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Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the Quarter Ended June 30, 2015

 

001-08931

Commission File Number

 

CUBIC CORPORATION

Exact Name of Registrant as Specified in its Charter

 

Delaware

 

95-1678055

State of Incorporation

 

IRS Employer Identification No.

 

9333 Balboa Avenue
San Diego, California 92123
Telephone (858) 277-6780

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Small Reporting Company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12-b-2 of the Exchange Act). Yes o No x

 

As of July 20, 2015, registrant had only one class of common stock of which there were 26,882,875 shares outstanding (after deducting 8,945,300 shares held as treasury stock).

 

 

 



Table of Contents

 

CUBIC CORPORATION

QUARTERLY REPORT ON FORM 10-Q

For the Quarter Ended June 30, 2015

 

TABLE OF CONTENTS

 

 

 

Page

 

 

 

PART I - FINANCIAL INFORMATION

 

 

 

Item 1.

Financial Statements (Unaudited)

4

 

Condensed Consolidated Statements of Income

4

 

Condensed Consolidated Statements of Comprehensive Income (Loss)

5

 

Condensed Consolidated Balance Sheets

6

 

Condensed Consolidated Statements of Cash Flows

7

 

Notes to the Condensed Consolidated Financial Statements

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

31

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

42

Item 4.

Controls and Procedures

42

 

 

 

PART II - OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings

42

Item 1A.

Risk Factors

43

Item 6.

Exhibits

43

 

2



Table of Contents

 

EXPLANATORY NOTE REGARDING AUDIT COMMITTEE INVESTIGATION

 

As disclosed in Item 2.02 of Form 8-K furnished on February 17, 2015, the Audit Committee of Cubic Corporation (“Company”, “we”, and “us”) conducted an investigation with the assistance of Latham & Watkins LLP and Deloitte FAS LLP to review the Company’s controls and procedures in connection with programs that are accounted for under the percentage of completion method. The Company’s internal controls identified the issue which led to the investigation.  As a result of the investigation, the Audit Committee and management of the Company have together determined that at September 30, 2014, the total estimated costs of certain of the Company’s Cubic Global Defense Systems (CGD Systems) segment (formerly known as Cubic Defense Systems (CDS) segment) contracts were inappropriately reduced during its accounting close for the year ended September 30, 2014. The inappropriate reduction of the estimated costs to complete these contracts resulted in the overstatement of CGD Systems sales and operating income by approximately $750,000 for the fourth quarter and full year of fiscal 2014. This error, in addition to other unrelated immaterial errors that have been identified by the Company’s management, are considered cumulatively immaterial and have been corrected in the financial statements for the quarter ended December 31, 2014.

 

See Note 1, “Basis for Presentation” of the Notes to Condensed Consolidated Financial Statements in “Part I - Item 1. Financial Statements” and “Part I - Item 4. Controls and Procedures” for further detail.

 

3



Table of Contents

 

PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

 

CUBIC CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(amounts in thousands, except per share data)

 

 

 

Nine Months Ended

 

Three Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Net sales:

 

 

 

 

 

 

 

 

 

Products

 

$

392,884

 

$

405,419

 

$

133,762

 

$

136,649

 

Services

 

612,244

 

596,567

 

214,044

 

203,708

 

 

 

1,005,128

 

1,001,986

 

347,806

 

340,357

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Products

 

288,926

 

305,245

 

94,381

 

108,301

 

Services

 

480,671

 

480,906

 

175,334

 

156,726

 

Selling, general and administrative

 

155,603

 

131,508

 

55,127

 

46,489

 

Research and development

 

12,830

 

13,822

 

5,938

 

3,949

 

Amortization of purchased intangibles

 

21,035

 

17,056

 

6,606

 

5,653

 

Restructuring costs

 

5,385

 

227

 

127

 

24

 

 

 

964,450

 

948,764

 

337,513

 

321,142

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

40,678

 

53,222

 

10,293

 

19,215

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest and dividend income

 

1,337

 

958

 

434

 

595

 

Interest expense

 

(3,058

)

(3,117

)

(1,125

)

(1,504

)

Other income (expense) - net

 

(1,157

)

(1,058

)

(257

)

(1,098

)

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

37,800

 

50,005

 

9,345

 

17,208

 

 

 

 

 

 

 

 

 

 

 

Income taxes

 

34,863

 

13,240

 

559

 

4,992

 

 

 

 

 

 

 

 

 

 

 

Net income

 

2,937

 

36,765

 

8,786

 

12,216

 

 

 

 

 

 

 

 

 

 

 

Less noncontrolling interest in income of VIE

 

29

 

79

 

6

 

10

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Cubic

 

$

2,908

 

$

36,686

 

$

8,780

 

$

12,206

 

 

 

 

 

 

 

 

 

 

 

Net income per share attributable to Cubic

 

 

 

 

 

 

 

 

 

Basic

 

$

0.11

 

$

1.37

 

$

0.33

 

$

0.46

 

Diluted

 

$

0.11

 

$

1.36

 

$

0.33

 

$

0.45

 

 

 

 

 

 

 

 

 

 

 

Dividends per common share

 

$

0.14

 

$

0.12

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares used in per share calculations:

 

 

 

 

 

 

 

 

 

Basic

 

26,868

 

26,786

 

26,883

 

26,789

 

Diluted

 

26,925

 

26,901

 

26,960

 

26,921

 

 

See accompanying notes.

 

4



Table of Contents

 

CUBIC CORPORATION

CONDENSED CONSOLIDATED

STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(in thousands)

 

 

 

Nine Months Ended

 

Three Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

2,937

 

$

36,765

 

$

8,786

 

$

12,216

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

(14,742

)

19,107

 

18,315

 

7,245

 

Change in net unrealized gains/losses from cash flow hedges:

 

 

 

 

 

 

 

 

 

Change in fair value of cash flow hedges, net of tax

 

519

 

(261

)

(448

)

(80

)

Adjustment for net gains/losses realized and included in net income, net of tax

 

(767

)

(231

)

101

 

(208

)

Total change in net unrealized gains/losses from cash flow hedges, net of tax

 

(248

)

(492

)

(347

)

(288

)

Total other comprehensive income (loss)

 

(14,990

)

18,615

 

17,968

 

6,957

 

Total comprehensive income (loss)

 

$

(12,053

)

$

55,380

 

$

26,754

 

$

19,173

 

 

5



Table of Contents

 

CUBIC CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands)

 

 

 

June 30,

 

September 30,

 

 

 

2015

 

2014

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

209,305

 

$

215,849

 

Restricted cash

 

69,202

 

69,056

 

Marketable securities

 

5,601

 

1,196

 

Accounts receivable - net

 

389,370

 

394,179

 

Recoverable income taxes

 

12,290

 

16,055

 

Inventories - net

 

66,259

 

38,775

 

Deferred income taxes and other current assets

 

37,612

 

30,277

 

Total current assets

 

789,639

 

765,387

 

 

 

 

 

 

 

Long-term contract receivables

 

13,460

 

15,870

 

Long-term capitalized contract costs

 

71,220

 

76,209

 

Property, plant and equipment - net

 

71,377

 

64,149

 

Deferred income taxes

 

2,707

 

17,849

 

Goodwill

 

239,824

 

184,141

 

Purchased intangibles - net

 

80,466

 

63,618

 

Other assets

 

17,855

 

7,383

 

 

 

$

1,286,548

 

$

1,194,606

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Short-term borrowings

 

$

70,000

 

$

 

Trade accounts payable

 

35,409

 

31,344

 

Customer advances

 

106,448

 

91,690

 

Accrued compensation and other current liabilities

 

133,119

 

133,367

 

Income taxes payable

 

9,979

 

12,737

 

Deferred income taxes

 

4,517

 

474

 

Current portion of long-term debt

 

545

 

563

 

Total current liabilities

 

360,017

 

270,175

 

 

 

 

 

 

 

Long-term debt

 

101,362

 

101,827

 

Other long-term liabilities

 

54,461

 

40,103

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Common stock

 

24,602

 

20,669

 

Retained earnings

 

802,294

 

803,059

 

Accumulated other comprehensive loss

 

(20,362

)

(5,372

)

Treasury stock at cost

 

(36,078

)

(36,078

)

Shareholders’ equity related to Cubic

 

770,456

 

782,278

 

Noncontrolling interest in variable interest entity

 

252

 

223

 

Total shareholders’ equity

 

770,708

 

782,501

 

 

 

$

1,286,548

 

$

1,194,606

 

 

See accompanying notes.

