UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
or
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:
CUBIC CORPORATION
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation) | (IRS Employer Identification No.) |
(Zip Code) | ||
(Address of principal executive offices) |
(
(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 |
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.
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).
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.
| Accelerated filer ☐ | |
Non-accelerated filer ☐ | Smaller reporting company | |
| Emerging growth company |
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
As of January 21, 2021, there were
CUBIC CORPORATION
QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended December 31, 2020
TABLE OF CONTENTS
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 |
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December 31, | |||||||
| 2020 |
| 2019 |
| |||
Net sales: | |||||||
Products | $ | | $ | | |||
Services |
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| |
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Costs and expenses: | |||||||
Products |
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Services |
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Selling, general and administrative expenses |
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Research and development |
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Amortization of purchased intangibles |
| |
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Gain on sale of property, plant and equipment |
| — |
| ( | |||
Restructuring costs |
| |
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| |
| | ||||
Operating income (loss) |
| |
| ( | |||
Other income (expenses): | |||||||
Interest and dividend income |
| |
| | |||
Interest expense |
| ( |
| ( | |||
Other income (expense), net |
| |
| ( | |||
Loss from continuing operations before income taxes |
| ( |
| ( | |||
Income tax provision |
| |
| | |||
Loss from continuing operations | ( | ( | |||||
Net loss from discontinued operations |
| — |
| ( | |||
Net loss | ( | ( | |||||
Less noncontrolling interest in net income of VIE |
| |
| | |||
Net loss attributable to Cubic | $ | ( | $ | ( | |||
Amounts attributable to Cubic: | |||||||
Net loss from continuing operations | $ | ( | $ | ( | |||
Net loss from discontinued operations |
| — |
| ( | |||
Net loss attributable to Cubic | $ | ( | $ | ( | |||
Net loss per share: | |||||||
Basic | |||||||
Continuing operations attributable to Cubic | $ | ( | $ | ( | |||
Discontinued operations | $ | — | $ | ( | |||
Basic earnings per share attributable to Cubic | $ | ( | $ | ( | |||
Diluted | |||||||
Continuing operations attributable to Cubic | $ | ( | $ | ( | |||
Discontinued operations | $ | — | $ | ( | |||
Diluted earnings per share attributable to Cubic | $ | ( | $ | ( | |||
Weighted average shares used in per share calculations: | |||||||
Basic |
| |
| | |||
Diluted | | |
See Notes to Condensed Consolidated Financial Statements.
3
CUBIC CORPORATION
CONDENSED CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(amounts in thousands)
Three Months Ended |
| ||||||
December 31, | |||||||
| 2020 |
| 2019 |
| |||
Net loss | $ | ( | $ | ( | |||
Other comprehensive income (loss): | |||||||
Foreign currency translation |
| |
| | |||
Change in unrealized gains/losses from cash flow hedges: | |||||||
Change in fair value of cash flow hedges, net of tax | ( | ( | |||||
Adjustment for net gains/losses realized and included in net income, net of tax | ( | | |||||
Total change in unrealized gains/losses realized from cash flow hedges, net of tax | ( | ( | |||||
Total other comprehensive income |
| |
| | |||
Total comprehensive income (loss) | | ( | |||||
Noncontrolling interest in comprehensive income of consolidated VIE, net of tax | | | |||||
Comprehensive loss attributable to Cubic, net of tax | $ | ( | $ | ( |
See Notes to Condensed Consolidated Financial Statements.
