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As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 8/05/20 Cubic Corp./DE 10-Q 6/30/20 93:17M Toppan Merrill Bridge/FA |
Document/Exhibit Description Pages Size
1: 10-Q Quarterly Report HTML 2.26M
2: EX-10.1 Material Contract HTML 64K
3: EX-31.1 Certification -- §302 - SOA'02 HTML 31K
4: EX-31.2 Certification -- §302 - SOA'02 HTML 31K
5: EX-32.1 Certification -- §906 - SOA'02 HTML 27K
6: EX-32.2 Certification -- §906 - SOA'02 HTML 27K
13: R1 Document and Entity Information HTML 77K
14: R2 Condensed Consolidated Statements of Operations HTML 137K
15: R3 Condensed Consolidated Statements of Comprehensive HTML 56K
Income (Loss)
16: R4 Condensed Consolidated Balance Sheets HTML 132K
17: R5 Condensed Consolidated Statements of Cash Flows HTML 142K
18: R6 Condensed Consolidated Statements of Changes in HTML 91K
Shareholders' Equity
19: R7 Condensed Consolidated Statements of Changes in HTML 26K
Shareholders' Equity (Parenthetical)
20: R8 Basis for Presentation HTML 37K
21: R9 COVID-19 Update HTML 29K
22: R10 Acquisitions and Divestitures HTML 420K
23: R11 Variable Interest Entities HTML 105K
24: R12 Revenue Recognition HTML 71K
25: R13 Net Income (Loss) Per Share HTML 59K
26: R14 Balance Sheet Details HTML 66K
27: R15 Fair Value of Financial Instruments HTML 167K
28: R16 Financing Arrangements HTML 35K
29: R17 Leases HTML 74K
30: R18 Pension Plans HTML 54K
31: R19 Stockholders' Equity HTML 135K
32: R20 Income Taxes HTML 30K
33: R21 Derivative Instruments and Hedging Activities HTML 120K
34: R22 Segment Information HTML 534K
35: R23 Restructuring Costs HTML 72K
36: R24 Legal Matters HTML 27K
37: R25 Basis for Presentation (Policies) HTML 33K
38: R26 Acquisitions and Divestitures (Tables) HTML 418K
39: R27 Variable Interest Entities (Tables) HTML 94K
40: R28 Revenue Recognition (Tables) HTML 64K
41: R29 Net Income (Loss) Per Share (Tables) HTML 57K
42: R30 Balance Sheet Details (Tables) HTML 65K
43: R31 Fair Value Of Financial Instruments (Tables) HTML 152K
44: R32 Leases (Tables) HTML 74K
45: R33 Pension Plans (Tables) HTML 54K
46: R34 Stockholders' Equity (Tables) HTML 131K
47: R35 Derivative Instruments and Hedging Activities HTML 116K
(Tables)
48: R36 Segment Information (Tables) HTML 535K
49: R37 Restructuring Costs (Tables) HTML 73K
50: R38 Basis for Presentation - New Accounting HTML 34K
Pronouncements (Details)
51: R39 Acquisitions and Divestitures - CGD Services - HTML 36K
Income (Loss) From Discontinued Operations
(Details)
52: R40 Acquisitions and Divestitures - Equity Method HTML 63K
Investment (Details)
53: R41 Acquisitions and Divestitures - Consolidated HTML 241K
Business Acquisitions (Details)
54: R42 Acquisitions and Divestitures - Goodwill and Pro HTML 54K
forma information (Details)
55: R43 Variable Interest Entities - Narrative (Details) HTML 153K
56: R44 Variable Interest Entities - Net assets and HTML 82K
liabilities (Details)
57: R45 Revenue Recognition (Details) HTML 51K
58: R46 Revenue Recognition (Backlog) (Details) HTML 44K
59: R47 Revenue Recognition (Contract Assets and HTML 38K
Liabilities) (Details)
60: R48 Net Income (Loss) Per Share (Details) HTML 34K
61: R49 Balance Sheet Details (Details) HTML 76K
62: R50 Fair Value of Financial Instruments - Recurring HTML 65K
Basis (Details)
63: R51 Fair Value of Financial Instruments - Contingent HTML 101K
Consideration (Details)
64: R52 Financing Arrangements - Extinguishment of Debt HTML 52K
(Details)
65: R53 Financing Arrangements - Credit Facility (Details) HTML 84K
66: R54 Financing Arrangements - Underwritten Public HTML 35K
Offering (Details)
67: R55 Leases - Operating Lease Portfolio (Details) HTML 32K
68: R56 Leases - Operating Lease Expense (Details) HTML 33K
69: R57 Leases - Other Information (Details) HTML 29K
70: R58 Leases - Maturities of Lease Liabilities (Details) HTML 47K
71: R59 Pension Plans (Details) HTML 40K
72: R60 Stockholders' Equity - Narrative (Details) HTML 57K
73: R61 Stockholders' Equity - Assumption used for RSU HTML 33K
activity (Details)
74: R62 Stockholders' Equity - RSU activity (Details) HTML 59K
75: R63 Stockholders' Equity - Non-cash compensation HTML 44K
expense (Details)
76: R64 Income Taxes (Details) HTML 27K
77: R65 Derivative Instruments and Hedging Activities - HTML 56K
Notional principal amounts (Details)
78: R66 Derivative Instruments and Hedging Activities - HTML 43K
Fair value of derivative financial instruments
(Details)
79: R67 Derivative Instruments and Hedging Activities - HTML 37K
Gains and losses recognized (Details)
80: R68 Segment Information - Business Segment Financial HTML 46K
Data (Details)
81: R69 Segment Information - Narrative (Details) HTML 28K
82: R70 Segment Information - Sales by Geographical Region HTML 65K
(Details)
83: R71 Segment Information - Sales by End Customer HTML 47K
(Details)
84: R72 Segment Information - Sales by Contract Type HTML 47K
(Details)
85: R73 Segment Information - Sales by Deliverable Type HTML 46K
(Details)
86: R74 Segment Information - Revenue Recognition Method HTML 47K
(Details)
87: R75 Restructuring Costs - Restructuring Charges HTML 37K
(Details)
88: R76 Restructuring costs - Rollforward of restructuring HTML 39K
liability (Details)
89: R77 Acquisitions and Divestitures - Delerrok Inc. HTML 32K
(Details)
91: XML IDEA XML File -- Filing Summary XML 167K
12: XML XBRL Instance -- cub-20200630x10q_htm XML 5.60M
90: EXCEL IDEA Workbook of Financial Reports XLSX 129K
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93: ZIP XBRL Zipped Folder -- 0001558370-20-009386-xbrl Zip 413K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM i 10-Q
i ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended i June 30, 2020
or
i ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________________________________ to __________________________________
Commission File Number: i 001-08931
CUBIC CORPORATION
(Exact name of registrant as specified in its charter)
| | |
i Delaware | | i 95-1678055 |
(State or other jurisdiction of incorporation) | | (IRS Employer Identification No.) |
| | |
i 9333 Balboa Avenue | | i 92123 |
i San Diego, i California | | (Zip Code) |
(Address of principal executive offices) | | |
( i 858) i 277-6780
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| | | | |
Title of each class |
| Trading Symbol(s) |
| Name of each exchange on which registered |
i Common stock, no par value | | i CUB | | i New York Stock Exchange |
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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. i Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). i Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | |
i Large accelerated filer ☒ | | Accelerated filer ☐ |
| | |
Non-accelerated filer ☐ | | Smaller reporting company i ☐ |
| | |
| | Emerging growth company i ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i ☐ No ☒
As of July 21, 2020, there were i 31,329,008 shares of the registrant’s common stock, no par value, issued and outstanding (after deducting 8,945,300 shares held as treasury stock).
CUBIC CORPORATION
QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended June 30, 2020
| ||||
|
|
| Page |
|
| | | | |
| | | | |
| | | | |
| 3 | | ||
| | 3 | | |
| Condensed Consolidated Statements of Comprehensive Income (Loss) | | 4 | |
| | 5 | | |
| | 6 | | |
| Condensed Consolidated Statements of Changes in Shareholders’ Equity | | 7 | |
| | 9 | | |
Management’s Discussion and Analysis of Financial Condition and Results of Operations | | 40 | | |
| 57 | | ||
| 57 | | ||
| | | | |
| | | | |
| | | | |
| 58 | | ||
| 58 | | ||
| 58 | |
2
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CUBIC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(amounts in thousands, except per share data)
| | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| ||||||||
| | June 30, | | | |||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| ||||
Net sales: | | | | | | | | | | | | | |
Products | | $ | i 221,039 | | $ | i 255,900 | | $ | i 609,137 | | $ | i 660,897 | |
Services | |
| i 129,400 | |
| i 126,779 | |
| i 391,623 | |
| i 364,380 | |
| |
| i 350,439 | |
| i 382,679 | |
| i 1,000,760 | |
| i 1,025,277 | |
Costs and expenses: | | | | | | | | | | | | | |
Products | |
| i 151,553 | |
| i 190,434 | |
| i 471,398 | |
| i 491,856 | |
Services | |
| i 79,943 | |
| i 77,224 | |
| i 251,011 | |
| i 243,851 | |
Selling, general and administrative expenses | |
| i 62,272 | |
| i 82,167 | |
| i 206,481 | |
| i 211,348 | |
Research and development | |
| i 12,254 | |
| i 12,470 | |
| i 32,036 | |
| i 38,236 | |
Amortization of purchased intangibles | |
| i 16,358 | |
| i 9,717 | |
| i 42,940 | |
| i 32,677 | |
Gain on sale of property, plant and equipment | |
| ( i 40) | |
| ( i 32,563) | |
| ( i 170) | |
| ( i 32,563) | |
Restructuring costs | |
| i 3,393 | |
| i 8,505 | |
| i 8,775 | |
| i 12,254 | |
| |
| i 325,733 | |
| i 347,954 | |
| i 1,012,471 | |
| i 997,659 | |
| | | | | | | | | | | | | |
Operating income (loss) | |
| i 24,706 | |
| i 34,725 | |
| ( i 11,711) | |
| i 27,618 | |
| | | | | | | | | | | | | |
Other income (expenses): | | | | | | | | | | | | | |
Interest and dividend income | |
| i 1,997 | |
| i 1,696 | |
| i 5,908 | |
| i 4,343 | |
Interest expense | |
| ( i 7,366) | |
| ( i 6,132) | |
| ( i 20,948) | |
| ( i 14,695) | |
Loss on extinguishment of debt | |
| — | |
| — | |
| ( i 16,090) | |
| i — | |
Other income (expense), net | |
| ( i 6,773) | |
| ( i 8,714) | |
| ( i 26,564) | |
| ( i 17,069) | |
| | | | | | | | | | | | | |
Income (loss) from continuing operations before income taxes | |
| i 12,564 | |
| i 21,575 | |
| ( i 69,405) | |
| i 197 | |
| | | | | | | | | | | | | |
Income tax provision (benefit) | |
| i 4,602 | |
| i 1,029 | |
| ( i 8,936) | |
| ( i 305) | |
| | | | | | | | | | | | | |
Income (loss) from continuing operations | | | i 7,962 | | | i 20,546 | | | ( i 60,469) | | | i 502 | |
Net income (loss) from discontinued operations | |
| i 252 | |
| ( i 202) | |
| ( i 203) | |
| ( i 1,541) | |
Net income (loss) | | | i 8,214 | | | i 20,344 | | | ( i 60,672) | | | ( i 1,039) | |
| | | | | | | | | | | | | |
Less noncontrolling interest in net income (loss) of VIE | |
| i 9,369 | |
| ( i 3,566) | |
| i 181 | |
| ( i 8,970) | |
| | | | | | | | | | | | | |
Net income (loss) attributable to Cubic | | $ | ( i 1,155) | | $ | i 23,910 | | $ | ( i 60,853) | | $ | i 7,931 | |
| | | | | | | | | | | | | |
Amounts attributable to Cubic: | | | | | | | | | | | | | |
Net income (loss) from continuing operations | | $ | ( i 1,407) | | $ | i 24,112 | | $ | ( i 60,650) | | $ | i 9,472 | |
Net income (loss) from discontinued operations | |
| i 252 | |
| ( i 202) | |
| ( i 203) | |
| ( i 1,541) | |
Net income (loss) attributable to Cubic | | $ | ( i 1,155) | | $ | i 23,910 | | $ | ( i 60,853) | | $ | i 7,931 | |
| | | | | | | | | | | | | |
Net income (loss) per share: | | | | | | | | | | | | | |
Basic | | | | | | | | | | | | | |
Continuing operations attributable to Cubic | | $ | ( i 0.04) | | $ | i 0.77 | | $ | ( i 1.94) | | $ | i 0.31 | |
Discontinued operations | | $ | i 0.01 | | $ | ( i 0.01) | | $ | ( i 0.01) | | $ | ( i 0.05) | |
Basic earnings per share attributable to Cubic | | $ | ( i 0.04) | | $ | i 0.77 | | $ | ( i 1.94) | | $ | i 0.26 | |
| | | | | | | | | | | | | |
Diluted | | | | | | | | | | | | | |
Continuing operations attributable to Cubic | | $ | ( i 0.04) | | $ | i 0.77 | | $ | ( i 1.94) | | $ | i 0.31 | |
Discontinued operations | | $ | i 0.01 | | $ | ( i 0.01) | | $ | ( i 0.01) | | $ | ( i 0.05) | |
Diluted earnings per share attributable to Cubic | | $ | ( i 0.04) | | $ | i 0.77 | | $ | ( i 1.94) | | $ | i 0.26 | |
| | | | | | | | | | | | | |
Dividends per common share | | $ | — | | $ | — | | $ | i 0.14 | | $ | i 0.14 | |
| | | | | | | | | | | | | |
Weighted average shares used in per share calculations: | | | | | | | | | | | | | |
Basic | |
| i 31,299 | |
| i 31,160 | |
| i 31,289 | |
| i 30,267 | |
Diluted | | | i 31,299 | | | i 31,249 | | | i 31,289 | | | i 30,332 | |
See Notes to Condensed Consolidated Financial Statements.
3
CUBIC CORPORATION
CONDENSED CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(amounts in thousands)
| | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| ||||||||
| | June 30, | | | |||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| ||||
Net income (loss) | | $ | i 8,214 | | $ | i 20,344 | | $ | ( i 60,672) | | $ | ( i 1,039) | |
Other comprehensive income (loss): | | | | | | | | | | | | | |
Foreign currency translation | |
| i 8,115 | |
| ( i 1,900) | |
| i 690 | |
| ( i 2,256) | |
Change in unrealized gains/losses from cash flow hedges: | | | | | | | | | | | | | |
Change in fair value of cash flow hedges, net of tax | | | ( i 13,741) | | | ( i 483) | | | ( i 13,868) | | | i 98 | |
Adjustment for net gains/losses realized and included in net income, net of tax | | | ( i 1,572) | | | i 69 | | | ( i 2,486) | | | i 331 | |
Total change in unrealized gains/losses realized from cash flow hedges, net of tax | | | ( i 15,313) | | | ( i 414) | | | ( i 16,354) | | | i 429 | |
Total other comprehensive loss | |
| ( i 7,198) | |
| ( i 2,314) | |
| ( i 15,664) | |
| ( i 1,827) | |
Total comprehensive income (loss) | | | i 1,016 | | | i 18,030 | | | ( i 76,336) | | | ( i 2,866) | |
Noncontrolling interest in comprehensive income (loss) of consolidated VIE, net of tax | | | i 9,369 | | | ( i 3,566) | | | i 181 | | | ( i 8,970) | |
Comprehensive income (loss) attributable to Cubic, net of tax | | $ | ( i 8,353) | | $ | i 21,596 | | $ | ( i 76,517) | | $ | i 6,104 | |
See Notes to Condensed Consolidated Financial Statements.
4
CUBIC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(amounts in thousands)
| | | | | | | |
| | June 30, | |
| |||
|
| 2020 |
| 2019 |
| ||
ASSETS | | | | | | | |
Current assets: | | | | | | | |
Cash and cash equivalents | | $ | i 109,050 | | $ | i 65,800 | |
Cash of consolidated VIE | | | i 743 | | | i 347 | |
Restricted cash | |
| i 22,279 | |
| i 19,507 | |
Restricted cash of consolidated VIE | | | i 1,669 | | | i 9,967 | |
Accounts receivable: | | | | | | | |
Billed | |
| i 145,599 | |
| i 127,406 | |
Allowance for doubtful accounts | |
| ( i 1,141) | |
| ( i 1,392) | |
| |
| i 144,458 | |
| i 126,014 | |
| | | | | | | |
Contract assets | |
| i 253,900 | |
| i 349,559 | |
Recoverable income taxes | |
| i 16,495 | |
| i 7,754 | |
Inventories | |
| i 151,613 | |
| i 106,794 | |
Other current assets | |
| i 35,570 | |
| i 38,534 | |
Other current assets of consolidated VIE | |
| i 99 | |
| i 33 | |
Total current assets | |
| i 735,876 | |
| i 724,309 | |
| | | | | | | |
Long-term contracts financing receivables | |
| i 53,739 | |
| i 36,285 | |
Long-term contracts financing receivables of consolidated VIE | | | i 191,042 | | | i 115,508 | |
Property, plant and equipment, net | |
| i 160,547 | |
| i 144,969 | |
Operating lease right-of-use asset | |
| i 82,141 | |
| — | |
Deferred income taxes | |
| i 8,932 | |
| i 4,098 | |
Goodwill | |
| i 783,368 | |
| i 578,097 | |
Purchased intangibles, net | |
| i 226,552 | |
| i 165,613 | |
Other assets | |
| i 19,615 | |
| i 76,872 | |
Other assets of consolidated VIE | | | — | | | i 1,419 | |
Total assets | | $ | i 2,261,812 | | $ | i 1,847,170 | |
| | | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | |
Current liabilities: | | | | | | | |
Short-term borrowings | | $ | i 277,000 | | $ | i 195,500 | |
Trade accounts payable | | | i 121,253 | | | i 180,773 | |
Trade accounts payable of consolidated VIE | | | i 175 | | | i 25 | |
Contract liabilities | |
| i 71,269 | |
| i 46,170 | |
Accrued compensation and current liabilities | | | i 117,332 | | | i 95,013 | |
Other current liabilities of consolidated VIE | | | i 150 | | | i 191 | |
Income taxes payable | |
| i 814 | |
| i 773 | |
Current portion of long-term debt | |
| i 11,250 | |
| i 10,714 | |
Total current liabilities | |
| i 599,243 | |
| i 529,159 | |
| | | | | | | |
Long-term debt | |
| i 433,653 | |
| i 189,110 | |
Long-term debt of consolidated VIE | |
| i 155,493 | |
| i 61,994 | |
Operating lease liability | |
| i 75,468 | |
| — | |
Other noncurrent liabilities | |
| i 78,528 | |
| i 64,734 | |
Other noncurrent liabilities of consolidated VIE | |
| i 5,572 | |
| i 21,605 | |
| | | | | | | |
Shareholders’ equity: | | | | | | | |
Common stock | | | i 287,252 | |
| i 274,472 | |
Retained earnings | |
| i 797,046 | |
| i 862,948 | |
Accumulated other comprehensive loss | |
| ( i 155,357) | |
| ( i 139,693) | |
Treasury stock at cost | |
| ( i 36,078) | |
| ( i 36,078) | |
Shareholders’ equity related to Cubic | |
| i 892,863 | |
| i 961,649 | |
Noncontrolling interest in VIE | |
| i 20,992 | |
| i 18,919 | |
Total shareholders’ equity | |
| i 913,855 | |
| i 980,568 | |
Total liabilities and shareholders’ equity | | $ | i 2,261,812 | | $ | i 1,847,170 | |
See Notes to Condensed Consolidated Financial Statements.
5
CUBIC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(amounts in thousands)
| | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| ||||||||
| | June 30, | | | |||||||||
|
| 2020 |
| 2019 | | 2020 |
| 2019 |
| ||||
Operating Activities: | | | | | | | | | | | | | |
Net income (loss) | | $ | i 8,214 | | $ | i 20,344 | | $ | ( i 60,672) | | $ | ( i 1,039) | |
Net income (loss) from discontinued operations | | | ( i 252) | |
| i 202 | |
| i 203 | |
| i 1,541 | |
Adjustments to reconcile net income (loss) to net cash used in operating activities: | | | | | | | | | | | | | |
Depreciation and amortization | |
| i 23,394 | |
| i 15,351 | |
| i 63,758 | |
| i 48,949 | |
Share-based compensation expense | |
| i 5,412 | |
| i 4,402 | |
| i 15,271 | |
| i 10,760 | |
Change in fair value of contingent consideration | | | ( i 74) | | | i 1,163 | | | ( i 4,552) | | | i 1,833 | |
Change in fair value of interest rate swap of consolidated VIE | | | i 6,888 | | | — | | | i 18,370 | | | — | |
Gain on sale of property, plant and equipment | | | — | | | ( i 32,563) | | | ( i 170) | | | ( i 32,563) | |
Deferred income taxes | |
| ( i 2,622) | |
| ( i 948) | |
| ( i 14,457) | |
| ( i 6,773) | |
Loss on extinguishment of debt | | | — | | | — | | | i 16,090 | | | — | |
Other items | | | ( i 5,020) | | | — | | | ( i 712) | | | — | |
Changes in operating assets and liabilities, net of effects from acquisitions | | | ( i 65,170) | | | ( i 6,897) | | | ( i 136,478) | | | ( i 105,364) | |
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES FROM CONTINUING OPERATIONS | |
| ( i 29,230) | |
| i 1,054 | |
| ( i 103,349) | |
| ( i 82,656) | |
NET CASH PROVIDED BY OPERATING ACTIVITIES FROM DISCONTINUED OPERATIONS | |
| i 2,693 | |
| — | |
| i 2,778 | |
| — | |
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES | |
| ( i 26,537) | |
| i 1,054 | |
| ( i 100,571) | |
| ( i 82,656) | |
| | | | | | | | | | | | | |
Investing Activities: | | | | | | | | | | | | | |
Acquisition of businesses, net of cash acquired | |
| — | |
| — | |
| ( i 234,788) | |
| ( i 395,854) | |
Proceeds from sale of property, plant and equipment | | | — | | | i 44,891 | | | — | | | i 44,891 | |
Purchases of property, plant and equipment | |
| ( i 10,741) | |
| ( i 13,114) | |
| ( i 35,802) | |
| ( i 35,291) | |
Purchase of non-marketable debt and equity securities | | | — | |
| ( i 52,997) | | | — | | | ( i 52,997) | |
Receipt of withheld proceeds from sale of trade receivables | |
| — | |
| — | |
| i 5,521 | |
| — | |
NET CASH USED IN INVESTING ACTIVITIES | |
| ( i 10,741) | |
| ( i 21,220) | |
| ( i 265,069) | |
| ( i 439,251) | |
| | | | | | | | | | | | | |
Financing Activities: | | | | | | | | | | | | | |
Proceeds from short-term borrowings | |
| i 110,000 | |
| i 168,000 | |
| i 994,500 | |
| i 782,500 | |
Principal payments on short-term borrowings | |
| ( i 170,000) | |
| ( i 146,000) | |
| ( i 913,000) | |
| ( i 551,500) | |
Proceeds from long-term borrowings | |
| — | |
| — | |
| i 450,000 | |
| — | |
Principal payments on long-term debt | |
| ( i 3,088) | |
| — | |
| ( i 202,921) | |
| — | |
Proceeds from long-term borrowings of consolidated VIE | |
| i 174,938 | |
| i 19,841 | |
| i 198,160 | |
| i 35,816 | |
Principal payments on long-term borrowings of consolidated VIE | | | ( i 92,575) | | | — | | | ( i 92,575) | | | — | |
Debt extinguishment make whole payment | |
| — | |
| — | |
| ( i 15,856) | |
| — | |
Deferred financing fees | |
| — | |
| ( i 1,854) | |
| ( i 2,517) | |
| ( i 1,854) | |
Deferred financing fees of consolidated VIE | |
| ( i 8,638) | |
| ( i 213) | |
| ( i 8,638) | |
| ( i 690) | |
Proceeds from stock issued under employee stock purchase plan | | | — | | | — | | | i 1,169 | | | i 783 | |
Purchase of common stock | | | — | | | — | | | ( i 3,660) | | | ( i 3,419) | |
Dividends paid | | | — | | | — | | | ( i 4,225) | | | ( i 4,205) | |
Contingent consideration payments related to acquisitions of businesses | |
| — | |
| — | |
| — | |
| ( i 820) | |
Equity contribution from Boston VIE partner | | | i 1,892 | | | — | | | i 1,892 | | | — | |
Proceeds from equity offering, net | |
| — | | | — | | | — | | | i 215,832 | |
NET CASH PROVIDED BY FINANCING ACTIVITIES | |
| i 12,529 | |
| i 39,774 | |
| i 402,329 | |
| i 472,443 | |
| | | | | | | | | | | | | |
Effect of exchange rates on cash | |
| i 8,634 | |
| ( i 1,574) | |
| i 1,431 | |
| ( i 234) | |
| | | | | | | | | | | | | |
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | |
| ( i 16,115) | |
| i 18,034 | |
| i 38,120 | |
| ( i 49,698) | |
| | | | | | | | | | | | | |
Cash, cash equivalents and restricted cash at the beginning of the period | |
| i 149,856 | |
| i 71,876 | |
| i 95,621 | |
| i 139,608 | |
| | | | | | | | | | | | | |
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT THE END OF THE PERIOD | | $ | i 133,741 | | $ | i 89,910 | | $ | i 133,741 | | $ | i 89,910 | |
| | | | | | | | | | | | | |
Supplemental disclosure of non-cash investing and financing activities: | | | | | | | | | | | | | |
Contingent consideration liability incurred with the acquisition of Delerrok | | | — | | | — | | | i 1,600 | | | — | |
Receivable recognized in connection with the acquisition of Trafficware, net | | | — | | | — | | | — | | | i 1,588 | |
Receivable recognized in connection with the acquisition of GRIDSMART, net | | | — | | | — | | | — | | | i 442 | |
Liability incurred to acquire Nuvotronics, net | | | — | | | — | | | — | | | i 5,300 | |
See Notes to Condensed Consolidated Financial Statements.