 

6



Table of Contents

 

CUBIC CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

 

 

 

Nine Months Ended

 

Three Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Operating Activities:

 

 

 

 

 

 

 

 

 

Net income

 

$

2,937

 

$

36,765

 

$

8,786

 

$

12,216

 

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

28,717

 

22,740

 

8,653

 

7,511

 

Share-based compensation expense

 

6,652

 

4,370

 

1,361

 

1,785

 

Changes in operating assets and liabilities net of effects from acquisitions

 

8,186

 

(27,138

)

(33,406

)

44,524

 

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

 

46,492

 

36,737

 

(14,606

)

66,036

 

 

 

 

 

 

 

 

 

 

 

Investing Activities:

 

 

 

 

 

 

 

 

 

Acquisition of businesses, net of cash acquired

 

(90,172

)

(83,456

)

(712

)

(3,773

)

Purchases of property, plant and equipment

 

(15,743

)

(13,536

)

(13,163

)

(2,589

)

Purchases of marketable securities

 

(6,201

)

 

(1,611

)

 

Proceeds from sales or maturities of marketable securities

 

1,196

 

4,055

 

 

 

Purchases of other assets

 

(2,993

)

 

 

 

NET CASH USED IN INVESTING ACTIVITIES

 

(113,913

)

(92,937

)

(15,486

)

(6,362

)

 

 

 

 

 

 

 

 

 

 

Financing Activities:

 

 

 

 

 

 

 

 

 

Proceeds from short-term borrowings

 

95,000

 

38,000

 

25,000

 

8,000

 

Principal payments on short-term borrowings

 

(25,000

)

(30,000

)

(10,000

)

(30,000

)

Principal payments on long-term debt

 

(403

)

(431

)

(134

)

(147

)

Proceeds from issuance of common stock

 

 

113

 

 

 

Purchases of common stock

 

(2,652

)

 

(929

)

 

Dividends paid

 

(3,627

)

(3,215

)

 

 

Net change in restricted cash

 

(146

)

353

 

(45

)

(44

)

Contingent consideration payments related to acquisitions of businessess

 

 

(2,368

)

 

(1,251

)

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

 

63,172

 

2,452

 

13,892

 

(23,442

)

 

 

 

 

 

 

 

 

 

 

Effect of exchange rates on cash

 

(2,295

)

16,697

 

17,401

 

5,266

 

 

 

 

 

 

 

 

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

(6,544

)

(37,051

)

1,201

 

41,498

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at the beginning of the period

 

215,849

 

203,892

 

208,104

 

125,343

 

 

 

 

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD

 

$

209,305

 

$

166,841

 

$

209,305

 

$

166,841

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

 

Liability incurred to acquire DTECH, net

 

$

8,898

 

$

 

$

44

 

$

 

Liability incurred to acquire Intific, net

 

$

 

$

1,173

 

$

 

$

 

 

See accompanying notes.

 

7



Table of Contents

 

CUBIC CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

June 30, 2015

 

Note 1 — Basis for Presentation

 

Cubic Corporation (“we”, “us”, and “Cubic”) has prepared the accompanying unaudited condensed consolidated financial statements in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

 

In our opinion, all adjustments necessary for a fair presentation of these financial statements have been included, and are of a normal and recurring nature, with the exceptions discussed within the Audit Committee Investigation and Correction of Immaterial Errors subsections below, considered necessary to fairly state the financial position of Cubic Corporation at June 30, 2015 and September 30, 2014; the results of its operations for the three- and nine-month periods ended June 30, 2015 and 2014; and its cash flows for the three- and nine-month periods ended June 30, 2015 and 2014. Operating results for the three- and nine-month periods ended June 30, 2015 are not necessarily indicative of the results that may be expected for the year ending September 30, 2015. For further information, refer to the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended September 30, 2014.

 

In February 2015, we implemented a plan to restructure our defense services and defense systems businesses into a single business called Cubic Global Defense (CGD) to better align our defense business organizational structure with customer requirements, increase operational efficiencies and improve collaboration and innovation across the company. After this restructuring there is now a single, combined management structure for our legacy Cubic Defense Systems (CDS) and legacy Mission Support Services (MSS) segments. However, for segment financial reporting purposes, we continue to report the financial results of our defense systems and defense services segments separately. These two reporting segments have been renamed Cubic Global Defense Systems (CGD Systems) and Cubic Global Defense Services (CGD Services), respectively. There have been no significant changes in the operations that are included in each of these reporting segments as a result of the restructuring.

 

The preparation of the financial statements in conformity with GAAP requires us to make estimates and assumptions 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. Actual results could differ from those estimates.

 

Audit Committee Investigation

 

Our Audit Committee has conducted an investigation with the assistance of Latham & Watkins LLP and Deloitte FAS LLP to review our controls and procedures in connection with programs that are accounted for under the percentage of completion method. Through the application of the Company’s internal controls, management identified an issue which led to the investigation. As a result of the investigation, the Audit Committee and management of the Company have together determined that as of September 30, 2014, the total estimated costs of certain of our CGD Systems segment contracts were inappropriately reduced during its accounting close for the year ended September 30, 2014. The inappropriate reduction of the estimated costs to complete these contracts resulted in the overstatement of CGD Systems sales and operating income by approximately $750,000 for the quarter and year ended September 30, 2014.

 

Correction of Immaterial Errors

 

During the accounting close for our March 31, 2015 financial statements, we identified certain errors, unrelated to the matters described in the paragraph above, in our September 30, 2014 financial statements. These errors included an overstatement of revenue recognition on one contract and the understatement of cost of sales on a small number of contracts. The cumulative impact of these errors resulted in an overstatement of the Company’s operating income for the year ended September 30, 2014 of $1.6 million.

 

8



Table of Contents

 

The cumulative amount of the errors described in the two paragraphs above overstated the Company’s operating income for fiscal 2014 by $2.4 million and understated the Company’s operating income for 2013 and prior years, cumulatively, by $0.3 million. The impact of correcting the above mentioned errors in the quarter ended December 31, 2014 understated operating income for the quarter by $2.1 million. The impact of correcting these errors (overstated) understated the following amounts in the quarter ended December 31, 2014 (in thousands):

 

 

 

Audit Committee

 

 

 

 

 

 

 

Investigation

 

 

 

 

 

 

 

Error

 

Other Errors

 

Total Errors

 

 

 

 

 

 

 

 

 

Net sales:

 

 

 

 

 

 

 

Products

 

$

747

 

$

517

 

$

1,264

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

Products

 

 

138

 

138

 

Services

 

 

438

 

438

 

Selling, general and administrative

 

 

(1,385

)

(1,385

)

 

 

 

(809

)

(809

)

 

 

 

 

 

 

 

 

Operating income

 

747

 

1,326

 

2,073

 

 

 

 

 

 

 

 

 

Income before income taxes

 

747

 

1,326

 

2,073

 

 

 

 

 

 

 

 

 

Income taxes

 

299

 

490

 

789

 

 

 

 

 

 

 

 

 

Net income attributable to Cubic

 

$

448

 

$

836

 

$

1,284

 

 

Based on a qualitative and quantitative analysis of these errors, management concluded that all such errors are cumulatively and individually considered immaterial to the 2014 financial statements and are immaterial to the expected full year results for 2015 and had no effect on the trend of financial results. As such, these errors have been corrected in the financial statements for the quarter ended December 31, 2014.

 

Interim Goodwill Impairment Test

 

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 on an annual basis and when circumstances indicate that an impairment is more likely than not. Such circumstances 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.

 

In the second quarter of fiscal 2015, we learned that our CGD Services business had not won two contracts for new work on which it had submitted proposals. Consequently, in the second quarter our Defense Services business lowered its internal profitability projections. As such, in the second quarter of fiscal 2015 we believed that it was appropriate to perform an interim goodwill impairment test for our Defense Services 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 value, including recorded goodwill. If the carrying value 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 value. Any resulting impairment determined would be recorded in the current period.

 

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Table of Contents

 

Determining the fair value of a reporting unit for purposes of the goodwill impairment test 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. Based upon the results of the first step of the impairment analysis that we performed, the estimated fair value for our Defense Services reporting unit exceeded its carrying value. As such, no impairment of goodwill was recorded in connection with our interim impairment test performed in the second quarter of fiscal 2015. In the third quarter of fiscal 2015, no interim goodwill impairment test was deemed necessary.

 

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.

 

Significant Accounting Policies

 

There have been no material changes to our significant accounting policies as compared with the significant accounting policies described in our Annual Report on Form 10-K for the year ended September 30, 2014.

 

Recent Accounting Pronouncements

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 outlines a comprehensive revenue recognition model and supersedes most current revenue recognition guidance and will require revenue to be recognized when promised goods or services are transferred to customers in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods or services. Adoption of the new rules could affect the timing of revenue recognition for certain transactions. ASU 2014-09 will be effective for us starting in the first quarter of fiscal 2019 or we may adopt ASU 2014-09 early in the first quarter of 2018. ASU 2014-09 allows for two methods of adoption: (a) “full retrospective” adoption, meaning the standard is applied to all periods presented, or (b) “modified retrospective” adoption, meaning the cumulative effect of applying ASU 2014-09 is recognized as an adjustment to the opening retained earnings balance in the year of adoption. We have not yet determined which method of adoption we will select or if we will choose to adopt the standard early. As the new standard will supersede substantially all existing revenue guidance affecting us under GAAP, it could impact revenue and cost recognition on a significant number of contracts across our business segments, in addition to our business processes and our information technology systems. As a result, our evaluation of the effect of the new standard will likely extend over several future periods.

