.8 million from 2019 while in 2019, contract assets increased by $77.4 million from 2018.
Changes in our operating cash flows have also been impacted by our expenditures on information technology process and supply chain redesign, primarily in 2019 and 2018. Expenditures included as cash used in operations totaled $3.9 million, $8.3 million, and $24.1 million in 2020, 2019, and 2018, respectively.
Investing activities from continuing operations used cash of $279.7 million, $458.8 million, and $47.1 million in 2020, 2019, and 2018, respectively. In 2020, cash used in investing activities included $197.8 million of cash paid related to the acquisition of Pixia and $37.0 million of cash paid related to the acquisition of Delerrok. In addition, investing activities in 2020 included capital expenditures of $49.2 million as well as $5.5 million of proceeds received related to the sale of trade receivables to banks which are required to be classified as investing activities.
Cash used in investing activities from continuing operations during 2019 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, $61.9 million of cash paid related to the acquisition of Nuvotronics, 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 an initial $50.0 million investment in Pixia. In addition, investing activities in 2019 included net proceeds of $44.9 million for the sale of land and buildings in San Diego and Orlando, and used cash of $49.1 million for capital expenditures.
Cash used in investing activities from continuing operations during 2018 included $16.3 million for acquisitions of businesses in our CMS segment and capital expenditures of $31.7 million.
Financing activities provided cash of $340.8 and $448.5 million in 2020 and 2019, respectively, and used cash of $31.7 million in 2018. Financing activities during 2020 included net short-term borrowings of $20.2 million, net proceeds from long-term borrowings of $244.4 million, a $15.9 million make-whole payment related to the early extinguishment of our senior unsecured notes in March 2020 and $3.4 million of payments for deferred financing fees related to our amended credit facility, as further described below. We used the net proceeds from the short-term and long-term borrowings to finance the acquisitions of Pixia and Delerrok in January 2020 and for general corporate purposes. Net long-term borrowings on the non-recourse debt of our consolidated VIE was $112.3 million during 2020. See discussion of our consolidated VIE in the section below.
Financing activities for 2019 included proceeds of net short-term borrowings of $195.5 million as well as $50.2 million of borrowings on the non-recourse debt of our consolidated VIE. 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, which was used to repay a portion of our outstanding borrowings under our revolving credit agreement, which has been used to finance the acquisition of Trafficware, and the remainder for general corporate purposes. Financing activities for fiscal year 2018 consisted primarily of net principal repayments of $55.0 million on short-term borrowings.
In fiscal 2020, 2019 and 2018, respectively, we repurchased $3.7 million, $3.7 million and $2.4 million of common stock in connection with our stock-based compensation plan in order to remit employee taxes. Dividends paid to shareholders amounted to $8.4 million ($0.27 cents per share) in 2020, $8.4 million ($0.27 cents per share) in 2019 and $7.3 million ($0.27 cents per share) in 2018.
49
Consolidated Variable Interest Entity
In March 2018, Cubic and John Laing, an unaffiliated company that specializes in contracting under public-private partnerships (P3), jointly formed Boston AFC 2.0 HoldCo LLC (“Boston HoldCo”). Also in March 2018, Boston HoldCo’s wholly owned subsidiary, Boston AFC 2.0 OpCo. LLC (“Boston OpCo”), 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 “Original MBTA Contract”). In June 2020, MBTA and Boston OpCo executed an amended agreement (the “Amended MBTA Contract”) to reset the project and modify certain aspects of the Original MBTA Contract. Collectively, Boston HoldCo and Boston OpCo are referred to as the “P3 Venture”.
We have consolidated Boston OpCo into our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.
Because we consolidate Boston OpCo, payments from Boston OpCo to Cubic are excluded from our cash flows provided by operating activities, and the cash received by Boston OpCo in connection with its draws on its non-recourse debt are reflected as cash provided by financing activities. Boston OpCo’s draws on its non-recourse debt amounted to $112.3 million, $50.2 million, and $13.2 million for the years ended September 30, 2020, 2019, and 2018 respectively. Payments we received from Boston OpCo that were not included in our cash provided by operating activities totaled $68.3 million, $48.2 million, and $20.8 million in 2020, 2019, and 2018.
Upon creation of the P3 Venture, Boston OpCo entered into a credit agreement with a group of financial institutions (the “Boston OpCo Credit Agreement”) which included a long-term credit facility of up to $212.4 million and a revolving credit facility. In connection with the execution of the Amended MBTA Contract, Boston OpCo entered into an amended credit agreement with a group of financial institutions (the “Boston OpCo Amended Credit Agreement”), which includes two long-term debt facilities and a revolving credit facility to replace the facilities in the Boston OpCo Credit Agreement. At closing of the Boston OpCo Amended Credit Agreement, Boston OpCo retired and paid off the outstanding principal balances of $92.6 million and accrued interest of $7.4 million due under the Boston OpCo Credit Agreement.
Under the Boston OpCo Amended Credit Agreement, the long-term debt facilities allow for draws up to an aggregate of $421.6 million during the design and build phase. The long-term debt facilities, including all interest and fees incurred, are required to be repaid on a fixed monthly schedule commencing once the design and build phase is completed in 2024. The long-term debt facilities bear interest at variable rates of LIBOR plus a margin of 1.75% to 2.5%. Boston OpCo incurred debt issuance and modification costs of $9.2 million during 2020 in connection with the Boston OpCo Amended Credit Agreement which are being amortized as interest expense using the effective interest method over the term of the long-term debt facilities. At September 30, 2020, the outstanding balance on the long-term debt facilities was $180.5 million, which is presented net of unamortized deferred financing costs of $17.2 million. The revolving credit facility allows for draws up to a maximum aggregate amount of $15.8 million during the operate and maintain phase. Boston OpCo’s debt is nonrecourse with respect to Cubic and our subsidiaries.
The Boston OpCo Amended Credit Agreement contains covenants that require Boston OpCo and Cubic to maintain progress on the delivery within a specified timeline and budget and provide regular reporting on such progress. It also contains events of default, including the delivery of a customized fare collection system to the MBTA by a pre-determined date as well as other customary events of default. Failure to meet such delivery date will result in incurring penalties due to the lenders thereunder.
In connection with the Boston OpCo Credit Agreement, Boston OpCo 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. Upon execution of the Boston OpCo Amended Credit Agreement, Boston OpCo terminated these interest rate swaps and paid termination costs of $34.4 million to the counterparties. The termination payments are included in cash flows used in operating activities in our Consolidated Statements of Cash Flows. In connection with the Boston OpCo Amended Credit Agreement, Boston OpCo entered into new pay-fixed/receive-variable interest rate swaps to mitigate variable
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interest rate associated with its long-term debt. At September 30, 2020 and 2019, the outstanding notional principal amounts on open interest rate swaps were $194.0 million and $137.4 million, respectively.
Financing Arrangements
At September 30, 2019, we had $200.0 million of outstanding senior unsecured notes bearing interest rates ranging from 3.35% to 3.93% as well as $226.5 million outstanding under an $800.0 million committed revolving credit agreement with a group of financial institutions. On March 27, 2020, we repaid and extinguished the remaining principal balance of $189.3 million of senior unsecured notes then outstanding and recognized a loss on debt extinguishment of $16.1 million, consisting of a $15.9 million make-whole payment to the note holders and a write-off of previously capitalized debt issuance costs of $0.2 million.
On March 27, 2020, we also executed a Fifth Amended and Restated Credit Agreement (the “Credit Facility”) with a group of financial institutions. The Credit Facility provided for a new term loan in the aggregate amount of $450.0 million (the “Term Loan”) and increased our existing revolving line of credit limit (the “Revolving Line of Credit”) from $800.0 million to $850.0 million. The commitments under the Credit Facility will mature on March 27, 2025 and bear interest generally at the LIBOR rate plus a margin that ranges between 1.00% and 2.00%. At September 30, 2020, the weighted average interest rate on outstanding borrowings under the Credit Facility was 2.15%. The Credit Facility is unsecured, but it is required to be guaranteed by certain significant domestic subsidiaries of Cubic.
On April 1, 2020, we entered into interest rate swaps with a group of financial institutions to mitigate the variable interest rate risk associated with the Credit Facility. The interest rate swaps contain forward starting notional principal amounts which align with our fixed repayment schedules under the Credit Facility and as of September 30, 2020 have an interest rate of approximately 2.74% and outstanding notional principal amounts of $500.0 million.
The available credit under our Revolving Line of Credit is reduced by any letters of credit issued under the Credit Facility. As of September 30, 2020, there were $444.4 million of borrowings under the Term Loan and $209.0 million of borrowings under the Revolving Line of Credit. Letters of credit outstanding under the Credit Facility totaled $93.1 million at September 30, 2020, which reduced our available line of credit to $547.9 million.
As of September 30, 2020, we had letters of credit and bank guarantees outstanding totaling $100.0 million, which includes the $93.1 million of letters of credit issued under the Revolving Line of Credit and $6.9 million of letters of credit issued under other facilities. The $100.0 million of letters of credit and bank guarantees includes $96.0 million that guarantees either our performance or customer advances under certain contracts and financial letters of credit totaling $4.0 million that primarily guarantees 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 also use surety bonds as an alternative to letters of credit.
We have entered into a short-term borrowing arrangement in the United Kingdom in the amount of £20.0 million British Pounds (equivalent to approximately $25.8 million at September 30, 2020) to help meet the short-term working capital requirements of our subsidiary located in the United Kingdom. At September 30, 2020, $6.7 million was outstanding under this arrangement.
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, 2020 was $25.5 million and is classified as restricted cash in our Consolidated Balance Sheets.
The terms of the Credit Facility contain financial covenants setting a maximum total ratio of debt to adjusted earnings before interest, taxes, depreciation and amortization and a minimum interest coverage ratio. In addition, the terms contain covenants that restrict, among other things, our ability to sell assets, incur indebtedness, make investments, grant liens, pay dividends and make other restricted payments. As of September 30, 2020, we were in compliance with all covenants under the Credit Facility.
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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, 2020 and 2019, we sold $18.4 million and $31.1 million of outstanding trade receivables to financial institutions.
Our financial condition remains strong with net working capital of $164 million and a current ratio of 1.3 to 1 at September 30, 2020. 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 equity ratio at September 30, 2020 was 66%.
As of September 30, 2020, the majority of the $154.1 million of our cash, cash equivalents and restricted cash was held by our foreign subsidiaries, primarily in the U.K., New Zealand and Australia.
Future repatriations of foreign earnings will generally be exempt from U.S. tax. We will continue to monitor our intentions to repatriate foreign earnings and provide applicable deferred taxes and withholding taxes that would be due upon repatriation of the undistributed foreign earnings.
Contractual Obligations
The following is a schedule of our contractual obligations outstanding as of September 30, 2020:
|
| Less than 1 |
|
|
|
| ||||||||||
Total | Year | 1 - 3 years | 4 - 5 years | After 5 years |
| |||||||||||
(in millions) |
| |||||||||||||||
Short-term borrowings | $ | 215.7 | $ | 215.7 | $ | — | $ | — | $ | — | ||||||
Long-term debt, including current portion |
| 444.4 |
| 11.3 |
| 45.0 |
| 388.1 |
| — | ||||||
Interest payments |
| 39.7 |
| 9.6 |
| 18.2 |
| 11.9 | — | |||||||
Operating leases |
| 109.6 |
| 18.4 |
| 29.8 |
| 24.0 |
| 37.4 | ||||||
Deferred compensation |
| 11.8 |
| 2.1 |
| 2.7 |
| 2.0 |
| 5.0 | ||||||
$ | 821.2 | $ | 257.1 | $ | 95.7 | $ | 426.0 | $ | 42.4 | |||||||
As of September 30, 2020, we had approximately $0.5 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 11 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 13 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, 2020, the maximum future contingent consideration that would be payable if all such goals were met is $29.8 million. However, we are unable to make a reasonable estimate as to the timing and magnitude of such future payments.