6
CUBIC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)
(amounts in thousands, except per share data)
| | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended June 30, 2020 | | |||||||||||||||
|
|
| |
|
| |
| Accumulated |
|
| |
|
| |
|
|
| |
| | | | | | | | Other | | | | | Noncontrolling | | Number |
| ||
| | Common | | Retained | | Comprehensive | | Treasury | | Interest in | | of Shares |
| |||||
| | Stock | | Earnings | | Loss | | Stock | | VIE | | Outstanding |
| |||||
| $ | i 281,840 | | $ | i 798,201 | | $ | ( i 148,159) | | $ | ( i 36,078) | | $ | i 9,731 | | i 31,296 | | |
| | | | | | | | | | | | | | | | | | |
Net income (loss) | |
| — | |
| ( i 1,155) | |
| — | |
| — | |
| i 9,369 |
| — | |
Other comprehensive loss, net of tax | |
| — | |
| — | |
| ( i 7,198) | |
| — | |
| — |
| — | |
Stock issued under equity incentive plans | | | — | | | — | | | — | | | — | | | — | | i 3 | |
Share-based compensation | |
| i 5,412 | |
| — | |
| — | |
| — | |
| — |
| — | |
Equity contribution from Boston VIE partner | | | — | | | — | | | — | | | — | | | i 1,892 | | — | |
| | | | | | | | | | | | | | | | | | |
| $ | i 287,252 | | $ | i 797,046 | | $ | ( i 155,357) | | $ | ( i 36,078) | | $ | i 20,992 |
| i 31,299 | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | For the Nine Months Ended June 30, 2020 | | |||||||||||||||
| |
| |
|
| |
| Accumulated |
|
| |
|
| |
|
| | |
| | | | | | | | Other | | | | | Noncontrolling | | Number | | ||
| | Common | | Retained | | Comprehensive | | Treasury | | Interest in | | of Shares | | |||||
| | Stock | | Earnings | | Loss | | Stock | | VIE | | Outstanding | | |||||
| | | | | | | | | | | | | | | | | | |
| $ | i 274,472 | | $ | i 862,948 | | $ | ( i 139,693) | | $ | ( i 36,078) | | $ | i 18,919 | | i 31,178 | | |
| | | | | | | | | | | | | | | | | | |
Net income (loss) | |
| — | |
| ( i 60,853) | |
| — | |
| — | |
| i 181 |
| — | |
Other comprehensive loss, net of tax | |
| — | |
| — | |
| ( i 15,664) | |
| — | |
| — |
| — | |
Stock issued under equity incentive plans | | | — | | | — | | | — | | | — | | | — | | i 156 | |
Stock issued under employee stock purchase plan | | | i 1,169 | | | — | | | — | | | — | | | — | | i 19 | |
Purchase of common stock | | | ( i 3,660) | | | — | | | — | | | — | | | — | | ( i 54) | |
Share-based compensation | |
| i 15,271 | |
| — | |
| — | |
| — | |
| — |
| — | |
Cumulative effect of accounting standard adoption | | | — | | | ( i 824) | | | — | | | — | | | — | | — | |
Equity contribution from Boston VIE partner | | | — | | | — | | | — | | | — | | | i 1,892 | | — | |
Cash dividends paid - $ i 0.14 per share of common stock | |
| — | |
| ( i 4,225) | |
| — | |
| — | |
| — |
| — | |
| | | | | | | | | | | | | | | | | | |
| $ | i 287,252 | | $ | i 797,046 | | $ | ( i 155,357) | | $ | ( i 36,078) | | $ | i 20,992 |
| i 31,299 | | |
7
| | | | | | | | | | | | | | | | | | |
|
| For the Three Months Ended June 30, 2019 |
| |||||||||||||||
| | | | | | | | Accumulated | | | | | | | | | | |
| | | | | | | | Other | | | | | Noncontrolling | | Number |
| ||
| | Common | | Retained | | Comprehensive | | Treasury | | Interest in | | of Shares |
| |||||
|
| Stock |
| Earnings |
| Loss |
| Stock |
| VIE |
| Outstanding |
| |||||
| $ | i 264,612 | | $ | i 801,486 | | $ | ( i 110,156) | | $ | ( i 36,078) | | $ | i 23,325 | | i 31,150 | | |
| | | | | | | | | | | | | | | | | | |
Net income (loss) | |
| — | |
| i 23,910 | |
| — | |
| — | |
| ( i 3,566) |
| — | |
Other comprehensive income, net of tax | |
| — | |
| — | |
| ( i 2,314) | |
| — | |
| — |
| — | |
Stock issued under equity incentive plans | | | — | | | — | | | — | | | — | | | — | | i 12 | |
Purchase of common stock | | | — | | | — | | | — | | | — | | | — | | ( i 2) | |
Share-based compensation | | | i 4,402 | | | — | | | — | | | — | | | — | | — | |
Other | | | ( i 49) | | | — | | | — | | | — | | | i 10 | | — | |
| | | | | | | | | | | | | | | | | | |
| $ | i 268,965 | | $ | i 825,396 | | $ | ( i 112,470) | | $ | ( i 36,078) | | $ | i 19,769 |
| i 31,160 | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | For the Nine Months Ended June 30, 2019 | | |||||||||||||||
| | | | | | | | Accumulated | | | | | | | | | | |
| | | | | | | | Other | | | | | Noncontrolling | | Number | | ||
| | Common | | Retained | | Comprehensive | | Treasury | | Interest in | | of Shares | | |||||
|
| Stock |
| Earnings |
| Loss |
| Stock |
| VIE |
| Outstanding | | |||||
| $ | i 45,008 | | $ | i 801,834 | | $ | ( i 110,643) | | $ | ( i 36,078) | | $ | i 24,075 | | i 27,255 | | |
| | | | | | | | | | | | | | | | | | |
Net income (loss) | |
| — | |
| i 7,931 | |
| — | |
| — | |
| ( i 8,970) |
| — | |
Other comprehensive income, net of tax | |
| — | |
| — | |
| ( i 1,827) | |
| — | |
| — |
| — | |
Stock issued under equity incentive plans | | | — | | | — | | | — | | | — | | | — | | i 144 | |
Stock issued under employee stock purchase plan | | | i 783 | | | — | | | — | | | — | | | — | | i 15 | |
Purchase of common stock | | | ( i 3,419) | | | — | | | — | | | — | | | — | | ( i 49) | |
Share-based compensation | |
| i 10,760 | |
| — | |
| — | |
| — | |
| — |
| — | |
Cumulative effect of accounting standard adoption | | | — | | | i 19,834 | | | — | | | — | | | i 4,655 | | — | |
Stock issued under equity offering | | | i 215,832 | | | — | | | — | | | — | | | — | | i 3,795 | |
Cash dividends paid - $ i 0.14 per share of common stock | |
| — | |
| ( i 4,205) | |
| — | |
| — | |
| — |
| — | |
Other | | | i 1 | | | i 2 | | | — | | | — | | | i 9 | | — | |
| | | | | | | | | | | | | | | | | | |
| $ | i 268,965 | | $ | i 825,396 | | $ | ( i 112,470) | | $ | ( i 36,078) | | $ | i 19,769 |
| i 31,160 | | |
See Notes to Condensed Consolidated Financial Statements.
8
CUBIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
iNote 1 — Basis for Presentation
Cubic Corporation (“we,” “us,” the “Company” 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 GAAP for complete financial statements.
In our opinion, the accompanying financial statements reflect all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the results for the interim periods presented. Operating results for the three- and nine-month periods ended June 30, 2020 are not necessarily indicative of the results that may be expected for our fiscal year ending September 30, 2020 (“fiscal 2020”). For further information, refer to the audited consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019 (“fiscal 2019”).
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.
iRecently Adopted Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (commonly known as Accounting Standards Codification (“ASC”) Topic 842) (“ASC 842”). Under the guidance, lessees are required to recognize the following for all leases (with the exception of short-term leases): (a) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (b) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. We adopted ASC 842 on October 1, 2019 using the optional transition method and, as a result, did not recast prior period unaudited condensed comparative financial statements. All prior period amounts and disclosures are presented under ASC 840, Leases, the legacy lease accounting guidance. We elected the practical expedients which provide that entities need not reassess whether existing contracts contain a lease, lease classification of existing leases, or the treatment of initial direct costs on existing leases. On October 1, 2019, we recorded a right-of-use asset of $ i 80.0 million and a lease liability of $ i 88.0 million in our consolidated balance sheets. We also recorded a $ i 0.8 million decrease in retained earnings related to the adoption of ASC 842. The adoption of the standard did not have a material impact on our consolidated statements of operations or consolidated statements of cash flows.
Recent Accounting Pronouncements – Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), which requires companies to record an allowance for expected credit losses over the contractual term of financial assets, including short-term trade receivables and contract assets, and expands disclosure requirements for credit quality of financial assets. The amendments in this ASU are effective for us in our annual period beginning October 1, 2020. We do not expect the adoption of this standard to have a significant impact on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). This standard removes the second step of the goodwill impairment test, where a determination of the fair value of individual assets and liabilities of a reporting unit was needed to measure the goodwill impairment. Under this updated standard, goodwill impairment will now be the amount by which a reporting unit’s carrying amount exceeds its fair value, not to exceed the carrying amount of goodwill. The guidance will be effective for us in our fiscal year beginning October 1, 2020. The adoption of ASU 2017-04 will have no immediate impact on our consolidated financial statements and will only have the potential to impact the amount of any goodwill impairment recorded after the adoption thereof.
/ /9
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement - Disclosure Framework (Topic 820). The updated guidance modifies the disclosure requirements on fair value measurements. The amendments in this ASU are effective for us in our annual period beginning October 1, 2020 and interim periods within that annual period. We do not expect the adoption of this standard to have a significant impact on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-14, Defined Benefit Plans - Disclosure Framework (Topic 715), which modifies the disclosure requirements for employers that sponsor defined benefit pension or other post-retirement benefit plans. The guidance removes disclosures that are no longer considered cost beneficial, clarifies the specific requirements of disclosures, and adds disclosure requirements identified as relevant. The amendments in this ASU are effective for us in our annual period beginning October 1, 2020. We do not expect the adoption of this standard to have a significant impact on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that Is a Service Contract (Subtopic 350-24), which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The amendments in this ASU are effective for us in our annual period beginning October 1, 2020. We do not expect the adoption of this standard to have a significant impact on our consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740) (“Topic 740”), which removes certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The amendments in this ASU are effective for us in our annual period beginning October 1, 2021 and interim periods within that annual period. We are currently evaluating the impact of this standard on our consolidated financial statements.
iNote 2 — COVID-19 Update
In March 2020, the novel coronavirus disease (“COVID-19”) was declared a pandemic by the World Health Organization. The outbreak has resulted in governments around the world implementing increasingly stringent measures to help control the spread of the virus, including quarantines, “shelter in place” and “stay at home” orders, travel restrictions, business curtailments, school closures, and other measures. In addition, governments and central banks in several parts of the world have enacted fiscal and monetary stimulus measures to counteract the impacts of COVID-19.
Cubic’s businesses have been deemed essential in the locations in which we operate around the world. As such, our priorities are to continue providing our essential products and services to customers while focusing on protecting the health and well-being of our employees.
Our condensed consolidated financial statements reflect estimates and assumptions made by management that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and reported amounts of revenue and expenses during the reporting periods presented. The Company considered the impact of COVID-19 on the assumptions and estimates used and determined that while our operating results in the second and third quarter of fiscal 2020 were impacted by the pandemic, no asset impairments have been recognized.
In light of the risks presented by the current environment, we have taken a number of steps to strengthen liquidity and manage cash flow. These steps include our long-term debt restructuring that closed in the second quarter of fiscal 2020 and which included an increase in limits under our revolving credit facility, as further described in Note 9. We have also been negotiating more favorable payment terms with our customers, suppliers and subcontractors and utilized governmental stimulus benefits, including those related to tax. In addition, we have modified executive and other employee compensation and have planned reductions in capital expenditures and other discretionary expenditures.
10
Note 3 — Acquisitions and Divestitures
Sale of CGD Services
In May 2018, we sold our Cubic Global Defense Services (“CGD Services”) business to Nova Global Supply & Services, LLC (Purchaser), an entity affiliated with GC Valiant, LP. The sale closed on May 31, 2018. In accordance with the terms of the stock purchase agreement executed in connection with the transaction, the Purchaser agreed to pay us $ i 135.0 million in cash upon the closing of the transaction, adjusted for the estimated working capital of CGD Services at the date of the sale compared to a working capital target established by the parties. In the third quarter of fiscal 2018, we received $ i 133.8 million in connection with the sale and we recorded a receivable from the Purchaser for the estimated amount due related to the working capital settlement. Since the sale we have worked with the Purchaser and revised certain estimates related to the working capital settlement. In connection with the revision of these estimates, we reduced the receivable from the Purchaser by $ i 0.6 million and recognized a corresponding loss on the sale of CGD Services in the first quarter of fiscal 2020. In the third quarter of fiscal 2020, we settled the working capital receivable with the purchaser and received cash of $ i 2.7 million and recognized a $ i 0.1 million reduction in the previously estimated loss on the sale of CGD Services.
Business Acquisitions
Each of the following acquisitions have been treated as a business combination for accounting purposes. The results of operations of each acquired business has been included in our consolidated financial statements since the respective date of each acquisition.
Cubic Mission Solutions (“CMS”)
PIXIA Corp.
On June 27, 2019, we paid cash of $ i 50.0 million to purchase i 20% of the outstanding shares of PIXIA Corp. (“Pixia”), a provider of high performance advanced data indexing, warehousing, processing and dissemination software solutions for large volumes of imagery data within traditional or cloud-based architectures. The purchase agreement with Pixia included an option to purchase the remaining i 80% of its shares of capital stock for $ i 200.0 million, subject to certain post-closing adjustment provisions, which we exercised in November 2019. On January 3, 2020, we completed the purchase of the remaining i 80% of Pixia’s issued and outstanding shares of capital stock for aggregate consideration consisting of $ i 197.8 million in net cash, resulting in our ownership of all of Pixia’s issued and outstanding shares of capital stock. The acquisition was financed primarily with proceeds from draws on our line of credit.
From June 27, 2019 through January 3, 2020, we accounted for our i 20% ownership of Pixia using the equity method of accounting. Upon completion of the acquisition of the remaining i 80% ownership interest, we now consolidate Pixia into our financial statements. The acquisition-date fair value of consideration transferred is $ i 245.2 million and is comprised of total cash paid of $ i 247.8 million, less a $ i 2.0 million dividend received from Pixia and less a $ i 0.6 million loss recognized during the period that we accounted for our i 20% ownership of Pixia using the equity method of accounting.
iThe following table summarizes the estimated fair values of assets acquired and liabilities assumed at the acquisition date (in millions):
| | | | |
| | | | |
Backlog |
| $ | i 42.5 |
|
Customer relationships | | | i 25.5 | |
Developed technology | | | i 14.1 | |
Trade name | | | i 5.7 | |
Accounts receivable, prepaids and other assets | | | i 4.0 | |
Deferred taxes | | | ( i 18.3) | |
Other net assets acquired (liabilities assumed) | |
| ( i 1.8) | |
Net identifiable assets acquired | |
| i 71.7 | |
Goodwill | |
| i 173.5 | |
Net assets acquired | | $ | i 245.2 | |
/11
The estimated fair values of assets acquired and liabilities assumed, including purchased intangibles, are preliminary estimates pending the finalization of our detailed valuation analyses and necessary calculations. The estimated fair values of purchased intangibles were determined using the valuation methodology deemed to be the most appropriate for each type of asset being valued. The trade name valuation used the relief from royalty method, the customer relationships and non-compete agreements valuations used the lost profits valuation method and the technology and backlog valuations used the excess earnings method.
The intangible assets are being amortized using straight-line methods based on the expected period of undiscounted cash flows that will be generated by the assets, over a weighted average useful life of approximately i four years from the date of acquisition.
The goodwill resulting from the acquisition consists primarily of the synergies expected from combining the operations of Pixia with our existing CMS business, and strengthening our capability of developing and integrating products in our CMS portfolio. The goodwill also includes the value of the assembled workforce that became our employees following the close of the acquisition. The amount recorded as goodwill is allocated to our CMS segment and is not expected to be deductible for tax purposes.
Nuvotronics, Inc.
In March 2019, we acquired all of the outstanding shares of capital stock of Nuvotronics, Inc. (“Nuvotronics”), a provider of microfabricated radio frequency products. Based in Durham, North Carolina, Nuvotronics’ patented PolyStrata technology enables the design and production of uniquely packaged RF devices, such as antennas, filters and combiners, all of which are also components in Cubic’s advanced technology product offerings. Nuvotronics is expected to provide synergies from combining its capabilities with our existing CMS business.
The acquisition-date fair value of consideration is $ i 66.8 million, which is comprised of net cash paid of $ i 61.9 million, plus the estimated fair value of contingent consideration of $ i 4.9 million. The acquisition was financed primarily with proceeds from draws on our line of credit. Under the purchase agreement executed in connection with the acquisition, we will pay the sellers up to $ i 8.0 million of contingent consideration if Nuvotronics meets certain gross profit goals for the 12-month period ending on each of December 31, 2020 and December 31, 2021. The contingent consideration liability will be re-measured to fair value at each reporting date until the contingencies are resolved and any subsequent changes in fair value are recognized in earnings.
iThe following table summarizes the fair values of the assets acquired and liabilities assumed at the acquisition date (in millions):
| | | | |
Technology |
| $ | i 22.7 |
|
Trade name | | | i 1.5 | |
Backlog | | | i 1.4 | |
Non-compete agreements | | | i 0.5 | |
Customer relationships | | | i 0.6 | |
Accounts receivable and contract assets | | | i 2.6 | |
Fixed assets | | | i 2.7 | |
Accounts payable and accrued expenses | | | ( i 1.8) | |
Deferred taxes | | | ( i 3.2) | |
Other net assets acquired (liabilities assumed) | |
| ( i 0.6) | |
Net identifiable assets acquired | |
| i 26.4 | |
Goodwill | |
| i 40.4 | |
Net assets acquired | | $ | i 66.8 | |
The fair values of purchased intangibles were determined using the valuation methodology deemed to be the most appropriate for each type of asset being valued. The trade name valuation used the relief from royalty method, the customer relationships valuation used the with-and-without valuation method and the technology and backlog valuations used the excess earnings method.
12
The intangible assets are being amortized using straight-line methods based on the expected period of undiscounted cash flows that will be generated by the assets, over an average useful life of i nine years from the date of acquisition.
The goodwill resulting from the acquisition consists primarily of the synergies expected from combining the operations of Nuvotronics with our existing CMS business, and strengthening our capability of developing and integrating products in our CMS portfolio. The goodwill also includes the value of the assembled workforce that became our employees following the close of the acquisition. The amount recorded as goodwill is allocated to our CMS segment and is not expected to be deductible for tax purposes.
Operating Results
iPixia’s and Nuvotronics’ sales and results of operations included in our operating results were as follows (in millions):
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | Three Months Ended | | ||||||||||
| | | | ||||||||||
| | Pixia | | Nuvotronics | | Pixia | | Nuvotronics | | ||||
Sales | | $ | i 4.2 | | $ | i 3.8 | | $ | — | | $ | i 3.6 | |
Operating loss | |
| ( i 5.9) | |
| ( i 2.9) | |
| — | |
| ( i 3.2) | |
Net loss after taxes | |
| ( i 5.9) | |
| ( i 2.9) | |
| — | |
| ( i 3.2) | |
| | | | | | | | | | | | | |
| | Nine Months Ended | | ||||||||||
| | | | ||||||||||
| | Pixia | | Nuvotronics | | Pixia | | Nuvotronics | | ||||
Sales | | $ | i 5.3 | | $ | i 9.8 | | $ | — | | $ | i 4.3 | |
Operating loss | | | ( i 15.9) | |
| ( i 7.8) | |
| — | |
| ( i 4.9) | |
Net loss after taxes | |
| ( i 15.9) | |
| ( i 7.8) | |
| — | |
| ( i 4.9) | |
iPixia’s and Nuvotronics’ operating results above included the following amounts (in millions):
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | Three Months Ended | | ||||||||||
| | | | ||||||||||
| | Pixia | | Nuvotronics | | Pixia | | Nuvotronics | | ||||
Amortization | | $ | i 7.2 | | $ | i 0.9 | | $ | — | | $ | i 0.6 | |
Acquisition-related expenses | |
| i 1.3 | |
| i 0.3 | |
| — | |
| i 1.1 | |
| | | | | | | | | | | | | |
| | Nine Months Ended | | ||||||||||
| | | | ||||||||||
| | Pixia | | Nuvotronics | | Pixia | | Nuvotronics | | ||||
Amortization | | $ | i 14.3 | | $ | i 3.1 | | $ | — | | $ | i 0.7 | |
Acquisition-related expenses | | | i 3.3 | |
| i 1.6 | |
| — | |
| i 2.9 | |
Gain for changes in fair value of contingent consideration | |
| — | |
| ( i 4.2) | |
| — | |
| — | |
iThe estimated amortization expense related to the intangible assets recorded in connection with our acquisitions of Pixia and Nuvotronics is as follows (in millions):
| | | | | | | |
Year Ending | | | | | | | |
September 30, |
| Pixia | | Nuvotronics |
| ||
2020 | | $ | i 21.5 | | $ | i 4.0 | |
2021 | |
| i 28.7 | |
| i 3.0 | |
2022 | |
| i 12.7 | |
| i 3.0 | |
2023 | |
| i 7.3 | |
| i 2.9 | |
2024 | |
| i 7.3 | |
| i 2.7 | |
Thereafter | | | i 10.5 | | | i 10.1 | |
13
Cubic Transportation Systems (“CTS”)
Delerrok Inc.
Since fiscal 2018, we invested a total of $ i 8.3 million to purchase i 17.5% of the outstanding shares of common stock of Delerrok Inc. (“Delerrok”), a private technology company based in Vista, California, that specializes in electronic fare collection systems for the mid-market. Our purchase agreement included an option to purchase the remaining i 82.5% of Delerrok’s outstanding shares of common stock, which we exercised in November 2019. On January 3, 2020, we completed the purchase of the remaining i 82.5% of Delerrok’s outstanding shares of common stock for aggregate consideration consisting of $ i 37.0 million in net cash, resulting in our ownership of all of Delerrok’s shares of common stock. We will also pay the sellers up to an additional $ i 2.0 million if Delerrok’s sales exceed certain levels from the date of acquisition through December 31, 2020.
Prior to the acquisition of all of Delerrok’s outstanding shares of common stock, we accounted for our investment in Delerrok using the cost method of accounting. Upon completion of the acquisition of all of Delerrok’s outstanding shares of common stock, we now consolidate Delerrok into our financial statements. The estimated acquisition-date fair value of consideration is $ i 45.1 million. The acquisition was financed primarily with proceeds from draws on our line of credit and is comprised of total cash paid of $ i 43.5 million and the estimated fair value of contingent consideration of $ i 1.6 million.
iThe following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date (in millions):
| | | | |
| | | | |
Technology |
| $ | i 14.9 |
|
Trade name | | | i 0.9 | |
Accounts receivable | | | i 0.9 | |
Other net assets acquired (liabilities assumed) | |
| ( i 0.2) | |
Deferred tax liability | | | ( i 2.0) | |
Net identifiable assets acquired | |
| i 14.5 | |
Goodwill | |
| i 30.6 | |
Net assets acquired | | $ | i 45.1 | |
The estimated fair values of assets acquired and liabilities assumed, including purchased intangibles, are preliminary estimates pending the finalization of our detailed valuation analyses and necessary calculations. The estimated fair values of purchased intangibles were determined using the valuation methodology deemed to be the most appropriate for each type of asset being valued. The trade name valuation used the relief from royalty method, the customer relationships valuation used the with-and-without valuation method and the technology valuations used the excess earnings method.
The intangible assets are being amortized using straight-line methods based on the expected period of undiscounted cash flows that will be generated by the assets, over an average useful life of approximately i eight years from the date of acquisition.
The goodwill resulting from the acquisition consists primarily of the synergies expected from combining the operations of Delerrok with our existing CTS business, and strengthening our capability of developing and integrating products in our CTS portfolio. The goodwill also includes the value of the assembled workforce that became our employees following the close of the acquisition. The amount recorded as goodwill is allocated to our CTS segment and is not expected to be deductible for tax purposes.
GRIDSMART Technologies, Inc.
In January 2019, we acquired all of the outstanding shares of capital stock of GRIDSMART Technologies, Inc. (“GRIDSMART”), a provider of differentiated video tracking solutions to the Intelligent Traffic Systems market. Based in Knoxville, Tennessee, GRIDSMART specializes in video detection at the intersection utilizing advanced image processing, computer vision modeling and machine learning along with a single camera solution providing best-in-class data for optimizing the flow of people and traffic through intersections.