 

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements - Going Concern, which requires management to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and provide related footnote disclosures. The guidance is effective for annual and interim reporting periods beginning on or after December 15, 2016. ASU 2014-15 will be effective for the Company beginning in the first quarter of fiscal 2016. Early adoption is permitted for financial statements that have not been previously issued. This adoption is not expected to have a significant impact on our financial statements.

 

In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. The new standard modifies current guidance on consolidation under the variable interest model and the voting model. ASU 2015-02 will be effective for the Company beginning in the first quarter of fiscal 2016. We are currently evaluating the impact of ASU 2015-02 on our financial statements.

 

In April 2015, the FASB issued ASU 2015-05, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. ASU 2015-05 provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. ASU 2015-05 will be effective for the Company beginning on October 1, 2016, with early adoption permitted. We are currently assessing the impact that adopting this new accounting guidance will have on our consolidated financial statements.

 

In April 2015, the FASB issued ASU  2015-03, Simplifying the Presentation of Debt Issuance Costs which requires that all costs incurred to issue debt be presented in the balance sheet as a direct reduction from the carrying value of the debt, similar to the presentation of debt discounts. ASU 2015-03 is effective for us on October 1, 2016 with early adoption permitted. We do not expect that the adoption of this new accounting guidance will have a material impact on our consolidated financial statements.

 

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Note 2 — Acquisitions

 

Each of the following acquisitions has 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.

 

DTECH LABS, Inc.

 

On December 16, 2014 we acquired all of the outstanding capital stock of DTECH LABs, Inc. (DTECH). DTECH, based in Sterling, VA, is a provider of modular networking and baseband communications equipment and adds networking capability to our secure communications business in our CGD Systems segment. In addition, this acquisition expands the portfolio of product offerings and the customer base of our CGD Systems segment.

 

For the three months ended June 30, 2015, the amount of DTECH’s sales and net loss after taxes included in our Condensed Consolidated Statement of Income were $10.8 million and $0.2 million, respectively. For the nine months ended June 30, 2015, the amount of DTECH’s sales and net loss after taxes included in our Condensed Consolidated Statement of Income were $22.6 million and $2.0 million, respectively. Included in DTECH’s operating results for the nine months ended June 30, 2015 are $0.8 million of transaction and acquisition related costs before related income taxes.

 

The purchase agreement states that the cost of the acquisition is approximately $99.5 million, adjusted by the difference between the net working capital acquired and the targeted working capital amounts and adjusted for other acquisition related payments made upon closing, plus a contingent amount of up to $15.0 million based upon DTECH’s achievement of revenue and gross profit targets in the future. The acquisition date fair value of the consideration transferred is estimated to be $99.4 million. Through June 30, 2015 we have paid $91.0 million to the seller.

 

At June 30, 2015 we have recorded a liability of $8.9 million as an estimate of the fair value of additional cash consideration that will be due to the seller in the future. The fair value of the additional consideration is made up of two components, the holdback consideration and the contingent consideration.

 

Approximately $4.9 million of cash consideration (Holdback Consideration) will be paid to the seller over time when certain events occur in the future. The fair value of the Holdback Consideration is estimated to approximate $4.5 million using a discounted cash flow model, based upon the expected timing of the payment of the Holdback Consideration. In addition to the Holdback Consideration, we will pay the seller up to $15.0 million of contingent cash consideration based upon DTECH’s achievement of revenue and gross profit targets. The purchase agreement specifies independent revenue and gross profit targets for the period from our acquisition of DTECH through September 30, 2015, and separately for each of fiscal 2016 and fiscal 2017. The total fair value of the contingent consideration has been estimated at $4.4 million as of June 30, 2015 using a real options approach (see Note 5 for further discussion of fair value measurements). The contingent consideration liability is re-measured to fair value at each reporting date until the contingencies are resolved and any changes in fair value are recognized in earnings.

 

The acquisition of DTECH was paid for with a combination of funds from our existing cash resources and borrowings on our revolving credit facility. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date (in millions):

 

Customer relationships

 

$

35.1

 

Non compete agreements

 

0.7

 

Backlog

 

2.1

 

Cash

 

0.9

 

Accounts receivable

 

5.4

 

Inventory

 

4.2

 

Warranty obligation

 

(0.4

)

Tax liabilities

 

(3.3

)

Accounts payable and accrued expenses

 

(3.3

)

Other net assets acquired

 

0.2

 

Net identifiable assets acquired

 

41.6

 

Goodwill

 

57.8

 

Net assets acquired

 

$

99.4

 

 

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The estimated fair values of purchased intangibles are preliminary estimates pending the finalization of our valuation analyses. The preliminary 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 customer relationships and backlog valuation used the excess earnings approach and the non-compete agreements used the with-and-without approach.

 

The intangible assets will be amortized using a combination of straight-line and accelerated methods based on the expected cash flows from the assets, over a weighted average useful life of two years from the date of acquisition and is expected to be deductible for tax purposes.

 

The goodwill resulting from the acquisition consists primarily of the synergies expected from combining the operations of DTECH with our existing CGD Systems business, including the synergies expected from combining the networking and secure communications technologies of DTECH, and complementary products that will enhance our overall product and service portfolio. The goodwill also consists of 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 CGD Systems segment and is expected to be deductible for tax purposes.

 

Based upon the preliminary estimate of the fair value of identifiable intangible assets, the estimated amortization expense related to the intangible assets recorded in connection with our acquisition of DTECH for future periods is as follows (in millions):

 

Year Ended
September 30,

 

 

 

2015

 

$

9.2

 

2016

 

8.0

 

2017

 

6.8

 

2018

 

5.5

 

2019

 

4.1

 

Thereafter

 

4.3

 

 

Intific

 

On February 28, 2014 we acquired all of the outstanding capital stock of Intific Inc. (Intific). Intific is focused on software and game-based solutions in modeling and simulation, training and education, cyber warfare, and neuroscience. The acquisition of Intific expanded the portfolio of services and customer base of our CGD Systems segment.

 

For the three months ended June 30, 2015, the amount of Intific’s sales and net loss after taxes included in our Condensed Consolidated Statement of Income were $3.8 million and $0.3 million, respectively. For the three months ended June 30, 2014, the amount of Intific’s sales and net loss after taxes included in our Condensed Consolidated Statement of Income were $1.9 million and $1.7 million, respectively.

 

For the nine months ended June 30, 2015, the amount of Intific’s sales and net loss after taxes included in our Condensed Consolidated Statement of Income were $10.6 million and $1.5 million, respectively. For the nine months ended June 30, 2014, the amount of Intific’s sales and net loss after taxes included in our Condensed Consolidated Statement of Income were $2.7 million and $3.8 million, respectively. Included in Intific’s operating results for the nine months ended June 30, 2014 are $0.2 million of transaction and acquisition related costs, and $3.7 million of compensation expense which was paid to Intific employees upon the close of the acquisition.

 

The acquisition date fair value of the consideration transferred was $12.4 million. Through June 30, 2015, we have paid cash of approximately $11.2 million to the seller and as of June 30, 2015 we have accrued a liability of $1.2 million for the remaining cash to be paid.

 

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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):

 

Customer relationships

 

$

2.0

 

Technology

 

0.7

 

Backlog

 

0.7

 

Other intangible assets

 

0.2

 

Accounts receivable

 

1.5

 

Deferred tax assets

 

1.5

 

Accounts payable and accrued expenses

 

(0.6

)

Deferred tax liabilities

 

(1.5

)

Other net assets acquired

 

0.5

 

Net identifiable assets acquired

 

5.0

 

Goodwill

 

7.4

 

Net assets acquired

 

$

12.4

 

 

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 customer relationships and backlog valuation used the excess earnings approach and the technology valuation used the replacement cost approach.

 

The intangible assets will be amortized using a combination of straight-line and accelerated methods based on the expected cash flows from the assets, over a weighted average useful life of two years from the date of acquisition and the amortization expense is not expected to be deductible for tax purposes.

 

The net deferred tax assets and liabilities offset each other to a negligible amount. However, the deferred tax liabilities of $1.5 million were primarily recorded to reflect the tax impact of amortization related to identified intangible assets that is not expected to be deductible for tax purposes, net of acquisition consideration that is a tax deductible expense. The deferred tax assets of $1.5 million primarily related to the future tax deduction for the cancellation of unvested options.

 

The goodwill resulting from the acquisition consists primarily of the synergies expected from combining the operations of Intific with our existing CGD Systems business and the acquired assembled workforce. The anticipated synergies include the ability to expand services offerings and cost reductions. The amount recorded as goodwill is allocated to our CGD Systems segment and is not expected to be deductible for tax purposes.