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Backlog
September 30, | |||||||
| 2020 |
| 2019 |
| |||
(in millions) |
| ||||||
Total backlog | |||||||
Cubic Transportation Systems | $ | 3,139.9 | $ | 2,953.3 | |||
Cubic Mission Solutions |
| 153.4 |
| 103.7 | |||
Cubic Global Defense Systems |
| 373.7 |
| 344.0 | |||
Total | $ | 3,667.0 | $ | 3,401.0 | |||
As reflected in the table above, total backlog increased $266.0 million from September 30, 2019 to September 30, 2020 primarily due to an award for an upgrade and extension to the transportation fare collection system for our Chicago customer and a contract amendment with our Boston customer. Changes in exchange rates between the prevailing currency in our foreign operations and the U.S. dollar as of September 30, 2020 increased backlog by $62.2 million.
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. Additionally, 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.
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.
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 method. The adoption of ASC 606 resulted in a change in our significant accounting policy regarding revenue recognition, as described below. In accordance with the modified retrospective transition method, our Consolidated Statements of Operations for the years ended September 30, 2020 and 2019 and our Consolidated Balance Sheets as of September 30, 2020 and 2019 are presented under ASC 606, while our Consolidated Statement of Operations for the year ended September 30, 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 retained earnings at the date of adoption.
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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.
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,
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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.
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
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performance obligation under the contract. 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.
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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 95% of our sales for 2020. 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 2020 operating income would have increased or decreased by approximately $6.2 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, excluding per share amounts).
Years Ended September 30, | ||||||||||
2020 |
| 2019 |
| 2018 | ||||||
Operating income (loss) | $ | 7,527 | $ | (2,235) | $ | (6,986) | ||||
Net loss from continuing operations attributable to Cubic | (8,131) | (2,351) | (5,146) | |||||||
Diluted loss per share attributable to Cubic |
| (0.26) |
| (0.08) |
| (0.19) | ||||
For our revenue recognition accounting policies, see discussion under “Revenue Recognition” in Note 1 to the Consolidated Financial Statements included in Item 8 of this Form 10-K.
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.
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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.
Future repatriations of foreign earnings will generally be exempt from U.S. tax. However, 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. Tax incurred on Global Intangible Low-Taxes income (GILTI) is treated as a current period income tax expense.
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 2020 amortization expense would have increased by approximately $2.6 million.
Valuation of Goodwill
Goodwill balances by reporting unit are as follows:
September 30, |
| 2020 |
| 2019 |
| 2018 |
| |||
(in millions) |
| |||||||||
Cubic Transportation Systems | $ | 287.7 | $ | 254.6 | $ | 49.8 | ||||
Cubic Mission Solutions | 354.9 | 181.4 | 138.1 | |||||||
Cubic Global Defense |
| 142.3 |
| 142.1 |
| 145.7 | ||||
Total goodwill | $ | 784.9 | $ | 578.1 | $ | 333.6 | ||||
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.
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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.
For the first step of our fiscal 2020 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 12% for CGD and 16.5% for CMS. The results of our 2020 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 15%.
Unforeseen negative changes in future business or other market conditions for any of our reporting units including margin compression or loss of business, could cause recorded goodwill to be impaired in the future. Also, changes in estimates and assumptions we make in conducting our goodwill assessment could affect the estimated fair value of our reporting units and could result in a goodwill impairment charge in a future period.
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 assumption on investment yields available at year-end on high quality corporate long-term bonds |
| ● | Inflation assumption is based on an evaluation of external market indicators |
| ● | Salary growth assumptions reflect our long-term actual experience in relation to the inflation assumption |
| ● | Expected return on plan assets reflects asset allocations, our historical experience, our investment strategy and the views of investment managers and large pension sponsors |
| ● | Retirement rates based primarily on actual plan experience |
| ● | Mortality rates are based on published mortality tables |
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 2020 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 2020 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, 2020, by approximately $10.2 million.
59
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). See Note 9 to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K for more information.
Interest income and expense 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. We have hedged our exposure to short-term interest rates by entering into a pay-fixed/receive variable-interest rate swap. See Note 9 to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K for more information. We believe that we are not significantly exposed to interest rate risk at this 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.
60
Item 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
CUBIC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share data)
Years Ended September 30, |
| |||||||||
| 2020 |
| 2019 |
| 2018 |
| ||||
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 property, plant and equipment |
| ( |
| ( |
| — | ||||
Restructuring costs |
| |
| |
| | ||||
| |
| |
| | |||||
Operating income |
| |
| |
| | ||||
Other income (expenses): | ||||||||||
Interest and dividend income |
| |
| |
| | ||||
Interest expense |
| ( |
| ( |
| ( | ||||
Loss on extinguishment of debt |
| ( |
| — |
| — | ||||
Other income (expense), net |
| ( |
| ( |
| ( | ||||
Income (loss) from continuing operations before income taxes |
| ( |
| |
| | ||||
Income tax provision (benefit) |
| ( |
| |
| | ||||
Income from continuing operations | | | | |||||||
Net income (loss) from discontinued operations |
| |
| ( |
| | ||||
Net income | | | | |||||||
Less noncontrolling interest in net income (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.
61
CUBIC CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Years Ended September 30, |
| |||||||||
| 2020 |
| 2019 |
| 2018 |
| ||||
Net income | $ | | $ | | $ | | ||||
Other comprehensive income (loss): | ||||||||||
Adjustment to pension liability, net of tax |
| ( |
| ( |
| | ||||
Foreign currency translation |
| |
| ( |
| ( | ||||
Change in unrealized gains/losses from cash flow hedges: | ||||||||||
Change in fair value of cash flow hedges, net of tax | ( | | | |||||||
Adjustment for net gains/losses realized and included in net income, net of tax | ( | ( | | |||||||
Total change in unrealized gains/losses realized from cash flow hedges, net of tax | ( | | | |||||||
Total other comprehensive loss |
| ( |
| ( |
| ( | ||||
Total comprehensive income (loss) | ( | | | |||||||
Noncontrolling interest in comprehensive income (loss) of consolidated VIE, net of tax | | ( | ( | |||||||
Comprehensive income (loss) attributable to Cubic, net of tax | $ | ( | $ | | $ | | ||||
See accompanying notes.
62
CUBIC CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, | |||||||
|---|---|---|---|---|---|---|---|
| 2020 |
| 2019 |
| |||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | | $ | | |||
Cash of consolidated VIE | | | |||||
Restricted cash |
| |
| | |||
Restricted cash of consolidated VIE | | | |||||
Accounts receivable: | |||||||
Billed |
| |
| | |||
Allowance for doubtful accounts |
| ( |
| ( | |||
| |
| | ||||
Contract assets |
| |
| | |||
Recoverable income taxes |
| |
| | |||
Inventories |
| |
| | |||
Other current assets |
| |
| | |||
Other current assets of consolidated VIE |
| |
| | |||
Total current assets |
| |
| | |||
Long-term contracts financing receivables |
| |
| | |||
Long-term contracts financing receivables of consolidated VIE | | | |||||
Property, plant and equipment, net |
| |
| | |||
Operating lease right-of-use asset |
| |
| — | |||
Deferred income taxes |
| |
| | |||
Goodwill |
| |
| | |||
Purchased intangibles, net |
| |
| | |||
Other assets |
| |
| | |||
Other assets of consolidated VIE | — | | |||||
Total assets | $ | | $ | | |||
LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||
Current liabilities: | |||||||
Short-term borrowings | $ | | $ | | |||
Trade accounts payable | | | |||||
Trade accounts payable of consolidated VIE | | | |||||
Contract liabilities |
| |
| | |||
Accrued compensation |
| |
| | |||
Other current liabilities |
| |
| | |||
Other current liabilities of consolidated VIE | | | |||||
Income taxes payable |
| |
| | |||
Current portion of long-term debt |
| |
| | |||
Total current liabilities |
| |
| | |||
Long-term debt |
| |
| | |||
Long-term debt of consolidated VIE |
| |
| | |||
Operating lease liability |
| |
| — | |||
Financing lease liability |
| |
| — | |||
Accrued pension liability |
| |
| | |||
Deferred compensation |
| |
| | |||
Income taxes payable |
| |
| | |||
63
September 30, | |||||||
|---|---|---|---|---|---|---|---|
| 2020 |
| 2019 |
| |||
Deferred income taxes | | | |||||
Other noncurrent liabilities |
| |
| | |||
Other noncurrent liabilities of consolidated VIE |
| |
| | |||
Commitments and contingencies | |||||||
Shareholders’ equity: | |||||||
Preferred stock, |
|
| |||||
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 | $ | | $ | | |||
See accompanying notes.
64
CUBIC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended September 30, |
| |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2020 |
| 2019 |
| 2018 |
| ||||
Operating Activities: | ||||||||||
Net income | $ | | $ | | $ | | ||||
Net (income) loss from discontinued operations |
| ( |
| |
| ( | ||||
Adjustments to reconcile net income to net cash used in operating activities: | ||||||||||
Depreciation and amortization |
| |
| |
| | ||||
Share-based compensation expense |
| |
| |
| | ||||
Change in fair value of contingent consideration | ( | ( | | |||||||
Change in fair value of interest rate swap of consolidated VIE | | — | — | |||||||
Gain on sale of property, plant and equipment | ( | ( | — | |||||||
Gain on sale of investment in real estate | — | — | ( | |||||||
Deferred income taxes |
| ( |
| ( |
| ( | ||||
Deferred compensation |
| ( | ( | | ||||||
Net pension benefit |
| ( |
| ( |
| ( | ||||
Loss on extinguishment of debt | | — | — | |||||||
Other items | | — | — | |||||||
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 |
| — |
| — |
| ( | ||||
Operating lease right of use asset |
| ( |
| — |
| — | ||||
Accounts payable and other current liabilities |
| ( |
| |
| | ||||
Contract liabilities |
| |
| ( |
| | ||||
Income taxes |
| ( |
| ( |
| ( | ||||
Operating lease liability |
| |
| — |
| — | ||||
Other items, net |
| ( |
| |
| ( | ||||
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 |
| ( |
| ( |
| | ||||
Investing Activities: | ||||||||||
Acquisition of businesses, net of cash acquired |
| ( |
| ( |
| ( | ||||
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 | ( | ( | ( | |||||||
Receipt of withheld proceeds from sale of trade receivables |
| |
| — |
| — | ||||
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 |
| ( |
| ( |
| ( | ||||
Proceeds from long-term borrowings |
| |
| — |
| — | ||||
Principal payments on long-term borrowings |
| ( |
| — |
| — | ||||
65
Years Ended September 30, |
| |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2020 |
| 2019 |
| 2018 |
| ||||
Proceeds from long-term borrowings of consolidated VIE | | | | |||||||
Principal payments on long-term borrowings of consolidated VIE | ( |
| — |
| — | |||||
Debt extinguishment make-whole payment | ( |
| — |
| — | |||||
Deferred financing fees | ( | ( | — | |||||||
Deferred financing fees of consolidated VIE | ( | — | ( | |||||||
Proceeds from stock issued under employee stock purchase plan | | | | |||||||
Purchase of common stock | ( | ( | ( | |||||||
Dividends paid | ( | ( | ( | |||||||
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 |
| |
| ( |
| ( | ||||
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH |
| |
| ( |
| | ||||
Cash, cash equivalents and restricted cash at the beginning of the period |
| |
| |
| | ||||
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT THE END OF THE PERIOD | $ | | $ | | $ | | ||||
Supplemental disclosure of non-cash investing and financing activities: | ||||||||||
Contingent consideration liability incurred with the acquisition of Delerrok | $ | | $ | — | $ | — | ||||
Withheld proceeds from the sale of trade receivables to be received in fiscal 2021 | $ | | $ | — | $ | — | ||||
Liability recognized in connection with the acquisition of Nuvotronics, net | $ | — | $ | | $ | — | ||||
Liability recognized in connection with the acquisition of Shield Aviation, net | $ | — | $ | — | $ | | ||||
See accompanying notes.