14
The acquisition-date fair value of consideration is $ i 86.8 million. The acquisition was financed primarily with proceeds from draws on our line of credit.
iThe following table summarizes the fair values of the assets acquired and liabilities assumed at the acquisition date (in millions):
| | | | |
| | | | |
Technology |
| $ | i 25.7 |
|
Customer relationships | | | i 3.6 | |
Trade name | | | i 2.4 | |
Inventory | | | i 4.3 | |
Accounts receivable | | | i 1.7 | |
Accounts payable and accrued expenses | | | ( i 1.9) | |
Deferred taxes | | | ( i 3.3) | |
Other net assets acquired | |
| i 0.5 | |
Net identifiable assets acquired | |
| i 33.0 | |
Goodwill | |
| i 53.8 | |
Net assets acquired | | $ | i 86.8 | |
The fair values of purchased intangibles were determined using the valuation methodology deemed to be the most appropriate for each type of asset being valued. The trade name valuation used the relief from royalty method, the customer relationships valuation used the with-and-without valuation method and the technology valuations used the excess earnings method.
The intangible assets are being amortized using straight-line methods based on the expected period of undiscounted cash flows that will be generated by the assets, over an average useful life of approximately i eight years from the date of acquisition.
The goodwill resulting from the acquisition consists primarily of the synergies expected from combining the operations of GRIDSMART with our existing CTS business, and strengthening our capability of developing and integrating products in our CTS portfolio. The goodwill also includes the value of the assembled workforce that became our employees following the close of the acquisition. The amount recorded as goodwill is allocated to our CTS segment and is not expected to be deductible for tax purposes.
Advanced Traffic Solutions Inc.
In October 2018, we acquired all of the outstanding shares of capital stock of Advanced Traffic Solutions Inc. (“Trafficware”), a provider of intelligent traffic solutions for the transportation industry based in Sugar Land, Texas. Trafficware provides a fully integrated suite of software, Internet of Things devices, and hardware solutions that optimize the flow of motorist and pedestrian traffic.
The acquisition-date fair value of consideration is $ i 237.2 million. The acquisition was financed primarily with proceeds from draws on our line of credit.
15
The following table summarizes the fair values of the assets acquired and liabilities assumed at the acquisition date (in millions):
| | | | |
| | | | |
Technology |
| $ | i 43.3 |
|
Customer relationships | | | i 21.9 | |
Backlog | | | i 4.8 | |
Trade name | | | i 4.6 | |
Accounts receivable | | | i 10.4 | |
Inventory | | | i 9.9 | |
Accounts payable and accrued expenses | | | ( i 9.5) | |
Other net assets acquired (liabilities assumed) | |
| ( i 2.0) | |
Net identifiable assets acquired | |
| i 83.4 | |
Goodwill | |
| i 153.8 | |
Net assets acquired | | $ | i 237.2 | |
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 trade name valuation used the relief from royalty method, the customer relationships valuation used the with-and-without valuation method, and the technology and backlog valuations used the excess earnings method.
The intangible assets are being amortized using straight-line methods based on the expected period of undiscounted cash flows that will be generated by the assets, over an average useful life of i seven years from the date of acquisition.
The goodwill resulting from the acquisition consists primarily of the synergies expected from combining the operations of Trafficware with our existing CTS business, and strengthening our capability of developing and integrating products in our CTS portfolio. The goodwill also includes the value of the assembled workforce that became our employees following the close of the acquisition. The amount recorded as goodwill is allocated to our CTS segment and is not expected to be deductible for tax purposes.
Operating Results
iThe sales and results of operations from Delerrok, GRIDSMART and Trafficware included in our operating results were as follows (in millions):
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | ||||||||||||||||
| | | | ||||||||||||||||
| | Delerrok | | GRIDSMART | | Trafficware | | Delerrok | | GRIDSMART | | Trafficware | | ||||||
Sales | | $ | i 0.4 | | $ | i 8.2 | | $ | i 14.4 | | $ | — | | $ | i 7.7 | | $ | i 15.8 | |
Operating income (loss) | |
| ( i 0.2) | |
| i 1.5 | |
| ( i 1.3) | |
| — | |
| i 0.7 | |
| ( i 1.0) | |
Net income (loss) after taxes | |
| ( i 0.2) | |
| i 1.5 | |
| ( i 1.3) | |
| — | |
| i 0.7 | |
| ( i 1.0) | |
| | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended | | ||||||||||||||||
| | | | ||||||||||||||||
| | Delerrok | | GRIDSMART | | Trafficware | | Delerrok | | GRIDSMART | | Trafficware | | ||||||
Sales | | $ | i 1.1 | | $ | i 20.1 | | $ | i 37.4 | | $ | — | | $ | i 14.0 | | $ | i 38.0 | |
Operating income (loss) | | | ( i 1.2) | |
| i 0.7 | |
| ( i 4.5) | |
| — | |
| ( i 1.3) | |
| ( i 9.5) | |
Net income (loss) after taxes | |
| ( i 1.2) | |
| i 0.7 | |
| ( i 4.5) | |
| — | |
| ( i 1.3) | |
| ( i 9.5) | |
16
The operating results above included the following amounts (in millions):
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | ||||||||||||||||
| | | | ||||||||||||||||
| | Delerrok | | GRIDSMART | | Trafficware | | Delerrok | | GRIDSMART | | Trafficware | | ||||||
Amortization | | $ | i 0.4 | | $ | i 1.3 | | $ | i 2.8 | | $ | — | | $ | i 1.3 | | $ | i 2.8 | |
Acquisition-related expenses | |
| i 0.5 | | | i 0.2 | |
| i 0.4 | |
| — | | | i 0.6 | |
| i 0.9 | |
(Gain) loss for changes in fair value of contingent consideration | |
| ( i 1.1) | | | — | |
| — | |
| — | | | — | |
| — | |
| | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended | | ||||||||||||||||
| | | | ||||||||||||||||
| | Delerrok | | GRIDSMART | | Trafficware | | Delerrok | | GRIDSMART | | Trafficware | | ||||||
Amortization | | $ | i 0.9 | | $ | i 4.0 | | $ | i 8.5 | | $ | — | | $ | i 2.7 | | $ | i 12.4 | |
Acquisition-related expenses | | | i 1.2 | | | i 0.6 | |
| i 1.3 | |
| — | | | i 2.4 | |
| i 4.4 | |
(Gain) loss for changes in fair value of contingent consideration | |
| ( i 1.1) | | | — | |
| — | |
| — | | | — | |
| — | |
iThe estimated amortization expense related to the intangible assets recorded in connection with our acquisitions are as follows (in millions):
| | | | | | | | | | |
Year Ending | | | | | | | | | | |
September 30, |
| Delerrok | | GRIDSMART | | Trafficware |
| |||
2020 | | $ | i 1.3 | | $ | i 5.3 | | $ | i 11.4 | |
2021 | |
| i 1.7 | | | i 3.9 | |
| i 11.4 | |
2022 | |
| i 1.6 | | | i 3.5 | |
| i 11.4 | |
2023 | |
| i 1.6 | | | i 3.5 | |
| i 6.4 | |
2024 | |
| i 1.6 | | | i 3.5 | |
| i 5.9 | |
Thereafter | | | i 8.0 | | | i 8.1 | | | i 12.9 | |
/Pro Forma Information
iThe following unaudited pro forma information presents our consolidated results of operations as if Pixia, Nuvotronics, Delerrok, GRIDSMART and Trafficware had been included in our consolidated results since October 1, 2018 (in millions):
| | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| ||||||||
| | June 30, | |
| |||||||||
| | 2020 |
| 2019 |
| 2020 |
| 2019 |
| ||||
Net sales | | $ | i 350.4 | | $ | i 384.4 | | $ | i 1,005.0 | | $ | i 1,050.2 | |
Net income (loss) | | | ( i 1.4) | | | i 14.4 | | | ( i 69.5) | | | ( i 18.8) | |
The pro forma information includes adjustments to give effect to events that are directly attributable to the acquisitions and have a continuing impact on our operations including the amortization of purchased intangibles and the elimination of interest expense for the repayment of debt. i No adjustments were made for transaction expenses, other items 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, 2018, and it does not purport to project our future operating results.
17
Goodwill
iChanges in goodwill for the nine months ended June 30, 2020 were as follows for each of our reporting units (in thousands):
| | | | | | | | | | | | | |
|
| | |
| |
| |
| | |
| ||
| | Cubic Transportation | | Cubic Mission | | Cubic Global | | | |
| |||
| | Systems | | Solutions | | Defense Systems | | Total |
| ||||
| | | | | | | | | | | | | |
Net balances at September 30, 2019 | | $ | i 254,592 | | $ | i 181,424 | | $ | i 142,081 | | $ | i 578,097 | |
Acquisitions | |
| i 30,621 | | | i 173,531 | | | — | | | i 204,152 | |
Adjustments | |
| i 603 | | | — | | | — | | | i 603 | |
Foreign currency exchange rate changes | |
| i 329 | |
| i 85 | | | i 102 | |
| i 516 | |
Net balances at June 30, 2020 | | $ | i 286,145 | | $ | i 355,040 | | $ | i 142,183 | | $ | i 783,368 | |
Goodwill represents the purchase price paid in excess of the fair value of net tangible and intangible assets acquired. Goodwill is not amortized but is subject to an impairment test at a reporting unit level on an annual basis and when circumstances indicate that an impairment is more-likely-than-not. Circumstances that might indicate an impairment is more-likely-than-not include a significant adverse change in the business climate for one of our reporting units or a decision to dispose of a reporting unit or a significant portion of a reporting unit.
The test for goodwill impairment is a two-step process. The first step of the test is performed by comparing the fair value of each reporting unit to its carrying amount, including recorded goodwill. If the carrying amount of a reporting unit exceeds its fair value, the second step is performed to measure the amount of the impairment, if any, by comparing the implied fair value of goodwill to its carrying amount. Any resulting impairment determined would be recorded in the current period.
Our most recent annual goodwill impairment test was our 2019 annual impairment test completed as of July 1, 2019. . Subsequent to the effective dates of the tests for each of our reporting units, we do not believe that circumstances have occurred that indicate that an impairment for any of our reporting units is more-likely-than-not. As such, no subsequent interim impairment tests have been performed.
Significant management judgment is required in the forecast of future operating results that are used in our impairment analysis. The estimates we used are consistent with the plans and estimates that we use to manage our business. For our CMS reporting unit, significant assumptions utilized in our discounted cash flow approach included growth rates for sales and margins at greater levels than we have achieved in prior years due to our expectation that businesses recently acquired by this reporting unit will achieve growth at higher rates than the unit’s legacy operations. Although we believe our underlying assumptions supporting these assessments are reasonable, if our forecasted sales and margin growth rates, timing of growth, or the discount rate vary from our forecasts, we could be exposed to material impairment charges in the future.
iNote 4 – Variable Interest Entities
In accordance with ASC 810, Consolidation (“ASC 810”), we assess our partnerships and joint ventures at inception, and when there are changes in relevant factors, to determine if any meet the qualifications of a variable interest entity (a “VIE”). We consider a partnership or joint venture to be a VIE if it has any of the following characteristics: (a) the total equity investment is not sufficient to permit the entity to finance its activities without additional subordinated financial support, (b) characteristics of a controlling financial interest are missing (either the ability to make decisions through voting or other rights, the obligation to absorb the expected losses of the entity or the right to receive the expected residual returns of the entity) or (c) the voting rights of the equity holders are not proportional to their obligations to absorb the expected losses of the entity or their rights to receive the expected residual returns of the entity, and substantially all of the entity’s activities either involve or are conducted on behalf of an investor that has disproportionately few voting rights.
We perform a qualitative assessment of each VIE to determine if we are its primary beneficiary. We conclude that we are the primary beneficiary and consolidate the VIE if we have both (a) the power to direct the activities that most significantly impact the VIE’s economic performance and (b) the obligation to absorb losses or the right to receive
18
benefits from the VIE that could potentially be significant to the VIE. We consider the VIE design, the contractual agreements that define the ownership structure, distribution of profits and losses, risks, responsibilities, indebtedness, voting rights and board or similar governance representation of the respective parties in determining if we are the primary beneficiary. We also consider all parties that have direct or implicit variable interests when determining whether we are the primary beneficiary. As required by ASC 810, our primary beneficiary assessment is continuously performed.
In March 2018, Cubic and John Laing, an unaffiliated company that specializes in contracting under public-private partnerships, jointly formed Boston AFC 2.0 HoldCo. LLC (“Boston HoldCo”). Also in March 2018, Boston HoldCo’s wholly owned subsidiary, Boston AFC 2.0 OpCo. LLC (“Boston OpCo”), entered into a contract with the Massachusetts Bay Transit Authority (“MBTA”) for the financing, development and operation of a next-generation fare payment system in Boston, Massachusetts (the “Original MBTA Contract”). Boston HoldCo is i 90% owned by John Laing and i 10% owned by Cubic. Collectively, Boston HoldCo and Boston OpCo are referred to as the “P3 Venture”. Based on our assessment under ASC 810, we concluded that Boston OpCo and Boston HoldCo are VIEs and that we are the primary beneficiary of Boston OpCo. Consequently, we have consolidated the financial statements of Boston OpCo within our consolidated financial statements. We have concluded that we are not the primary beneficiary of Boston HoldCo, and as a result, we have not consolidated the financial statements of Boston HoldCo within our consolidated financial statements. In June 2020, MBTA and Boston OpCo executed an amended agreement (the “Amended MBTA Contract”), which modified a number of the provisions of the Original MBTA Contract.
Under the Original MBTA Contract, MBTA was scheduled to make fixed payments to Boston OpCo in the aggregate amount of $ i 558.5 million, adjusted for incremental transaction-based fees, inflation and performance penalties over a i ten-year operate and maintain phase. All of Boston OpCo’s contractual responsibilities under the Original MBTA Contract regarding the design and development and the operation and maintenance of the fare system were subcontracted to Cubic by Boston OpCo. Under its subcontract with Boston OpCo, Cubic was scheduled to receive fixed payments in the aggregate amount of $ i 427.6 million, adjusted for incremental transaction-based fees inflation, and performance penalties.
The Amended MBTA Contract modified certain aspects of the Original MBTA Contract, such as extending the design and build phase to 2024, adding new functionality to the next-generation fare payment system, and increasing the scope and duration of the operate and maintain phase. In accordance with ASC 606, Revenue from Contracts with Customers (“ASC 606”), the Amended MBTA Contract was treated as a modification to the Original MBTA Contract, and as such Boston OpCo’s contract value was increased by additional fixed payments to be made by MBTA of $ i 278.9 million plus the estimated value of future variable payments to be made by MBTA for incremental transaction-based fees and inflation indexed payments.
The Amended MBTA Contract consists of a design and build phase of approximately i four years and an operate and maintain phase of approximately i twelve years. The design and build phase is planned to be completed in 2024 and the initial operate and maintain phase is expected to commence in 2021, with full service commencement spanning from 2024 through 2033. Under the Amended MBTA Contract, MBTA will make payments to Boston OpCo consisting of fixed payments of $ i 43.5 million during the design and build phase, fixed payments of $ i 175.8 million upon full service commencement, fixed payments of $ i 618.0 million during the full service period commencement of the operate and maintain phase, variable payments for incremental transaction-based fees and inflation indexed payments during the operate and maintain phase, and payment adjustments for any performance penalties incurred by Boston OpCo during the project.
Boston OpCo subcontracted all of its contractual responsibilities regarding the design and build and the operation and maintenance of the fare system to Cubic. Under its subcontract with Boston OpCo, Cubic will receive fixed payments in the aggregate amount of $ i 596.4 million, adjusted for incremental transaction-based fees, inflation indexed payments, less any performance penalties incurred.
Upon creation of the P3 Venture and upon execution of the Amended MBTA Contract, John Laing made loans to Boston HoldCo of $ i 24.3 million and $ i 1.9 million, respectively, in the form of bridge loans that are intended to be converted to equity in the future in accordance with its equity funding responsibilities under the terms of the P3 Venture. Concurrently, Boston HoldCo made corresponding equity contributions to Boston OpCo in the same amounts which are included within equity of noncontrolling interest in the VIE in our consolidated financial statements. Also, we issued a letter of credit for $ i 2.9 million to Boston HoldCo in accordance with our equity funding responsibilities under the terms
19
of the P3 Venture. Boston HoldCo is able to draw on the letter of credit in certain liquidity instances, but i no amounts have been drawn on such letter of credit as of June 30, 2020.
Upon creation of the P3 Venture, Boston OpCo entered into a credit agreement with a group of financial institutions (the “Boston OpCo Credit Agreement”), which included a long-term credit facility of up to $ i 212.4 million and a revolving credit facility. The long-term credit facility bore interest at variable rates of London Interbank Offer Rate (“LIBOR”) plus i 1.3%. In connection with the execution of the Amended MBTA Contract in June 2020, Boston OpCo entered into an amended credit agreement with a group of financial institutions (the “Boston OpCo Amended Credit Agreement”), which includes i two long-term debt facilities and a revolving credit facility to replace the facilities in the Boston OpCo Credit Agreement. At closing of the Boston OpCo Amended Credit Agreement, Boston OpCo retired and paid the outstanding principal balance of $ i 92.6 million plus accrued interest of $ i 7.4 million due under the Boston OpCo Credit Agreement.
Under the Boston OpCo Amended Credit Agreement, the long-term debt facilities allow for draws up to an aggregate of $ i 421.6 million and such draws may only be made during the design and build phase of the Amended MBTA Contract. The long-term debt facilities, including all interest and fees incurred, is required to be repaid on a fixed monthly schedule starting once the design and build phase is completed in 2024. The long-term debt facilities bear interest at variable rates of LIBOR plus a margin of i 1.75% to i 2.0% over the design and build phase and LIBOR plus a margin of i 2.0% to i 2.5% over the operate and maintain phase. Boston OpCo incurred debt issuance and modification costs of $ i 8.6 million in connection with the Boston OpCo Amended Credit Agreement and these fees are being amortized as interest expense using the effective interest method over the term of the long-term debt facilities. At June 30, 2020, the outstanding balance on the long-term debt facilities was $ i 172.8 million, which is presented net of total unamortized deferred financing costs of $ i 17.3 million. The revolving credit facility allows for draws up to a maximum aggregate amount of $ i 15.8 million during the operate and maintain phase of the Amended MBTA Contract. Boston OpCo’s debt is nonrecourse with respect to Cubic and our subsidiaries. The fair value of the long-term debt facility approximates its carrying amount.
The Boston OpCo Amended Credit Agreement contains a number of covenants which require that Boston OpCo and Cubic maintain progress on the delivery of the MBTA Amended Agreement within a specified timeline and budget and provide regular reporting on such progress. The Boston OpCo Amended Credit Agreement also contains customary events of default including the delivery of a customized fare collection system to MBTA by a pre-determined date. Failure to meet such delivery date will result in Boston OpCo, and Cubic via our subcontract with Boston OpCo, to incur penalties due to the lenders thereunder.
In connection with the Boston OpCo Credit Agreement, Boston OpCo entered into pay-fixed/receive-variable interest rate swaps with a group of financial institutions to mitigate variable interest rate risk associated with its long-term debt facility. Upon execution of the Boston OpCo Amended Credit Agreement, Boston OpCo terminated these interest rate swaps and paid termination costs of $ i 34.4 million to the counterparties. The termination payments are included in cash flows used in operating activities in our Condensed Consolidated Statements of Cash Flows. In connection with the Boston OpCo Amended Credit Agreement, Boston OpCo entered into new pay-fixed/receive-variable interest rate swaps to mitigate the variable interest rate associated with its long-term debt facility. The interest rate swaps contain forward starting notional principal amounts which align with Boston OpCo’s expected draws on its long-term debt facility. At June 30, 2020, the outstanding notional principal amounts on open interest rate swaps were $ i 172.8 million. The fair value of Boston OpCo’s interest rate swaps at June 30, 2020 was $ i 5.6 million and is recorded as a liability in other noncurrent liabilities in our condensed consolidated balance sheets. Boston OpCo’s interest rate swaps were not designated as effective hedges at June 30, 2020 and as such unrealized gains (losses) are included in other income (expense), net. As a result of changes in the fair value of its interest rate swaps, Boston OpCo recognized losses of $ i 6.9 million and $ i 18.4 million for the three and nine months ended June 30, 2020, respectively, and losses of $ i 7.0 million and $ i 16.9 million for the three and nine months ended June 30, 2019, respectively. See Note 8 for a description of the measurement of fair value of derivative financial instruments, including Boston OpCo’s interest rate swaps.
Boston OpCo holds a restricted cash balance which is required by the Amended MBTA Contract to allow for the delivery of future change orders directed by MBTA.
20
The assets and liabilities of Boston OpCo that are included in our condensed consolidated balance sheets are as follows:
| | | | | | | |
| | June 30, | |
| |||
|
| 2020 |
| 2019 |
| ||
| | (in thousands) | | ||||
Cash | | $ | i 743 | | $ | i 347 | |
Restricted cash | | | i 1,669 | | | i 9,967 | |
Other current assets | | | i 99 | | | i 33 | |
Long-term contracts financing receivable | | | i 191,042 | | | i 115,508 | |
Other noncurrent assets | | | — | | | i 1,419 | |
Total assets | | $ | i 193,553 | | $ | i 127,274 | |
| | | | | | | |
Trade accounts payable | | $ | i 175 | | $ | i 25 | |
Accrued compensation and other current liabilities | | | i 150 | | | i 191 | |
Due to Cubic | | | i 11,754 | | | i 25,143 | |
Other noncurrent liabilities | | | i 5,572 | | | i 21,605 | |
Long-term debt | | | i 155,493 | | | i 61,994 | |
Total liabilities | | $ | i 173,144 | | $ | i 108,958 | |
Total Cubic equity | | | ( i 583) | | | ( i 603) | |
Noncontrolling interests | | | i 20,992 | | | i 18,919 | |
Total liabilities and owners' equity | | $ | i 193,553 | | $ | i 127,274 | |
The assets of Boston OpCo are restricted for its use only and are not available for our general operations. Boston OpCo’s debt is non-recourse to Cubic. Our maximum exposure to loss as a result of our equity interest in the P3 Venture is limited to the $ i 2.7 million outstanding letter of credit, which will be converted to a cash contribution upon completion of the design and build phase of the Amended MBTA Contract.
iBoston OpCo’s results of operations included in our Condensed Consolidated Statements of Operations are as follows (in thousands):
| | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| ||||||||
| | June 30, | | | |||||||||
| | 2020 |
| 2019 | | 2020 |
| 2019 | | ||||
Revenue | | $ | i 17,585 | | $ | i 3,233 | | $ | i 20,632 | | $ | i 7,519 | |
Operating income | |
| i 17,344 | |
| i 2,823 | |
| i 19,832 | |
| i 6,521 | |
Other income (expense), net | |
| ( i 6,888) | |
| ( i 7,031) | | | ( i 19,636) | | | ( i 16,884) | |
Interest income | |
| i 1,663 | |
| i 1,075 | | | i 4,871 | | | i 2,335 | |
Interest expense | |
| ( i 1,710) | |
| ( i 829) | |
| ( i 4,864) | |
| ( i 1,939) | |
iNote 5 — Revenue Recognition
We account for revenue in accordance with ASC 606, Revenue from Contracts with Customers.
Contract Estimates: Use of the cost-to-cost or other similar methods of revenue recognition requires us to make reasonably dependable estimates regarding the revenue and cost associated with the design, manufacture and delivery of our products and services. Revisions or adjustments to estimates of the transaction price, estimated costs at completion and estimated profit or loss of a performance obligation are often required as work progresses under a contract, as experience is gained, as facts and circumstances change and as new information is obtained, even though the scope of work required under the contract may not change. Revisions or adjustments may also be required if contract modifications occur. The impact of revisions in profit or loss estimates are recognized on a cumulative catch-up basis in the period in which the revisions are made. The revisions in contract estimates, if significant, can materially affect our results of operations and cash flows, and in some cases result in liabilities to complete contracts in a loss position. The aggregate impact of net changes in contract estimates are presented in the table below (amounts in thousands, except per share numbers):
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| | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| ||||||||
| | June 30, | | | |||||||||
| | 2020 |
| 2019 | | 2020 |
| 2019 | | ||||
Operating income (loss) | | $ | i 19,297 | | $ | ( i 1,054) | | $ | i 5,499 | | $ | ( i 1,040) | |
Net income (loss) from continuing operations | |
| i 18,596 | |
| ( i 1,185) | |
| i 5,103 | |
| ( i 1,100) | |
Net income (loss) from continuing operations attributable to Cubic | | | i 4,826 | | | ( i 1,185) | | | ( i 8,667) | | | ( i 1,100) | |
Diluted earnings (loss) per share attributable to Cubic | |
| i 0.15 | | | ( i 0.04) | |
| ( i 0.28) | |
| ( i 0.04) | |
For the three and nine months ended June 30, 2020, operating income and net income from continuing operations increased by $ i i 25.0 / million and $ i i 27.8 / million, respectively, due to changes in estimates recognized by CTS and Boston OpCo related to the Amended MBTA Contract executed in June 2020. Operating income (loss) and net income (loss) from continuing operations reflects 100% of Boston OpCo’s change in contract estimates. However, because we only own i 10% of Boston OpCo, net income (loss) attributable to Cubic reflects only i 10% of Boston OpCo’s change in contract estimates. See Note 4 for further details.
Backlog: Backlog (i.e., unfulfilled or remaining performance obligations) represents the sales we expect to recognize for our products and services for which control has not yet transferred to the customer. It is comprised of both funded backlog (firm orders for which funding is authorized and appropriated) and unfunded backlog. Unexercised contract options and indefinite delivery indefinite quantity (“IDIQ”) contracts are not included in backlog until the time the option or IDIQ task order is exercised or awarded. For our cost-reimbursable and fixed-priced-incentive contracts, the estimated consideration we expect to receive pursuant to the terms of the contract may exceed the contractual award amount. The estimated consideration is determined at the outset of the contract and is continuously reviewed throughout the contract period. In determining the estimated consideration, we consider the risks related to the technical, schedule and cost impacts to complete the contract and an estimate of any variable consideration. Periodically, we review these risks and may increase or decrease backlog accordingly. As of June 30, 2020, our ending backlog was $ i 3.7 billion, compared to $ i 3.4 billion at September 30, 2019. We expect to recognize approximately i 30% of our June 30, 2020 backlog over the next i 12 months as revenue, and approximately i 45% over the next i 24 months as revenue, with the remainder recognized thereafter.