 

The estimated amortization expense related to the intangible assets recorded in connection with our acquisition of Intific for future periods is as follows (in millions):

 

Year Ended
September 30,

 

 

 

2015

 

$

0.9

 

2016

 

0.7

 

2017

 

0.6

 

2018

 

0.5

 

2019

 

0.2

 

Thereafter

 

0.1

 

 

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Table of Contents

 

ITMS

 

On November 26, 2013 we acquired all of the outstanding capital stock of Intelligent Transport Management Solutions Limited (ITMS) from Serco Limited. ITMS is a provider of traffic management systems technology, traffic and road enforcement and maintenance of traffic signals, emergency equipment and other critical road and tunnel infrastructure. The acquisition of ITMS expands the portfolio of services and customer base of our Cubic Transportation Systems (CTS) segment.

 

For the three months ended June 30, 2015, the amount of ITMS’ sales and net loss after taxes included in our Condensed Consolidated Statement of Income were $10.9 million and $0.6 million, respectively. For the three months ended June 30, 2014, the amount of ITMS’ sales and net loss after taxes included in our Condensed Consolidated Statement of Income were $12.8 million and $0.5 million, respectively.

 

For the nine months ended June 30, 2015, the amount of ITMS’ sales and net loss after taxes included in our Condensed Consolidated Statement of Income were $33.1 million and $2.2 million, respectively. For the nine months ended June 30, 2014, the amount of ITMS’ sales and net loss after taxes included in our Condensed Consolidated Statement of Income were $30.1 million and $0.2 million, respectively. Included in the ITMS operating results are $0.5 million of transaction costs incurred during the nine months ended June 30, 2014.

 

The acquisition date fair value of the consideration transferred was $72.2 million. We paid the seller cash of $69.0 million in November 2013 and $3.2 million in May 2014.

 

The following table summarizes the fair values of the assets acquired and liabilities assumed at the acquisition date (in millions):

 

Customer relationships

 

$

15.7

 

Intellectual property

 

1.6

 

Backlog

 

5.7

 

Supplier relationships

 

0.6

 

Agreements with seller

 

1.3

 

Accounts receivable - billed

 

4.4

 

Accounts receivable - unbilled

 

6.9

 

Deferred tax liabilities, net

 

(0.2

)

Deferred revenue

 

(2.6

)

Accounts payable and accrued expenses

 

(4.6

)

Other net assets acquired

 

2.6

 

Net identifiable assets acquired

 

31.4

 

Goodwill

 

40.8

 

Net assets acquired

 

$

72.2

 

 

The fair values of purchased intangibles were determined using the valuation methodology deemed to be the most appropriate for each type of asset being valued. The customer relationships and backlog valuation used the excess earnings approach and the non-compete agreement and seller agreements valuations used the with-and-without approach. The supplier relationship and intellectual property valuations used the replacement cost approach.

 

The intangible assets will be amortized using a combination of straight-line and accelerated methods based on the expected cash flows from the assets, over a weighted average useful life of two years from the date of acquisition. Future amortization of purchased intangibles is not deductible for tax purposes.

 

The goodwill resulting from the acquisition consists primarily of the synergies expected from combining the operations of ITMS with our existing CTS business and the acquired assembled workforce. The anticipated synergies include the ability to expand services offerings and cost reductions. The amount recorded as goodwill is allocated to our CTS segment and is not expected to be deductible for tax purposes.

 

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Table of Contents

 

The estimated amortization expense related to the intangible assets recorded in connection with our acquisition of ITMS for future periods is as follows (in millions):

 

Year Ended
September 30,

 

 

 

2015

 

$

5.9

 

2016

 

4.9

 

2017

 

3.9

 

2018

 

2.9

 

2019

 

0.9

 

Thereafter

 

0.1

 

 

Changes in goodwill for the nine months ended June 30, 2015 were as follows (in millions):

 

 

 

 

 

Cubic Global

 

Cubic Global

 

 

 

 

 

Transportation

 

Defense

 

Defense

 

 

 

 

 

Systems

 

Services

 

Systems

 

Total

 

 

 

 

 

 

 

 

 

 

 

Balances at September 30, 2014

 

$

59.2

 

$

94.4

 

$

30.6

 

$

184.2

 

Acquisitions

 

 

 

57.8

 

57.8

 

Foreign currency exchange rate changes

 

(1.6

)

 

(0.6

)

(2.2

)

Balances at June 30, 2015

 

$

57.6

 

$

94.4

 

$

87.8

 

$

239.8

 

 

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Table of Contents

 

Pro forma information

 

The following unaudited pro forma information presents our consolidated results of operations as if DTECH, Intific and ITMS had been included in our consolidated results since October 1, 2013 (in millions):

 

 

 

Nine Months Ended

 

Three Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

1,014.8

 

$

1,046.5

 

$

347.8

 

$

352.5

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Cubic

 

$

4.0

 

$

37.9

 

$

8.8

 

$

13.8

 

 

The pro forma information includes adjustments to give effect to pro forma events that are directly attributable to the acquisitions and have a continuing impact on operations including the amortization of purchased intangibles and the elimination of interest expense for the repayment of debt. There were no material, nonrecurring pro forma adjustments directly attributable to the business combinations included in the reported pro forma sales and net income attributable to Cubic. No adjustments were made for transaction expenses, other adjustments that do not reflect ongoing operations or for operating efficiencies or synergies. The pro forma financial information is not necessarily indicative of what the consolidated financial results of our operations would have been had the acquisitions been completed on October 1, 2013, and it does not purport to project our future operating results.

 

Note 3 — Net Income Per Share

 

Basic net income per share (EPS) is computed by dividing the net income for the period by the weighted average number of common shares outstanding during the period, including vested restricted stock units (RSUs).

 

In periods with a net income, 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 restricted stock units. Dilutive restricted stock units are calculated based on the average share price for each fiscal period using the treasury stock method. For RSUs with performance-based vesting, no common equivalent shares are included in the computation of diluted EPS until the related performance criteria have been met. In periods with a net loss, common equivalent shares are not included in the computation of diluted EPS, because to do so would be anti-dilutive.

 

Basic and diluted EPS are computed as follows (amounts in thousands, except per share data).

 

 

 

Nine Months Ended

 

Three Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Cubic

 

$

2,908

 

$

36,686

 

$

8,780

 

$

12,206

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares - basic

 

26,868

 

26,786

 

26,883

 

26,789

 

Effect of dilutive securities

 

57

 

115

 

77

 

132

 

Weighted average shares - diluted

 

26,925

 

26,901

 

26,960

 

26,921

 

 

 

 

 

 

 

 

 

 

 

Net income per share attributable to Cubic, basic

 

$

0.11

 

$

1.37

 

$

0.33

 

$

0.46

 

Effect of dilutive securities

 

 

(0.01

)

 

(0.01

)

Net income per share attributable to Cubic, diluted

 

$

0.11

 

$

1.36

 

$

0.33

 

$

0.45

 

 

 

 

 

 

 

 

 

 

 

Anti-dilutive employee share-based awards

 

 

 

 

 

 

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Table of Contents

 

Note 4 — Balance Sheet Details

 

Marketable Securities

 

Marketable securities consist of fixed time deposits with short-term maturities. Marketable securities are classified and accounted for as available-for-sale. These investments are recorded at fair value in the accompanying Condensed Consolidated Balance Sheets and the change in fair value is recorded, net of taxes, as a component of other comprehensive income (loss). There have been no significant realized or unrealized gains or losses on these marketable securities to date. Marketable securities have been classified as current assets in the accompanying Condensed Consolidated Balance Sheets based upon the nature of the securities and availability for use in current operations.

 

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Table of Contents

 

Accounts Receivable

 

The components of accounts receivable are as follows (in thousands):

 

 

 

June 30,

 

September 30,

 

 

 

2015

 

2014

 

 

 

 

 

 

 

Trade and other receivables

 

$

16,119

 

$

30,593

 

Long-term contracts:

 

 

 

 

 

Billed

 

92,436

 

121,871

 

Unbilled

 

294,442

 

258,074

 

Allowance for doubtful accounts

 

(167

)

(489

)

Total accounts receivable

 

402,830

 

410,049

 

Less estimated amounts not currently due

 

(13,460

)

(15,870

)

Current accounts receivable

 

$

389,370

 

$

394,179

 

 

The amount classified as not currently due is an estimate of the amount of long-term contract accounts receivable that will not be collected within one year from June 30, 2015 under transportation systems contracts in the U.S. and Australia based upon the payment terms in the contracts. The non-current balance at September 30, 2014 represented non-current amounts due from customers under transportation systems contracts in the same locations.