66
CUBIC CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(in thousands, except per share amounts)
|
|
|
|
| Accumulated |
|
|
|
|
|
|
| ||||||
Other | Noncontrolling | Number |
| |||||||||||||||
Common | Retained | Comprehensive | Treasury | Interest in | of Shares |
| ||||||||||||
Stock | Earnings | Loss | Stock | VIE | Outstanding |
| ||||||||||||
October 1, 2017 | $ | |
| |
| ( |
| ( |
| — |
| | ||||||
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 - $ |
| — |
| ( |
| — |
| — |
| — |
| — | ||||||
September 30, 2018 |
| |
| |
| ( |
| ( |
| |
| | ||||||
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 - $ |
| — |
| ( |
| — |
| — |
| — |
| — | ||||||
September 30, 2019 |
| |
| |
| ( |
| ( |
| |
| | ||||||
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 - $ |
| — |
| ( |
| — |
| — |
| — |
| — | ||||||
September 30, 2020 | $ | | $ | | $ | ( | $ | ( | $ | |
| | ||||||
See accompanying notes.
67
CUBIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020
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.
We have historically operated in
In fiscal 2018 we sold our legacy services business, CGD Services. The operating results, assets, liabilities, and cash flows of CGD Services in our consolidated financial statements have been classified as discontinued operations for all periods presented. Refer to “Note 2 – Acquisitions and Divestitures” for additional information about the sale of CGD Services and the related discontinued operation classification and “Note 16 – Business Segment Information” for additional information and disclosures of our operating and reportable segments.
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 $
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
68
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 method.
In accordance with the modified retrospective transition method, our Consolidated Statements of Operations for the years ended September 30, 2020 and 2019 and our Consolidated Balance Sheets as of September 30, 2020 and 2019 are presented under ASC 606, while our Consolidated Statement of Operations for the year ended September 30, 2018 is presented under ASC 605, Revenue Recognition, the accounting standard in effect for periods ending prior to October 1, 2018.
Upon adoption of ASC 606, we recorded a net increase to shareholders’ equity of $
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
69
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. 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
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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.
Our contracts contain varying billing timetables and payment terms. 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. 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
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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. Refer to “Note 4 – Revenue Recognition” for the aggregate impact of net changes in contract estimates.
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. Refer to Note 4 for further details.
Disaggregation of Revenue: See Note 16 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 $
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. Restricted cash is included in cash, cash equivalents and restricted cash in our consolidated statements of cash flows.
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 given the high credit quality of our customers, and we have historically collected substantially all of our receivables. We generally require minimal allowance for doubtful accounts for our customers, which amounted to $
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 per the contractually agreed project milestones. 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.
Property, Plant and Equipment: We carry property, plant and equipment at cost. We provide depreciation in amounts sufficient to amortize the cost of the depreciable assets over their estimated useful lives. Generally, we use straight-line methods for depreciable real property over estimated useful lives or the term of the underlying lease, if shorter than the estimated useful lives, for leasehold improvements. We use accelerated methods (declining balance and sum-of-the-years-digits) for machinery and equipment over their estimated useful lives.
Certain costs incurred in the development of internal-use software and software applications, including external direct costs of materials and services and applicable compensation costs of employees devoted to specific software
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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 to
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, goodwill is impaired. Through the end of fiscal 2020, we measured any 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 where 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
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 undiscounted 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 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 similar or related cases or proceedings. We may increase or decrease our 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
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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, both the effective and ineffective portions 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. 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.
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, 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 14 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 (U.S. Tax Reform), 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. Tax incurred on Global Intangible Low-Taxes Income (GILTI) is treated as a current period income tax expense.
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.
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
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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.
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, | ||||||||||
| 2020 |
| 2019 |
| 2018 |
| ||||
Weighted average shares - basic |
| |
| |
| | ||||
Effect of dilutive securities |
| — |
| |
| | ||||
Weighted average shares - diluted |
| |
| |
| | ||||
Number of anti-dilutive securities | | — | — | |||||||
Recent Accounting Pronouncements:
Recently Adopted Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (ASU) 2016-02, Leases (commonly known as ASC 842). Under the guidance, lessees are required to recognize the following for all leases (with the exception of short-term leases): (a) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (b) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. We adopted ASC 842 on October 1, 2019 using the optional transition method and, as a result, did not recast prior period unaudited comparative financial statements. All prior period amounts and disclosures are presented under ASC 840, Leases, the legacy lease accounting guidance. We elected 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. On October 1, 2019, we recorded a right-of-use asset of $
Recent Accounting Pronouncements – Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), which requires companies to record an allowance for expected credit losses over the contractual term of financial assets, including short-term trade receivables and contract assets, and expands disclosure requirements for credit quality of financial assets. The amendments in this ASU are effective for us in our annual period beginning October 1, 2020. 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 (“ASU 2017-04”). 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. The adoption of ASU 2017-04 will have no immediate impact on our consolidated financial statements and will only have the potential to impact the amount of any goodwill impairment recorded after the adoption thereof.
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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 ASU are effective for us in our annual period beginning October 1, 2020 and interim periods within that annual period. 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 Plans - Disclosure Framework (Topic 715), which modifies the disclosure requirements for employers that sponsor defined benefit pension or other post-retirement 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 ASU are effective for us in our annual period beginning October 1, 2020. 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 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that Is a Service Contract (Subtopic 350-24), which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The amendments in this ASU are effective for us in our annual period beginning October 1, 2020. We do not expect the adoption of this standard to have a significant impact on our consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740) (“Topic 740”), which removes certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The amendments in this ASU are effective for us in our annual period beginning October 1, 2021 and interim periods within that annual period. We are currently evaluating the impact of this standard on our consolidated financial statements.
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NOTE 2—ACQUISITIONS AND DIVESTITURES
Sale of CGD Services
On May 31, 2018, we sold our Cubic Global Defense Services (“CGD Services”) business to Nova Global Supply & Services, LLC (Purchaser), an entity affiliated with GC Valiant, LP. In accordance with the terms of the stock purchase agreement executed in connection with the transaction, the Purchaser agreed to pay us $
Business Acquisitions
Each of the following acquisitions have been treated as a business combination for accounting purposes. The results of operations of each acquired business have been included in our consolidated financial statements since the respective date of each acquisition.
Cubic Transportation Systems (“CTS”)
Delerrok Inc.
In fiscal 2018 and 2019 we invested a total of $
Prior to the acquisition of all of Delerrok’s outstanding shares of common stock, we accounted for our investment in Delerrok using the cost method of accounting. We began consolidating Delerrok in our financial statements effective January 3, 2020. The estimated acquisition-date fair value of consideration is $
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The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date (in millions):
Technology |
| $ | |
|
Trade name | | |||
Accounts receivable | | |||
Other net assets acquired (liabilities assumed) |
| ( | ||
Deferred tax liability | ( | |||
Net identifiable assets acquired |
| | ||
Goodwill |
| | ||
Net assets acquired | $ | |
The estimated fair values of assets acquired and liabilities assumed, including purchased intangibles, are preliminary estimates pending the finalization of our detailed valuation analyses and necessary calculations. 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 and the technology 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
The goodwill resulting from the acquisition consists primarily of the synergies expected from combining the operations of Delerrok 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.
Prior Fiscal Years Acquisitions
In January 2019 and October 2018, respectively, we acquired all of the outstanding shares of capital stock of GRIDSMART Technologies, Inc. (“GRIDSMART”), a provider of differentiated video tracking solutions and Advanced Trafficware Solutions, Inc. (“Trafficware”), a provider of intelligent traffic solutions. The acquisition date fair-value of consideration was $
The following table summarizes the acquisition date fair values of the assets acquired and liabilities assumed (in millions):
GRIDSMART | Trafficware | ||||||
Technology |
| $ | | $ | |
| |
Customer relationships | | | |||||
Backlog | — | | |||||
Trade name | | | |||||
Inventory | | | |||||
Accounts receivable | | | |||||
Accounts payable and accrued expenses | ( | ( | |||||
Deferred taxes | ( | — | |||||
Other net assets acquired (liabilities assumed) |
| |
| ( | |||
Net identifiable assets acquired |
| |
| | |||
Goodwill |
| |
| | |||
Net assets acquired | $ | | $ | | |||
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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 and are being amortized using straight-line methods based on the expected period of undiscounted cash flows that will be generated by the assets. The average useful life of these assets is
The goodwill resulting from these acquisitions consists primarily of the synergies expected from combining the operations of GRIDSMART and Trafficware with our existing CTS business, and strengthening our capability of developing and integrating products in our CTS portfolio. The resulting goodwill from each acquisition also includes the value of the assembled workforce that became our employees following the close of the acquisition. The amounts recorded as goodwill are allocated to our CTS segment and are not expected to be deductible for tax purposes.
Operating Results
The sales and results of operations from Delerrok, GRIDSMART and Trafficware included in our operating results were as follows (in millions):
September 30, 2020 | ||||||||||
Delerrok |
| GRIDSMART |
| Trafficware | ||||||
Sales | $ | | $ | | $ | | ||||
Operating income (loss) | ( |
| |
| ( | |||||
Net income (loss) after taxes |
| ( |
| |
| ( | ||||
September 30, 2019 | ||||||||||
Delerrok |
| GRIDSMART |
| Trafficware | ||||||
Sales | $ | — | $ | | $ | | ||||
Operating income (loss) | — |
| |
| ( | |||||
Net income (loss) after taxes |
| — |
| |
| ( | ||||
The operating results above included the following amounts (in millions):
September 30, 2020 | ||||||||||
Delerrok |
| GRIDSMART |
| Trafficware | ||||||
Amortization | $ | | $ | | $ | | ||||
Acquisition-related expenses | | |
| | ||||||
(Gain) loss for changes in fair value of contingent consideration |
| ( | — |
| — | |||||
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September 30, 2019 | ||||||||||
Delerrok |
| GRIDSMART |
| Trafficware | ||||||
Amortization | $ | — | $ | | $ | | ||||
Acquisition-related expenses | — | |
| | ||||||
The estimated amortization expense related to the intangible assets recorded in connection with our acquisitions are as follows (in millions):
Year Ending September 30, |
| Delerrok |
| GRIDSMART |
| Trafficware |
| |||
2021 | $ | | $ | | $ | | ||||
2022 |
| | |
| | |||||
2023 |
| | |
| | |||||
2024 |
| | |
| | |||||
2025 |
| | |
| | |||||
Thereafter | | | | |||||||
Cubic Mission Solutions (“CMS”)
PIXIA Corp.