Accounts Receivable: Amounts billed include $ i 53.3 million and $ i 60.3 million due on U.S. federal government contracts at June 30, 2020 and September 30, 2019, respectively.
In our normal course of business, we may sell trade receivables to financial institutions as a cash management technique. We do not retain financial or legal obligations for these receivables that would result in material losses. Our ongoing involvement is limited to the remittance of customer payments to the financial institutions with respect to the sold trade receivables; therefore, our sold trade receivables are not included in our Condensed Consolidated Balance Sheet in any period presented. As of September 30, 2019, we sold $ i 31.1 million of outstanding trade receivables to financial institutions. i No trade receivables were sold as of June 30, 2020. During the first nine months of fiscal 2020, we received $ i 5.5 million related to withheld proceeds from receivables we sold as of September 30, 2019, which is included in cash provided by investing activities in our Condensed Consolidated Statements of Cash Flows.
Contract Assets and Liabilities: Contract assets include unbilled amounts typically resulting from sales under contracts when the percentage-of-completion method of revenue recognition is utilized and revenue recognized exceeds the amount billed to the customer per the contractually agreed project milestones. Contract liabilities include advance payments and billings in excess of revenue recognized. i Contract assets and contract liabilities were as follows (in thousands):
| | | | | | | |
| | | | | | | |
| | June 30, | |
| |||
|
| 2020 |
| 2019 |
| ||
| | |
| ||||
Contract assets | | $ | i 253,900 | | $ | i 349,559 | |
Contract liabilities | | $ | i 71,269 | | $ | i 46,170 | |
Contract assets decreased $ i 95.7 million during the nine months ended June 30, 2020, due to billings in excess of revenue recognized related to the satisfaction or partial satisfaction of performance obligations. There were i no significant impairment losses related to our contract assets during the nine months ended June 30, 2020.
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Contract liabilities increased $ i 25.1 million during the nine months ended June 30, 2020, due to payments received in excess of revenue recognized on these performance obligations. During the three and nine-month periods ended June 30, 2020, we recognized $ i 3.6 million and $ i 19.9 million of our contract liabilities at September 30, 2019 as revenue, respectively. We expect our contract liabilities to be recognized as revenue over the next 12 months.
iNote 6 — Net Income (Loss) Per Share
Basic net income (loss) per share (“EPS”) is computed by dividing the net income (loss) attributable to Cubic for the period by the weighted average number of common shares outstanding during the period, including vested restricted stock units (“RSUs”).
In periods with a net income from continuing operations attributable to Cubic, diluted EPS is computed by dividing the net income for the period by the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares consist of dilutive RSUs. Dilutive RSUs are calculated based on the average underlying 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. For RSUs with performance and market-based vesting, no common equivalent shares are included in the computation of diluted EPS until the performance criteria have been met, and once the criteria are met the dilutive RSUs are calculated using the treasury stock method, modified by the multiplier that is calculated at the end of the accounting period as if the vesting date was at the end of the accounting period. The multiplier on RSUs with performance and market-based vesting is further described in Note 12.
In periods with a net loss from continuing operations attributable to Cubic, common equivalent shares are not included in the computation of diluted EPS because to do so would be anti-dilutive.
iThe weighted-average number of shares outstanding used to compute net income (loss) per common share were as follows (in thousands):
| | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| ||||||||
| | June 30, | | | |||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| ||||
| | | | | | | | | | | | | |
Weighted average shares - basic | |
| i 31,299 | |
| i 31,160 | |
| i 31,289 | |
| i 30,267 | |
Effect of dilutive securities | |
| — | |
| i 89 | |
| — | |
| i 65 | |
Weighted average shares - diluted | |
| i 31,299 | |
| i 31,249 | |
| i 31,289 | |
| i 30,332 | |
| | | | | | | | | | | | | |
Number of anti-dilutive securities | | | i 1,243 | | | — | | | i 1,109 | | | — | |
/
iNote 7 — Balance Sheet Details
Restricted Cash
Cash and cash equivalents excluded $ i 23.9 million and $ i 29.5 million of restricted cash at June 30, 2020 and September 30, 2019, respectively, which for purposes of our consolidated statements of cash flows, is included in cash, cash equivalents and restricted cash.
Inventories
iInventories consist of the following (in thousands):
| | | | | | | |
| | June 30, | | | |||
|
| 2020 |
| 2019 |
| ||
| | | | | | | |
Finished products | | $ | i 16,825 | | $ | i 10,905 | |
Work in process and inventoried costs under long-term contracts | | | i 90,731 | | | i 46,951 | |
Materials and purchased parts | |
| i 44,057 | |
| i 48,938 | |
Net inventories | | $ | i 151,613 | | $ | i 106,794 | |
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At June 30, 2020, work in process and inventoried costs under long-term contracts included approximately $ i 7.7 million in costs incurred outside the scope of work or in advance of a contract award compared to $ i 5.8 million at September 30, 2019. We believe it is probable that we will recover the costs inventoried at June 30, 2020, plus a profit margin, under contract change orders or awards within the next year.
Costs we incur for certain U.S. federal government contracts include general and administrative costs as allowed by government cost accounting standards. The amounts remaining in inventory totaled $ i 0.4 million and $ i 0.5 million at June 30, 2020 and September 30, 2019, respectively.
Property, Plant and Equipment
iSignificant components of property, plant and equipment are as follows (in thousands):
| | | | | | | |
| | June 30, | | | |||
|
| 2020 |
| 2019 | | ||
Land and land improvements | | $ | i 7,362 | | $ | i 7,348 | |
Buildings and improvements | |
| i 48,628 | |
| i 48,191 | |
Machinery and other equipment | |
| i 125,656 | |
| i 107,297 | |
Software | | | i 114,172 | | | i 108,526 | |
Leasehold improvements | |
| i 20,346 | |
| i 17,064 | |
Construction and internal-use software development in progress | | | i 24,308 | | | i 16,814 | |
Accumulated depreciation and amortization | |
| ( i 179,925) | |
| ( i 160,271) | |
| | $ | i 160,547 | | $ | i 144,969 | |
Deferred Compensation Plan
We have a non-qualified deferred compensation plan offered to a select group of highly compensated employees. The plan provides participants with the opportunity to defer a portion of their compensation in a given plan year. The liabilities associated with the non-qualified deferred compensation plan are included in other noncurrent liabilities in our Condensed Consolidated Balance Sheets and totaled $ i 10.9 million at June 30, 2020 and $ i 11.0 million at September 30, 2019.
In the past we have made contributions to a rabbi trust to provide a source of funds for satisfying a portion of these deferred compensation liabilities. The total carrying value of the assets set aside to fund deferred compensation liabilities totaled $ i i 6.4 / million at each of June 30, 2020 and September 30, 2019, and were comprised entirely of life insurance contracts. The carrying value of the life insurance contracts is based on the cash surrender value of the policies. 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 Operations.
iNote 8 — 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. |
24
The following table presents assets and liabilities measured and recorded at fair value on our Condensed Consolidated Balance Sheets on a recurring basis (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| ||||||||||||||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| ||||||||
Assets | | | | | | | | | | | | | | | | | | | | | | | | | |
Current derivative assets | | $ | — | | $ | i 1,761 | | $ | — | | $ | i 1,761 | | $ | — | | $ | i 2,635 | | $ | — | | $ | i 2,635 | |
Noncurrent derivative assets | |
| — | |
| i 624 | |
| — | |
| i 624 | |
| — | |
| i 859 | |
| — | |
| i 859 | |
Total assets measured at fair value | | $ | — | | $ | i 2,385 | | $ | — | | $ | i 2,385 | | $ | — | | $ | i 3,494 | | $ | — | | $ | i 3,494 | |
Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | |
Current derivative liabilities | | | — | | | i 4,365 | | | — | | | i 4,365 | |
| — | | | i 529 | | | — | |
| i 529 | |
Noncurrent derivative liabilities | |
| — | |
| i 13,342 | |
| — | |
| i 13,342 | |
| — | |
| i 228 | |
| — | |
| i 228 | |
Contingent consideration to seller of H4 Global | | | — | |
| — | |
| i 564 | |
| i 564 | | | — | |
| — | |
| i 1,073 | | | i 1,073 | |
Contingent consideration to seller of Deltenna | |
| — | |
| — | |
| i 2,806 | |
| i 2,806 | |
| — | |
| — | |
| i 1,787 | |
| i 1,787 | |
Contingent consideration to seller of Shield | |
| — | |
| — | |
| i 4,052 | |
| i 4,052 | |
| — | |
| — | |
| i 3,814 | |
| i 3,814 | |
Contingent consideration to seller of Nuvotronics | | | — | |
| — | |
| — | |
| — | | | — | |
| — | |
| i 4,200 | | | i 4,200 | |
Contingent consideration to seller of Delerrok | | | — | | | — | | | i 500 | | | i 500 | | | — | |
| — | |
| — | | | — | |
Total liabilities measured at fair value | | $ | — | | $ | i 17,707 | | $ | i 7,922 | | $ | i 25,629 | | $ | — | | $ | i 757 | | $ | i 10,874 | | $ | i 11,631 | |
Derivative financial instruments are measured at fair value, the material portions of which are based on active or inactive markets for identical or similar instruments or model-derived valuations whose inputs are observable. Where model-derived valuations are appropriate, we use the applicable credit spread as the discount rate. Credit risk related to derivative financial instruments is considered minimal and is managed by requiring high credit standards for counterparties and through periodic settlements of positions.
The fair value of contingent consideration liabilities to the sellers of businesses that we have acquired are revalued to their fair value each period and any increase or decrease is recorded into selling, general and administrative expense. Any changes in the assumed timing and amount of the probability of payment scenarios could impact the fair value.
At June 30, 2020, we have the following remaining contingent consideration arrangements with the sellers of companies which we acquired:
| ● | H4 Global: Payments of up to $ i 2.7 million of contingent consideration based upon the value of contracts entered into over the i five-year period ending September 30, 2020. |
| ● | Deltenna: Payments of up to $ i 6.7 million of contingent consideration if Deltenna meets certain sales goals from the date of acquisition through the fiscal year ending September 30, 2022. |
| ● | Shield: Payments of up to $ i 10.0 million of contingent consideration if Shield meets certain sales goals from the date of acquisition through July 31, 2025. |
| ● | Nuvotronics: Payments of up to $ i 8.0 million of contingent consideration if Nuvotronics meets certain gross profit goals for the 12-month periods ending on each of December 31, 2020 and December 31, 2021. |
| ● | Delerrok: Payments of up to $ i 2.0 million of contingent consideration if Delerrok meets certain sales goals for the 12-month period ending December 31, 2020. |
The maximum remaining payout to the sellers of H4 Global is $ i 2.7 million at June 30, 2020 and is based on a percentage of the value of contracts entered into from October 1, 2015 through September 30, 2020. The fair value of the contingent consideration was estimated using a probability weighted approach by applying probabilities to different scenarios and summing the present value of any future payments. The selected discount rate was i 23.0% as of June 30, 2020 and i 23.5% as of September 30, 2019.
Under the terms of the Deltenna purchase agreement, we will pay the sellers of Deltenna up to $ i 6.7 million if Deltenna meets certain sales goals through September 30, 2022. The fair value of the contingent consideration was estimated using a combination of a probability weighted approach and the real option approach. Under the real option approach,
25
each payment was modeled using long digital options written on the underlying revenue metric. The strike price for each option is the respective revenue as specified in the related agreement, and the spot price is calibrated to the revenue forecast by calculating the present value of the corresponding projected revenues using a risk-adjusted discount rate. The volatility for the underlying revenue metrics was based upon an analysis of comparable public companies and was i 38% as of June 30, 2020 and i 36% as of September 30, 2019. The selected discount rate was i 10% as of June 30, 2020 and i 11% as of September 30, 2019.
Under the terms of the Shield purchase agreement, we will pay the sellers of Shield up to $ i 10.0 million if Shield meets certain sales goals through July 31, 2025. The fair value of the contingent consideration was estimated based on Monte Carlo simulations, which uses a probability distribution of values based on one million simulation trials. Key inputs for the simulation include projected revenues, discount rates, risk adjustment factors and volatility. The volatility and revenue risk adjustment factors were determined based on an analysis of publicly traded comparable companies and as of June 30, 2020 were i 31% and i 17%, respectively, and as of September 30, 2019 were i 18% and i 13%, respectively. The selected discount rate was based primarily on an analysis of publicly traded comparable companies and was i 6.5% at June 30, 2020 and i 3.6% at September 30, 2019.
Under the terms of the Nuvotronics purchase agreement, we will pay the sellers of Nuvotronics up to $ i 8.0 million if Nuvotronics meets certain gross profit goals for the 12 month period ending on each of December 31, 2020 and December 31, 2021. The fair value of the contingent consideration was estimated based on Monte Carlo simulations, which uses a probability distribution of values based on one million simulation trials. As of June 30, 2020, the fair value of the Nuvotronics contingent consideration was determined to be zero as its forecasted gross profit was below the payout thresholds.
Under the terms of the Delerrok purchase agreement, we will pay the sellers of Delerrok up to $ i 2.0 million if Delerrok meets certain sales goals for the 12-month period ending December 31, 2020. The fair value of the contingent consideration was estimated based on Monte Carlo simulations, which uses a probability distribution of values based on one million simulation trials. Key inputs for the simulation include projected revenues, assumed discount rates for projected revenues and cash flows and volatility. The volatility factor was determined based on an analysis of publicly traded comparable companies and was i 19.0% as of June 30, 2020. The discount rate used as of June 30, 2020 was i 3.4% and was based on our risk-free rate of return adjusted for our revenue required risk premium.
The inputs to each of the contingent consideration fair value models include significant unobservable inputs and therefore represent Level 3 measurements within the fair value hierarchy. Significant judgment is employed in determining the appropriateness of these assumptions as of the acquisition dates and each subsequent period. Accordingly, changes in the assumptions described above can materially impact the amount of contingent consideration expense we record in any period.
iAs of June 30, 2020, the following table summarizes the change in fair value of our Level 3 contingent consideration liabilities (in thousands):
| | | | | | | | | | | | | | | | | | | |
|
| H4 Global |
| Deltenna |
| Shield |
| Nuvotronics | | Delerrok |
| Total | | ||||||
Balance as of September 30, 2019 |
| $ | i 1,073 | | $ | i 1,787 | | $ | i 3,814 | | $ | i 4,200 | | $ | — | | $ | i 10,874 |
|
Initial measurement recognized at acquisition | | | — | | | — | | | — | | | — | | | i 1,600 | | | i 1,600 | |
Total remeasurement (gain) loss recognized in earnings | |
| ( i 509) | |
| i 1,019 | |
| i 238 | |
| ( i 4,200) | |
| ( i 1,100) | |
| ( i 4,552) | |
Balance as of June 30, 2020 | | $ | i 564 | | $ | i 2,806 | | $ | i 4,052 | | $ | — | | $ | i 500 | | $ | i 7,922 | |
We carry certain financial instruments, including accounts receivable, short-term borrowings, accounts payable and accrued liabilities at cost, which we believe approximates fair value because of the short-term maturity of these instruments. The fair value of our variable rate long-term debt approximates its carrying value at June 30, 2020.
In fiscal 2019, we invested $ i 5.0 million in Franklin Blackhorse, L.P., a limited partnership investment fund that invests in early stage, privately owned companies in the military, commercial and disruptive technology sectors. We account for our investment using the equity method of accounting. Our share of the fund’s operating losses was $ i i 0.6 / million for the three- and nine-month periods ended June 30, 2020, and are included in other income (expense), net in our Condensed Consolidated Statements of Operations. Our share of the fund’s operating results was not material for the three- and nine-month periods ended June 30, 2019. Our investment balance is included within other assets in our Condensed
26
Consolidated Statements of Operations and amounted to $ i 4.9 million and $ i 5.5 million as of June 30, 2020 and September 30, 2019, respectively.
We did not have any significant non-financial assets or liabilities measured at fair value on a non-recurring basis in the first three quarters of fiscal 2020 or fiscal 2019 other than assets and liabilities acquired in business acquisitions described in Note 3 and the RSUs that contain performance and market-based vesting criteria described in Note 12.
iNote 9 — Financing Arrangements
At September 30, 2019, we had $ i 200.0 million of outstanding senior unsecured notes bearing interest rates ranging from i 3.35% to i 3.93% as well as $ i 226.5 million outstanding under an $ i 800.0 million committed revolving credit agreement with a group of financial institutions. On March 27, 2020, we repaid and extinguished the remaining principal balance of $ i 189.3 million of senior unsecured notes then outstanding and recognized a loss on debt extinguishment of $ i 16.1 million, consisting of a $ i 15.9 million make-whole payment to the note holders and a write-off of previously capitalized debt issuance costs of $ i 0.2 million.
On March 27, 2020, we also executed a Fifth Amended and Restated Credit Agreement (the “Credit Facility”) with a group of financial institutions. The Credit Facility provided for a new term loan in the aggregate amount of $ i 450.0 million (the “Term Loan”) and increased our existing revolving line of credit limit (the “Revolving Line of Credit”) from $ i 800.0 million to $ i 850.0 million. The commitments under the Credit Facility will mature on March 27, 2025 and bear interest generally at the LIBOR rate plus a margin that ranges between i 1.00% and i 2.00%. At June 30, 2020, the weighted average interest rate on outstanding borrowings under the Credit Facility was i 2.18%. The Credit Facility is unsecured, but it is required to be guaranteed by certain significant domestic subsidiaries of Cubic.
On April 1, 2020, we entered into pay-fixed/receive-variable interest rate swaps with a group of financial institutions to mitigate the variable interest rate risk associated with the Credit Facility. The interest rate swaps contain forward starting notional principal amounts which align with our fixed repayment schedules under the Credit Facility and have a fixed interest rate of LIBOR plus a margin of approximately i 74 basis points. At June 30, 2020, the outstanding notional principal amounts on open interest rate swaps were $ i 550.0 million. See Note 8 for a description of the measurement of fair value of our derivative financial instruments.
Debt issuance and modification costs of $ i 2.5 million were incurred in connection with the execution of the Credit Facility and are recorded as a reduction to the related liability on our Condensed Consolidated Balance Sheets and are being amortized as interest expense using the effective interest method over the stated term of the Credit Facility. At June 30, 2020, our total debt issuance costs had an unamortized balance of $ i 4.9 million.
The available credit under our Revolving Line of Credit is reduced by any letters of credit issued under the Credit Facility. As of June 30, 2020, there were $ i 447.2 million of borrowings under the Term Loan and $ i 277.0 million of borrowings under the Revolving Line of Credit. Letters of credit outstanding under the Credit Facility totaled $ i 94.0 million at June 30, 2020, which reduced our available line of credit to $ i 479.0 million. The $ i 94.0 million of letters of credit includes both financial letters of credit and performance guarantees.
As of June 30, 2020, we had letters of credit and bank guarantees outstanding totaling $ i 101.4 million, which includes the $ i 94.0 million of letters of credit issued under the Revolving Line of Credit and $ i 7.4 million of letters of credit issued under other facilities. The $ i 101.4 million of letters of credit and bank guarantees includes $ i 96.9 million that guarantees either our performance or customer advances under certain contracts and financial letters of credit and $ i 4.5 million that primarily guarantees our payment of certain self-insured liabilities. We have never had a drawing on a letter of credit instrument, nor are any anticipated; therefore, we estimate the fair value of these instruments to be i zero.
We have entered into a short-term borrowing arrangement in the United Kingdom in the amount of £ i 20.0 million British Pounds (equivalent to approximately $ i 24.8 million at June 30, 2020) to help meet the short-term working capital requirements of our subsidiary located in the United Kingdom. At June 30, 2020, i no amounts were outstanding under this borrowing arrangement.
We maintain a cash account with a bank in the United Kingdom for which the funds are restricted as to use. The account is required to secure the customer’s interest in cash deposited in the account to fund our activities related to our
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performance under a fare collection services contract in the United Kingdom. The balance in the account as of June 30, 2020 was $ i 22.3 million and is classified as restricted cash in our Condensed Consolidated Balance Sheets.
The terms of the Credit Facility contain financial covenants setting a maximum total ratio of debt to adjusted earnings before interest, taxes, depreciation and amortization and a minimum interest coverage ratio. In addition, the terms contain covenants that restrict, among other things, our ability to sell assets, incur indebtedness, make investments, grant liens, pay dividends and make other restricted payments. As of June 30, 2020, we were in compliance with all covenants under the Credit Facility.
In December 2018, we completed an underwritten public offering of i 3,795,000 shares of our common stock, including the exercise of the underwriters’ option to purchase additional shares. All shares were offered by us at a price to the public of $ i 60.00 per share. Net proceeds were $ i 215.8 million, after deducting underwriting discounts and commissions and offering expenses in the aggregate of $ i 11.9 million. We used the net proceeds from the offering to repay a portion of our outstanding borrowings under our Revolving Line of Credit which was used to finance the acquisition of Trafficware and for general corporate purposes.
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 accrued compensation and current liabilities in our Condensed Consolidated Balance Sheets amounted to $ i 6.8 million at June 30, 2020 and $ i 7.4 million at September 30, 2019.
iNote 10 — Leases
We adopted ASC 842 on October 1, 2019. See “Note 1—Recently Adopted Accounting Pronouncements” for the impacts of the adoption of ASC 842. Our primary involvement with leases is as a lessee where we lease properties to support our business. A majority of our leases are operating leases of office space. For these leases, we have elected to account for the lease and non-lease components together as a single lease component. Our operating leases expire at various dates through 2030 without taking into consideration available renewal options, and many such leases require variable lease payments by us for property taxes, insurance premiums, common area maintenance and other costs. Certain of these leases also have extension or termination options, and we assess the likelihood of exercising such options. If it is reasonably certain that we will exercise the options, we include the impact in the measurement of our right-of-use assets and lease liabilities.
Our right-of-use assets for operating leases are included in operating lease right-of-use-assets on our Condensed Consolidated Balance Sheets. Our lease liabilities for operating leases are included in other current liabilities for the current portion and in operating lease liabilities for the long-term portion. We use our incremental borrowing rate in determining the present value of lease payments. Our operating lease expense is included in costs and expenses in our consolidated statements of operations. Total operating lease expense consists of operating lease cost, which is recognized on a straight-line basis over the lease term, and variable lease cost, which is recognized based on actual amounts incurred. We also sublease certain immaterial properties and sublease income is included as a reduction of rental expense.
The following tables present our operating leases, related lease expenses and other information (dollars in millions):
iOperating Lease Portfolio
| | | | |
| | | ||
| | 2020 | | |
Right-of-use assets | | $ | i 82.1 | |
Lease liabilities | |
| i 92.0 | |
Weighted average remaining lease term | |
| i 7.0 years | |
Weighted average discount rate | |
| i 3.01% | |
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Operating Lease Expense
| | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| ||
| | June 30, | | | |||
| | 2020 | | 2020 | | ||
Operating lease expense | | $ | i 4.9 | | $ | i 14.3 | |
Short-term lease expense | | | i 0.1 | | | i 0.2 | |
Variable lease expense | | | i 0.7 | | | i 2.5 | |
Total lease expense | | $ | i 5.7 | | $ | i 17.0 | |
Other Information
| | | | |
| | Nine Months Ended |
| |
| | | ||
| | 2020 | | |
Cash paid for amounts included in the measurement of lease liabilities | | $ | i 13.7 | |
Right-of-use assets obtained in exchange for new operating lease liabilities | |
| i 18.9 | |
Maturities of Lease Liabilities
iOur future minimum lease commitments of our operating leases on an undiscounted basis, reconciled to the lease liability at June 30, 2020 were as follows (in millions):
| | | | |
2020 |
| $ | i 4.7 |
|
2021 | |
| i 17.6 | |
2022 | |
| i 15.3 | |
2023 | |
| i 13.4 | |
2024 | |
| i 12.6 | |
Thereafter | |
| i 39.1 | |
Total lease payments | | | i 102.7 | |
Less: imputed interest | | | ( i 10.7) | |
Present value of operating lease liabilities | | $ | i 92.0 | |
In fiscal 2019, we entered into agreements related to the construction and leasing of i two buildings on our existing corporate campus in San Diego, California. Under these agreements, we will act as the construction agent, a financial institution will own the buildings and we will lease the property for a term of i five years upon their completion expected in December 2020. The terms of these agreements include provisions that require 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, 2020, we were in compliance with all covenants included in these agreements.
iNote 11 — Pension Plans
iThe components of net periodic pension cost (benefit) are as follows (in thousands):
| | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| ||||||||
| | June 30, | | | |||||||||
| | 2020 |
| 2019 | | 2020 |
| 2019 | | ||||
Service cost | | $ | i 160 | | $ | i 150 | | $ | i 489 | | $ | i 449 | |
Interest cost | |
| i 1,490 | |
| i 1,915 | |
| i 4,528 | |
| i 5,746 | |
Expected return on plan assets | |
| ( i 2,904) | |
| ( i 3,020) | |
| ( i 8,796) | |
| ( i 9,063) | |
Amortization of actuarial loss | |
| i 948 | |
| i 530 | |
| i 2,917 | |
| i 1,592 | |
Administrative expenses | |
| i 84 | |
| i 97 | |
| i 253 | |
| i 291 | |
Net pension benefit | | $ | ( i 222) | | $ | ( i 328) | | $ | ( i 609) | | $ | ( i 985) | |
/
29
Note 12 - Shareholders’ Equity
Long-Term Equity Incentive Plan
Under our long-term equity incentive plan, we have provided participants with three general categories of grant awards: (a) RSUs with time-based vesting, (b) RSUs with performance-based vesting, and (c) RSUs with performance and market-based vesting.