 

Inventories

 

Inventories consist of the following (in thousands):

 

 

 

June 30,

 

September 30,

 

 

 

2015

 

2014

 

 

 

 

 

 

 

Work in process and inventoried costs under long-term contracts

 

$

83,061

 

$

58,440

 

Materials and purchased parts

 

2,367

 

125

 

Customer advances

 

(19,169

)

(19,790

)

Net inventories

 

$

66,259

 

$

38,775

 

 

Pursuant to contract provisions, agencies of the U.S. government and certain other customers have title to, or security interest in, inventories related to such contracts as a result of advances, performance-based payments, and progress payments. Contract advances, performance-based payments and progress payments received are recorded as an offset against the related inventory balances for contracts that are accounted for on a percentage-of-completion basis using units-of-delivery as the basis to measure progress toward completing the contract. This determination is performed on a contract by contract basis. Any amount of payments received in excess of the cumulative amount of accounts receivable and inventoried costs for a contract is classified as customer advances, which is classified as a liability on the balance sheet.

 

At June 30, 2015, work in process and inventoried costs under long-term contracts includes approximately $1.8 million in costs incurred outside the scope of work or in advance of a contract award compared to $2.3 million at September 30, 2014. We believe it is probable that we will recover the costs inventoried at June 30, 2015, plus a profit margin, under contract change orders or awards within the next year.

 

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Table of Contents

 

Long-term Capitalized Costs

 

Long-term capitalized contract costs consist of costs incurred on a contract to develop and manufacture a transportation fare system for a customer for which revenue recognition did not begin until the customer began operating the system in the fourth fiscal quarter of 2013. These capitalized costs are being recognized as cost of sales based upon the ratio of revenue recorded during the period compared to the revenue expected to be recognized over the term of the contract, which is through January 2024. Long-term capitalized costs that were recognized as cost of sales totaled $2.3 million and $6.0 million for the quarter and nine-month periods ended June 30, 2015, respectively, and $5.1 million and $6.1 million for the quarter and nine-month periods ended June 30, 2014, respectively. The balance of long-term capitalized costs at June 30, 2015 is expected to be recognized as cost of sales in approximately equal quarterly amounts in future months through the term of the contract.

 

Capitalized Software

 

We capitalize certain costs associated with the development or purchase of internal-use software. The amounts capitalized are included in property, plant and equipment in our Condensed Consolidated Balance Sheets and are amortized on a straight-line basis over the estimated useful life of the software, which ranges from three to seven years. No amortization expense is recorded until the software is ready for its intended use. As a part of our ongoing effort to upgrade our current information systems, early in fiscal 2015 we began the process of designing and implementing new enterprise resource planning (ERP) software and other software applications to manage our operations. Capitalized software costs totaled $1.3 million and $12.1 million for the quarter and nine-month periods ended June 30, 2015, respectively. The vast majority of the capitalized software costs at June 30, 2015 are related to the development of our ERP system, which is classified as construction in process as it has not yet been placed in service. At September 30, 2014 the carrying value of capitalized software was immaterial.

 

In addition to software costs that were capitalized in fiscal 2015, during the three and nine months ended June 30, 2015, we recognized expense related to the development of our ERP system of $4.7 million and $6.6 million, respectively, for costs that did not meet the requirements for capitalization. ERP expense is classified within selling, general and administrative expenses in the Condensed Consolidated Statements of Income.

 

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Table of Contents

 

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 long-term liabilities in our Condensed Consolidated Balance Sheets and totaled $9.7 million and $9.5 million at June 30, 2015 and September 30, 2014, respectively.

 

In the first quarter of fiscal 2015, we began making 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 June 30, 2015 was $3.0 million. These assets are classified as other non-current assets and consist of life insurance contracts with a carrying value of $2.0 million and marketable securities with a carrying value of $1.0 million. The carrying value of the life insurance contracts is based on the cash surrender value of the policies. The marketable securities in the rabbi trust are carried at fair value, which is based upon quoted market prices for identical securities. Changes in the carrying value of the deferred compensation liability, and changes in the carrying value of the assets held in the rabbi trust are reflected in our Condensed Consolidated Statements of Income.

 

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 fair value of cash equivalents and short-term investments approximates their cost. The fair value of our marketable securities is determined based on quoted market prices for identical securities. 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 our contingent consideration liability to the seller of DTECH is revalued to its 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. The fair value of the contingent consideration was estimated using a real options approach. Each annual payment was modeled using a portfolio of long and short digital options written on the underlying earnings metric (revenue or gross profit). The strike price for each option is the respective earnings threshold as specified in the agreement, and the spot price is calibrated to the revenue and gross profit forecast by calculating the present value of the corresponding projected earnings metric using a risk-adjusted discount rate. The volatility for the underlying earnings metrics was estimated to be 22% based on analysis of comparable guideline public companies. The risk-free rate was selected based on the quoted yields for U.S. Treasury securities with terms matching the earn-out payment period. The inputs to this model are 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 date and each subsequent period. Accordingly, changes in the assumptions described above can materially impact the amount of contingent consideration expense we record in any period.

 

There was no change in the fair value of the contingent consideration between the date of the acquisition of DTECH and March 31, 2015; therefore, no contingent consideration expense was recorded through March 31, 2015.  For the period from April 1, 2015 through June 30, 2015 the following table summarizes the change in fair value of our Level 3 contingent consideration liability (in thousands):

 

Balance as of April 1, 2015

 

$

3,900

 

Total remeasurement recognized in earnings

 

 

450

 

Balance as of June 30, 2015

 

$

4,350

 

 

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The following table presents assets and liabilities measured and recorded at fair value on our balance sheets on a recurring basis (in thousands):

 

 

 

June 30, 2015

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

56,571

 

$

26,320

 

$

 

$

82,891

 

Marketable securities

 

 

5,601

 

 

5,601

 

Current derivative assets

 

 

9,693

 

 

9,693

 

Noncurrent derivative assets

 

 

13,466

 

 

13,466

 

Marketable securities in rabbi trust

 

992

 

 

 

992

 

Total assets measured at fair value

 

$

57,563

 

$

55,080

 

$

 

$

112,643

 

Liabilities

 

 

 

 

 

 

 

 

 

Current derivative liabilities

 

$

 

$

9,287

 

$

 

$

9,287

 

Noncurrent derivative liabilities

 

 

13,466

 

 

13,466

 

Current contingent consideration to seller of DTECH

 

 

 

1,989

 

1,989

 

Noncurrent contingent consideration to seller of DTECH

 

 

 

2,361

 

2,361

 

Total liabilities measured at fair value

 

$

 

$

22,753

 

$

4,350

 

$

27,103

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2014

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

46,183

 

$

34,511

 

$

 

$

80,694

 

Marketable securities

 

 

1,196

 

 

1,196

 

Current derivative assets

 

 

7,389

 

 

7,389

 

Noncurrent derivative assets

 

 

5,920

 

 

5,920

 

Total assets measured at fair value

 

$

46,183

 

$

49,016

 

$

 

$

95,199

 

Liabilities

 

 

 

 

 

 

 

 

 

Current derivative liabilities

 

$

 

$

6,645

 

$

 

$

6,645

 

Noncurrent derivative liabilities

 

 

5,878

 

 

5,878

 

Total liabilities measured at fair value

 

$

 

$

12,523

 

$

 

$

12,523

 

 

We carry financial instruments, including accounts receivable, accounts payable and accrued liabilities at cost, which we believe approximates fair value because of the short-term maturity of these instruments.

 

The following table presents the estimated fair value and carrying value of our long-term debt (in millions):

 

 

 

June 30,

 

September 30,

 

 

 

2015

 

2014

 

Fair value

 

$

99.7

 

$

99.6

 

Carrying value

 

$

101.9

 

$

102.4

 

 

The fair value of long-term debt is calculated by discounting the value of the note based on market interest rates for similar debt instruments, which is a Level 2 technique.

 

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Note 6 — Financing Arrangements

 

In March 2013, we entered into a note purchase and private shelf agreement pursuant to which we issued $100.0 million of senior unsecured notes, bearing interest at a rate of 3.35% and maturing on March 12, 2025. Interest on these notes is due semi-annually and principal payments are due from 2021 through 2025.

 

In addition, pursuant to the agreement, on July 17, 2015 we issued additional senior unsecured notes in an aggregate principal amount of $25.0 million. These additional notes will also mature on March 12, 2025 and will bear an interest rate of 3.70%.  All other terms, including the principal and interest payment dates are the same as the notes issued in March 2013.

 

We have a committed five-year revolving credit agreement (Revolving Credit Agreement) with a group of financial institutions in the amount of $200 million, which expires in May 2017. The available line of credit is reduced by any letters of credit issued under the Revolving Credit Agreement. As of June 30, 2015, there were borrowings totaling $70.0 million under this agreement and there were letters of credit outstanding totaling $22.9 million, which reduce the available line of credit to $107.1 million.