On June 27, 2019, we paid cash of $
From June 27, 2019 through January 3, 2020, we accounted for our
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The following table summarizes the fair values of assets acquired and liabilities assumed at the acquisition date (in millions):
Backlog |
| $ | |
|
Customer relationships | | |||
Developed technology | | |||
Trade name | | |||
Accounts receivable, prepaids and other assets | | |||
Deferred taxes | ( | |||
Other net assets acquired (liabilities assumed) |
| ( | ||
Net identifiable assets acquired |
| | ||
Goodwill |
| | ||
Net assets acquired | $ | |
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 and non-compete agreements valuations used the lost profits 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 a weighted average useful life of approximately
The goodwill resulting from the acquisition consists primarily of the synergies expected from combining the operations of Pixia 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.
Prior Fiscal Years Acquisitions
In March 2019 and July 2018, respectively, we acquired all of the outstanding shares of capital stock of Nuvotronics, Inc. (“Nuvotronics”), a provider of microfabricated radio frequency products, and Shield Aviation, Inc. (“Shield”), a provider of autonomous aircraft systems (AAS) for intelligence, surveillance and reconnaissance services. The acquisition date fair-value of consideration was $
The following table summarizes the acquisition date fair values of the assets acquired and liabilities assumed (in millions):
Nuvotronics | Shield | ||||||
Technology |
| $ | | $ | |
| |
Backlog and customer relationships | | — | |||||
Trade name | | — | |||||
Non-compete agreements | | — | |||||
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 | $ | | $ | | |||
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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 and are being amortized using straight-line methods based on the expected period of undiscounted cash flows that will be generated by the assets. The average useful life of these assets is
The goodwill resulting from these acquisitions consists primarily of the synergies expected from combining the operations of Nuvotronics and Shield with our existing CMS business, and strengthening our capability of developing and integrating products in our CMS portfolio. The resulting goodwill from each acquisition also includes the value of the assembled workforce that became our employees following the close of the acquisition. The amounts recorded as goodwill are allocated to our CMS segment and are not expected to be deductible for tax purposes.
Operating Results
Pixia’s, Nuvotronics’, and Shield’s sales and results of operations included in our operating results were as follows (in millions):
September 30, 2020 | ||||||||||
Pixia |
| Nuvotronics |
| Shield | ||||||
Sales | $ | | $ | | $ | — | ||||
Operating loss | ( |
| ( |
| ( | |||||
Net loss after taxes |
| ( |
| ( |
| ( | ||||
September 30, 2019 | ||||||||||
Pixia |
| Nuvotronics |
| Shield | ||||||
Sales | $ | — | $ | | $ | — | ||||
Operating loss | — |
| ( |
| ( | |||||
Net loss after taxes |
| — |
| ( |
| ( | ||||
Pixia’s, Nuvotronics’, and Shield’s operating results above included the following amounts (in millions):
September 30, 2020 | ||||||||||
Pixia |
| Nuvotronics |
| Shield | ||||||
Amortization | $ | | $ | | $ | | ||||
Acquisition-related expenses | |
| |
| — | |||||
(Gain) loss for changes in fair value of contingent consideration |
| — |
| ( |
| | ||||
September 30, 2019 | ||||||||||
Pixia |
| Nuvotronics |
| Shield | ||||||
Amortization | $ | — | $ | | $ | | ||||
Acquisition-related expenses | — |
| |
| — | |||||
Gain for changes in fair value of contingent consideration |
| — |
| ( |
| ( | ||||
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Shield did not have material operating results in the year ended September 30, 2018.
The estimated amortization expense related to the intangible assets recorded in connection with these acquisitions is as follows (in millions):
Year Ending September 30, |
| Pixia |
| Nuvotronics |
| Shield |
|
| |||
2021 | $ | | $ | | $ | | |||||
2022 |
| |
| |
| | |||||
2023 |
| |
| |
| | |||||
2024 |
| |
| |
| | |||||
2025 |
| |
| |
| | |||||
Thereafter | | | | ||||||||
Pro Forma Information
The following unaudited pro forma information presents our consolidated results of operations as if Pixia, Nuvotronics, Shield, Delerrok, GRIDSMART, and Trafficware had been included in our consolidated results since October 1, 2018 (in millions):
Year Ended |
| ||||||
September 30, |
| ||||||
2020 |
| 2019 |
| ||||
Net sales | $ | | $ | | |||
Net income (loss) | $ | ( | $ | | |||
The pro forma information includes adjustments to give effect to events that are directly attributable to the acquisitions and have a continuing impact on our operations including the amortization of purchased intangibles.
NOTE 3—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 they are a variable interest entity (a “VIE”). We consider a partnership or joint venture to be 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, or (c) the voting rights of the equity holders are not proportional to their obligations to absorb the expected losses of the entity. We continually assess 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 that could potentially be significant to the VIE. We consider the VIE design, ownership and voting structure, contractual relationships, distribution of profits and losses, risks, responsibilities, and indebtedness in determining if we are the primary beneficiary.
In March 2018, Cubic and John Laing, an unaffiliated company that specializes in contracting under public-private partnerships, jointly formed Boston AFC 2.0 HoldCo. LLC (“Boston HoldCo”). Also in March 2018, Boston HoldCo’s wholly owned subsidiary, Boston AFC 2.0 OpCo. LLC (“Boston OpCo”), 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, Massachusetts (the “Original MBTA Contract”). Boston HoldCo is
83
beneficiary of Boston OpCo. Consequently, we have consolidated the financial statements of Boston OpCo. We have concluded that we are not the primary beneficiary of Boston HoldCo, and thus we have not consolidated the financial statements of Boston HoldCo. In June 2020, MBTA and Boston OpCo executed an amended agreement (the “Amended MBTA Contract”), which modified a number of the provisions of the Original MBTA Contract as described below.
Under the Original MBTA Contract, MBTA was scheduled to make fixed payments to Boston OpCo of $
The Amended MBTA Contract modified certain aspects of the Original MBTA Contract, such as extending the design and build phase to 2024, adding new functionality to the next-generation fare payment system, and increasing the scope and duration of the operate and maintain phase. In accordance with ASC 606, the Amended MBTA Contract was treated as a modification to the Original MBTA Contract, and as such Boston OpCo’s contract value was increased by additional fixed payments to be made by MBTA of $
The Amended MBTA Contract consists of a design and build phase of approximately
Boston OpCo subcontracted all of its contractual responsibilities regarding the design and build and the operation and maintenance of the fare system under the Amended MBTA Contract to Cubic. Under its subcontract with Boston OpCo, Cubic will receive fixed payments in the aggregate amount of $
Upon creation of the P3 Venture and upon execution of the Amended MBTA Contract, John Laing made loans to Boston HoldCo of $
Upon creation of the P3 Venture, Boston OpCo entered into a credit agreement with a group of financial institutions (the “Boston OpCo Credit Agreement”), which included a long-term credit facility of up to $
Under the Boston OpCo Amended Credit Agreement, the long-term debt facilities allow for draws up to an aggregate of $
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design and build phase is completed in 2024. The long-term debt facilities bear interest at variable rates of LIBOR plus a margin of
The Boston OpCo Amended Credit Agreement contains a number of covenants which require that Boston OpCo and Cubic maintain progress on the delivery within a specified timeline and budget and provide regular reporting on such progress. It also contains customary events of default including the delivery of a customized fare collection system to MBTA by a pre-determined date. Failure to meet such delivery date will result in Boston OpCo, and Cubic via our subcontract with Boston OpCo, to incur penalties due to the lenders thereunder.
In connection with the Boston OpCo Credit Agreement, Boston OpCo 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 facility. Upon execution of the Boston OpCo Amended Credit Agreement, Boston OpCo terminated these interest rate swaps and paid termination costs of $
Boston OpCo holds a restricted cash balance which is required by the Amended MBTA Contract to allow for the delivery of future change orders directed by MBTA.
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The assets and liabilities of Boston OpCo that are included in our consolidated balance sheets are as follows:
September 30, | |||||||
| 2020 |
| 2019 |
| |||
(in thousands) | |||||||
Cash | $ | | $ | | |||
Restricted cash | | | |||||
Other current assets | | | |||||
Long-term contracts financing receivable | | | |||||
Other noncurrent assets | — | | |||||
Total assets | $ | | $ | | |||
Trade accounts payable | $ | | $ | | |||
Accrued compensation and other current liabilities | | | |||||
Due to Cubic | | | |||||
Other noncurrent liabilities | | | |||||
Long-term debt | | | |||||
Total liabilities | $ | | $ | | |||
Total Cubic equity | | ( | |||||
Noncontrolling interests | | | |||||
Total liabilities and owners' equity | $ | | $ | | |||
The assets of Boston OpCo are restricted for its use only and are not available for our general operations. Boston OpCo’s debt is non-recourse to Cubic. Our maximum exposure to loss as a result of our equity interest in the P3 Venture is limited to the $
Boston OpCo’s results of operations included in our Consolidated Statements of Operations are as follows (in thousands):
Years Ended September 30, | ||||||||||
2020 |
| 2019 |
| 2018 | ||||||
Revenue | $ | | $ | | $ | — | ||||
Operating income |
| |
| |
| — | ||||
Other income (expense), net | ( |
| ( |
| — | |||||
Interest income | |
| |
| — | |||||
Interest expense |
| ( |
| ( |
| — | ||||
Note 4 — Revenue Recognition
Contract Estimates
As described in Note 1 above, many of our contracts are accounted for on the percentage-of-completion cost-to-cost method, under which 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 aggregate impact of net changes in contract estimates to our operating results are presented in the table below (in thousands, except per share amounts):
Years Ended September 30, | ||||||||||
2020 |
| 2019 |
| 2018 | ||||||
Operating income (loss) | $ | | $ | ( | $ | ( | ||||
Net loss from continuing operations attributable to Cubic | ( | ( | ( | |||||||
Diluted loss per share attributable to Cubic |
| ( |
| ( |
| ( | ||||
For the year ended September 30, 2020, operating income increased by $
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income (loss) reflects 100% of Boston OpCo’s change in contract estimates. However, because we only own
Backlog
As of September 30, 2020, our ending backlog was $
Accounts Receivable
The components of accounts receivable are as follows (in thousands):
September 30, | |||||||
| 2020 |
| 2019 |
| |||
Accounts receivable | |||||||
Billed | $ | | $ | | |||
Allowance for doubtful accounts | ( | ( | |||||
Net accounts receivable | $ | | $ | ||||
Amounts billed include $
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, 2020 and 2019, we sold $
Contract Assets and Liabilities
Contract assets and contract liabilities were as follows (in thousands):
September 30, | |||||||
| 2020 |
| 2019 |
| |||
| |||||||
Contract assets | $ | | $ | | |||
Contract liabilities | $ | | $ | | |||
Contract assets decreased $
Contract liabilities increased $
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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. |
| ● | 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 Consolidated Balance Sheets on a recurring basis (in thousands):
September 30, 2020 |
| September 30, 2019 |
| ||||||||||||||||||||||
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| |||||||||
Assets | |||||||||||||||||||||||||
Current derivative assets | $ | — | $ | | $ | — | $ | | $ | — | $ | | $ | — | $ | | |||||||||
Noncurrent derivative assets |
| — |
| |
| — |
| |
| — |
| |
| — |
| | |||||||||
Total assets measured at fair value | $ | — | $ | | $ | — | $ | | $ | — | $ | | $ | — | $ | | |||||||||
Liabilities | |||||||||||||||||||||||||
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 Delerrok | — | — | | | — |
| — |
| — | — | |||||||||||||||
Total liabilities measured at fair value | $ | — | $ | | $ | | $ | | $ | — | $ | | $ | | $ | | |||||||||
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, 2020, we have the following remaining contingent consideration arrangements with the sellers of companies which we acquired:
H4 Global: Payments of up to $
88
consideration was determined based on the remaining value of contracts entered into through September 30, 2020 for which the related consideration payment had yet to be paid to the sellers.