Each RSU with time-based vesting or performance-based vesting represents a contingent right to receive i one share of our common stock. Each RSU with performance and market-based vesting represents a contingent right to receive up to i 1.25 shares of our common stock. Dividend equivalent rights accrue with respect to the RSUs as dividends are paid on shares of our common stock and vest proportionately with the RSUs to which they relate. Vested shares are delivered to the recipient following each vesting date.
Time-based RSUs granted prior to fiscal 2020 generally vest in i four equal installments on each of the four October 1 dates following the grant date, subject to the recipient’s continued service with the Company through such vesting date. Time-based RSUs granted in fiscal 2020 generally vest in i three equal installments on each of the three October 1 dates following the grant date, subject to the recipient’s continued service with the Company through such vesting date.
The performance-based RSUs granted to participants vest over i three-year performance periods based on our achievement of certain revenue growth targets, earnings growth targets and return on equity targets established by the Compensation Committee of our Board of Directors (the “Compensation Committee”) over the performance periods, subject to the recipient’s continued service with the Company through the end of the respective performance periods. The level at which we perform against scalable targets over the performance periods will determine the percentage of the RSUs that will ultimately vest.
In fiscal 2019 and fiscal 2020, the Compensation Committee granted RSUs which contained both performance- and market-based vesting criteria. The performance- and market-based RSUs granted to participants vest over i three-year performance periods based on our achievement of revenue growth targets and earnings growth targets subject to the recipient’s continued service with the Company through the end of the respective performance periods. For these RSUs, the relative total stock return (“TSR”) for shares of our common stock as compared to the Russell 2000 Index (the “Index”) over the performance period will result in a multiplier for the number of RSUs that will vest. If the TSR performance exceeds the performance of the Index based on a scale established by the Compensation Committee, the multiplier will result in up to an additional i 25% of RSUs vesting at the end of the performance period. If the TSR performance is below the performance of the Index based on a scale established by the Compensation Committee, the multiplier would result in a reduction of up to i 25% of these RSUs vesting at the end of the performance period. For the performance- and market-based RSUs granted in fiscal 2020, if our absolute TSR is negative for the i three-year performance period, the TSR multiplier shall not exceed i 100%, regardless of the performance relative to the Index.
During fiscal 2019, the Compensation Committee amended the Company’s long-term equity incentive plan to provide accelerated vesting for retirement age participants. Under the amended plan, participants who are i 60 years of age, and have achieved i 10 years of continuous service, are eligible for accelerated vesting of their RSUs. Participants who have reached the retirement age criteria must generally provide us with a i one-year notice of retirement. For participants who have reached the retirement age criteria, expense is recognized over the adjusted service period.
The grant date fair value of each RSU with time-based vesting or performance-based vesting is the fair market value of i one share of our common stock at the grant date.
/30
The grant date fair value of each RSU with performance- and market-based vesting was calculated using a Monte Carlo simulation valuation method. Under this method, the prices of the Index and shares of our common stock were simulated through the end of the performance period. The correlation matrix between shares of our common stock and the Index as well as the corresponding return volatilities were developed based upon an analysis of historical data. i The following tables include the assumptions used for the valuation of the RSUs with performance and market-based vesting that were granted during fiscal 2019 and fiscal 2020:
| | | | | | |
| | | |
| | |
|
| | | | | |
| | | RSUs granted during fiscal 2020 | | | |
| | | | | | |
Date of grant |
| | | | | |
Grant date fair value per RSU |
| | $ i 52.51 | | | |
Performance period begins |
| | | | | |
Performance period ends |
| | | | | |
Risk-free interest rate | | | i 1.6% | | | |
Expected volatility | | | i 41% | | | |
| | | | | | |
| | | | | | |
| | | RSUs granted during fiscal 2019 | | ||
| | | | | | |
Date of grant |
| | | | ||
Grant date fair value per RSU |
| | $ i 67.40 | | $ i 59.29 | |
Performance period begins |
| | | | ||
Performance period ends |
| | | | ||
Risk-free interest rate | | | i 2.8% | | i 2.8% | |
Expected volatility | | | i 34% | | i 34% | |
At June 30, 2020, the total number of unvested RSUs that are ultimately expected to vest, after consideration of expected forfeitures and estimated vesting of performance-based RSUs, is i 511,508 RSUs with time-based vesting, i 106,772 RSUs with performance-based vesting, and i 194,237 RSUs with performance- and market-based vesting.
31
The following table summarizes our RSU activity:
| | | | | | |
| | Unvested RSUs with Time-Based Vesting |
| |||
|
| |
| Weighted Average |
| |
| | Number of Shares | | Grant-Date Fair Value per Share |
| |
Unvested at September 30, 2019 |
| i 422,094 |
| $ | i 58.84 | |
Granted |
| i 383,661 | | | i 57.75 | |
Vested |
| ( i 162,253) | | | i 55.66 | |
Forfeited |
| ( i 51,331) | | | i 60.04 | |
Unvested at June 30, 2020 | | i 592,171 | | $ | i 58.90 | |
| | | | | | |
| | Unvested RSUs with Performance-Based Vesting |
| |||
|
| |
| Weighted Average |
| |
| | Number of Shares | | Grant-Date Fair Value per Share |
| |
Unvested at September 30, 2019 |
| i 315,262 |
| $ | i 55.67 | |
Granted |
| — | |
| — | |
Vested |
| — | |
| — | |
Forfeited |
| ( i 177,492) | |
| i 47.57 | |
Unvested at June 30, 2020 | | i 137,770 | | $ | i 61.40 | |
| | | | | | |
| | Unvested RSUs with Performance- and Market-Based Vesting |
| |||
|
| |
| Weighted Average |
| |
| | Number of Shares | | Grant-Date Fair Value per Share |
| |
Unvested at September 30, 2019 |
| i 227,402 |
| $ | i 66.77 | |
Granted |
| i 346,826 | | | i 52.51 | |
Vested |
| — | |
| — | |
Forfeited |
| ( i 51,088) | |
| i 59.03 | |
Unvested at June 30, 2020 | | i 523,140 | | $ | i 58.07 | |
iWe recorded non-cash compensation expense related to stock-based awards as follows (in thousands):
| | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | ||||||||
| | June 30, | | | |||||||||
| | 2020 | | 2019 | | 2020 | | 2019 | | ||||
Cost of sales | | $ | i 857 |
| $ | i 498 | | $ | i 2,139 |
| $ | i 1,236 | |
Selling, general and administrative | |
| i 4,555 | |
| i 3,904 | |
| i 13,132 | |
| i 9,524 | |
| | $ | i 5,412 | | $ | i 4,402 | | $ | i 15,271 | | $ | i 10,760 | |
As of June 30, 2020, there was $ i 50.4 million of unrecognized compensation expense 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 $ i 48.5 million, which is expected to be recognized over a weighted average period of i 1.5 years.
We estimate forfeitures at the time of grant and revise those estimates in subsequent periods on a cumulative basis in the period the estimated forfeiture rate changes for all stock-based awards when significant events occur. We consider our historical experience with employee turnover as the basis to arrive at our estimated forfeiture rate. The forfeiture rate was estimated to be i i 12.5 / % per year in each of fiscal 2019 and fiscal 2020. To the extent the actual forfeiture rate is different from what we have estimated, compensation expense related to these awards will be different from our expectations.
iNote 13 – Income Taxes
The Tax Cuts and Jobs Act, as enacted by the U.S. federal government in December 2017, fundamentally changed the taxation of multinational corporations in the United States. Significant provisions impacting Cubic include global intangible low-taxed income, a new tax on income of foreign corporations and base-erosion and anti-abuse tax (“BEAT”). BEAT provisions impose an alternative tax on applicable taxpayers with base-erosion payments greater than a de minimis threshold. After considering available tax planning opportunities, we made a reasonable forecast of BEAT expense for the third quarter of fiscal 2020.
32
On March 27, 2020, the U.S. federal government enacted the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The CARES Act was intended to assist with the stabilization of the U.S. domestic economy during the COVID-19 crisis and includes relief provisions for the U.S. corporate income tax system, including temporary changes to the prior and future utilization of net operation losses, acceleration of depreciation for certain qualifying improvements and relaxed limitations on the deductibility of interest. At June 30, 2020, we have made reasonable estimates of the impact of the CARES Act on our condensed consolidated statements of operations and our condensed consolidated statements of cash flows.
The quarterly forecast of our annual effective tax rate is impacted by numerous factors including income fluctuations by tax jurisdiction throughout the year, the level of intercompany transactions, applicability of new tax regimes and the impact of acquisitions. For the three-month period ended June 30, 2020, we concluded it is more appropriate to use a blend of the discrete effective tax rate method for U.S. operations and the estimated annual effective tax rate method for foreign operations to determine income tax expense for the period.
The income tax expense recognized on pre-tax loss from continuing operations for the three- and nine-month periods ended June 30, 2020 resulted in effective tax rates of i 37% and i 13%, respectively, which differ from the effective tax rates of i 5% and negative i 166% for the three- and nine-month periods ended June 30, 2019, respectively. The variability in effective tax rates primarily relates to the difference in jurisdictional mix of earnings, increased U.S. BEAT cash tax expense, discrete benefits related to the release of a portion of the existing U.S. deferred tax valuation allowance due to deferred tax liabilities acquired in business combinations, as well as cash tax benefits resulting from the net operating loss carryback provisions of the CARES Act.
iNote 14 — Derivative Instruments and Hedging Activities
In order to manage our exposure to fluctuations in interest and foreign currency exchange rates, we utilize derivative financial instruments such as forward starting swaps and foreign currency forwards for periods typically up to i five years. 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, both the effective and ineffective portions of a change in the fair value of the derivative are recognized as a component of accumulated other comprehensive income (loss) until the underlying hedged item is recognized in earnings, or the forecasted transaction is no longer probable of occurring. We formally document all hedging relationships for all derivative hedges and the underlying hedged items, as well as the risk management objectives and strategies for undertaking the hedge transactions. We classify the fair value of all derivative contracts as current or noncurrent assets or liabilities, depending on the realized and unrealized gain or loss position of the hedged contract at the balance sheet date, and the timing of future cash flows. The cash flows from derivatives treated as hedges are classified in the condensed consolidated statements of cash flows in the same category as the item being hedged.
iThe following table shows the notional principal amounts of our outstanding derivative instruments as of June 30, 2020 and September 30, 2019 (in thousands):
| | | | | | | |
| | Notional Principal |
| ||||
| | | | ||||
Instruments designated as accounting hedges: | | | | | | | |
Foreign currency forwards | | $ | i 112,508 | | $ | i 143,164 | |
Interest rate swaps | |
| i 645,000 | |
| i 95,000 | |
| | | | | | | |
Instruments not receiving hedge accounting treatment: | | | | | | | |
Foreign currency forwards | | $ | i 2,218 | | $ | i 24,220 | |
Included in the amounts not receiving hedge accounting treatment at June 30, 2020 and September 30, 2019 were non-designated foreign currency forwards with notional principal amounts of $ i 2.2 million and $ i 14.0 million, respectively,
/33
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 have approximately offset an equal and opposite amount of gains or losses related to the foreign currency exposure. These foreign currency forward contracts resulted in unrealized gains of $ i 1.1 million and unrealized losses of $ i 0.2 million for the three months ended June 30, 2020 and 2019, respectively, and resulted in unrealized losses of $ i 0.6 million and $ i 0.3 million for the nine months ended June 30, 2020 and 2019, respectively. Unrealized gains or losses are included in other income (expense), net in our condensed consolidated statements of operations.
In conjunction with the agreements related to the construction and leasing of i two new buildings on our existing corporate campus, in August 2019, we entered into pay-fixed/receive-variable interest rate swaps with a group of financial institutions to mitigate variable interest rate risk associated with these future lease obligations. The interest rate swaps contain forward starting notional principal amounts of $ i 95.0 million which align with our expected lease payments. These interest rate swaps were designated as effective cash flow hedges and as such, unrealized gains (losses) are included in accumulated other comprehensive income (loss). Unrealized losses as a result of changes in the fair value of the interest rate swaps were $ i 2.5 million and $ i 4.7 million for the three and nine months ended June 30, 2020, respectively.
On April 1, 2020, in conjunction with the Credit Facility described in Note 9, we entered into pay-fixed/receive-variable interest rate swaps with a group of financial institutions to mitigate variable interest rate risk associated with the Credit Facility. The interest rate swaps contain forward starting notional principal amounts of $ i 550.0 million and were designated as effective cash flow hedges, and as such, unrealized gains (losses) are included in accumulated other comprehensive income (loss). Unrealized losses as a result of changes in the fair value of the interest rate swaps were $ i i 7.8 / million for the three and nine months ended June 30, 2020.
The notional principal amounts for outstanding derivative instruments provide one measure of the transaction volume outstanding and do not represent the amount of our exposure to credit or market loss. Credit risk represents our gross exposure to potential accounting loss on derivative instruments that are outstanding or unsettled if all counterparties failed to perform according to the terms of the contract, based on then-current interest or currency exchange rates at each respective date. Our exposure to credit loss and market risk will vary over time as a function of interest and currency exchange rates. The amount of credit risk from derivative instruments and hedging activities was not material for the periods ended June 30, 2020 or September 30, 2019. Although the table above reflects the notional principal amounts of our foreign exchange instruments, it does not reflect the gains or losses associated with the exposures and transactions that the foreign exchange instruments are intended to hedge. The amounts ultimately realized upon settlement of these financial instruments, together with the gains and losses on the underlying exposures, will depend on actual market conditions during the remaining life of the instruments.
We generally enter into master netting arrangements, which reduce credit risk by permitting net settlement of transactions with the same counterparty. We present our derivative assets and derivative liabilities at their gross fair values. We did not have any derivative instruments with credit risk-related contingent features that would require us to post collateral as of June 30, 2020 or September 30, 2019.
iThe 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 (in thousands):
| | | | | | | | | |
| | | | Fair Value |
| ||||
|
| Balance Sheet Location |
|
|
| ||||
Asset derivatives: | | | | | | | | | |
Foreign currency forwards |
| Other current assets | | $ | i 1,761 | | $ | i 2,635 | |
Foreign currency forwards |
| Other assets | |
| i 624 | |
| i 619 | |
Forward starting swap |
| Other assets | |
| — | |
| i 240 | |
Total | | | | $ | i 2,385 | | $ | i 3,494 | |
Liability derivatives: | | | | | | | | | |
Foreign currency forwards |
| Accrued compensation and current liabilities | | $ | i 4,365 | | $ | i 529 | |
Foreign currency forwards |
| Other noncurrent liabilities | |
| i 1,118 | |
| i 228 | |
Forward starting swap |
| Other noncurrent liabilities | |
| i 12,224 | |
| — | |
Total | | | | $ | i 17,707 | | $ | i 757 | |
34
The tables below present gains and losses recognized in other comprehensive income (loss) related to derivative financial instruments designated as cash flow hedges, as well as the amount of gains and losses reclassified into earnings (in thousands):
| | | | | | | | | | | | | |
| | Three Months Ended | | ||||||||||
| | | | ||||||||||
|
| |
| |
| |
| |
| ||||
| | Gains (losses) | | Gains (losses) | | | | Gains (losses) | | ||||
| | recognized in | | reclassified into | | Gains (losses) | | reclassified into | | ||||
Derivative Type | | OCI | | earnings | | recognized in OCI | | earnings | | ||||
Foreign currency forwards | | $ | ( i 18,521) | | $ | i 2,125 | | $ | i 661 | | $ | i 94 | |
| | | | | | | | | | | | | |
| | Nine Months Ended | | ||||||||||
| | | | ||||||||||
|
| |
| |
| |
| |
| ||||
| | Gains (losses) | | Gains (losses) | | | | Gains (losses) | | ||||
| | recognized in | | reclassified into | | Gains (losses) | | reclassified into | | ||||
Derivative Type | | OCI | | earnings | | recognized in OCI | | earnings | | ||||
Foreign currency forwards | | $ | ( i 18,696) | | $ | i 3,398 | | $ | ( i 134) | | $ | i 466 | |
Foreign currency forwards designated as accounting hedges (including both fair value and cash flow hedges) had realized gains of $ i 2.5 million and $ i 5.4 million for the three- and nine-month periods ended June 30, 2020, respectively.
The amount of unrealized gains and losses from derivative instruments and hedging activities classified as not highly effective did not have a material impact on the results of operations for the three- and nine-month periods ended June 30, 2020 or 2019. The amount of estimated unrealized net gains from cash flow hedges which are expected to be reclassified to earnings in the next 12 months is $ i 1.9 million, net of income taxes.
35
Note 15 — Segment Information
We define our operating segments and reportable segments based on the way our Chief Executive Officer, who we have concluded is our chief operating decision maker, manages our operations for purposes of allocating resources and assessing performance and we continually reassess our operating segment and reportable segment designation based upon these criteria. We evaluate performance and allocate resources based on total segment operating income or loss. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies in Note 1. Intersegment sales and transfers are immaterial and are eliminated in consolidation.
iBusiness segment financial data is as follows (in millions):
| | | | | | | | | | | | | |
| | Three Months Ended |
| Nine Months Ended |
| ||||||||
| | June 30, | | | |||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | | ||||
Sales: | | | | | | | | | | | | | |
Cubic Transportation Systems | | $ | i 215.5 | | $ | i 212.7 | | $ | i 601.8 | | $ | i 595.2 | |
Cubic Mission Solutions | |
| i 69.0 | |
| i 95.0 | | | i 167.2 | | | i 203.3 | |
Cubic Global Defense Systems | |
| i 65.9 | |
| i 75.0 | |
| i 231.8 | |
| i 226.8 | |
Total sales | | $ | i 350.4 | | $ | i 382.7 | | $ | i 1,000.8 | | $ | i 1,025.3 | |
| | | | | | | | | | | | | |
Operating income (loss): | | | | | | | | | | | | | |
Cubic Transportation Systems | | $ | i 50.9 | | $ | i 17.2 | | $ | i 77.8 | | $ | i 37.0 | |
Cubic Mission Solutions | |
| ( i 21.3) | |
| i 1.3 | | | ( i 67.6) | | | ( i 12.1) | |
Cubic Global Defense Systems | |
| i 6.1 | |
| i 1.9 | |
| i 18.1 | |
| i 10.0 | |
Unallocated corporate expenses | |
| ( i 11.0) | |
| i 14.3 | |
| ( i 40.0) | |
| ( i 7.3) | |
Total operating income (loss) | | $ | i 24.7 | | $ | i 34.7 | | $ | ( i 11.7) | | $ | i 27.6 | |
| | | | | | | | | | | | | |
Depreciation and amortization: | | | | | | | | | | | | | |
Cubic Transportation Systems | | $ | i 7.1 | | $ | i 6.9 | | $ | i 21.6 | | $ | i 24.1 | |
Cubic Mission Solutions | |
| i 13.3 | |
| i 6.0 | | | i 34.3 | | | i 17.2 | |
Cubic Global Defense Systems | |
| i 1.9 | |
| i 1.7 | |
| i 5.2 | |
| i 5.4 | |
Corporate | |
| i 1.1 | |
| i 0.7 | |
| i 2.7 | |
| i 2.2 | |
Total depreciation and amortization | | $ | i 23.4 | | $ | 15.3 | | $ | i 63.8 | | $ | i 48.9 | |
Unallocated corporate expenses include costs of strategic and information technology (“IT”) system resource planning as part of our One Cubic Initiatives, which totaled $ i 0.3 million in the third quarter of fiscal 2020 compared to $ i 2.4 million in the third quarter of fiscal 2019. Unallocated corporate costs included $ i 3.3 million of costs incurred in the first nine months of fiscal 2020 for strategic and IT system resource planning compared to $ i 6.3 million in the first nine months of fiscal 2019.
iDisaggregation of Total Net Sales: We disaggregate our sales from contracts with customers by end customer, contract type, deliverable type and revenue recognition method for each of our segments, as we believe these factors can affect the nature, amount, timing and uncertainty of our revenue and cash flows.
Sales by Geographic Region (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, 2020 | | Nine months ended June 30, 2020 | | ||||||||||||||||||||
| | CTS |
| CMS |
| CGD |
| Total |
| CTS |
| CMS |
| CGD |
| Total | | ||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
United States | | $ | i 134.7 | | $ | i 67.0 | | $ | i 32.2 | | $ | i 233.9 | | $ | i 342.5 | | $ | i 161.3 | | $ | i 78.3 | | $ | i 582.1 | |
United Kingdom | |
| i 43.3 | |
| i 0.6 | |
| i 4.7 | |
| i 48.6 | |
| i 140.8 | |
| i 1.3 | |
| i 13.6 | |
| i 155.7 | |
Australia | |
| i 30.2 | |
| i 0.7 | |
| i 8.1 | |
| i 39.0 | |
| i 96.7 | |
| i 2.4 | |
| i 21.4 | |
| i 120.5 | |
Far East/Middle East | |
| i 0.3 | |
| i 0.3 | |
| i 12.4 | |
| i 13.0 | |
| i 2.2 | |
| i 0.8 | |
| i 84.0 | |
| i 87.0 | |
Other | |
| i 7.0 | |
| i 0.4 | |
| i 8.5 | |
| i 15.9 | |
| i 19.6 | |
| i 1.4 | |
| i 34.5 | |
| i 55.5 | |
Total sales | | $ | i 215.5 | | $ | i 69.0 | | $ | i 65.9 | | $ | i 350.4 | | $ | i 601.8 | | $ | i 167.2 | | $ | i 231.8 | | $ | i 1,000.8 | |
/ /36
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, 2019 | | Nine months ended June 30, 2019 | | ||||||||||||||||||||
| | CTS |
| CMS |
| CGD |
| Total |
| CTS |
| CMS |
| CGD |
| Total | | ||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
United States | | $ | i 128.9 | | $ | i 94.0 | | $ | i 31.6 | | $ | i 254.5 | | $ | i 327.3 | | $ | i 200.1 | | $ | i 101.3 | | $ | i 628.7 | |
United Kingdom | |
| i 47.5 | |
| i 0.2 | |
| i 7.7 | |
| i 55.4 | |
| i 151.6 | |
| i 1.3 | |
| i 16.3 | |
| i 169.2 | |
Australia | |
| i 30.9 | |
| i 0.3 | |
| i 8.1 | |
| i 39.3 | |
| i 91.1 | |
| i 0.5 | |
| i 20.7 | |
| i 112.3 | |
Far East/Middle East | |
| i 0.7 | |
| i 0.1 | |
| i 15.2 | |
| i 16.0 | |
| i 8.5 | |
| i 0.7 | |
| i 45.8 | |
| i 55.0 | |
Other | |
| i 4.7 | |
| i 0.4 | |
| i 12.4 | |
| i 17.5 | |
| i 16.7 | |
| i 0.7 | |
| i 42.7 | |
| i 60.1 | |
Total sales | | $ | i 212.7 | | $ | i 95.0 | | $ | i 75.0 | | $ | i 382.7 | | $ | i 595.2 | | $ | i 203.3 | | $ | i 226.8 | | $ | i 1,025.3 | |
Sales by End Customer: We are the prime contractor for the vast majority of our sales. The table below presents total net sales disaggregated by end customer (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, 2020 | | Nine months ended June 30, 2020 | | ||||||||||||||||||||
| | CTS |
| CMS |
| CGD |
| Total |
| CTS |
| CMS |
| CGD |
| Total | | ||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Federal Government and State and Local Municipalities | | $ | i 127.8 | | $ | i 64.9 | | $ | i 32.4 | | $ | i 225.1 | | $ | i 325.4 | | $ | i 155.1 | | $ | i 85.4 | | $ | i 565.9 | |
Other | |
| i 87.7 | |
| i 4.1 | |
| i 33.5 | |
| i 125.3 | |
| i 276.4 | |
| i 12.1 | |
| i 146.4 | |
| i 434.9 | |
Total sales | | $ | i 215.5 | | $ | i 69.0 | | $ | i 65.9 | | $ | i 350.4 | | $ | i 601.8 | | $ | i 167.2 | | $ | i 231.8 | | $ | i 1,000.8 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, 2019 | | Nine months ended June 30, 2019 | | ||||||||||||||||||||
| | CTS |
| CMS |
| CGD |
| Total |
| CTS |
| CMS |
| CGD |
| Total | | ||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Federal Government and State and Local Municipalities | | $ | i 123.1 | | $ | i 91.8 | | $ | i 37.4 | | $ | i 252.3 | | $ | i 310.7 | | $ | i 195.6 | | $ | i 107.3 | | $ | i 613.6 | |
Other | |
| i 89.6 | |
| i 3.2 | |
| i 37.6 | |
| i 130.4 | |
| i 284.5 | |
| i 7.7 | |
| i 119.5 | |
| i 411.7 | |
Total sales | | $ | i 212.7 | | $ | i 95.0 | | $ | i 75.0 | | $ | i 382.7 | | $ | i 595.2 | | $ | i 203.3 | | $ | i 226.8 | | $ | i 1,025.3 | |
Sales by Contract Type: Substantially all of our contracts are fixed-price type contracts. Sales included in “Other” contract types represent cost-plus and time-and-material type contracts.