 

We have a secured letter of credit facility agreement with a bank (Secured Letter of Credit Facility) which is cancellable by us at any time upon the completion of certain conditions to the satisfaction of the bank. At June 30, 2015 there were letters of credit outstanding under this agreement of $61.0 million. Restricted cash at June 30, 2015 of $69.2 million was held on deposit in the U.K. as collateral in support of this Secured Letter of Credit Facility. We are required to leave the cash in the restricted account so long as the bank continues to maintain associated letters of credit under the facility. The maximum amount of letters of credit currently allowed by the facility is $62.8 million, and any increase above this amount would require bank approval and additional restricted funds to be placed on deposit. We may choose at any time to terminate the facility and move the associated letters of credit to another credit facility. Letters of credit outstanding under the Secured Letter of Credit Facility do not reduce the available line of credit under the Revolving Credit Agreement.

 

As of June 30, 2015, we had letters of credit and bank guarantees outstanding totaling $79.3 million, including the letters of credit outstanding under the Revolving Credit Agreement and the Secured Letter of Credit Facility, which guarantee either our performance or customer advances under certain contracts. In addition, we had financial letters of credit outstanding totaling $16.6 million as of June 30, 2015, which primarily guarantee our payment of certain self-insured liabilities. We have never had a drawing on a letter of credit instrument, nor are any anticipated; therefore, we estimate the fair value of these instruments to be zero.

 

We maintain short-term borrowing arrangements in New Zealand and Australia totaling $0.5 million New Zealand dollars (equivalent to approximately $0.34 million) and $3.0 million Australian dollars (equivalent to approximately $2.3 million) to help meet the short- term working capital requirements of our subsidiaries in those countries. At June 30, 2015, no amounts were outstanding under these borrowing arrangements.

 

The terms of certain of our lending and credit agreements include provisions that require and/or limit, among other financial ratios and measurements, the permitted levels of debt, coverage of cash interest expense, and under certain circumstances, payments of dividends or other distributions to shareholders. As of June 30, 2015, these agreements do not restrict such distributions to shareholders.

 

Our self-insurance arrangements are limited to certain workers’ compensation plans, automobile liability and product liability claims. Under these arrangements, we self-insure only up to the amount of a specified deductible for each claim. Self-insurance liabilities included in other current liabilities on the balance sheet amounted to $8.7 million and $9.1 million as of June 30, 2015 and September 30, 2014, respectively.

 

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Note 7 — Pension Plans

 

The components of net periodic pension cost (benefit) are as follows (in thousands):

 

 

 

Nine Months Ended

 

Three Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Service cost

 

$

505

 

$

463

 

$

166

 

$

157

 

Interest cost

 

6,833

 

7,461

 

2,248

 

2,505

 

Expected return on plan assets

 

(10,363

)

(9,869

)

(3,483

)

(3,313

)

Amortization of actuarial loss

 

521

 

599

 

183

 

202

 

Administrative expenses

 

121

 

114

 

42

 

38

 

Net pension benefit

 

$

(2,383

)

$

(1,232

)

$

(844

)

$

(411

)

 

Note 8 - Stockholders’ Equity

 

Long Term Equity Incentive Plan

 

On March 21, 2013, the Executive Compensation Committee of the Board of Directors (Compensation Committee) approved a long- term equity incentive award program. Through June 30, 2015, the Compensation Committee has granted 546,085 RSU’s with time-based vesting and 488,604 RSU’s with performance-based vesting under this program.

 

Each RSU represents a contingent right to receive one share of our common stock. Dividend equivalent rights accrue with respect to the RSUs when and as dividends are paid on our common stock and vest proportionately with the RSUs to which they relate. Vested shares are delivered to the recipient following each vesting date.

 

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Table of Contents

 

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

 

The performance-based RSUs granted to participants vest over three-year performance periods based on Cubic’s achievement of performance goals established by the Compensation Committee over the performance periods, subject to the recipient’s continued service through the end of the respective performance periods. For the performance-based RSUs granted to date, the vesting will be contingent upon Cubic meeting one of three types of vesting criteria over the performance period. These three categories of vesting criteria consist of revenue growth targets, earnings targets, and return on equity targets. The level at which Cubic performs against scalable targets over the performance periods will determine the percentage of the RSUs that will ultimately vest.

 

Through June 30, 2015, Cubic has granted 1,034,689 restricted stock units of which 230,493 have vested. The grant date fair value of each restricted stock unit is the fair market value of one share of our common stock at the grant date. At June 30, 2015, 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 273,131.

 

The following table summarizes our RSU activity:

 

 

 

Unvested Restricted Stock Units

 

 

 

Number of Shares

 

Weighted-
Average Grant-
Date Fair Value

 

Unvested at September 30, 2014

 

642,949

 

$

46.43

 

Granted

 

303,104

 

48.14

 

Vested

 

(160,499

)

45.91

 

Forfeited

 

(43,341

)

47.48

 

Unvested at June 30, 2015

 

742,213

 

$

47.17

 

 

Note 9 - Stock-Based Compensation

 

We recorded non-cash compensation expense related to stock-based awards for the three- and nine-month period ended June 30, 2015 and 2014 as follows (in thousands):

 

 

 

Nine Months Ended

 

Three Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Cost of sales

 

$

536

 

$

397

 

$

117

 

$

192

 

Selling, general and administrative

 

6,116

 

3,973

 

1,244

 

1,593

 

 

 

$

6,652

 

$

4,370

 

$

1,361

 

$

1,785

 

 

In the second quarter of fiscal 2015, the Board of Directors approved the acceleration of vesting of certain restricted stock units for the Company’s Advisor to the Chief Executive Officer, and former Chief Executive Officer in connection with his retirement.  We recognized $1.7 million of stock-based compensation expense in the second quarter of fiscal 2015 as a result of this stock award.

 

As of June 30, 2015, there was $26.5 million of unrecognized compensation cost related to unvested RSUs. Based upon the expected forfeitures and the expected vesting of performance based RSUs, the aggregate fair value of RSUs expected to ultimately vest is $13.1 million. This amount is expected to be recognized over a weighted-average period of 1.7 years.

 

We are required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods on a cumulative basis in the period the estimated forfeiture rate changes for all stock-based awards when significant events occur. We consider our historical experience with employee turnover as the basis to arrive at our estimated forfeiture rate. The forfeiture rate was estimated to be 12.5% per year as of June 30, 2015. To the extent the actual forfeiture rate is different from what we have estimated, stock-based compensation related to these awards will be different from our expectations.

 

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Table of Contents

 

Note 10 — Income Taxes

 

Our effective tax rate for the three months ended June 30, 2015 was 6% as compared to 22% for the year ended September 30, 2014. The effective tax rate for the three months ended June 30, 2015 is lower than the prior full year effective tax rate primarily due to the disproportionate favorable impact of certain discrete tax events during the quarter, such as the expiration of the statute of limitations in a significant jurisdiction.

 

The amount of net unrecognized tax benefits was $6.7 million as of June 30, 2015 and $4.7 million as of September 30, 2014, exclusive of interest and penalties. The increase in net unrecognized tax benefits was primarily related to acquisitions. At June 30, 2015, the amount of net unrecognized tax benefits from permanent tax adjustments that, if recognized, would favorably impact the effective rate was $4.0 million. During the next 12 months, it is reasonably possible that resolution of reviews by taxing authorities, both domestic and international, could be reached with respect to approximately $3.4 million of the net unrecognized tax benefits depending on the timing of examinations and expiration of statute of limitations, either because our tax positions are sustained or because we agree to their disallowance and pay the related income tax.

 

We are subject to ongoing audits from various taxing authorities in the jurisdictions in which we do business. As of June 30, 2015, the years open under the statute of limitations in significant jurisdictions include fiscal years 2012-2014 in the U.S. We believe we have adequately provided for uncertain tax issues that have not yet been resolved with federal, state and foreign tax authorities.

 

Companies are required to assess whether a valuation allowance should be recorded against their deferred tax assets (“DTAs”) based on the consideration of all available evidence, using a “more likely than not” realization standard. The four sources of taxable income that must be considered in determining whether DTAs will be realized are, (1) future reversals of existing taxable temporary differences (i.e. offset of gross deferred tax assets against gross deferred tax liabilities); (2) taxable income in prior carryback years, if carryback is permitted under the tax law; (3) tax planning strategies and (4) future taxable income exclusive of reversing temporary differences and carryforwards.

 

In assessing whether a valuation allowance is required, significant weight is to be given to evidence that can be objectively verified. We have evaluated our DTAs, including an assessment of our cumulative income or loss over the prior three-year period and future periods, to determine if a valuation allowance was required. A significant negative factor in our assessment was Cubic’s three-year cumulative U.S. loss history at the end of the fiscal year 2014 and projected for fiscal year 2015.

 

After a review of the four sources of taxable income described above and in view of our three-year cumulative U.S. loss, we recorded an increase in our valuation allowance on U.S. DTAs, with a corresponding charge to our income tax provision, of approximately $29.3 million and $0.9 million in the second and third quarters of fiscal 2015, respectively.  Through June 30, 2015, a total valuation allowance of $46.2 million has been established for U.S. net deferred tax assets, certain foreign operating losses and other foreign assets.