Deltenna: Payments of up to $
Shield: Payments of up to $
Nuvotronics: Payments of up to $
Delerrok: Payments of up to $
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.
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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, 2020, the following table summarizes the change in fair value of our Level 3 contingent consideration liabilities (in thousands):
H4 Global |
| Deltenna |
| Shield |
| Nuvotronics |
| Delerrok |
| TeraLogics |
| Total | ||||||||||
Balance as of September 30, 2018 |
| $ | | $ | | $ | | $ | — | $ | — | $ | | $ | |
| ||||||
Initial measurement recognized at acquisition | — | — | — | | — | — | | |||||||||||||||
Cash paid to seller | ( | — | — | — | — | ( | ( | |||||||||||||||
Adjustment to the provisional acquisition date valuation | — | — |
| — |
| — |
| — | — |
| — | |||||||||||
Total remeasurement (gain) loss recognized in earnings |
| |
| |
| ( |
| ( |
| — |
| — |
| ( | ||||||||
Balance as of September 30, 2019 | $ | | $ | | $ | | $ | | $ | — | $ | — | $ | | ||||||||
Initial measurement recognized at acquisition | — | — | — | — | | — | | |||||||||||||||
Cash paid to seller | — | — | — | — | — | — | — | |||||||||||||||
Adjustment to the provisional acquisition date valuation | — | — |
| — |
| — |
| — | — |
| — | |||||||||||
Total remeasurement (gain) loss recognized in earnings |
| |
| |
| |
| ( |
| ( |
| — |
| ( | ||||||||
Balance as of September 30, 2020 | $ | | $ | | $ | | $ | — | $ | | $ | — | $ | | ||||||||
We carry certain financial instruments, including accounts receivable, short-term borrowings, accounts payable and accrued liabilities at cost, which we believe approximates fair value because of the short-term maturity of these instruments. The fair value of our variable rate long-term debt approximates its carrying value at September 30, 2020.
In fiscal 2019 and 2020, we invested $
We did not have any significant non-financial assets or liabilities measured at fair value on a non-recurring basis in 2020, 2019 or 2018 other than assets and liabilities acquired in business acquisitions described in Note 2 and the RSUs that contain performance and market-based vesting criteria described in Note 14.
NOTE 6—INVENTORIES
Inventories consist of the following (in thousands):
September 30, | |||||||
| 2020 |
| 2019 |
| |||
Finished products | $ | | $ | | |||
Work in process and inventoried costs under long-term contracts | | | |||||
Materials and purchased parts |
| |
| | |||
Net inventories | $ | | $ | | |||
At September 30, 2020, work in process and inventoried costs under long-term contracts includes approximately $
90
September 30, 2019. We believe it is probable that we will recover the costs inventoried at September 30, 2020, plus a profit margin, under contract change orders or awards within the next year.
NOTE 7—PROPERTY, PLANT AND EQUIPMENT
Significant components of property, plant and equipment are as follows (in thousands):
September 30, | |||||||
| 2020 |
| 2019 | ||||
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 |
| ( |
| ( | |||
$ | | $ | | ||||
In fiscal 2019, we entered into agreements related to the construction and leasing of
In the third quarter of fiscal 2019 we sold the land and buildings comprising our separate CTS campus in San Diego and entered into a lease with the buyer 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 $
As a part of our efforts to upgrade our current information systems, early in fiscal 2015 we purchased new enterprise resource planning (ERP) software and began the process of designing and configuring this software and other software applications to manage our operations.
Costs incurred in the development of internal-use software and software applications, including external direct costs of materials and services and applicable compensation costs of employees devoted to specific software development, are capitalized as computer software costs. Costs incurred outside of the application development stage, 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 to
Through September 30, 2020 we have incurred costs of $
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 2020. 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
91
Our provisions for depreciation of plant and equipment and amortization of leasehold improvements and software amounted to $
NOTE 8—GOODWILL AND PURCHASED INTANGIBLE ASSETS
Changes in goodwill for the two years ended September 30, 2020 are as follows (in thousands):
|
|
|
|
| |||||||||
Cubic Transportation | Cubic Mission | Cubic Global |
| ||||||||||
Systems | Solutions | Defense Systems | Total |
| |||||||||
Net balances at October 1, 2018 | $ | | $ | | $ | | $ | | |||||
Reassignment on April 1, 2019 | — | | ( | — | |||||||||
Acquisitions | | | — | | |||||||||
Foreign currency exchange rate changes |
| ( |
| ( |
| ( |
| ( | |||||
Net balances at September 30, 2019 | | | | | |||||||||
Acquisitions |
| | | — | | ||||||||
Foreign currency exchange rate changes |
| |
| | |
| | ||||||
Net balances at September 30, 2020 | $ | | $ | | $ | | $ | | |||||
In fiscal 2019, we reorganized our reporting structure to move our wireless infrastructure business from CGD to CMS and reassigned $
We complete our annual goodwill impairment test each year as of July 1 separately for our CTS, CMS and CGD 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 2020 impairment test, the estimated fair value of all
Significant management judgment is required in the forecast of future operating results that are used in our impairment analysis. The estimates we used are consistent with the plans and estimates that we use to manage our business. For our CMS reporting unit, significant assumptions utilized in our discounted cash flow approach included continued sales growth and margin expansion due to our expectation that businesses recently acquired by this reporting unit will achieve growth at higher rates than the unit’s legacy operations. 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 could be exposed to material impairment charges in the future.
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Purchased Intangible Assets:
September 30, 2020 | September 30, 2019 |
| |||||||||||||||||
|
|
|
| Gross |
|
|
| ||||||||||||
Gross Carrying | Accumulated | Net Carrying | Carrying | Accumulated | Net Carrying |
| |||||||||||||
Amount | Amortization | Amount | Amount | Amortization | Amount |
| |||||||||||||
Contract and program intangibles | $ | | $ | ( | $ | | $ | | $ | ( | $ | | |||||||
Other purchased intangibles |
| |
| ( |
| |
| |
| ( |
| | |||||||
Total | $ | | $ | ( | $ | | $ | | $ | ( | $ | | |||||||
Total amortization expense for 2020, 2019 and 2018 was $
The table below shows our expected amortization of purchased intangibles as of September 30, 2020, for each of the next five years and thereafter (in thousands):
|
|
|
| |||||||
Transportation | Cubic Mission |
| ||||||||
Systems | Solutions | Total |
| |||||||
2021 | $ | | $ | | $ | | ||||
2022 |
| |
| |
| | ||||
2023 |
| |
| |
| | ||||
2024 |
| |
| |
| | ||||
2025 |
| |
| |
| | ||||
Thereafter |
| |
| |
| | ||||
$ | | $ | | $ | | |||||
NOTE 9—FINANCING ARRANGEMENTS
Long-term debt consists of the following (in thousands):
| September 30, | ||||||
| 2020 |
| 2019 | ||||
Term Loan from a group of financial institutions | $ | | $ | — | |||
Senior unsecured notes payable |
| — |
| | |||
Less unamortized debt issuance costs |
| ( |
| ( | |||
Less current portion |
| ( |
| ( | |||
$ | | $ | | ||||
Maturities of our long-term debt are as follows: 2021 — $
At September 30, 2019, we had $
On March 27, 2020, we executed a Fifth Amended and Restated Credit Agreement (the “Credit Facility”) with a group of financial institutions. The Credit Facility provided for a new term loan in the aggregate amount of $
93
On April 1, 2020, we entered into interest rate swaps with a group of financial institutions to mitigate the variable interest rate risk associated with the Credit Facility. The interest rate swaps contain forward starting notional principal amounts which align with our fixed repayment schedules under the Credit Facility and as of September 30, 2020 have an interest rate of approximately
Interest paid amounted to $
Debt issuance and modification costs of $
The available credit under our Revolving Line of Credit is reduced by any letters of credit issued under the Credit Facility. As of September 30, 2020, there were $
As of September 30, 2020, we had letters of credit and bank guarantees outstanding totaling $
We have entered into a short-term borrowing arrangement in the United Kingdom in the amount of £
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, 2020 was $
The terms of the Credit Facility contain financial covenants setting a maximum total ratio of debt to adjusted earnings before interest, taxes, depreciation and amortization and a minimum interest coverage ratio. In addition, the terms contain covenants that restrict, among other things, our ability to sell assets, incur indebtedness, make investments, grant liens, pay dividends and make other restricted payments. As of September 30, 2020, we were in compliance with all covenants under the Credit Facility.
In December 2018, we completed an underwritten public offering of
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.
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Self-insurance liabilities included in accrued compensation and current liabilities in our Consolidated Balance Sheets amounted to $
NOTE 10—LEASES
Our primary involvement with leases is as a lessee where we lease properties to support our business. A majority of our leases are operating leases of office space. For these leases, we have elected to account for the lease and non-lease components together as a single lease component. Our operating leases expire at various dates through 2032 without taking into consideration available renewal options, and many such leases require variable lease payments by us for property taxes, insurance premiums, common area maintenance and other costs. Certain of these leases also have extension or termination options, and we assess the likelihood of exercising such options. If it is reasonably certain that we will exercise the options, we include the impact in the measurement of our right-of-use assets and lease liabilities.
Our right-of-use assets for operating leases are included in operating lease right-of-use-assets on our Consolidated Balance Sheets. Our lease liabilities for operating leases are included in other current liabilities for the current portion and in operating lease liabilities for the long-term portion. We use our incremental borrowing rate in determining the present value of lease payments. Our operating lease expense is included in costs and expenses in our consolidated statements of operations. Total operating lease expense consists of operating lease cost, which is recognized on a straight-line basis over the lease term, and variable lease cost, which is recognized based on actual amounts incurred. We also sublease certain immaterial properties and sublease income is included as a reduction of rental expense.
The following tables present our operating leases, related lease expenses and other information (dollars in millions):
Operating Lease Portfolio
September 30, 2020 |
| ||||
Right-of-use assets | $ | | |||
Lease liabilities |
| | |||
Weighted average remaining lease term |
| ||||
Weighted average discount rate |
| ||||
Operating Lease Expense
Year Ended | ||||
September 30, 2020 | ||||
Operating lease expense | $ | | ||
Short-term lease expense | | |||
Variable lease expense | | |||
Total lease expense | $ | | ||
Other Information
Year Ended | ||||
September 30, 2020 | ||||
Cash paid for amounts included in the measurement of lease liabilities | $ | | ||
Right-of-use assets obtained in exchange for new operating lease liabilities | | |||
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Maturities of Lease Liabilities
Our future minimum lease commitments of our operating leases on an undiscounted basis, reconciled to the lease liability at September 30, 2020 were as follows (in millions):
2021 |
| $ | |
|
2022 |
| | ||
2023 |
| | ||
2024 |
| | ||
2025 |
| | ||
Thereafter |
| | ||
Total lease payments | | |||
Less: imputed interest | ( | |||
Present value of operating lease liabilities | $ | |
In fiscal 2019, we entered into agreements related to the construction and leasing of
Rental expense for leases classified as operating leases under ASC 840 for the years ended September 30, 2019 and 2018 amounted to $
NOTE 11—INCOME TAXES
The Tax Cuts and Jobs Act, as enacted by the U.S. federal government in December 2017, fundamentally changed the taxation of multinational corporations in the United States. Significant provisions impacting Cubic include global intangible low-taxed income, a new tax on income of foreign corporations, and base-erosion and anti-abuse tax (“BEAT”). BEAT provisions impose an alternative tax on applicable taxpayers with base-erosion payments greater than a de minimis threshold.