On a fixed-price type contract, we agree to perform the contractual statement of work for a predetermined sales price. Certain of our fixed-price contracts include compensation for bonuses, transactional variable based fees or other similar provisions. On a cost-plus type contract, we are paid our allowable incurred costs plus a profit which can be fixed or variable depending on the applicable contract’s fee arrangement up to funding levels that are predetermined by the customer. On a time-and-material type contract, we are paid on the basis of direct labor hours expended at specified fixed-price hourly rates (that include wages, overhead, allowable general and administrative expenses and profit) and materials at cost. The table below presents total net sales disaggregated by contract type (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, 2020 | | Nine months ended June 30, 2020 | | ||||||||||||||||||||
| | CTS |
| CMS |
| CGD |
| Total |
| CTS |
| CMS |
| CGD |
| Total | | ||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
Fixed Price | | $ | i 213.1 | | $ | i 61.8 | | $ | i 57.2 | | $ | i 332.1 | | $ | i 592.4 | | $ | i 144.0 | | $ | i 207.1 | | $ | i 943.5 | |
Other | |
| i 2.4 | |
| i 7.2 | |
| i 8.7 | |
| i 18.3 | |
| i 9.4 | |
| i 23.2 | |
| i 24.7 | |
| i 57.3 | |
Total sales | | $ | i 215.5 | | $ | i 69.0 | | $ | i 65.9 | | $ | i 350.4 | | $ | i 601.8 | | $ | i 167.2 | | $ | i 231.8 | | $ | i 1,000.8 | |
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| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, 2019 | | Nine months ended June 30, 2019 | | ||||||||||||||||||||
| | CTS |
| CMS |
| CGD |
| Total |
| CTS |
| CMS |
| CGD |
| Total | | ||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
Fixed Price | | $ | i 210.5 | | $ | i 93.2 | | $ | i 69.5 | | $ | i 373.2 | | $ | i 586.3 | | $ | i 199.6 | | $ | i 209.4 | | $ | i 995.3 | |
Other | |
| i 2.2 | |
| i 1.8 | |
| i 5.5 | |
| i 9.5 | |
| i 8.9 | |
| i 3.7 | |
| i 17.4 | |
| i 30.0 | |
Total sales | | $ | i 212.7 | | $ | i 95.0 | | $ | i 75.0 | | $ | i 382.7 | | $ | i 595.2 | | $ | i 203.3 | | $ | i 226.8 | | $ | i 1,025.3 | |
Sales by Deliverable Type: The table below presents total net sales disaggregated by the type of deliverable, which is determined by us at the performance obligation level (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, 2020 | | Nine months ended June 30, 2020 | | ||||||||||||||||||||
| | CTS |
| CMS |
| CGD |
| Total |
| CTS |
| CMS |
| CGD |
| Total | | ||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
Product | | $ | i 124.2 | | $ | i 59.7 | | $ | i 37.1 | | $ | i 221.0 | | $ | i 317.4 | | $ | i 141.6 | | $ | i 150.2 | | $ | 609.2 | |
Service | |
| i 91.3 | |
| i 9.3 | |
| i 28.8 | |
| i 129.4 | |
| i 284.4 | |
| i 25.6 | |
| i 81.6 | |
| i 391.6 | |
Total sales | | $ | i 215.5 | | $ | i 69.0 | | $ | i 65.9 | | $ | i 350.4 | | $ | i 601.8 | | $ | i 167.2 | | $ | i 231.8 | | $ | i 1,000.8 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, 2019 | | Nine months ended June 30, 2019 | | ||||||||||||||||||||
| | CTS |
| CMS |
| CGD |
| Total |
| CTS |
| CMS |
| CGD |
| Total | | ||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
Product | | $ | i 122.8 | | $ | i 87.3 | | $ | i 45.8 | | $ | i 255.9 | | $ | i 328.7 | | $ | i 183.9 | | $ | i 148.3 | | $ | i 660.9 | |
Service | |
| i 89.9 | |
| i 7.7 | |
| i 29.2 | |
| i 126.8 | |
| i 266.5 | |
| i 19.4 | |
| i 78.5 | |
| i 364.4 | |
Total sales | | $ | i 212.7 | | $ | i 95.0 | | $ | i 75.0 | | $ | i 382.7 | | $ | i 595.2 | | $ | i 203.3 | | $ | i 226.8 | | $ | i 1,025.3 | |
Revenue Recognition Method: Sales recognized at a point in time are typically for standard goods with a short production cycle and are recognized when the customer obtains control, which is generally upon delivery and acceptance. Sales for services and for products with a long production cycle, which often include significant customization and development, are recognized over time. The table below presents total net sales disaggregated based on the revenue recognition method applied (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, 2020 | | Nine months ended June 30, 2020 | | ||||||||||||||||||||
| | CTS |
| CMS |
| CGD |
| Total |
| CTS |
| CMS |
| CGD |
| Total | | ||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
Point in Time | | $ | i 26.5 | | $ | i 41.4 | | $ | i 2.9 | | $ | i 70.8 | | $ | i 72.3 | | $ | i 93.9 | | $ | i 4.8 | | $ | i 171.0 | |
Over Time | |
| i 189.0 | |
| i 27.6 | |
| i 63.0 | |
| i 279.6 | |
| i 529.5 | |
| i 73.3 | |
| i 227.0 | |
| i 829.8 | |
Total sales | | $ | i 215.5 | | $ | i 69.0 | | $ | i 65.9 | | $ | i 350.4 | | $ | i 601.8 | | $ | i 167.2 | | $ | i 231.8 | | $ | i 1,000.8 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, 2019 | | Nine months ended June 30, 2019 | | ||||||||||||||||||||
| | CTS |
| CMS |
| CGD |
| Total |
| CTS |
| CMS |
| CGD |
| Total | | ||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
Point in Time | | $ | i 29.7 | | $ | i 76.0 | | $ | i 1.0 | | $ | i 106.7 | | $ | i 68.2 | | $ | i 169.2 | | $ | i 2.9 | | $ | i 240.3 | |
Over Time | |
| i 183.0 | |
| i 19.0 | |
| i 74.0 | |
| i 276.0 | |
| i 527.0 | |
| i 34.1 | |
| i 223.9 | |
| i 785.0 | |
Total sales | | $ | i 212.7 | | $ | i 95.0 | | $ | i 75.0 | | $ | i 382.7 | | $ | i 595.2 | | $ | i 203.3 | | $ | i 226.8 | | $ | i 1,025.3 | |
iNote 16 — Restructuring Costs
In fiscal 2019, we initiated projects to restructure and modify our supply chain strategy, functional responsibilities, methods, capabilities, processes and rationalize suppliers with the goal of reducing ongoing costs and increasing the efficiencies of our worldwide procurement organization. The majority of the costs associated with these restructuring
38
activities are related to consultants that we have engaged in connection with these efforts, and such costs have been recognized by our corporate entity. The total costs of this restructuring project have been incurred and these efforts have been materially completed as of the third quarter of fiscal 2020.
In the first nine months of fiscal 2019 and 2020, our Corporate segment incurred additional restructuring charges, consisting primarily of employee severance costs related to headcount reductions initiated to optimize our cost positions. The total costs of each of these restructuring plans initiated thus far are not expected to be significantly greater than the charges incurred to date.
iRestructuring charges incurred by our business segments were as follows (in millions):
| | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | ||||||||
| | June 30, | | |||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
Restructuring costs: | | | | | | | | | | | | |
Cubic Transportation Systems |
| $ | i 0.2 | | | i 1.4 |
| $ | i 0.7 |
| $ | i 2.2 |
Cubic Mission Solutions | |
| i 0.4 | | | — | |
| i 0.4 | |
| — |
Cubic Global Defense Systems | |
| i 0.7 | | | i 2.6 | |
| i 1.3 | |
| i 2.7 |
Unallocated corporate expenses | |
| i 2.1 | | | i 4.5 | |
| i 6.4 | |
| i 7.4 |
Total restructuring costs |
| $ | i 3.4 |
| $ | i 8.5 |
| $ | i 8.8 |
| $ | i 12.3 |
iThe following table presents a rollforward of our restructuring liability as of June 30, 2020, which is included within accrued compensation and other current liabilities within our condensed consolidated balance sheets (in millions):
| | | | | | | | |
| | Restructuring Liability | | | Restructuring Liability | | ||
|
| Employee Separation and Other | | | Consulting Costs |
| ||
Balance as of September 30, 2019 | | $ | i 2.0 | | | $ | i 0.8 | |
Accrued costs | | | i 7.0 | | | | i 1.8 | |
Cash payments | | | ( i 8.3) | | | | ( i 2.2) | |
Balance as of June 30, 2020 | | $ | i 0.7 | | | $ | i 0.4 | |
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.
iNote 17 — Legal Matters
We consider all current legal matters to be ordinary proceedings incidental to our business. We believe the outcome of these proceedings will not have a materially adverse effect on our financial position, results of operations or cash flows.
39
CUBIC CORPORATION
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
Cubic Corporation (“we,” “us,” the “Company” and “Cubic”) is a technology-driven, market-leading global provider of innovative, mission-critical solutions that reduce congestion and increase operational readiness and effectiveness through superior situational understanding. Cubic designs, integrates and operates systems, products and services focused in the transportation, command, control, communication, computers, intelligence, surveillance and reconnaissance (“C4ISR”), and training markets. We operate in three reportable business segments: Cubic Transportation Systems (“CTS”), Cubic Mission Solutions (“CMS”), and Cubic Global Defense Systems (“CGD”).
CTS specializes in the design, development, production, installation, maintenance and operation of automated fare payment, traffic management and enforcement solutions, real-time information systems, and revenue management infrastructure and technologies for transportation agencies. As part of our turnkey solutions, CTS also provides these customers with a comprehensive suite of business process outsourcing services and expertise, such as card and payment media management, central systems and application support, retail network management, customer call centers and financial clearing and settlement support. As transportation authorities seek to optimize their operations by outsourcing bundled systems and services, CTS has transformed itself from a provider of automated fare collection systems into a systems integrator and services company focused on the intelligent transportation market.
CMS provides networked C4ISR capabilities for defense, intelligence, security and commercial missions. CMS’s core competencies include protected wide-band communications for space, aircraft, unmanned aerial vehicle (“UAV”), and terrestrial applications. It provides rugged internet of things cloud solutions, interoperability gateways, and artificial intelligence/machine learning based command and control, intelligence, surveillance and reconnaissance applications for video situational understanding. Through its acquisition of PIXIA Corp. (“Pixia”), CMS offers cloud-based platforms designed to manage and share large amounts of imagery data, wide-area motion imagery and geospatial data. CMS is also building UAV systems to provide intelligence, surveillance and reconnaissance as-a-service.
CGD is a leading diversified supplier of live, virtual, constructive and game-based training solutions to the U.S. Department of Defense, other U.S. government agencies and allied nations. We offer a full range of training solutions for military and security forces. Our customized systems and services accelerate combat readiness in the air, on the ground and at sea while meeting the demands of evolving operations globally.
COVID-19 Update
In March 2020, the novel coronavirus disease (“COVID-19”) was declared a pandemic by the World Health Organization. The pandemic has negatively affected the U.S. and global economy, disrupted global supply chains and financial markets, and resulted in significant travel restrictions, mandated facility closures and shelter-in-place orders in numerous jurisdictions worldwide. Cubic’s businesses have been deemed essential in the locations in which we operate around the world. As such, our priorities are to continue providing our essential products and services to customers while focusing on protecting the health and well-being of our employees.
We have activated our crisis response team that has proactively implemented our business continuity plans and has taken a variety of measures to ensure the ongoing availability of our essential services, while taking health and safety measures, including implementing enhanced cleaning and hygiene protocols in our facilities, implementing remote work policies where possible, eliminating non-essential travel and providing education resources to employees. We have used our manufacturing facility to produce personal protective gear, such as general-purpose face coverings and face shields.
The pandemic has presented challenges and impacts on each of our businesses, including delays of customer orders, slowdown of certain projects and impacts due to travel restrictions and remote work. We have taken proactive measures regarding communications and scheduling in order to mitigate the potential impacts of the pandemic with our vendors and subcontractors. To date we have not experienced significant disruptions in our supply chain, nor have we
40
experienced any significant disruptions at our manufacturing facilities. However, if our supply chain and subcontractors are more significantly impacted in the future and we are not able to implement alternatives or other mitigations, deliveries and other milestones on affected programs could be adversely impacted.
The vast majority of revenue from our CTS businesses is earned under fixed-price contracts. However, approximately 2% of our annual revenue is directly tied to the level of transit ridership. While transit ridership levels have improved from the lows of the pandemic, they remain significantly below normal levels with uncertainty surrounding the pace and timing of recovery. As a result, many of our transit agency customers continue to experience a significant decline in their revenues. While we continue to believe that CTS’s backlog is largely insulated from the impacts of COVID-19 due to the critical service of fare collection, there could be potential delays in the award of new business. Our CMS businesses have experienced some delays in timing of orders and shipments which negatively impacted sales and profits in the second and third quarter of fiscal 2020, and we believe the delays are related to the COVID-19 pandemic. However, our CMS businesses continue to actively write proposals as the U.S. National Defense Strategy continues to drive demand in our markets. Our CGD businesses have experienced some slowdowns in onsite defense training work and certain customer orders have been delayed, but generally customer budgets are in place and orders are anticipated later in fiscal 2020.
We believe that the fundamentals of our Company remain strong in the midst of the global pandemic. We expect to have sufficient liquidity on hand to continue business operations during this volatile period and we have taken a number of steps to strengthen liquidity and manage cash flow. These steps include long-term debt restructuring and an increase in limits on our revolving credit facility as further described in the “Liquidity and Capital Resources” section below. We have also been negotiating more favorable payment terms with certain customers, suppliers and subcontractors and utilized governmental stimulus benefits (including those relating to tax). In addition, we have modified compensation to members of our Board of Directors, executives and other employees and have planned reductions in capital expenditures and other discretionary expenditures, which increased our operating income by over $8.0 million in our third quarter of fiscal 2020, offsetting some of the negative impacts from COVID-19.
The extent to which COVID-19 will adversely impact our business depends on future developments, which are highly uncertain and unpredictable, including new information concerning the severity of the outbreak and the effectiveness of actions, domestically and globally, to contain or mitigate its effects. While we expect the pandemic to continue to negatively impact our results of operations, cash flows and financial position, the current level of uncertainty over the economic and operational impacts of COVID-19 means that the related financial impact to us cannot be reasonably estimated at this time.
Non-GAAP Financial Information
In addition to results reported under U.S. generally accepted accounting principles (“GAAP”), this Quarterly Report on Form 10-Q also contains non-GAAP measures as defined under Regulation G. These non-GAAP measures consist of Adjusted EBITDA, Adjusted Net Income and Adjusted EPS. We believe that these non-GAAP measures provide additional insight into our ongoing operations and underlying business trends, facilitate a comparison of our results between current and prior periods, and facilitate the comparison of our operating results with the results of other public companies that provide non-GAAP measures. We use Adjusted EBITDA internally to evaluate the operating performance of our business, for strategic planning purposes and as a factor in determining incentive compensation for certain employees. These non-GAAP measures facilitate company-to-company operating comparisons by excluding items that we believe are not part of our core operating performance. Adjusted Net Income is defined as GAAP net income (loss) from continuing operations attributable to Cubic excluding amortization of purchased intangibles, restructuring costs, loss on extinguishment of debt, acquisition-related expenses, strategic and IT system resource planning expenses, gains or losses on the disposal of fixed assets, other non-operating expense (income), tax impacts related to acquisitions, and the impact of the Tax Cuts and Jobs Act (“U.S. Tax Reform”). Adjusted EPS is defined as Adjusted Net Income on a per share basis using the weighted average diluted shares outstanding. Adjusted EBITDA is defined as GAAP net income (loss) from continuing operations attributable to Cubic before interest expense (income), loss on extinguishment of debt, income taxes, depreciation and amortization, other non-operating expense (income), acquisition-related expenses, strategic and IT system resource planning expenses, restructuring costs, and gains or losses on the disposal of fixed assets. Strategic and IT system resource planning expenses consists of expenses incurred in the development of our enterprise resource planning system and the redesign of our supply chain which include internal labor costs and external costs of materials and services that do not qualify for capitalization. Acquisition-related expenses include business acquisition expenses including retention bonus expenses, due diligence and consulting costs
41
incurred in connection with the acquisitions, and expenses recognized related to the change in the fair value of contingent consideration for acquisitions.
These non-GAAP measures are not measurements of financial performance under GAAP and should not be considered as measures of discretionary cash available to the Company or as alternatives to net income as a measure of performance. In addition, other companies may define these non-GAAP measures differently and, as a result, our non-GAAP measures may not be directly comparable to the non-GAAP measures of other companies. Furthermore, non-GAAP financial measures have limitations as an analytical tool and you should not consider these measures in isolation, or as a substitute for analysis of our results as reported under GAAP. A reconciliation of these non-GAAP measures to the most directly comparable GAAP measures is included under the “Reconciliation of Non-GAAP Financial Information” section below.
Consolidated Financial Results
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | |
| Nine Months Ended | | | | | ||||||||
| | June 30, | | | | | | | | | | |||||||||
| | 2020 |
| 2019 | | % Change | |
| 2020 |
| 2019 | | % Change | | ||||||
(in millions, except per share data) | | | | | | | | | | | | | | | | | | | | |
Sales | | $ | 350.4 | | $ | 382.7 | | | (8) | % | | $ | 1,000.8 | | $ | 1,025.3 | | | (2) | % |
Operating income (loss) | | | 24.7 | | | 34.7 | | | (29) | % | | | (11.7) | | | 27.6 | | | nm | |
Net income (loss) from continuing operations attributable to Cubic | | | (1.4) | | | 24.1 | | | nm | | | | (60.7) | | | 9.5 | | | nm | |
Diluted earnings (loss) per share from continuing operations attributable to Cubic | | | (0.04) | | | 0.77 | | | nm | | | | (1.94) | | | 0.31 | | | nm | |
Adjusted EBITDA | | | 38.2 | | | 30.6 | | | 25 | % | | | 54.1 | | | 70.0 | | | (23) | % |
Adjusted Net Income | | | 23.0 | | | 20.7 | | | 11 | % | | | 15.4 | | | 37.4 | | | (59) | % |
Adjusted EPS | | | 0.74 | | | 0.66 | | | 12 | % | | | 0.49 | | | 1.23 | | | (60) | % |
nm - not meaningful | | | | | | | | | | | | | | | | | | | | |
Sales:
Third Quarter of 2020 vs. Third Quarter of 2019: Sales for the third quarter of fiscal 2020 decreased 8% to $350.4 million from $382.7 million in the third quarter last year. Sales from CTS increased by 1%, while sales from CMS and CGD decreased by 27% and 12%, respectively. Sales in the third quarter of fiscal 2020 were negatively impacted by COVID-19 due to a decrease in sales resulting from lower transit ridership and delayed orders as discussed further below in the analysis of segment sales. In addition, average exchange rates between the prevailing currency in our foreign operations and the U.S. dollar had unfavorable impacts on sales of $3.4 million for the third quarter of fiscal 2020 compared to the third quarter of our fiscal year ended September 30, 2019 (“fiscal 2019”). Sales generated by businesses we acquired during fiscal 2020 and fiscal 2019 totaled $31.0 million for the third quarter of fiscal 2020, compared to $27.1 million in the same period last year.
First Nine Months of 2020 vs. First Nine Months of 2019: Sales for the first nine months of fiscal 2020 decreased 2% to $1,000.8 million compared to $1,025.3 million in the same period last year. For the first nine months of fiscal 2020, sales from CGD and CTS increased by 2% and 1%, respectively, while CMS sales decreased by 18%, as compared to the same period last year primarily due to delayed orders of expeditionary satellite communications products as compared to the timing of orders in fiscal 2019. Sales for the first nine months of fiscal 2020 were negatively impacted by COVID-19 due to a decrease in sales resulting from lower transit ridership and delayed orders as discussed above. in addition, average exchange rates between the prevailing currencies in our foreign operations and the U.S. dollar had a net unfavorable impact on sales of $10.2 million for the first nine months of fiscal 2020 compared to the same period last year. Sales generated by businesses we acquired during fiscal 2020 and fiscal 2019 totaled $73.7 million for the first nine months of fiscal 2020, compared to $56.3 million for the same period last year.
See the segment discussions below for further analysis of segment sales.
42
Gross Margin:
Third Quarter of 2020 vs. Third Quarter of 2019: Our gross margin percentage on product sales increased to 31% in the third quarter of fiscal 2020, as compared to 26% in the same period last year. The increase was primarily due to a contract amendment signed in the third quarter of fiscal 2020 in our CTS segment and cost saving initiatives, partially offset by lower sales of high margin expeditionary satellite communications products from CMS. Our gross margin percentage on service sales of 38% for the third quarter of fiscal 2020 was relatively flat compared to 39% in the third quarter of last year.
First Nine Months of 2020 vs. First Nine Months of 2019: Our gross margin percentage on products sales decreased to 23% for the first nine months of fiscal 2020, as compared to 26% in the same period last year. The decrease was primarily due to lower sales of high margin expeditionary satellite communications products and other secure communications and secure networks products at CMS, partially offset by the impact of the contract amendment and cost saving initiatives noted above. Our gross margin percentage on service sales increased to 36% for the first nine months of fiscal 2020 compared to 33% for the same period last year. The increase was primarily driven by the impact of productivity initiatives in CTS as well as services sales mix.
Selling, General and Administrative:
Third Quarter of 2020 vs. Third Quarter of 2019: Selling, General and Administrative (“SG&A”) expenses decreased in the third quarter of fiscal 2020 to $62.3 million compared to $82.2 million in the same period last year. As a percentage of sales, SG&A expense were 18% in the third quarter of fiscal 2020, compared to 21% in the same period last year. The decrease in SG&A expense was driven by cost reduction initiatives implemented in the third quarter of fiscal 2020 and lower acquisition-related expenses of $2.7 million as compared to the same period last year.
First Nine Months of 2020 vs. First Nine Months of 2019: SG&A expenses decreased to $206.5 million for the first nine months of fiscal 2020, compared to $211.3 million for the same period last year. As a percentage of sales, SG&A expenses were 21% for both the first nine months of fiscal 2020 and fiscal 2019. The decrease in SG&A expense was driven by cost reduction initiatives implemented in the third quarter of fiscal 2020 as well as a reduction in acquisition-related expenses of $5.3 million through the first nine months of fiscal 2020 as compared to the same period last year.
Restructuring: Restructuring expenses decreased to $3.4 million in the third quarter of fiscal 2020 compared to $8.5 million in the same period last year, and for the first nine months of fiscal 2020, restructuring expenses decreased to $8.8 million compared to $12.3 million for the same period last year. The expenses primarily related to severance costs associated with headcount reductions as well as costs to restructure and modify our supply chain strategy, functional responsibilities, methods, capabilities, processes and rationalize suppliers with the goal of reducing ongoing costs and increasing the efficiencies of our worldwide procurement organization.
Research and Development:
Internally funded company-sponsored research and development (“R&D”) expenses, as reflected in our Condensed Consolidated Statements of Operations (as included in Part I, Item 1 of this Quarterly Report on Form 10-Q) are as follows (in thousands):
| | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | ||||||||
| | June 30, | | | |||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| ||||
Company-Sponsored Research and Development Expense: | | | | | | | | | | | | | |
Cubic Transportation Systems | | $ | 2,734 | | $ | 1,737 | | $ | 5,850 | | $ | 8,788 | |
Cubic Mission Solutions | | | 8,985 | | | 7,319 | | | 21,834 | | | 19,240 | |
Cubic Global Defense Systems | |
| 535 | |
| 2,555 | |
| 4,352 | |
| 9,349 | |
Unallocated corporate expenses | |
| — | |
| 859 | |
| — | |
| 859 | |
Total company-sponsored research and development expense | | $ | 12,254 | | $ | 12,470 | | $ | 32,036 | | $ | 38,236 | |
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Company-sponsored R&D expense was relatively flat in the third quarter of fiscal 2020 compared to the same period last year and decreased $6.2 million for the nine-month period ended June 30, 2020 as compared to the same period last year due to the timing of certain planned R&D projects including CTS and CGD digital initiatives.
In addition to internally funded Company-sponsored R&D, a significant portion of our new product development occurs during the performance of contractual work for our customers. These costs are included in cost of sales in our Condensed Consolidated Statements of Operations (included in Part I, Item 1 of this Quarterly Report on Form 10-Q) as they are directly related to contract performance. The estimated cost of contract R&D activities included in our cost of sales is as follows (in thousands):
| | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | ||||||||
|
| June 30, | |
| |||||||||
| | 2020 |
| 2019 |
| 2020 |
| 2019 | | ||||
Cost of Contract Research and Development Activities: | | | | | | | | | | | | | |
Cubic Transportation Systems | | $ | 15,032 | | $ | 14,650 | | $ | 45,331 | | $ | 40,801 | |
Cubic Mission Solutions | | | 10,333 | | | 8,212 | | | 29,478 | | | 20,331 | |
Cubic Global Defense Systems | |
| 9,016 | |
| 8,847 | |
| 25,729 | |
| 26,069 | |
Total cost of contract research and development activities | | $ | 34,381 | | $ | 31,709 | | $ | 100,538 | | $ | 87,201 | |
Amortization of Purchased Intangibles: Amortization of purchased intangibles for the third quarter of fiscal 2020 increased to $16.4 million from $9.7 million in the third quarter last year and increased to $42.9 million in the first nine months of fiscal 2020 as compared to $32.7 million in the same period last year. The increase in amortization expense was driven by the completion of our acquisitions of Delerrok Inc. (“Delerrok”) and Pixia in January 2020, partially offset by lower amortization of purchased intangible assets that are amortized based upon accelerated methods.