4
CUBIC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(amounts in thousands)
December 31, | September 30, |
| |||||
| 2020 |
| 2020 |
| |||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | | $ | | |||
Cash of consolidated VIE | | | |||||
Restricted cash |
| |
| | |||
Restricted cash of consolidated VIE | | | |||||
Accounts receivable: | |||||||
Billed |
| |
| | |||
Allowance for doubtful accounts |
| ( |
| ( | |||
| |
| | ||||
Contract assets |
| |
| | |||
Recoverable income taxes |
| |
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Inventories |
| |
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Other current assets |
| |
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Other current assets of consolidated VIE |
| |
| | |||
Total current assets |
| |
| | |||
Long-term contracts financing receivables |
| |
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Long-term contracts financing receivables of consolidated VIE | | | |||||
Property, plant and equipment, net |
| |
| | |||
Operating lease right-of-use asset |
| |
| | |||
Deferred income taxes |
| |
| | |||
Goodwill |
| |
| | |||
Purchased intangibles, net |
| |
| | |||
Other assets |
| |
| | |||
Total assets | $ | | $ | | |||
LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||
Current liabilities: | |||||||
Short-term borrowings | $ | | $ | | |||
Trade accounts payable | | | |||||
Trade accounts payable of consolidated VIE | | | |||||
Contract liabilities |
| |
| | |||
Accrued compensation and current liabilities | | | |||||
Other current liabilities of consolidated VIE | | | |||||
Income taxes payable |
| |
| | |||
Current portion of long-term debt |
| |
| | |||
Total current liabilities |
| |
| | |||
Long-term debt |
| |
| | |||
Long-term debt of consolidated VIE |
| |
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Operating lease liability |
| |
| | |||
Financing lease liability |
| |
| | |||
Other noncurrent liabilities |
| |
| | |||
Other noncurrent liabilities of consolidated VIE |
| |
| | |||
Shareholders’ equity: | |||||||
Common stock | |
| | ||||
Retained earnings |
| |
| | |||
Accumulated other comprehensive loss |
| ( |
| ( | |||
Treasury stock at cost - |
| ( |
| ( | |||
Shareholders’ equity related to Cubic |
| |
| | |||
Noncontrolling interest in VIE |
| |
| | |||
Total shareholders’ equity |
| |
| | |||
Total liabilities and shareholders’ equity | $ | | $ | |
See Notes to Condensed Consolidated Financial Statements.
5
CUBIC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(amounts in thousands)
Three Months Ended |
| ||||||
December 31, | |||||||
| 2020 |
| 2019 |
| |||
Operating Activities: | |||||||
Net loss | $ | ( | $ | ( | |||
Net loss from discontinued operations | — |
| | ||||
Adjustments to reconcile net income to net cash used in operating activities: | |||||||
Depreciation and amortization |
| |
| | |||
Share-based compensation expense |
| |
| | |||
Change in fair value of contingent consideration | ( | ( | |||||
Change in fair value of interest rate swap of consolidated VIE | ( | ( | |||||
Deferred income taxes |
| ( |
| | |||
Other items | | | |||||
Changes in operating assets and liabilities, net of effects from acquisitions | ( | ( | |||||
NET CASH USED IN OPERATING ACTIVITIES FROM CONTINUING OPERATIONS |
| ( |
| ( | |||
NET CASH USED IN OPERATING ACTIVITIES FROM DISCONTINUED OPERATIONS |
| — |
| ( | |||
NET CASH USED IN OPERATING ACTIVITIES |
| ( |
| ( | |||
Investing Activities: | |||||||
Purchases of property, plant and equipment |
| ( |
| ( | |||
Receipt of withheld proceeds from sale of trade receivables |
| |
| | |||
NET CASH USED IN INVESTING ACTIVITIES |
| ( |
| ( | |||
Financing Activities: | |||||||
Proceeds from short-term borrowings |
| |
| | |||
Principal payments on short-term borrowings |
| ( |
| ( | |||
Principal payments on long-term borrowings |
| ( |
| — | |||
Proceeds from long-term borrowings of consolidated VIE |
| |
| | |||
Principal payments on finance lease liability |
| ( |
| — | |||
Proceeds from stock issued under employee stock purchase plan | — | | |||||
Purchase of common stock | ( | ( | |||||
NET CASH PROVIDED BY FINANCING ACTIVITIES |
| |
| | |||
Effect of exchange rates on cash |
| |
| | |||
NET DECREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH |
| ( |
| ( | |||
Cash, cash equivalents and restricted cash at the beginning of the period |
| |
| | |||
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT THE END OF THE PERIOD | $ | | $ | | |||