On March 27, 2020, the U.S. federal government enacted the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The Cares Act intended to assist with the stabilization of the U.S. domestic economy during the COVID-19 crisis and includes relief provisions for the U.S. corporate income tax system, including temporary changes to the prior and future utilization of net operation losses, acceleration of depreciation for certain qualifying improvements and relaxed limitations on the deductibility of interest. At September 30, 2020, we have made reasonable estimates of the impact of the CARES Act on our condensed consolidated statements of operations and our condensed consolidated statements of cash flows.
Income (loss) from continuing operations before income taxes includes the following components (in thousands):
| Years Ended September 30, | ||||||||
2020 |
| 2019 |
| 2018 | |||||
| (in thousands) | ||||||||
United States | $ | ( | $ | ( | $ | ( | |||
Foreign |
| |
| |
| | |||
Total | $ | ( | $ | | $ | | |||
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Significant components of the provision (benefit) for income taxes from continuing operations are as follows:
| Years Ended September 30, |
| ||||||||
2020 |
| 2019 |
| 2018 | ||||||
(in thousands) | ||||||||||
Current: | ||||||||||
Federal | $ | ( | $ | ( | $ | ( | ||||
State |
| |
| |
| | ||||
Foreign |
| |
| |
| | ||||
Total current |
| |
| |
| | ||||
Deferred: | ||||||||||
Federal |
| ( |
| ( |
| ( | ||||
State |
| ( |
| ( |
| | ||||
Foreign |
| |
| |
| ( | ||||
Total deferred |
| ( |
| ( |
| ( | ||||
Provision (benefit) for income taxes | $ | ( | $ | | $ | | ||||
The reconciliation of income tax computed at the U.S. federal statutory tax rate to income tax expense (benefit) is as follows:
| Years Ended September 30, |
| ||||||||
2020 |
| 2019 |
| 2018 | ||||||
(in thousands) |
| |||||||||
Tax expense (benefit) at U.S. statutory rate | $ | ( | $ | | $ | | ||||
State income taxes, net of federal tax effect |
| ( |
| |
| ( | ||||
Base Erosion and Anti-abuse Tax | | | — | |||||||
Global Intangible Low-Tax Income | | | — | |||||||
Foreign rate differential |
| ( |
| |
| | ||||
Nondeductible expenses |
| |
| |
| | ||||
Stock based compensation | | | | |||||||
Acquisition related Items | ( | | | |||||||
Tax credits |
| ( |
| ( |
| ( | ||||
Reserve for tax contingencies |
| ( |
| ( |
| ( | ||||
Deferred tax asset valuation allowance |
| ( |
| ( |
| | ||||
Impact of U.S. Tax Reform |
| — |
| — |
| ( | ||||
Non-controlling interest in equity arrangements | ( | | | |||||||
Other |
| ( |
| |
| ( | ||||
Provision (benefit) for income taxes | $ | ( | $ | | $ | | ||||
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Significant components of our deferred tax assets and liabilities are as follows:
September 30, | |||||||
| 2020 |
| 2019 |
| |||
(in thousands) |
| ||||||
Deferred tax assets: | |||||||
Accrued employee benefits | $ | | $ | | |||
Allowances for loss contingencies |
| |
| | |||
Debt obligation basis difference | | — | |||||
Deferred compensation |
| |
| | |||
Foreign currency mark-to-market |
| |
| — | |||
Inventory valuation | | | |||||
Long-term contracts | | | |||||
Prepaid and accrued expenses | | | |||||
Property, plant and equipment |
| |
| — | |||
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 | ( | ( | |||||
Lease right-of-use assets | ( | — | |||||
Property, plant and equipment | — | ( | |||||
Unremitted earnings | ( | ( | |||||
Other |
| ( |
| ( | |||
Total deferred tax liabilities |
| ( |
| ( | |||
Net deferred tax asset (liability) | $ | ( | $ | ( | |||
The deferred tax assets and liabilities for fiscal 2020 and 2019 include amounts related to various acquisitions. The total change in deferred tax assets and liabilities in fiscal 2020 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 basis 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, 2020, we have federal and state income tax credit carryforwards (in thousands) which begin to expire as follows:
U.S. foreign tax credits | $ | | 2024 | ||||
U.S. research and development tax credits | | 2025 | |||||
State research and development tax credits |
| |
| 2038 & 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 | $ | | 2033 | ||||
U.S. capital loss carryforwards | | 2023 | |||||
State loss carryforwards | | 2023 | |||||
State capital loss carryforwards | | 2023 | |||||
Foreign net operating loss carryforwards |
| |
| Do not expire |
We continue to evaluate our net U.S. deferred income taxes, which includes an assessment of the cumulative income or loss over the prior three-year periods and future periods. After consideration of our recent history of U.S. losses, we continue to maintain a valuation allowance on net U.S. federal deferred tax assets as of September 30, 2020.
As of September 30, 2020, a total valuation allowance of $
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.
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, 2020, we have recorded a deferred tax liability of $
Accounting for Uncertainty in Income Taxes
During fiscal 2020 and 2019, the aggregate changes in our total gross amount of unrecognized tax benefits are summarized as follows:
September 30, | |||||||
| 2020 |
| 2019 |
| |||
| (in thousands) | ||||||
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 |
| |
| | |||
Balance at end of year | $ | | $ | | |||
At September 30, 2020 and 2019, the amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $
99
We are subject to ongoing audits from various taxing authorities in the jurisdictions in which we do business. As of September 30, 2020, the fiscal years open under the statute of limitations in significant jurisdictions include 2016 through 2020 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 $
NOTE 12—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.
The following table shows the notional principal amounts of our outstanding derivative instruments as of September 30, 2020 and 2019 (in thousands):
Notional Principal |
| ||||||
September 30, 2020 | September 30, 2019 | ||||||
Instruments designated as accounting hedges: | |||||||
Foreign currency forwards | $ | | $ | | |||
Interest rate swaps |
| |
| | |||
Instruments not receiving hedge accounting treatment: | |||||||
Foreign currency forwards | $ | | $ | | |||
Included in the amounts not receiving hedge accounting treatment at September 30, 2020 and 2019 were non-designated foreign currency forwards with notional principal amounts of $
In conjunction with the agreements related to the construction and leasing of
On April 1, 2020, in conjunction with the Credit Facility described in Note 9, we entered into interest rate swaps with a group of financial institutions to mitigate variable interest rate risk associated with the Credit Facility. As of September 30, 2020, the interest rate swaps contain outstanding notional principal amounts of $
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
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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, 2020 and 2019. 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, 2020 or 2019.
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):
Fair Value |
| ||||||||
| Balance Sheet Location |
| September 30, 2020 |
| September 30, 2019 |
| |||
Asset derivatives: | |||||||||
Foreign currency forwards |
| Other current assets | $ | | $ | | |||
Foreign currency forwards |
| Other assets |
| |
| | |||
Forward starting swaps |
| Other assets |
| — |
| | |||
Total | $ | | $ | | |||||
Liability derivatives: | |||||||||
Foreign currency forwards |
| Accrued compensation and current liabilities | $ | | $ | | |||
Foreign currency forwards |
| Other noncurrent liabilities |
| |
| | |||
Forward starting swaps |
| Other noncurrent liabilities |
| |
| — | |||
Total | $ | | $ | | |||||
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, 2020 | September 30, 2019 | ||||||||||||
Gains (losses) | Gains (losses) | Gains (losses) | |||||||||||
recognized in | reclassified into | Gains (losses) | reclassified into | ||||||||||
Derivative Type |
| OCI |
| earnings |
| recognized in OCI |
| earnings | |||||
Foreign currency forwards | $ | ( | $ | | $ | | $ | | |||||
Forward starting swap |
| ( |
| — |
| |
| — | |||||
Total | $ | ( | $ | | $ | | $ | | |||||
Foreign currency forwards designated as accounting hedges (including both fair value and cash flow hedges) had realized gains of $
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, 2020 or 2019. 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 $
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NOTE 13—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 $
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, 2020 and 2019 were $
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. In fiscal 2020, we froze matching company contributions to the U.S. plan effective April 1, 2020 due to the uncertainty caused by COVID-19. We reinstated matching company contributions effective October 1, 2020. Company contributions to defined contribution plans aggregated $
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
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 -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
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plans, as of September 30, 2020, we expect to make contributions of approximately $
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 loss included in accumulated other comprehensive income (loss) at September 30, 2020 and expected to be recognized in net pension cost during fiscal 2021 is a loss of $
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the defined benefit pension plans were as follows (in thousands):
September 30, | |||||||
| 2020 |
| 2019 |
| |||
Projected benefit obligation | $ | | $ | | |||
Accumulated benefit obligation |
| |
| | |||
Fair value of plan assets |
| |
| | |||
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The following table sets forth changes in the projected benefit obligation and fair value of plan assets and the funded status for these defined benefit plans (in thousands):
September 30, | |||||||
| 2020 |
| 2019 |
| |||
Change in benefit obligations: | |||||||
Net benefit obligation at the beginning of the year | $ | | $ | | |||
Service cost |
| |
| | |||
Interest cost |
| |
| | |||
Actuarial 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 | $ | ( | $ | ( | |||
The components of net periodic pension cost (benefit) were as follows (in thousands):
Years Ended September 30, | ||||||||||
2020 |
| 2019 |
| 2018 | ||||||
Service cost | $ | | $ | | $ | | ||||
Interest cost |
| |
| |
| | ||||
Expected return on plan assets |
| ( |
| ( |
| ( | ||||
Amortization of actuarial loss |
| |
| |
| | ||||
Administrative expenses |
| |
| |
| | ||||
Net pension benefit | $ | ( | $ | ( | $ | ( | ||||
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| Years Ended September 30, | ||||||
2020 |
| 2019 |
| 2018 | |||
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 |
| ||||||
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, 2020 are as follows:
| Allocation | |
Asset Category | Range | |
Equity securities |
| |
Debt securities |
| |
Cash | ||
Real estate |
|
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.
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September 30, 2020 | September 30, 2019 |
| |||||||||||||||||||||||
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| |||||||||
Plan assets held at fair value: | |||||||||||||||||||||||||
Cash equivalents | $ | | $ | — | $ | — | $ | | $ | | $ | — | $ | — | $ | | |||||||||
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 | $ | | $ | | |||||||||||||||||||||
* 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, 2020 and 2019.