Operating Income (Loss):
Third Quarter of 2020 vs. Third Quarter of 2019: Our operating income decreased to $24.7 million in the third quarter of fiscal 2020 compared to $34.7 million in the same period last year. CTS operating income increased to $50.9 million for the third quarter of fiscal 2020 compared to $17.2 million last year and CGD operating income increased to $6.1 million in the third quarter compared to $1.9 million in the same period last year. The CMS operating loss for the third quarter of fiscal 2020 was $21.3 million compared to operating income of $1.2 million in the same period last year. Operating income in the third quarter of fiscal 2020 was negatively impacted by COVID-19 due to a decrease in sales resulting from lower transit ridership and delayed orders. Our operating results were significantly impacted by accounting for businesses acquired in fiscal 2020 and fiscal 2019. On a consolidated basis, the businesses that we acquired during fiscal 2020 and fiscal 2019 had operating losses totaling $8.8 million in the third quarter of fiscal 2020, as compared to $3.5 million in the third quarter last year. The operating losses include total acquisition-related expenses, including amortization of intangible assets, of $14.1 million in the third quarter of fiscal 2020, as compared to $7.3 million in the same period last year.
Unallocated corporate and other costs for the third quarter of fiscal 2020 were $11.0 million compared to income of $14.3 million in the third quarter of fiscal 2019. The third quarter of fiscal 2019 included a gain on the sale of land and real estate of $32.6 million. Excluding this gain, unallocated corporate and other costs decreased by $7.5 million in the third quarter of fiscal 2020 as compared to fiscal 2019. The decrease was primarily driven by lower corporate restructuring costs, reduced strategic and IT system resource planning expenses, and cost reduction initiatives implemented in the third quarter of fiscal 2020.
The average exchange rates between the prevailing currencies in our foreign operations and the U.S. dollar had a net unfavorable impact in the third quarter of fiscal 2020 of $0.6 million as compared to the third quarter of last year.
First Nine Months of 2020 vs. First Nine Months of 2019: Our consolidated operating loss for the first nine months of fiscal 2020 was $11.7 million compared to operating income of $27.6 million for the first nine months of last year. The CMS operating loss for the first nine months of fiscal 2020 increased to $67.6 million compared to $12.1 million last year, while CGD operating income increased 81% to $18.1 million and CTS operating income increased 110% to $77.8
44
million for the first nine months of fiscal 2020 compared to the same period last year. Our operating results for the first nine months of fiscal 2020 were negatively impacted by COVID-19 due to a decrease in sales resulting from lower transit ridership and delayed orders. Our operating results were impacted by accounting for businesses acquired in fiscal 2020 and fiscal 2019. On a consolidated basis, the businesses that we acquired during fiscal 2020 and fiscal 2019 had operating losses totaling $28.7 million in the first nine months of fiscal 2020, compared to $15.7 million in the same period last year. The operating losses include acquisition-related expenses, including amortization of intangible assets, of $37.7 million in the first nine months of fiscal 2020, as compared to $25.5 million in the same period last year. Additionally, CTS incurred SG&A expenses for other acquisition-related expenses of $3.9 million for the first nine months of fiscal 2020.
Unallocated corporate and other costs for the first nine months of fiscal 2020 were $40.0 million compared to $7.3 million in the same period last year. The first nine months of fiscal 2019 included a gain on the sale of real estate of $32.6 million. Excluding this gain, unallocated corporate and other costs were relatively flat in the first nine months of fiscal 2020 as compared to the same period last year.
The average exchange rates between the prevailing currencies in our foreign operations and the U.S. dollar had a net unfavorable impact on our operating results of $1.3 million in the first nine months of fiscal 2020 compared to the same period last year.
See the segment discussions below for further analysis of segment operating income and loss.
Interest and Dividend Income and Interest Expense: Interest and dividend income was $2.0 million in the third quarter of fiscal 2020 compared to $1.7 million in the same period last year, and $5.9 million in the first nine months of fiscal 2020 compared to $4.3 million in the same period last year. The increase was primarily due to the interest income recorded on higher balances of long-term contracts financing receivables in our Condensed Consolidated Balance Sheets (as included in Part I, Item 1 of this Quarterly Report on Form 10-Q). Interest expense for the third quarter of fiscal 2020 was $7.4 million compared to $6.1 million in the third quarter of last year and was $20.9 million for the first nine months of fiscal 2020 compared to $14.7 million for the same period last year. The increase in interest expense was due to higher average debt balances in fiscal 2020 primarily as a result of the completion of our acquisitions of Pixia and Delerrok in January 2020, as well an increase in the average outstanding non-recourse debt balance of our consolidated variable interest entity (“VIE”). The 90% noncontrolling interest in the net income (loss) of the consolidated VIE, which includes the interest income and expense of such VIE, is added back to our net income (loss) to arrive at net income (loss) attributable to Cubic.
Loss on Extinguishment of Debt: Loss on extinguishment of debt was $16.1 million during the first nine months of fiscal 2020 and related to our repayment and extinguishment of our senior unsecured notes in March 2020. See the “Liquidity and Capital Resources” section below for further discussion.
Other Income (Expense): Other income (expense) netted to expense of $6.8 million in the third quarter of fiscal 2020 compared to expense of $8.7 million in the third quarter of fiscal 2019 and netted to expense of $26.6 million in the first nine months of fiscal 2020 compared to expense of $17.1 million in the same period last year. Changes in our non-operating expenses are primarily driven by changes in the fair value of an interest rate swap held by our consolidated VIE. The 90% noncontrolling interest in the net income (loss) of the consolidated VIE, including the VIE’s loss on its interest rate swap, is added back to our net income (loss) to arrive at net income (loss) attributable to Cubic.
Income Tax Provision: The income tax expense recognized on pre-tax loss from continuing operations for the three and nine months ended June 30, 2020 resulted in an effective tax rate of 37% and 13%, respectively, which differs from the effective tax rates of 5% and negative 166% for the three and nine months ended June 30, 2019, respectively. The variability in effective tax rates primarily relates to the difference in jurisdictional mix of earnings, increased U.S. base-erosion and anti-abuse cash tax, discrete benefits related to the release of a portion of the existing U.S. deferred tax valuation allowance due to deferred tax liabilities acquired in business combinations, as well as cash tax benefits resulting from the net operating loss carryback provisions of the Coronavirus Aid, Relief, and Economic Security Act enacted by the U.S. federal government in March 2020.
Our effective tax rate could be affected by, among other factors, the mix of business between U.S. and foreign jurisdictions, the level of intercompany transactions, applicability of new tax regimes, the impact of acquisitions, fluctuations in the need for a valuation allowance against deferred tax assets, our ability to take advantage of available
45
tax attributes and audits of our records by taxing authorities. After considering these impacts, we have determined that a reliable estimate of the annual effective tax rate for fiscal 2020 cannot be made.
Net Loss from Continuing Operations attributable to Cubic: Our net loss from continuing operations attributable to Cubic in the third quarter of fiscal 2020 was $1.4 million compared to net income from continuing operations attributable to Cubic of $24.1 million in the third quarter of fiscal 2019. The increase in net loss from continuing operations attributable to Cubic was primarily due to the lower operating income as described above. For the first nine months of fiscal 2020, our net loss from continuing operations attributable to Cubic was $60.7 million compared to net income from continuing operations attributable to Cubic of $9.5 million last year. The increase in net loss from continuing operations attributable to Cubic was primarily due to the increases in our operating loss, other non-operating expenses, and interest expense as described above, as well as the $16.1 million loss on extinguishment of debt.
Adjusted EBITDA: Adjusted EBITDA increased to $38.2 million in the third quarter of fiscal 2020 compared to $30.6 million in the third quarter of fiscal 2019. The increase in Adjusted EBITDA was due to the same factors described above in operating income (loss), but excludes amortization expense, gain on sale of fixed assets, restructuring costs and acquisition-related expenses.
For the first nine months of fiscal 2020, Adjusted EBITDA decreased to $54.1 million compared to $70.0 million last year. The decrease in Adjusted EBITDA was primarily due to the same factors that drove the increase in operating loss described above, but excludes amortization expense, gain on sale of fixed assets, restructuring costs and acquisition-related expenses.
Adjusted Net Income (Loss): Our Adjusted Net Income increased to $23.0 million in the third quarter of fiscal 2020 compared to $20.7 million in the same period last year. The increase in Adjusted Net Income was primarily due to the same factors described above in net loss from continuing operations attributable to Cubic, but excludes amortization expense, restructuring costs, loss on extinguishment of debt, acquisition-related expenses and non-operating gains and losses.
For the first nine months of fiscal 2020, Adjusted Net Income decreased to $15.4 million compared to $37.4 million for the first nine months last year. The decrease in Adjusted Net Income was primarily due to the same factors that drove the increase in net loss from continuing operations attributable to Cubic described above, but excludes amortization expense, restructuring costs, loss on extinguishment of debt, acquisition-related expenses and non-operating gains and losses.
Adjusted EPS: Adjusted EPS increased to $0.74 in the third quarter of fiscal 2020 compared to $0.66 in the third quarter last year. For the first nine months of fiscal 2020, Adjusted EPS decreased to $0.49 compared to $1.23 last year. The changes in Adjusted EPS was due to the same factors that impacted Adjusted Net Income noted above.
CTS Segment
| | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | |
| Nine Months Ended | | | | |
| ||||||||
| | June 30, | | | | | | | | | | | |||||||||
| | 2020 |
| 2019 | | % Change | |
| 2020 |
| 2019 | | % Change | | | ||||||
(in millions) | | | | | | | | | | | | | | | | | | | | | |
Sales | | $ | 215.5 | | $ | 212.7 | | | 1 | % | | $ | 601.8 | | $ | 595.2 | | | 1 | % | |
Operating income | | | 50.9 | | | 17.2 | | | 196 | % | | | 77.8 | | | 37.0 | | | 110 | % | |
Adjusted EBITDA | | | 41.9 | | | 24.5 | | | 71 | % | | | 88.3 | | | 64.3 | | | 37 | % | |
Sales:
Third Quarter of 2020 vs. Third Quarter of 2019: CTS sales for the third quarter of fiscal 2020 increased 1% to $215.5 million from $212.7 million in the third quarter last year. Sales increased in the U.S. and decreased in the U.K and Australia as compared to the same periods last year. Sales were higher in the U.S. due to increased work on our system development contract in Boston, which was partially offset by lower revenue on the system development contract in New York. The decrease in sales in the U.K. and Australia were primarily caused by a reduction in work on fare system hardware in the U.K. and the strengthening of the U.S. dollar against the British Pound and Australian Dollar. Sales in
46
the third quarter of fiscal 2020 were negatively impacted by COVID-19 due to a decrease in sales resulting from lower transit ridership. In addition, average exchange rates between the prevailing currencies in our foreign operations and the U.S. dollar resulted in a decrease in sales of $2.6 million for the third quarter of fiscal 2020, compared to the third quarter last year.
First Nine Months of 2020 vs. First Nine Months of 2019: CTS sales for the first nine months of fiscal 2020 increased 1% to $601.8 million from $595.2 million in the same period last year. Sales increased in the U.S. and decreased in the U.K compared to the same periods last year while sales in Australia were relatively flat. Sales were higher in the U.S. primarily due to increased work on system development contracts in Boston and Chicago, which were partially offset by lower revenue on the system development contract in New York. The decrease in sales in the U.K. was primarily caused by a reduction in work on fare system hardware and the strengthening of the U.S. dollar against the British Pound. Sales for the first nine months of fiscal 2020 were negatively impacted by COVID-19 due to a decrease in sales resulting from lower transit ridership. In addition, average exchange rates between the prevailing currencies in our foreign operations and the U.S. dollar resulted in a decrease in sales of $8.4 million for the first nine months of fiscal 2020 compared to the same period last year, primarily due to the strengthening of the U.S. dollar against the British Pound and Australian dollar.
Operating Income:
Third Quarter of 2020 vs. Third Quarter of 2019: CTS operating income for the third quarter of fiscal 2020 increased 196% to $50.9 million compared to $17.2 million in the third quarter last year. Operating income was higher in the U.S. due to a contract amendment signed in the third quarter of fiscal 2020 with our Boston customer and cost saving initiatives, which were partially offset by lower work on our New York contract. Additionally, CTS’s consolidated VIE recognized higher operating income due to the contract amendment with our Boston customer. Operating income in the U.K. and Australia was slightly higher as compared to the same period last year due primarily to the impact of cost saving initiatives. The average exchange rates between the prevailing currencies in our foreign operations and the U.S. dollar resulted in a decrease in operating income of $0.5 million for the third quarter of fiscal 2020 compared to the same period last year.
First Nine Months of 2020 vs. First Nine Months of 2019: CTS operating income for the first nine months of fiscal 2020 increased 110% to $77.8 million compared to $37.0 million in the first nine months of last year. Operating income was higher in the U.S. due to the contract amendment signed in the third quarter of fiscal 2020 with our Boston customer increased system development work on our contracts in Boston and Chicago, cost saving initiatives, which were partially offset by lower revenue on our New York contract. Additionally, CTS’s consolidated VIE recognized higher operating income due to the contract amendment with our Boston customer. Operating income in the U.K. was higher as compared to the same period last year due to productivity measures achieved on service contracts. Operating income in the APAC region slightly decreased in the first nine months of fiscal 2020 due to lower profitability on Australian service contracts. The average exchange rates between the prevailing currencies in our foreign operations and the U.S. dollar resulted in a decrease in operating income of $1.0 million for the first nine months of fiscal 2020 compared to the same period last year.
Amortization of Purchased Intangibles: Amortization of purchased intangibles included in the CTS results amounted to $4.8 million in the third quarter of fiscal 2020 compared to $4.7 million in the third quarter of fiscal 2019, and $14.1 million in the first nine months of fiscal 2020 compared to $17.5 million in the first nine months of last year. The decrease in amortization expense for the first nine months of fiscal 2020 is related to purchased intangible assets that are amortized based upon accelerated methods, partially offset by increased amortization as a result of the amortization of intangible assets acquired in our purchase of Delerrok in January 2020.
Adjusted EBITDA: CTS Adjusted EBITDA increased 71% to $41.9 million in the third quarter of fiscal 2020 compared to $24.5 million in the third quarter of fiscal 2019, and increased 37% to $88.3 million in the first nine months of fiscal 2020 compared to $64.3 million in the same period last year. The increase in Adjusted EBITDA was primarily driven by the same factors that drove the increase in operating income described above, excluding amortization of purchased intangibles and acquisition-related expenses. In addition, CTS is required to reflect 100% of the sales and operating income of its consolidated VIE in its operating results. However, because CTS only owns 10% of the consolidated VIE, CTS reflects only 10% of the Adjusted EBITDA of the VIE in CTS Adjusted EBITDA.
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CMS Segment
| | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | |
| Nine Months Ended | | | | |
| ||||||||
| | June 30, | | | | | | | | | | | |||||||||
| | 2020 |
| 2019 | | % Change | |
| 2020 |
| 2019 | | % Change | | | ||||||
(in millions) | | | | | | | | | | | | | | | | | | | | | |
Sales | | $ | 69.0 | | $ | 95.0 | | | (27) | % | | $ | 167.2 | | $ | 203.3 | | | (18) | % | |
Operating income (loss) | | | (21.3) | | | 1.3 | | | nm | | | | (67.6) | | | (12.1) | | | nm | | |
Adjusted EBITDA | | | (5.0) | | | 9.3 | | | nm | | | | (30.8) | | | 9.9 | | | nm | | |
nm - not meaningful | | | | | | | | | | | | | | | | | | | | | |
Sales:
Third Quarter of 2020 vs. Third Quarter of 2019: CMS sales for the third quarter of fiscal 2020 decreased 27% to $69.0 million from $95.0 million in the third quarter last year. The decrease in sales resulted from decreased product deliveries on delayed orders of expeditionary satellite communications products. Businesses acquired by CMS in fiscal 2020 and fiscal 2019 had sales of $8.0 million for the third quarter of fiscal 2020 compared to $3.6 million in the same period last year.
First Nine Months of 2020 vs. First Nine Months of 2019: CMS sales for the first nine months of fiscal 2020 decreased 18% to $167.2 million from $203.3 million in the same period last year. The decrease in sales resulted from decreased deliveries on delayed orders of expeditionary satellite communications products. Businesses acquired by CMS in fiscal 2020 and fiscal 2019 had sales of $15.1 million for the first nine months of fiscal 2020 compared to $4.3 million for the same period last year.
Operating Income (Loss):
Third Quarter of 2020 vs. Third Quarter of 2019: The CMS operating loss for the third quarter of fiscal 2020 was $21.3 million compared to operating income of $1.3 million in the same period last year. The lower operating income was driven by lower deliveries of expeditionary satellite communications products, incremental investments in technologies being developed for certain secure communications contracts, higher R&D expense from increased investments in innovation and operating losses incurred by newly acquired businesses. Operating losses incurred by businesses acquired by CMS during fiscal 2020 and fiscal 2019 totaled $8.8 million for the third quarter of fiscal 2020, compared to $3.2 million in the third quarter last year. These operating losses were driven by acquisition-related expenses, including amortization of intangible assets, totaling $9.6 million for the third quarter of fiscal 2020, compared to $1.7 million for the same quarter last year.
First Nine Months of 2020 vs. First Nine Months of 2019: The CMS operating loss was $67.6 million in the first nine months of fiscal 2020 compared to $12.1 million in the same period last year. The increase in operating loss was driven by lower deliveries of expeditionary satellite communications products, incremental investments in technologies being developed for certain secure communications contracts, higher R&D expense from increased investments in innovation and operating losses incurred by newly acquired businesses. Operating losses incurred by businesses acquired by CMS during fiscal 2020 and fiscal 2019 totaled $23.7 million for the first nine months of fiscal 2020, compared to $4.9 million of operating losses in the same period last year. These operating losses were driven by acquisition-related expenses, including amortization of intangible assets, totaling $22.3 million for the first nine months of fiscal 2020, compared to $3.6 million in the same period last year.
Amortization of Purchased Intangibles: Amortization of purchased intangibles included in the CMS results amounted to $11.5 million in the third quarter of fiscal 2020 compared to $4.9 million in the third quarter of fiscal 2019, and $28.8 million in the first nine months of fiscal 2020 compared to $14.6 million last year. The increase in amortization was due to the amortization of purchased intangibles related to our acquisition of Pixia in January 2020.
Adjusted EBITDA: CMS Adjusted EBITDA was a loss of $5.0 million in the third quarter of fiscal 2020 compared to income of $9.3 million in the third quarter of fiscal 2019, and was a loss of $30.8 million in the first nine months of fiscal 2020 compared to income of $9.9 million in the same period last year. The change in Adjusted EBITDA was
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primarily driven by the same factors that drove the change in operating income (loss) described above, excluding amortization of purchased intangibles and acquisition-related expenses.
CGD Segment
| | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | |
| Nine Months Ended | | | | |
| ||||||||
| | June 30, | | | | | | | | | | | |||||||||
| | 2020 |
| 2019 | | % Change | |
| 2020 |
| 2019 | | % Change | | | ||||||
(in millions) | | | | | | | | | | | | | | | | | | | | | |
Sales | | $ | 65.9 | | $ | 75.0 | | | (12) | % | | $ | 231.8 | | $ | 226.8 | | | 2 | % | |
Operating income | | | 6.1 | | | 1.9 | | | 221 | % | | | 18.1 | | | 10.0 | | | 81 | % | |
Adjusted EBITDA | | | 8.6 | | | 7.4 | | | 16 | % | | | 23.9 | | | 19.6 | | | 22 | % | |
Sales:
Third Quarter of 2020 vs. Third Quarter of 2019: CGD sales for the third quarter of fiscal 2020 decreased 12% to $65.9 million from $75.0 million in the third quarter last year. The decrease in sales was due to decreased work on ground combat training system contracts based on timing of orders, partially offset by an increase in air combat training systems work during the quarter.
First Nine Months of 2020 vs. First Nine Months of 2019: CGD sales for the first nine months of fiscal 2020 increased 2% to $231.8 million from $226.8 million in the same period last year. The increase in sales was primarily due to increased work on air combat training systems, partially offset by decreased work on digital and ground combat training system development.
Operating Income:
Third Quarter of 2020 vs. Third Quarter of 2019: CGD operating income for the third quarter of fiscal 2020 increased 221% to $6.1 million from $1.9 million in the same period last year. Operating income increased primarily due to lower SG&A costs incurred as a result of cost saving initiatives implemented in fiscal 2019 and fiscal 2020, lower restructuring costs incurred, lower acquisition-related expenses and reduced R&D expenditures in the third quarter of fiscal 2020. The increase in operating income was partially offset by lower income from digital and ground combat training system development contracts.
First Nine Months of 2020 vs. First Nine Months of 2019: CGD operating income for the first nine months of fiscal 2020 increased 81% to $18.1 million from $10.0 million in the same period last year. Operating income increased primarily due to higher system development work on air combat training systems, a reduction of R&D activities, lower acquisition-related expenses and lower SG&A costs as a result of productivity and cost saving initiatives. The increase in operating income was partially offset by lower income from digital and ground combat training system development contracts.
Amortization of Purchased Intangibles: CGD had no significant amortization expense in the third quarter and first nine months of fiscal 2020 compared to $0.1 million in the third quarter of last year and $0.6 million in the first nine months of last year.
Adjusted EBITDA: CGD Adjusted EBITDA increased 16% to $8.6 million in the third quarter of fiscal 2020 compared to $7.4 million in the same period last year and increased 22% to $23.9 million in the first nine months of fiscal 2020 compared to $19.6 million in the first nine months of last year. The increase in Adjusted EBITDA was primarily driven by the same factors that drove the increase in operating income described above other than the reductions in restructuring charges, amortization expenses and acquisition-related expenses as these items are not included in Adjusted EBITDA.
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Backlog
| | | | | | | |
| | June 30, | |
| |||
|
| 2020 |
| 2019 |
| ||
| | (in millions) |
| ||||
Total backlog | | | | | | | |
Cubic Transportation Systems | | $ | 3,194.8 | | $ | 2,953.3 | |
Cubic Mission Solutions | |
| 181.0 | |
| 103.7 | |
Cubic Global Defense Systems | |
| 356.6 | |
| 344.0 | |
Total | | $ | 3,732.4 | | $ | 3,401.0 | |
Total backlog increased by $331.4 million from September 30, 2019 to June 30, 2020 primarily due to an award for an upgrade and extension to the transportation fare collection system for our Chicago customer and a contract amendment with our Boston customer. Changes in exchange rates between the prevailing currencies in our foreign operations and the U.S. dollar as of June 30, 2020 increased backlog by a net $16.5 million as compared to September 30, 2019.
Reconciliation of Non-GAAP Financial Information
We reconcile Adjusted EBITDA and Adjusted Net Income to GAAP net income, which we consider to be the most directly comparable GAAP financial measure. We reconcile Adjusted EPS to GAAP EPS, which we consider to be the most directly comparable GAAP financial measure. The following tables reconcile these non-GAAP measures to their most directly comparable GAAP financial measure:
Adjusted Net Income and Adjusted EPS Reconciliation
| | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | ||||||||
| | June 30, | | | |||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | | ||||
(in millions, except per share data) | | | | ||||||||||
GAAP EPS | | $ | (0.04) | | $ | 0.77 | | $ | (1.94) | | $ | 0.31 | |
GAAP Net income (loss) from continuing operations attributable to Cubic | | $ | (1.4) | | $ | 24.1 | | $ | (60.7) | | $ | 9.5 | |
Noncontrolling interest in net income (loss) of VIE | | | 9.4 | | | (3.6) | | | 0.2 | | | (9.0) | |
Amortization of purchased intangibles | | | 16.4 | | | 9.7 | | | 42.9 | | | 32.7 | |
Gain on sale of fixed assets | | | (0.1) | | | (32.6) | | | (0.2) | | | (32.6) | |
Restructuring costs | | | 3.4 | | | 8.6 | | | 8.8 | | | 12.3 | |
Loss on extinguishment of debt | | | — | | | — | | | 16.1 | | | — | |
Acquisition-related expenses, excluding amortization | | | 2.0 | | | 4.7 | | | 7.9 | | | 13.3 | |
Strategic and IT system resource planning expenses | | | 0.4 | | | 2.4 | | | 3.3 | | | 6.3 | |
Other non-operating expense (income), net | | | 6.8 | | | 8.8 | | | 26.6 | | | 17.1 | |
Noncontrolling interest in Adjusted Net Income of VIE | | | (15.6) | | | (2.7) | | | (17.8) | | | (6.2) | |
Tax impact related to acquisitions1 | | | 0.6 | | | 0.1 | | | (12.9) | | | (7.4) | |
Impact of U.S. Tax Reform | | | 0.1 | | | — | | | 0.7 | | | — | |
Tax impact related to non-GAAP adjustments2 | | | 1.1 | | | 1.3 | | | 0.5 | | | 1.4 | |
Adjusted Net Income | | $ | 23.0 | | $ | 20.7 | | $ | 15.4 | | $ | 37.4 | |
Adjusted EPS | | $ | 0.74 | | $ | 0.66 | | $ | 0.49 | | $ | 1.23 | |
| | | | | | | | | | | | | |
Weighted Average Diluted Shares Outstanding (in thousands) | | | 31,299 | | | 31,249 | | | 31,289 | | | 30,332 | |
1 Represents the tax accounting impact of significant discrete items recorded at the time of acquisition.
2 The tax effect of the non-GAAP adjustments is generally based on the statutory tax rate of the jurisdiction of the event.