 

If sufficient positive evidence arises in the future, such as a sustained return to profitability in the U.S., any existing valuation allowance could be reversed as appropriate, decreasing income tax expense in the period that such conclusion is reached.

 

The non-cash charge to establish a valuation allowance does not have any impact on the Company’s consolidated operations or cash flows, nor does such an allowance preclude the Company from using loss carryforwards or other deferred tax assets in the future. Until the Company re-establishes a pattern of continuing profitability in the U.S. tax jurisdiction, in accordance with the applicable accounting guidance, U.S. income tax expense or benefit related to the recognition of deferred tax assets in the condensed 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 condensed statement of operations.

 

Note 11 — 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. We do not use any derivative financial instruments for trading or other speculative purposes.

 

All derivatives are recorded at fair value, however, the classification of gains and losses resulting from changes in the fair values of derivatives are dependent on the intended use of the derivative and its resulting designation. If a derivative is designated as a fair value hedge, then a change in the fair value of the derivative is offset against the change in the fair value of the underlying hedged item and only the ineffective portion of the hedge, if any, is recognized in earnings. If a derivative is designated as a cash flow hedge, then the effective portion of a change in the fair value of the derivative is recognized as a component of accumulated other comprehensive loss until the underlying hedged item is recognized in earnings, or the forecasted transaction is no longer probable of occurring. If a

 

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Table of Contents

 

derivative does not qualify as a highly effective hedge, any change in fair value is immediately recognized in earnings. We formally document all hedging relationships for all derivative hedges and the underlying hedged items, as well as the risk management objectives and strategies for undertaking the hedge transactions. We classify the fair value of all derivative contracts as current or non- current 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 Condensed Consolidated Statements of Cash Flows in the same category as the item being hedged.

 

The following table shows the notional principal amounts of our outstanding derivative instruments as of June 30, 2015 and September 30, 2014 (in thousands):

 

 

 

Notional Principal

 

 

 

June 30, 2015

 

September 30, 2014

 

Instruments designated as accounting hedges:

 

 

 

 

 

Foreign currency forwards

 

$

241,925

 

$

249,628

 

 

 

 

 

 

 

Instruments not designated as accounting hedges:

 

 

 

 

 

Foreign currency forwards

 

$

146,767

 

$

136,955

 

 

Included in the amounts not designated as accounting hedges above at June 30, 2015 and September 30, 2014 are foreign currency forwards with notional principal amounts of $140.1 million and $132.1 million, respectively, that have been designed to manage exposure to foreign currency exchange risks, and for which the gains or losses of the changes in fair value of the forwards has approximately offset an equal and opposite amount of gains or losses related to the foreign currency exposure.

 

The notional principal amounts for outstanding derivative instruments provide one measure of the transaction volume outstanding and do not represent the amount of the Company’s exposure to credit or market loss. Credit risk represents the Company’s gross exposure to potential accounting loss on derivative instruments that are outstanding or unsettled if all counterparties failed to perform according to the terms of the contract, based on then-current interest or currency exchange rates at each respective date. The Company’s 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 periods ended June 30, 2015 and September 30, 2014. Although the table above reflects the notional principal amounts of the Company’s 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.

 

The Company generally enters into master netting arrangements, which reduce credit risk by permitting net settlement of transactions with the same counterparty. The Company presents its derivative assets and derivative liabilities at their gross fair values. The Company did not have any derivative instruments with credit-risk related contingent features that would require it to post collateral as of June 30, 2015 or September 30, 2014.

 

The table below presents the fair value of our derivative financial instruments that qualify for hedge accounting as well as their classification in the Condensed Consolidated Balance Sheets as of June 30, 2015 and September 30, 2014 (in thousands):

 

 

 

 

 

Fair Value

 

 

 

Balance Sheet Location

 

June 30, 2015

 

September 30, 2014

 

Asset derivatives:

 

 

 

 

 

 

 

Foreign currency forwards

 

Other current assets

 

$

9,693

 

$

7,389

 

Foreign currency forwards

 

Other noncurrent assets

 

13,466

 

5,920

 

 

 

 

 

$

23,159

 

$

13,309

 

Liability derivatives:

 

 

 

 

 

 

 

Foreign currency forwards

 

Other current liabilities

 

$

9,287

 

$

6,645

 

Foreign currency forwards

 

Other noncurrent liabilities

 

13,466

 

5,878

 

Total

 

 

 

$

22,753

 

$

12,523

 

 

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Table of Contents

 

The tables below present gains and losses recognized in other comprehensive income for the three and nine months ended June 30, 2015 and 2014 related to derivative financial instruments designated as cash flow hedges, as well as the amount of gains and losses reclassified into earnings during those periods (in thousands):

 

 

 

Nine Months Ended

 

 

 

June 30, 2015

 

June 30, 2014

 

 

 

June 30, 2015

 

June 30, 2014

 

Derivative Type

 

Gains (losses)
recognized in
OCI

 

Gains (losses)
reclassified into
earnings -
Effective Portion

 

Gains (losses)
recognized in
OCI

 

Gains (losses)
reclassified into
earnings -
Effective Portion

 

Location of gain (loss)

 

Gains (losses) recognized - Ineffective
Portion and amount excluded from
effectiveness testing

 

Foreign currency forwards

 

$

(382

)

$

1,180

 

$

(757

)

$

355

 

Other income/(expense), net

 

$

 

$

 

Forward starting swap

 

 

 

 

 

Other income/(expense), net

 

 

164

 

 

 

$

(382

)

$

1,180

 

$

(757

)

$

355

 

 

 

$

 

$

164

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

June 30, 2015

 

June 30, 2014

 

 

 

June 30, 2015

 

June 30, 2014

 

Derivative Type

 

Gains (losses)
recognized in
OCI

 

Gains (losses)
reclassified into
earnings -
Effective Portion

 

Gains (losses)
recognized in
OCI

 

Gains (losses)
reclassified into
earnings -
Effective Portion

 

Location of gain (loss)

 

Gains (losses) recognized - Ineffective
Portion and amount excluded from
effectiveness testing

 

Foreign currency forwards

 

$

(534

)

$

(156

)

$

(443

)

$

320

 

Other income/(expense), net

 

$

 

$

 

Forward starting swap

 

 

 

 

 

Other income/(expense), net

 

 

(673

)

 

 

$

(534

)

$

(156

)

$

(443

)

$

320

 

 

 

$

 

$

(673

)

 

The amount of 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 three and nine months ended June 30, 2015. For the three and nine months ended June 30, 2014, we recognized a loss of $0.7 million and a gain of $0.2 million, respectively, related to derivative instruments classified as not highly effective. 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 $0.3 million, net of income taxes.

 

Foreign currency forwards

 

In order to limit our exposure to foreign currency exchange rate risk we generally hedge those commitments greater than $50,000 by using foreign currency exchange 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, Swedish krona, 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.

 

Forward starting swap

 

In July 2012 we entered into a forward starting swap contract with a bank in order to manage our exposure to fluctuations in interest rates related to an anticipated financing. This forward starting swap terminated on July 1, 2014. During the quarter ended June 30, 2014 we recognized a loss related to the forward starting swap of $0.7 million and during the nine months ended June 30, 2014 we recognized a gain on the swap of $0.2 million.

 

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Table of Contents

 

Note 12 — Segment Information

 

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

 

 

 

Nine Months Ended

 

Three Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Sales:

 

 

 

 

 

 

 

 

 

Cubic Transportation Systems

 

$

411.5

 

$

429.1

 

$

133.3

 

$

153.0

 

Cubic Global Defense Services

 

298.4

 

291.7

 

111.9

 

91.8

 

Cubic Global Defense Systems

 

295.2

 

281.2

 

102.6

 

95.6

 

Total sales

 

$

1,005.1

 

$

1,002.0

 

$

347.8

 

$

340.4

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss):

 

 

 

 

 

 

 

 

 

Cubic Transportation Systems

 

$

50.8

 

$

35.2

 

$

11.7

 

$

15.3

 

Cubic Global Defense Services

 

4.2

 

6.0

 

3.1

 

1.8

 

Cubic Global Defense Systems

 

2.8

 

16.1

 

3.2

 

3.3

 

Unallocated corporate expenses and other

 

(17.1

)

(4.1

)

(7.7

)

(1.2

)

Total operating income

 

$

40.7

 

$

53.2

 

$

10.3

 

$

19.2

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization:

 

 

 

 

 

 

 

 

 

Cubic Transportation Systems

 

$

8.4

 

$

8.5

 

$

2.8

 

$

2.7

 

Cubic Global Defense Services

 

6.2

 

8.5

 

1.9

 

2.7

 

Cubic Global Defense Systems

 

13.3

 

5.0

 

3.9

 

1.8

 

Other

 

0.8

 

0.7

 

0.1

 

0.3

 

Total depreciation and amortization

 

$

28.7

 

$

22.7

 

$

8.7

 

$

7.5

 

 

Changes in estimates on contracts for which revenue is recognized using the cost-to-cost-percentage-of-completion method had no impact on operating income for the three months ended June 30, 2015 and $4.8 million for the three months ended June 30, 2014, and decreased operating income by $13.8 million and $3.8 million for the nine months ended June 30, 2015 and 2014, respectively.