We expect to pay the following pension benefit payments (in thousands):
2021 |
| $ | |
|
2022 |
| | ||
2023 |
| | ||
2024 |
| | ||
2025 |
| | ||
2024-2028 |
| | ||
NOTE 14—STOCKHOLDERS’ EQUITY
Long-Term Equity Incentive Plan
Under our long-term equity incentive plan, we have provided participants with three general categories of grant awards: (a) RSUs with time-based vesting, (b) RSUs with performance-based vesting, and (c) RSUs with performance and market-based vesting.
Each RSU with time-based vesting or vesting represents a contingent right to receive
Time-based RSUs granted prior to fiscal 2020 generally vest in
The performance-based RSUs granted to participants vest over
106
recipient’s continued service with the Company through the end of the respective performance periods. The level at which we perform against scalable targets over the performance periods will determine the percentage of the RSUs that will ultimately vest.
In fiscal 2019 and fiscal 2020, the Compensation Committee granted RSUs which contained both performance- and market-based vesting criteria. For these RSUs, the relative total stock return (“TSR”) for shares of our common stock as compared to the Russell 2000 Index (the “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
During fiscal 2019, the Compensation Committee amended the Company’s long-term equity incentive plan to accelerate the service requirement for retirement age participants. Under the amended plan, participants who are
In September 2020, the Compensation Committee modified the revenue and earnings growth targets of the performance and market based RSUs granted to participants during fiscal 2020 to include acquired businesses in the baseline performance target. As a result, the grant date fair value of these RSUs were revalued as of the date of the approved modification in September 2020.
The grant date fair value of each RSU with time-based vesting or performance-based vesting is the fair market value of
107
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 shares of our common stock were simulated through the end of the performance period. The correlation matrix between shares of our common stock and the Index as well as the corresponding return volatilities were developed based upon an analysis of historical data.
| ||||||
| ||||||
| RSUs granted during fiscal 2020 |
| ||||
Valuation Date |
| September 17, 2020 | ||||
Grant date fair value per RSU |
| $ | ||||
Performance period begins |
| October 1, 2019 | ||||
Performance period ends |
| September 30, 2022 | ||||
Risk-free interest rate | ||||||
Expected volatility | ||||||
RSUs granted during fiscal 2019 | ||||||
|
| |||||
Valuation Date |
| November 21, 2018 | April 1, 2019 | |||
Grant date fair value per RSU |
| $ | $ | |||
Performance period begins |
| October 1, 2018 | October 1, 2018 | |||
Performance period ends |
| September 30, 2021 | September 30, 2021 | |||
Risk-free interest rate | ||||||
Expected volatility | ||||||
At September 30, 2020, 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
The following table summarizes our RSU activity:
Unvested RSUs with Time-Based Vesting |
| |||||
|
| Weighted Average |
| |||
Number of Shares | Grant-Date Fair Value per Share |
| ||||
Unvested at September 30, 2018 |
| |
| $ | | |
Granted |
| | | |||
Vested |
| ( |
| | ||
Forfeited |
| ( |
| | ||
Unvested at September 30, 2019 |
| | $ | | ||
Granted | | | ||||
Vested | ( | | ||||
Forfeited | ( | | ||||
Unvested at September 30, 2020 | | $ | | |||
108
Unvested RSUs with Performance-Based Vesting |
| |||||
|
| Weighted Average |
| |||
Number of Shares | Grant-Date Fair Value per Share |
| ||||
Unvested at September 30, 2018 |
| |
| $ | | |
Granted |
| — |
| — | ||
Vested |
| — |
| — | ||
Forfeited |
| ( |
| | ||
Unvested at September 30, 2019 |
| | $ | | ||
Granted | — | — | ||||
Vested | — | — | ||||
Forfeited | ( |
| | |||
Unvested at September 30, 2020 | | $ | | |||
Unvested RSUs with Performance- and Market-Based Vesting |
| |||||
|
| Weighted Average |
| |||
Number of Shares | Grant-Date Fair Value per Share |
| ||||
Unvested at September 30, 2018 |
| — |
| $ | — | |
Granted |
| | | |||
Vested |
| — |
| — | ||
Forfeited |
| ( |
| | ||
Unvested at September 30, 2019 |
| | $ | | ||
Granted | |
| | |||
Vested | — | — | ||||
Forfeited | ( |
| | |||
Unvested at September 30, 2020 | | $ | | |||
As of September 30, 2020, approximately
We recorded non-cash compensation expense related to stock-based awards as follows (in thousands):
| ||||||||||
Years Ended September 30, | ||||||||||
2020 |
| 2019 |
| 2018 | ||||||
Cost of sales | $ | | $ | | $ | | ||||
Selling, general and administrative |
| |
| |
| | ||||
Restructuring costs | | — | — | |||||||
$ | | $ | | $ | | |||||
As of September 30, 2020, there was $
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
Shareholder Rights Plan
On September 20, 2020, our Board of Directors adopted a shareholder rights plan (Rights Agreement) and declared a dividend of
109
record on October 1, 2020. When exercisable, each Right will entitle the registered holder to purchase from the Company one-thousandth of a share of Series A Junior Participating Preferred Stock, without par value (Preferred Shares), of the Company at a price of $
NOTE 15—LEGAL MATTERS
We consider all 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 16—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. In August 2020, we implemented a plan to realign and combine our CMS and CGD segments into Cubic Mission and Performance Solutions (CMPS). The realignment will leverage common technologies across the defense business, enhance collaboration and customer intimacy globally, reduce complexity and costs, and increase organizational efficiency. We performed an assessment of our operating and reportable segments as of September 30, 2020, which is based upon factors such as the nature of the business activities and customers, and the nature of the information presented to our chief operating decision maker. Based on this assessment, we have concluded that CTS, CMS and CGD each remain separate operating segments as of September 30, 2020. However, in the first quarter of fiscal 2021, additional aspects of resource allocation and performance assessment are expected to be made at the CMPS level and we anticipate that CMS and CGD will be combined into a single operating and reporting segment.
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 in Note 1. Intersegment sales and transfers are immaterial and are eliminated in consolidation.
Our reportable segments are business units that offer different products and services. Operating results for each segment are reported separately to senior corporate management to make decisions as to the allocation of corporate resources and to assess performance.
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Business segment financial data is as follows (in millions):
Years Ended September 30, | ||||||||||
| 2020 |
| 2019 |
| 2018 | |||||
Sales: | ||||||||||
Cubic Transportation Systems | $ | | $ | | $ | | ||||
Cubic Mission Solutions | | | | |||||||
Cubic Global Defense Systems |
| |
| |
| | ||||
Total sales | $ | | $ | | $ | | ||||
Operating income (loss): | ||||||||||
Cubic Transportation Systems | $ | | $ | | $ | | ||||
Cubic Mission Solutions | ( | | ( | |||||||
Cubic Global Defense Systems |
| |
| |
| | ||||
Unallocated corporate expenses |
| ( |
| ( |
| ( | ||||
Total operating income | $ | | $ | | $ | | ||||
Assets: | ||||||||||
Cubic Transportation Systems | $ | | $ | | $ | | ||||
Cubic Mission Solutions | | | | |||||||
Cubic Global Defense |
| |
| |
| | ||||
Corporate |
| |
| |
| | ||||
Total assets | $ | | $ | | $ | | ||||
Depreciation and amortization: | ||||||||||
Cubic Transportation Systems | $ | | $ | | $ | | ||||
Cubic Mission Solutions | | | | |||||||
Cubic Global Defense Systems |
| |
| |
| | ||||
Corporate |
| |
| |
| | ||||
Total depreciation and amortization | $ | | $ | | $ | | ||||
Capital expenditures: | ||||||||||
Cubic Transportation Systems | $ | | $ | | $ | | ||||
Cubic Mission Solutions | | | | |||||||
Cubic Global Defense |
| |
| |
| | ||||
Corporate |
| |
| |
| | ||||
Total expenditures for long-lived assets | $ | | $ | | $ | | ||||
As of September 30, |
| 2020 |
| 2019 |
| 2018 | ||||
Long-lived assets, net: |
|
|
|
|
|
|
| |||
United States | $ | | $ | | $ | | ||||
United Kingdom |
| |
| |
| | ||||
Other foreign countries |
| |
| |
| | ||||
Total long-lived assets, net | $ | | $ | | $ | | ||||
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CGD and CMS segment sales include $
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 can affect the nature, amount, timing, and uncertainty of our revenue and cash flows.
Sales by Geographic Region (in millions):
Year Ended September 30, 2020 | |||||||||||||
| CTS |
| CMS |
| CGD |
| Total | ||||||
United States | $ | | $ | | $ | | $ | | |||||
United Kingdom |
| | | | | ||||||||
Australia |
| | | | | ||||||||
Far East/Middle East |
| | | | | ||||||||
Other |
| | | | | ||||||||
Total sales | $ | | $ | | $ | | $ | | |||||
Year Ended September 30, 2019 | |||||||||||||
CTS |
| CMS |
| CGD |
| Total | |||||||
United States | $ | | $ | | $ | | $ | | |||||
United Kingdom |
| | | | | ||||||||
Australia |
| | | | | ||||||||
Far East/Middle East |
| | | | | ||||||||
Other |
| | | | | ||||||||
Total sales | $ | | $ | | $ | | $ | | |||||
Year Ended September 30, 2018 | |||||||||||||
CTS |
| CMS |
| CGD |
| Total | |||||||
United States | $ | | $ | | $ | | $ | | |||||
United Kingdom |
| | | | | ||||||||
Australia |
| | | | | ||||||||
Far East/Middle East |
| | | | | ||||||||
Other |
| | | | | ||||||||
Total sales | $ | | $ | | $ | | $ | | |||||
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Sales by End Customer: We are the prime contractor for the vast majority of our sales. Sales included in other end customers primarily represent sales to foreign governments and commercial customers. The table below presents total net sales disaggregated by end customer (in millions):
Year Ended September 30, 2020 | |||||||||||||
CTS |
| CMS |
| CGD |
| Total | |||||||
U.S. Federal Government and State and Local Municipalities | $ | | $ | | $ | | $ | | |||||
Other |
| |
| |
| |
| | |||||
Total sales | $ | | $ | | $ | | $ | | |||||
Year Ended September 30, 2019 | |||||||||||||
CTS |
| CMS |
| CGD |
| Total | |||||||
U.S. Federal Government and State and Local Municipalities | $ | | $ | | $ | | $ | | |||||
Other |
| |
| |
| |
| | |||||
Total sales | $ | | $ | | $ | | $ | | |||||
Year Ended September 30, 2018 | |||||||||||||
CTS |
| CMS |
| CGD |
| Total | |||||||
U.S. Federal Government and State and Local Municipalities | $ | | $ | | $ | | $ | | |||||
Other |
| |
| |
| |
| | |||||
Total sales | $ | | $ | | $ | | $ | | |||||
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Sales by Contract Type: Substantially all of our contracts are fixed-price type contracts. Sales included in Other contract types represent cost plus fee and time and material type contracts.