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Adjusted EBITDA Reconciliation
| | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | ||||||||
(in millions) | | June 30, | | June 30, | | ||||||||
Cubic Transportation Systems | | 2020 |
| 2019 | | 2020 |
| 2019 | | ||||
Sales | | $ | 215.5 | | $ | 212.7 | | $ | 601.8 | | $ | 595.2 | |
Operating income | | $ | 50.9 | | $ | 17.2 | | $ | 77.8 | | $ | 37.0 | |
Depreciation and amortization | | | 7.1 | | | 6.9 | | | 21.6 | | | 24.1 | |
Noncontrolling interest in income of VIE | | | (15.6) | | | (2.5) | | | (17.8) | | | (5.8) | |
Acquisition-related expenses (gains), excluding amortization | | | (0.7) | | | 1.4 | | | 6.0 | | | 6.8 | |
Restructuring costs | | | 0.2 | | | 1.5 | | | 0.7 | | | 2.2 | |
Adjusted EBITDA | | $ | 41.9 | | $ | 24.5 | | $ | 88.3 | | $ | 64.3 | |
Adjusted EBITDA margin | | | 19.4% | | | 11.5% | | | 14.7% | | | 10.8% | |
| | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | ||||||||
(in millions) | | June 30, | | June 30, | | ||||||||
Cubic Mission Solutions | | 2020 |
| 2019 | | 2020 |
| 2019 | | ||||
Sales | | $ | 69.0 | | $ | 95.0 | | $ | 167.2 | | $ | 203.3 | |
Operating income (loss) | | $ | (21.3) | | $ | 1.3 | | $ | (67.6) | | $ | (12.1) | |
Depreciation and amortization | | | 13.3 | | | 6.0 | | | 34.3 | | | 17.2 | |
Acquisition-related expenses, excluding amortization | | | 2.6 | | | 2.0 | | | 2.1 | | | 4.8 | |
Restructuring costs | | | 0.4 | | | - | | | 0.4 | | | - | |
Adjusted EBITDA | | $ | (5.0) | | $ | 9.3 | | $ | (30.8) | | $ | 9.9 | |
Adjusted EBITDA margin | | | (7.2%) | | | 9.8% | | | (18.4%) | | | 4.9% | |
| | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | ||||||||
(in millions) | | June 30, | | June 30, | | ||||||||
Cubic Global Defense Systems | | 2020 |
| 2019 | | 2020 |
| 2019 | | ||||
Sales | | $ | 65.9 | | $ | 75.0 | | $ | 231.8 | | $ | 226.8 | |
Operating income | | $ | 6.1 | | $ | 1.9 | | $ | 18.1 | | $ | 10.0 | |
Depreciation and amortization | | | 1.9 | | | 1.7 | | | 5.2 | | | 5.4 | |
Acquisition-related expenses (gains), excluding amortization | | | - | | | 0.9 | | | (0.5) | | | 1.2 | |
(Gain) loss on sale of fixed assets | | | (0.1) | | | 0.3 | | | (0.2) | | | 0.3 | |
Restructuring costs | | | 0.7 | | | 2.6 | | | 1.3 | | | 2.7 | |
Adjusted EBITDA | | $ | 8.6 | | $ | 7.4 | | $ | 23.9 | | $ | 19.6 | |
Adjusted EBITDA margin | | | 13.1% | | | 9.9% | | | 10.3% | | | 8.6% | |
| | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | ||||||||
(in millions) | | June 30, | | June 30, | | ||||||||
Cubic Consolidated | | 2020 |
| 2019 | | 2020 |
| 2019 | | ||||
Sales | | $ | 350.4 | | $ | 382.7 | | $ | 1,000.8 | | $ | 1,025.3 | |
Net income (loss) from continuing operations attributable to Cubic | | $ | (1.4) | | $ | 24.1 | | $ | (60.7) | | $ | 9.5 | |
Noncontrolling interest in net income (loss) of VIE | | | 9.4 | | | (3.6) | | | 0.2 | | | (9.0) | |
Income tax provision (benefit) | | | 4.6 | | | 1.0 | | | (8.9) | | | (0.3) | |
Interest expense, net | | | 5.4 | | | 4.5 | | | 15.0 | | | 10.4 | |
Loss on extinguishment of debt | | | - | | | - | | | 16.1 | | | - | |
Other non-operating expense (income), net | | | 6.8 | | | 8.8 | | | 26.6 | | | 17.1 | |
Operating income (loss) | | $ | 24.7 | | $ | 34.7 | | $ | (11.7) | | $ | 27.6 | |
Depreciation and amortization | | | 23.4 | | | 15.3 | | | 63.8 | | | 48.9 | |
Noncontrolling interest in EBITDA of VIE | | | (15.6) | | | (2.5) | | | (17.8) | | | (5.8) | |
Acquisition-related expenses, excluding amortization | | | 2.0 | | | 4.7 | | | 7.9 | | | 13.3 | |
Strategic and IT system resource planning expenses | | | 0.4 | | | 2.4 | | | 3.3 | | | 6.3 | |
Gain on sale of fixed assets | | | (0.1) | | | (32.6) | | | (0.2) | | | (32.6) | |
Restructuring costs | | | 3.4 | | | 8.6 | | | 8.8 | | | 12.3 | |
Adjusted EBITDA | | $ | 38.2 | | $ | 30.6 | | $ | 54.1 | | $ | 70.0 | |
Adjusted EBITDA margin | | | 10.9% | | | 8.0% | | | 5.4% | | | 6.8% | |
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Liquidity and Capital Resources
Operating activities used cash of $100.6 million for the first nine months of fiscal 2020 primarily due to inventory builds for upcoming scheduled deliveries, as well as payments to vendors and contractors for goods and services received related to our significant work on customer contracts in the fourth quarter of fiscal 2019. Our use of cash from operating activities includes cash outflows of $106.7 million from our consolidated VIE. As further described below, our consolidated operating cash flows exclude $63.0 million of cash received by Cubic from our consolidated VIE in the first nine months of fiscal 2020.
Investing activities used cash of $265.1 million for the first nine months of fiscal 2020 and included $197.8 million of cash paid related to the acquisition of Pixia in our CMS segment, and $37.0 million of cash paid related to the acquisition of Delerrok in our CTS segment. In addition, investing activities during the period included capital expenditures of $35.8 million as well as $5.5 million of proceeds received related to the sale of trade receivables to banks which are required to be classified as investing activities.
Financing activities provided cash of $402.3 million for the first nine months of fiscal 2020 and included net short-term borrowings of $81.5 million, net proceeds from long-term borrowings of $247.1 million, a $15.9 million make-whole payment related to the early extinguishment of our senior unsecured notes in March 2020 and $2.5 million of payments for deferred financing fees related to our amended credit facility, as further described below. We used the net proceeds from the short-term and long-term borrowings to finance the acquisitions of Pixia and Delerrok in January 2020 and for general corporate purposes. Net long-term borrowings undertaken by our consolidated VIE amounted to $105.6 million for the first nine months of fiscal 2020. See discussion of our consolidated VIE in the section below.
Consolidated Variable Interest Entity
In March 2018, Cubic and John Laing, an unaffiliated company that specializes in contracting under public-private partnerships, jointly formed Boston AFC 2.0 HoldCo. LLC (“Boston HoldCo”). Also in March 2018, Boston HoldCo’s wholly owned entity, Boston AFC 2.0 OpCo. LLC (“Boston OpCo”), entered into a contract with the Massachusetts Bay Transit Authority (“MBTA”) for the financing, development and operation of a next-generation fare payment system in Boston (the “Original MBTA Contract”). In June 2020, MBTA and Boston OpCo executed an amended agreement (the “Amended MBTA Contract”) to reset the project and modify certain aspects of the Original MBTA Contract. Collectively, Boston HoldCo and Boston OpCo are referred to as the “P3 Venture”.
We have consolidated Boston OpCo into our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Also, because we consolidate Boston OpCo into Cubic’s financial statements, any payments from Boston OpCo to Cubic are excluded from our cash flows provided by operating activities in our Condensed Consolidated Statements of Cash Flows, and the cash received by Boston OpCo in connection with its draws on its non-recourse debt are reflected as cash provided by financing activities in our Condensed Consolidated Statements of Cash Flows. Boston OpCo’s draws on its non-recourse debt amounted to $105.6 million in the first nine months of fiscal 2020. Payments we received from Boston OpCo that were not included in cash provided by operating activities totaled $63.0 million in the first nine months of fiscal 2020 and have totaled a cumulative $132.0 million since the inception of our contract with Boston OpCo in March 2018.
Upon creation of the P3 Venture, Boston OpCo entered into a credit agreement with a group of financial institutions (the “Boston OpCo Credit Agreement”) which included a long-term credit facility of up to $212.4 million and a revolving credit facility. The long-term credit facility bore interest at variable rates of London Interbank Offer Rate (“LIBOR”) plus 1.3%. In connection with the execution of the Amended MBTA Contract, Boston OpCo entered into an amended credit agreement with a group of financial institutions (the “Boston OpCo Amended Credit Agreement”), which includes two long-term debt facilities and a revolving credit facility to replace the facilities in the Boston OpCo Credit Agreement. At closing of the Boston OpCo Amended Credit Agreement, Boston OpCo retired and paid off the outstanding principal balances of $92.6 million and accrued interest of $7.4 million due under the Boston OpCo Credit Agreement.
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Under the Boston OpCo Amended Credit Agreement, the long-term debt facilities allow for draws up to an aggregate of $421.6 million and such draws may only be made during the design and build phase of the Amended MBTA Contract. The long-term debt facilities, including all interest and fees incurred, is required to be repaid on a fixed monthly schedule starting once the design and build phase is completed in 2024. The long-term debt facilities bear interest at variable rates of LIBOR plus a margin of 1.75% to 2.0% over the design and build phase and LIBOR plus a margin of 2.0% to 2.5% over the operate and maintain phases. Boston OpCo incurred debt issuance and modification costs of $8.6 million in connection with the Boston OpCo Amended Credit Agreement which are being amortized as interest expense using the effective interest method over the term of the long-term debt facilities. At June 30, 2020, the outstanding balance on the long-term debt facilities was $172.8 million, which is presented net of unamortized deferred financing costs of $17.3 million. The revolving credit facility allows for draws up to a maximum aggregate amount of $15.8 million during the operate and maintain phase of the Amended MBTA Contract. Boston OpCo’s debt is nonrecourse with respect to Cubic and our subsidiaries. The fair value of the long-term debt facility approximates its carrying amount. Upon closing of the Boston OpCo Amended Credit Agreement, John Laing made a loan to Boston HoldCo of $1.9 million in the form of a bridge loan that is intended to be converted to equity in the future in accordance with its equity funding responsibilities under the terms of the P3 Venture. Concurrently, Boston HoldCo made a corresponding equity contribution to Boston OpCo in the same amounts which is included within equity of noncontrolling interest in VIE in our consolidated financial statements.
The Boston OpCo Amended Credit Agreement contains covenants that require Boston OpCo and Cubic to maintain progress on the delivery of the Amended MBTA Contract within a specified timeline and budget and provide regular reporting on such progress. The Boston OpCo Amended Credit Agreement also contains events of default, including the delivery of a customized fare collection system to the MBTA by a pre-determined date as well as other customary events of default. Failure to meet such delivery date will result in Boston OpCo, and Cubic via our subcontract with Boston OpCo, incurring penalties due to the lenders thereunder.
In connection with the Boston OpCo Credit Agreement, Boston OpCo entered into pay-fixed/receive-variable interest rate swaps with a group of financial institutions to mitigate variable interest rate risk associated with its long-term debt. Upon execution of the Boston OpCo Amended Credit Agreement, Boston OpCo terminated these interest rate swaps and paid termination costs of $34.4 million to the counterparties. The termination payments are included in cash flows used in operating activities in our Condensed Consolidated Statements of Cash Flows. In connection with the Boston OpCo Amended Credit Agreement, Boston OpCo entered into new pay-fixed/receive-variable interest rate swaps to mitigate variable interest rate associated with its long-term debt. The interest rate swaps contain forward starting notional principal amounts which align with Boston OpCo’s expected draws on its long-term debt facility. At June 30, 2020, the outstanding notional principal amounts on Boston OpCo’s open interest rate swaps were $172.8 million.
Financing Arrangements
At September 30, 2019, we had $200.0 million of outstanding senior unsecured notes bearing interest rates ranging from 3.35% to 3.95% as well as $226.5 million outstanding under an $800.0 million committed revolving credit agreement with a group of financial institutions. On March 27, 2020, we repaid and extinguished the remaining principal balance of $189.3 million of senior unsecured notes then outstanding and recognized a loss on debt extinguishment of $16.1 million, consisting of a $15.9 million make-whole payment to the note holders and a write-off of previously capitalized debt issuance costs of $0.2 million.
On March 27, 2020, we also executed a Fifth Amended and Restated Credit Agreement (the “Credit Facility”) with a group of financial institutions. The Credit Facility provided for a new term loan in the aggregate amount of $450.0 million (the “Term Loan”) and increased our existing revolving line of credit limit (the “Revolving Line of Credit”) from $800.0 million to $850.0 million. The commitments under the Credit Facility will mature on March 27, 2025 and bear interest generally at the LIBOR rate plus a margin that ranges between 1.00% and 2.00%. At June 30, 2020, the weighted average interest rate on outstanding borrowings under the Credit Facility was 2.18%. The Credit Facility is unsecured, but it is required to be guaranteed by certain significant domestic subsidiaries of Cubic.
On April 1, 2020, we entered into pay-fixed/receive-variable interest rate swaps with a group of financial institutions to mitigate the variable interest rate risk associated with the Credit Facility. The interest rate swaps contain forward starting notional principal amounts which align with our fixed repayment schedules under the Credit Facility and have a fixed interest rate of LIBOR plus a margin of approximately 74 basis points. At June 30, 2020, the outstanding notional principal amounts on open interest rate swaps were $550.0 million.
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Debt issuance and modification costs of $2.5 million were incurred in connection with the Credit Facility and are recorded as a reduction to the related liability on our condensed consolidated balance sheets and are being amortized as interest expense using the effective interest method over the stated term of the Credit Facility. At June 30, 2020, our total debt issuance costs had an unamortized balance of $4.9 million. The available credit under our Revolving Line of Credit is reduced by any letters of credit issued under the Credit Facility. As of June 30, 2020, there were $447.2 million of borrowings under the Term Loan and $277.0 million of borrowings under the Revolving Line of Credit. Letters of credit outstanding under the Credit Facility totaled $94.0 million at June 30, 2020, which reduced our available line of credit to $479.0 million. The $94.0 million of letters of credit includes both financial letters of credit and performance guarantees.
As of June 30, 2020, we had letters of credit and bank guarantees outstanding totaling $101.4 million, which includes the $94.0 million of letters of credit issued under the Revolving Line of Credit and $7.4 million of letters of credit issued under other facilities. The $101.4 million of letters of credit and bank guarantees includes $96.9 million that guarantees either our performance or customer advances under certain contracts and financial letters of credit and $4.5 million that primarily guarantees our payment of certain self-insured liabilities. We have never had a drawing on a letter of credit instrument, nor are any anticipated; therefore, we estimate the fair value of these instruments to be zero.
We have entered into a short-term borrowing arrangement in the United Kingdom in the amount of £20.0 million British Pounds (equivalent to approximately $24.8 million at June 30, 2020) to help meet the short-term working capital requirements of our subsidiary located in the United Kingdom. At June 30, 2020, no amounts were outstanding under this borrowing arrangement.
We maintain a cash account with a bank in the United Kingdom for which the funds are restricted as to use. The account is required to secure the customer’s interest in cash deposited in the account to fund activities related to our performance under a fare collection services contract in the United Kingdom. The balance in the account as of June 30, 2020 was $22.3 million and is classified as restricted cash in our Condensed Consolidated Balance Sheets.
The terms of the Credit Facility contain financial covenants setting a maximum total ratio of debt to adjusted earnings before interest, taxes, depreciation and amortization and a minimum interest coverage ratio. In addition, the terms contain covenants that restrict, among other things, our ability to sell assets, incur indebtedness, make investments, grant liens, pay dividends and make other restricted payments. As of June 30, 2020, we were in compliance with all covenants under the Credit Facility.
In the normal course of our business, we may sell trade receivables to financial institutions as a cash management technique. We do not retain financial or legal obligations for these receivables that would result in material losses. Our ongoing involvement is limited to the remittance of customer payments to the financial institutions with respect to the sold trade receivables; therefore, our sold trade receivables are not included in our Condensed Consolidated Balance Sheet in any period presented. As of September 30, 2019, we sold $31.1 million of outstanding trade receivables to financial institutions. No trade receivables were sold as of June 30, 2020. The cash received for the sale of trade receivables is included in cash provided by operating activities in our Condensed Consolidated Statements of Cash Flows. During the first nine months of fiscal 2020, we received $5.5 million related to withheld proceeds from receivables we sold as of September 30, 2019, which is included in cash provided by investing activities in our Condensed Consolidated Statements of Cash Flows.
Our financial condition remains strong with working capital of $136.2 million and a current ratio of 1.2 to 1 at June 30, 2020. We expect that for our current operations, cash on hand, cash flows from operations and our unused lines of credit will be adequate to meet our liquidity requirements for the foreseeable future. Our cash is invested primarily in highly liquid bank deposits and government instruments in the U.S., the U.K., New Zealand and Australia.
Future repatriations of foreign earnings will generally be exempt from U.S. tax. We will continue to monitor our intentions to repatriate foreign earnings and provide applicable deferred taxes and withholding taxes that would be due upon repatriation of the undistributed foreign earnings.
Recent Accounting Pronouncements
See “Recent Accounting Pronouncements” in Note 1 of the Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.
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Critical Accounting Policies, Estimates and Judgments
Our financial statements are prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We continually evaluate our estimates and judgments, the most critical of which are those related to revenue recognition, income taxes, valuation of goodwill, purchased intangibles, accounting for business combinations and pension costs. We base our estimates and judgments on historical experience and other factors that we believe to be reasonable under the circumstances. Materially different results can occur as circumstances change and additional information becomes known.
Besides the estimates identified above that are considered critical, we make many other accounting estimates in preparing our financial statements and related disclosures. All estimates, whether or not deemed critical, affect reported amounts of assets, liabilities, revenues and expenses, as well as disclosures of contingent assets and liabilities. These estimates and judgments are also based on historical experience and other factors that are believed to be reasonable under the circumstances. Materially different results can occur as circumstances change and additional information becomes known, even for estimates and judgments that are not deemed critical.
There have been no significant changes to the critical accounting policies disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for fiscal 2019.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Statements contained in this Quarterly Report on Form 10-Q that are not statements of historical fact should be considered forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements about our expectations, beliefs, plans, objectives, assumptions, future events or our future financial or operating performance, including those concerning new programs and growth in the markets in which we do business, increases in demand for our products and for fully integrated systems, retention of existing contracts and receipt of new contracts, the development of new products, systems and services, expansion of our automated payment and fare collection systems and services, maintenance of long-term relationships with our existing customers, expansion of our service offerings and customer base for services, maintenance of a diversified business mix, expansion of our international footprint, strategic acquisitions, the uncertainty regarding the scope, duration and impact of COVID-19, U.S. and foreign government funding, supplies of raw materials and purchased parts, cash needs, financial condition, liquidity, prospects, and the trends that may affect us or the industries in which we operate, are not historical and may be forward-looking.
These statements are often, but not always, made through the use of words or phrases such as “may,” “will,” “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “predict,” “potential,” “opportunity” and similar words or phrases or the negatives of these words or phrases. These forward-looking statements involve risks, estimates, assumptions and uncertainties, including those discussed under “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for fiscal 2019 and in Part II, Item 1A of this Quarterly Report on Form 10-Q, that could cause actual results to differ materially from those expressed in these statements.
Such risks, estimates, assumptions and uncertainties include, among others:
| ● | the impact of the COVID-19 outbreak or future epidemics on our business, including the potential for facility closures or work stoppages; supply chain disruptions; program delays; our ability to recover our costs under contracts; changing government funding and acquisition priorities and payment policies and regulations; and potential impacts to the fair value of our assets; |
| ● | our dependence on U.S. and foreign government contracts; |
| ● | delays in approving U.S. and foreign government budgets and cuts in U.S. and foreign government defense expenditures; |
55
| ● | the ability of certain government agencies to unilaterally terminate or modify our contracts with them; |
| ● | the effects of potential sequestration on our contracts; |
| ● | our assumptions covering behavior by public transit authorities; |
| ● | our ability to successfully integrate new companies into our business and to properly assess the effects of such integration on our financial condition; |
| ● | the U.S. government’s increased emphasis on awarding contracts to small businesses, and our ability to retain existing contracts or win new contracts under competitive bidding processes; |
| ● | negative audits by the U.S. government; |
| ● | the effects of politics and economic conditions on negotiations and business dealings in the various countries in which we do business or intend to do business; |
| ● | competition and technology changes in the defense and transportation industries; |
| ● | changes in the way transit agencies pay for transit systems; |
| ● | our ability to accurately estimate the time and resources necessary to satisfy obligations under our contracts; |
| ● | the effect of adverse regulatory changes on our ability to sell products and services; |
| ● | our ability to identify, attract and retain qualified employees; |
| ● | our failure to properly implement our enterprise resource planning system; |
| ● | unforeseen problems with the implementation and maintenance of our information systems; |
| ● | business disruptions due to cyber security threats, physical threats, terrorist acts, acts of nature and public health crises; |
| ● | our involvement in litigation, including litigation related to patents, proprietary rights and employee misconduct; |
| ● | our reliance on subcontractors and on a limited number of third parties to manufacture and supply our products; |
| ● | our ability to comply with our development contracts and to successfully develop, introduce and sell new products, systems and services in current and future markets; |
| ● | defects in, or a lack of adequate coverage by insurance or indemnity for, our products and systems; |
| ● | changes in U.S. and foreign tax laws, exchange rates or our economic assumptions regarding our pension plans; and |
| ● | other factors discussed elsewhere in this Quarterly Report on Form 10-Q. |
Because the risks, estimates, assumptions and uncertainties referred to above could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us or on our behalf, you should not place undue reliance on any forward-looking statements. In addition, past financial or operating performance is not necessarily a reliable indicator of future performance and you should not use our historical performance to anticipate results or future period trends. Further, any forward-looking statement speaks only as of the date on which it is made, and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. New
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factors emerge from time to time, and it is not possible for us to predict which factors will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our market risks at June 30, 2020 have not materially changed from those described under “Quantitative and Qualitative Disclosures About Market Risk” in Part II, Item 7A of our Annual Report on Form 10-K for fiscal 2019.
ITEM 4. CONTROLS AND PROCEDURES
We performed an evaluation of the effectiveness of our disclosure controls and procedures as of June 30, 2020. The evaluation was performed with the participation of senior management of each business segment and key corporate functions, and under the supervision of our Chief Executive Officer and our Chief Financial Officer. Based on our evaluation, we concluded that our disclosure controls and procedures were operating and effective as of that date.
Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)) are designed to provide reasonable assurance that information required to be disclosed in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
There have not been any significant changes in our internal control over financial reporting during the fiscal quarter ended June 30, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We consider all current legal matters to be ordinary proceedings incidental to our business. We believe the outcome of these proceedings will not have a materially adverse effect on our financial position, results of operations or cash flows.
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors disclosed under “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for fiscal 2019, and in Part II, Item 1A of our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2020.
ITEM 6. EXHIBITS
Exhibit No. |
| Description |
|---|---|---|
3.1 | | |
3.2 | | |
10.1 | | |
31.1 | | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2 | | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32.1 | | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350. |
32.2 | | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350. |
101 | | Financial statements from the Cubic Corporation Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, formatted in Inline eXtensible Business Reporting Language (Inline iXBRL): (i) Condensed Consolidated Statements of Operations, (ii) Condensed Consolidated Statements of Comprehensive Income (Loss), (iii) Condensed Consolidated Balance Sheets, (iv) Condensed Consolidated Statements of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements. |
104 | | Cover Page Interactive Data File, formatted as Inline XBRL and contained in Exhibit 101. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | |
| | | CUBIC CORPORATION |
| | | |
Date: | | /s/ Anshooman Aga | |
| | | |
| | | Executive Vice President and Chief Financial Officer |
| | | (Principal Financial Officer) |
| | | |
| | | |
Date: | | /s/ Mark A. Harrison | |
| | | |
| | | Senior Vice President and Chief Accounting Officer |
| | | (Principal Accounting Officer) |
59
| This ‘10-Q’ Filing | Date | Other Filings | ||
|---|---|---|---|---|
 | ||||
| 7/31/25 | ||||
| 3/27/25 | ||||
| 9/30/22 | ||||
| 12/31/21 | ||||
| 10/1/21 | ||||
| 9/30/21 | ||||
| 12/31/20 | 10-Q | |||
| 10/1/20 | 4, 4/A | |||
| 9/30/20 | 10-K, 10-K/A, 11-K | |||
| Filed on: | 8/5/20 | 8-K | ||
| 7/21/20 | ||||
| For Period end: | 6/30/20 | 4 | ||
| 4/1/20 | ||||
| 3/31/20 | 10-Q, 10-Q/A | |||
| 3/27/20 | 8-K | |||
| 1/3/20 | 8-K, 8-K/A | |||
| 11/29/19 | 4, 4/A | |||
| 10/1/19 | 4, 4/A | |||
| 9/30/19 | 10-K, 11-K | |||
| 7/1/19 | ||||
| 6/30/19 | 10-Q | |||
| 6/27/19 | ||||
| 4/1/19 | ||||
| 11/21/18 | 4 | |||
| 10/1/18 | 3, 3/A, 4, 4/A | |||
| 5/31/18 | 8-K, SD | |||
| 10/1/15 | 3, 4 | |||
| List all Filings | ||||
As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 1/28/21 Cubic Corp./DE 10-K/A 9/30/20 13:2.9M Toppan Merrill Bridge/FA 11/18/20 Cubic Corp./DE 10-K 9/30/20 123:23M Toppan Merrill Bridge/FA |
As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 2/19/19 Cubic Corp./DE 8-K:5,9 2/18/19 2:118K Toppan Merrill/FA 11/14/18 Cubic Corp./DE 8-K:5,9 11/13/18 2:126K Toppan Merrill/FA |