 

These adjustments increased net income by $0.3 million ($0.01 per share) for the three months ended June 30, 2015 and decreased net income by approximately $2.0 million ($0.07 per share) for the three months ended June 30, 2014, and decreased net income by $10.7 million ($0.40 per share) and $0.3 million ($0.01 per share) for the nine months ended June 30, 2015 and 2014, respectively.

 

Note 13 — Legal Matters

 

In November 2011, we received a claim from a public transit authority customer which alleged that the authority incurred a loss of transit revenue due to the inappropriate and illegal actions of one of our former employees, who has pled guilty to the charges. This individual was employed to work on a contract we acquired in a business combination in 2009 and had allegedly been committing these illegal acts from almost two years prior to our acquisition of the contract, until his arrest in May 2011. The transit system was designed and installed by a company unrelated to us. The transit authority sought recoupment from us of a total amount of $4.5 million for alleged lost revenue, fees and damages. In March 2012, the county superior court entered a default judgment against our former employee and others for $2.9 million based upon the estimated loss of revenue by the public transit authority customer. In 2012, we recorded an accrued cost of $2.9 million within general and administrative expense in the transportation systems segment based upon the court’s assessment of these losses. In July 2014, we entered into a settlement agreement with the customer for a cash payment of $2.6 million plus an assignment of forty percent of any insurance proceeds we receive under relevant insurance policies. In June 2014 we reduced our accrued costs to $2.6 million. In March 2015, our insurer paid us $1.8 million related to this matter and we paid our customer forty percent of this amount, or $0.7 million, in connection with the settlement agreement with the customer. We recognized a gain of the net amount of $1.1 million as a reduction of general and administrative expenses in the first quarter of fiscal 2015.

 

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In October and December of 2013, and January of 2014, lawsuits were filed in the United States District Court for the Northern District of Illinois, Eastern Division against us and one of our transit customers alleging variously, among other things, breach of contract, violation of the Illinois Consumer Fraud Act, unjust enrichment and violation of the Electronic Funds Act. In January 2014, these cases were consolidated into a single case and the plaintiffs are seeking to have the case certified as a class action. Plaintiffs variously claim, among other things, that: (i) they were wrongly charged for calling the call center that we operate for patrons of our transit customer, (ii) they were wrongly charged for a transfer and a second fare, (iii) they were not credited the cost of a transit card even after registration of the card, as is required under the terms of the cardholder agreement, and (iv) they were double charged for rides taken. We are undertaking the defense of the transit customer pursuant to our contractual obligations to that customer. We are investigating the matter and are vigorously defending this lawsuit. As this case remains in its early stages, we cannot estimate the probability of loss or any range of estimate of possible loss.

 

In October 2014, a lawsuit was filed in the United States District Court, Northern District of Illinois against us and our same transit customer alleging infringement of various patents held by the plaintiff. We are investigating the matter and plan to vigorously defend the lawsuit. We are also undertaking defense of our customer in this matter pursuant to our contractual obligations to that customer. Due to the preliminary nature of this case, we cannot estimate the probability of loss or any range of estimate of possible loss.

 

In January 2015, we received $3.6 million as a settlement of a claim related to the reimbursement of expenses we incurred primarily in 2014 for a proposal prepared for a prospective customer of our transportation systems business. This $3.6 million settlement has been recorded as a reduction of research and development and general and administrative expenses in the quarter ended March 31, 2015.

 

We are not a party to any other material pending proceedings and we consider all other matters to be ordinary proceedings incidental to the business. We believe the outcome of these other proceedings will not have a materially adverse effect on our financial position, results of operations, or cash flows.

 

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Note 14 — Restructuring Costs

 

In February 2015, we implemented a plan to restructure our defense services and defense systems businesses into a single business called Cubic Global Defense to better align our defense business organizational structure with customer requirements, increase operational efficiencies and improve collaboration and innovation across the company. The restructuring plan includes a reduction in global employee headcount by approximately 100. We incurred a restructuring charge of $5.4 million in the second quarter of fiscal 2015. The total costs of the restructuring plan are not expected to be significantly greater than the charges incurred to date. Restructuring charges incurred by business segment were as follows (in millions):

 

 

 

Nine Months Ended

 

Three Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Restructuring costs:

 

 

 

 

 

 

 

 

 

Cubic Transportation Systems

 

$

0.5

 

$

 

$

0.1

 

$

 

Cubic Global Defense Services

 

0.3

 

 

0.1

 

 

Cubic Global Defense Systems

 

4.0

 

0.3

 

(0.2

)

 

Unallocated corporate expenses and other

 

0.6

 

(0.1

)

0.1

 

 

Total restructuring costs

 

$

5.4

 

$

0.2

 

$

0.1

 

$

 

 

The following table presents a rollforward of our restructuring liability as of June 30, 2015, which is included within accrued compensation and other current liabilities within our Condensed Consolidated Balance Sheets (in millions):

 

 

 

Restructuring Liability

 

 

 

Employee Separation

 

 

 

 

 

Liability as of September 30, 2014

 

$

0.8

 

Accrued costs

 

5.4

 

Cash payments

 

(4.4

)

Liability as of June 30, 2015

 

$

1.8

 

 

Certain restructuring costs are based upon estimates. Actual amounts paid may ultimately differ from these estimates. If additional costs are incurred or recognized amounts exceed costs, such changes in estimates will be recognized when incurred.

 

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CUBIC CORPORATION

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

June 30, 2015

 

We are a global provider of cost-effective systems and solutions that address the transportation and global defense markets’ most pressing and demanding requirements. We are engaged in the design, development, manufacture, integration, and sustainment of advanced technology systems and products. We also provide a broad range of engineering, training, technical, logistic, and information technology services. We serve the needs of various federal and regional government agencies in the U.S. and other allied nations around the world with products and services that have both defense and civil applications. Our main areas of focus are in transportation payment and information systems, defense, intelligence, homeland security, and information technology, including cyber security.

 

We operate in three reportable business segments: Cubic Transportation Systems (CTS), Cubic Global Defense Services (CGD Services) and Cubic Global Defense Systems (CGD Systems). All of our business segments share a common mission of providing situational awareness and understanding to create enhanced value for our customers worldwide. We organize our business segments based on the nature of the products and services offered.

 

CTS is a systems integrator that develops and provides fare collection infrastructure, services and technology, traffic management and road enforcement systems and services, and real-time passenger information systems and services for transportation authorities and operators worldwide. We offer fare collection devices, software systems and multiagency, multimodal transportation integration technologies, as well as a full suite of operational services that help agencies efficiently collect fares, manage operations, reduce revenue leakage and make transportation more convenient. We provide a wide range of services for transportation authorities in major markets worldwide, including computer hosting services, call center and web services, payment media issuance and distribution services, retail point of sale network management, payment processing and enforcement, financial clearing and settlement, software application support and outsourced asset operations and maintenance.

 

CGD Services is a leading provider of highly specialized support services to the U.S. government and allied nations. Services provided include live, virtual and constructive training, real-world mission rehearsal exercises, professional military education, intelligence support, information technology, information assurance and related cyber support, development of military doctrine, consequence management, infrastructure protection and force protection, as well as support to field operations, and logistics.

 

CGD Systems is focused on two primary lines of business: Training Systems and Secure Communications. CGD Systems is a diversified supplier of live and virtual military training systems, and secure communication systems and products to the U.S. Department of Defense, other U.S. government agencies and allied nations. We design and manufacture instrumented range systems for fighter aircraft, armored vehicles and infantry force-on-force live training weapons effects simulations, laser-based tactical and communication systems, and precision gunnery solutions. Our secure communications products are aimed at intelligence, surveillance, asset tracking and search and rescue markets. Our acquisition of DTECH LABs, Inc. in December 2014, added networking capability to our secure communications business.

 

Consolidated Overview

 

Sales for the quarter ended June 30, 2015 increased 2% to $347.8 million from $340.4 million in the third quarter of last year. Sales from CGD Services and CGD Systems increased 22% and 7%, respectively, while sales from CTS decreased by 13%, compared to the third quarter of last year. For the first nine months of the fiscal year, sales increased to $1.005 billion compared to $1.002 billion last year, an increase of less than one percent. CGD Services and CGD Systems sales increased 2% and 5%, respectively, while CTS sales decreased 4% compared to the first nine months of last year. The average exchange rates between the prevailing currency in our foreign operations and the U.S. dollar resulted in a decrease in sales of $14.6 million for the third quarter and $32.6 million for the nine-month period compared to the same periods last year. Sales generat