The table below presents total net sales disaggregated by contract type (in millions):
Year Ended September 30, 2020 | |||||||||||||
CTS |
| CMS |
| CGD |
| Total | |||||||
Fixed Price | $ | | $ | | $ | | $ | | |||||
Other |
| |
| |
| |
| | |||||
Total sales | $ | | $ | | $ | | $ | | |||||
Year Ended September 30, 2019 | |||||||||||||
CTS |
| CMS |
| CGD |
| Total | |||||||
Fixed Price | $ | | $ | | $ | | $ | | |||||
Other |
| |
| |
| |
| | |||||
Total sales | $ | | $ | | $ | | $ | | |||||
Year Ended September 30, 2018 | |||||||||||||
CTS |
| CMS |
| CGD |
| Total | |||||||
Fixed Price | $ | | $ | | $ | | $ | | |||||
Other |
| |
| |
| |
| | |||||
Total sales | $ | | $ | | $ | | $ | | |||||
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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):
Year Ended September 30, 2020 | |||||||||||||
CTS |
| CMS |
| CGD |
| Total | |||||||
Product | $ | | $ | | $ | | $ | | |||||
Service |
| |
| |
| |
| ||||||
Total sales | $ | | $ | | $ | | $ | | |||||
Year Ended September 30, 2019 | |||||||||||||
CTS |
| CMS |
| CGD |
| Total | |||||||
Product | $ | | $ | | $ | | $ | | |||||
Service |
| |
| |
| |
| | |||||
Total sales | $ | | $ | | $ | | $ | | |||||
Year Ended September 30, 2018 | |||||||||||||
CTS |
| CMS |
| CGD |
| Total | |||||||
Product | $ | | $ | | $ | | $ | | |||||
Service |
| |
| |
| |
| | |||||
Total sales | $ | | $ | | $ | | $ | | |||||
Revenue Recognition Method: Sales recognized at a point in time are typically for standard goods with a short production cycle and are recognized when the customer obtains control, which is generally upon delivery and acceptance. Sales for services and for products with a long production cycle, which often include significant customization and development, are recognized over time. The table below presents total net sales disaggregated based on the revenue recognition method applied (in millions):
Year Ended September 30. 2020 | |||||||||||||
CTS |
| CMS |
| CGD |
| Total | |||||||
Point in Time | $ | | $ | | $ | | $ | | |||||
Over Time |
| |
| |
| |
| | |||||
Total sales | $ | | $ | | $ | | $ | | |||||
Year Ended September 30. 2019 | |||||||||||||
CTS |
| CMS |
| CGD |
| Total | |||||||
Point in Time | $ | | $ | | $ | | $ | | |||||
Over Time |
| |
| |
| |
| | |||||
Total sales | $ | | $ | | $ | | $ | | |||||
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NOTE 17—RESTRUCTURING
In the fourth quarter of fiscal 2020, we announced our NextCUBIC transformation to restructure the way we work and operate as a business. Part of this initiative included establishing a Transformation Office and appointing a Chief Transformation Officer to identify, vet, plan and implement improvement initiatives across Cubic. Coinciding with this initiative, we also announced the combination of CGD and CMS into CMPS. This combination will help us optimize customer access and presence, leverage key enablers across the combined businesses and realize untapped cross-segment technical synergies to capture organizational efficiencies. The significant portion of the costs associated with these restructuring activities are related to consultants that we have engaged in connection with these efforts, and such costs are recognized by our corporate entity. Other restructuring charges related to headcount reductions initiated to optimize our cost positions. Our NextCUBIC transformation initiatives will continue through fiscal 2021, and our consulting fees that will be incurred in the future are generally contingent upon the achievement of future cost savings and increased profitability. The total expected restructuring costs related to these initiatives cannot currently be estimated.
In fiscal 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 have been incurred and these efforts have been materially completed as of the third quarter of fiscal 2020.
In fiscal 2019 and 2020 we incurred additional restructuring charges, consisting primarily of employee severance costs related to headcount reductions initiated to optimize certain 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.
Restructuring charges incurred by our business segments were as follows (in millions):
Years Ended September 30, | |||||||||
| 2020 |
| 2019 |
| 2018 | ||||
Restructuring costs: | |||||||||
Cubic Transportation Systems |
| $ | | $ | | $ | | ||
Cubic Mission Solutions |
| |
| — |
| | |||
Cubic Global Defense Systems | | | | ||||||
Unallocated corporate expenses |
| |
| |
| | |||
Total restructuring costs |
| $ | | $ | | $ | | ||
The following table presents a rollforward of our restructuring liability as of September 30, 2020, which is included within accrued compensation and other current liabilities within our consolidated balance sheet, (in millions):
Restructuring Liability | Restructuring Liability | ||||||
| Employee Separation and Other |
| Consulting Costs | ||||
Balance as of October 1, 2018 |
| $ | | $ | | ||
Accrued costs |
| |
| | |||
Cash payments | ( | ( | |||||
Balance as of September 30, 2019 | $ | | $ | | |||
Accrued costs | | | |||||
Cash payments | ( | ( | |||||
Balance as of September 30, 2020 | $ | | $ | | |||
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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 18—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, 2020 and 2019:
Year |
| |||||||||||||||
Three Months Ended | Ended | |||||||||||||||
Fiscal 2020 |
| September 30 |
| June 30 |
| March 31 |
| December 31 |
| September 30 |
| |||||
(in thousands, except per share data) |
| |||||||||||||||
Net sales | $ | | $ | | $ | | $ | | $ | | ||||||
Operating income (loss) |
| |
| |
| ( |
| ( | | |||||||
Net income (loss) |
| |
| ( |
| ( |
| ( | ( | |||||||
Net income (loss) per share, basic |
| |
| ( |
| ( |
| ( | ( | |||||||
Net income (loss) per share, diluted |
| |
| ( |
| ( |
| ( | ( | |||||||
Year |
| |||||||||||||||
Three Months Ended | Ended | |||||||||||||||
Fiscal 2019 |
| September 30 |
| June 30 |
| March 31 |
| December 31 | September 30 |
| ||||||
(in thousands, except per share data) |
| |||||||||||||||
Net sales | $ | | $ | | $ | | $ | | $ | | ||||||
Operating income (loss) |
| |
| |
| ( |
| ( | | |||||||
Net income (loss) |
| |
| |
| ( |
| ( | | |||||||
Net income (loss) per share, basic |
| |
| |
| ( |
| ( | | |||||||
Net income (loss) per share, diluted |
| |
| |
| ( |
| ( | | |||||||
The following table summarizes the aggregate impact of net changes in contract estimates (amounts in thousands, except per share data):
Three Months Ended September 30, | |||||||
2020 |
| 2019 | |||||
Operating income (loss) | $ | | $ | ( | |||
Net income (loss) from continuing operations attributable to Cubic |
| |
| ( | |||
Diluted earnings (loss) per share |
| |
| ( | |||
117
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 (the “Company”) as of September 30, 2020 and 2019, 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, 2020, 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, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2020, 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, 2020, 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 18, 2020, expressed an unqualified opinion thereon.
Adoption of New Accounting Standards
ASU No. 2014-09
As discussed in Note 1 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 Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, as amended (commonly known as Accounting Standards Codification (ASC) 606).
ASU No. 2016-02
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for leases effective October 1, 2019, due to the adoption of ASU No. 2016-02, Leases (Topic 842), and the related amendments.
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
118
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.
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. 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. |
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 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 2 to the consolidated financial statements, during the year ended September 30, 2020 the Company completed its acquisitions of the remaining 80% of PIXIA Corp. and the remaining 82.5% of Delerrok Inc. (collectively “the acquired entities”) for additional consideration of $197.8 million and $37.0 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, backlog 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 |
119
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. | |
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, backlog 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, backlog 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 acquired entities 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. |
/s/ Ernst & Young LLP
We have served as the Company's auditor since 1959.
San Diego, California
November 18, 2020
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, 2020, 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, 2020, our CEO and CFO have concluded that our disclosure controls and procedures were effective.
120
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 Pixia and Delerrok which we acquired in 2020 and are included in the 2020 consolidated financial statements of the Company and constituted less than 2% of total and net assets, excluding the preliminary value of goodwill and purchased intangibles as of September 30, 2020 and 1.7% of revenues for the year then ended.
Based on our evaluation, management has concluded that our internal control over financial reporting was effective as of September 30, 2020.
The effectiveness of our internal control over financial reporting as of September 30, 2020 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, 2020 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
Item 9B. OTHER INFORMATION
None.
121
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, 2020, 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, 2020, 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, 2020 and 2019, 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, 2020, and the related notes, and our report dated November 18, 2020 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 PIXIA Corp. or Delerrok Inc., which are included in the 2020 consolidated financial statements of the Company and constituted less than 2% of total and net assets, excluding the preliminary value of goodwill and purchased intangibles, as of September 30, 2020 and 1.7% of revenues 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 PIXIA Corp. or Delerrok Inc.
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 detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
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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 18, 2020
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PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Information regarding directors and corporate governance will be included in our definitive Proxy Statement to be filed with the SEC in connection with our 2021 Annual Meeting of Shareholders, and is incorporated herein by reference. Information regarding executive officers is presented in Item 1 of this Annual Report on Form 10-K under the heading “Executive Officers”.
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.
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PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) | Documents filed as part of this Report: |
(1) | The following consolidated financial statements of Cubic Corporation, as referenced in Item 8 of this Form 10-K: |
(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.
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(b) | Exhibits: |
2.1 | |
2.2† | |
2.3 | |
3.1 | |
3.2 | |
3.3 | |
4.1 | |
4.2 | |
4.3 | |
10.1* | |
10.2* | |
10.3* | |
10.4* | |
10.5* | |
10.6* | |
10.7* | |
10.8* | |
10.9* | |
10.10* | |
10.11* |
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10.12* | |
10.13* | |
10.14* | |
10.15* | |
10.16 | |
10.17 | |
10.18 | |
10.19 | |
10.20 | |
10.21 | |
10.22 | |
10.23 | |
21.1 | |
23.1 | |
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 fiscal year ended September 30, 2020, formatted in Inline eXtensible Business Reporting Language (XBRL): (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. |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
† Portions of this exhibit have been omitted pursuant to Item 601(b)(10)(iv) of Regulation S-K.
* Indicates management contract or compensatory plan or arrangement
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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 | |||||
11/18/20 | /s/ Bradley H. Feldmann | |||||
Date | BRADLEY H. FELDMANN, | |||||
Chairman, President & 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:
11/18/20 | /s/ Bradley H. Feldmann | 11/18/20 | /s/ David F. Melcher | |||
Date | BRADLEY H. FELDMANN, | Date | DAVID F. MELCHER, | |||
Chairman, President & | Lead Independent Director | |||||
Chief Executive Officer, Director | ||||||
(Principal Executive Officer) | ||||||
11/18/20 | /s/ Anshooman Aga | 11/18/20 | /s/ Mark A. Harrison | |||
Date | ANSHOOMAN AGA, | MARK A. HARRISON, | ||||
Executive Vice President and Chief | Senior Vice President and Chief | |||||
Financial Officer | Accounting Officer | |||||
(Principal Financial Officer) | (Principal Accounting Officer) | |||||
11/18/20 | /s/ Prithviraj Banerjee | 11/18/20 | /s/ Bruce Blakley | |||
Date | PRITHVIRAJ BANERJEE, | Date | BRUCE BLAKLEY, | |||
Director | Director | |||||
11/18/20 | /s/ Maureen Breakiron-Evans | 11/18/20 | /s/ Denise L. Devine | |||
Date | MAUREEN BREAKIRON-EVANS, | Date | DENISE L. DEVINE, | |||
Director | Director | |||||
11/18/20 | /s/ Carolyn A. Flowers | 11/18/20 | /s/ Janice M. Hamby | |||
Date | CAROLYN A. FLOWERS, | Date | JANICE M. HAMBY, | |||
Director | Director | |||||
11/18/20 | /s/ Steven J. Norris | |||||
Date | STEVEN J. NORRIS, | |||||
Director | ||||||
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