Supplemental disclosure of non-cash investing and financing activities: | |||||||
Withheld proceeds from the sale of trade receivables to be received in fiscal 2021 | | — |
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 December 31, 2020 | ||||||||||||||||||
|
|
|
|
| Accumulated |
|
|
|
|
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| ||||||
Other | Noncontrolling | Number |
| |||||||||||||||
Common | Retained | Comprehensive | Treasury | Interest in | of Shares |
| ||||||||||||
Stock |
| Earnings |
| Loss |
| Stock |
| VIE |
| Outstanding |
| |||||||
October 1, 2020 | $ | | $ | | $ | ( | $ | ( | $ | | | |||||||
Net income (loss) |
| — |
| ( |
| — |
| — |
| |
| — | ||||||
Other comprehensive income, net of tax |
| — |
| — |
| |
| — |
| — |
| — | ||||||
Stock issued under equity incentive plans | — | — | — | — | — | | ||||||||||||
Purchase of common stock | ( | — | — | — | — | ( | ||||||||||||
Share-based compensation |
| |
| — |
| — |
| — |
| — | — | |||||||
| ||||||||||||||||||
December 31, 2020 | $ | | $ | | $ | ( | $ | ( | $ | |
| |
| For the Three Months Ended December 31, 2019 |
| ||||||||||||||||
Accumulated | ||||||||||||||||||
Other | Noncontrolling | Number |
| |||||||||||||||
Common | Retained | Comprehensive | Treasury | Interest in | of Shares |
| ||||||||||||
| Stock |
| Earnings |
| Loss |
| Stock |
| VIE |
| Outstanding |
| ||||||
October 1, 2019 | $ | | $ | | $ | ( | $ | ( | $ | | | |||||||
Net income (loss) |
| — |
| ( |
| — |
| — |
| |
| — | ||||||
Other comprehensive income, net of tax |
| — |
| — |
| |
| — |
| — |
| — | ||||||
Stock issued under equity incentive plans | — | — | — | — | — | | ||||||||||||
Stock issued under employee stock purchase plan | | — | — | — | — | — | ||||||||||||
Purchase of common stock | ( | — | — | — | — | ( | ||||||||||||
Share-based compensation | | — | — | — | — | — | ||||||||||||
Cumulative effect of accounting standard adoption | — | ( | — | — | — | — | ||||||||||||
December 31, 2019 | $ | | $ | | $ | ( | $ | ( | $ | |
| |
See Notes to Condensed Consolidated Financial Statements.
7
CUBIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
December 31, 2020
Note 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 quarter ended December 31, 2020 are not necessarily indicative of the results that may be expected for our fiscal year ending September 30, 2021 (“fiscal 2021”). 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, 2020 (“fiscal 2020”).
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.
As described in Note 14, we concluded that the combination of our legacy Cubic Mission Solutions (“CMS”) and our legacy Cubic Global Defense (“CGD”) segments into our new Cubic Mission and Performance Solutions (“CMPS”) segment resulted in CMPS becoming a single operating segment beginning on October 1, 2020. Applicable prior period amounts have been adjusted retrospectively to reflect the reportable segment change.
Recently Adopted Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“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. We adopted ASU 2016-13 on October 1, 2020. The adoption of this standard did not have a material 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. We adopted ASU 2017-04 on October 1, 2020. The adoption of ASU 2017-04 did not have an impact on our consolidated financial statements and would only have the potential to impact the amount of goodwill impairment recorded in the event that goodwill is determined to be impaired in the future.
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. We adopted ASU 2018-13 on October 1, 2020. The adoption of this standard did not have an 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. We adopted ASU 2018-14 on October 1, 2020. The adoption of this standard did not have a significant impact on our consolidated financial statements.
8
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. We adopted ASU 2018-15 on October 1, 2020. The adoption of this standard did not have a significant impact on our consolidated financial statements.
Recent Accounting Pronouncements – Not Yet Adopted
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.
Note 2 — Acquisitions and Divestitures
Business Acquisitions
Each of the following acquisitions have been treated as a business combination for accounting purposes. The results of operations of each acquired business have been included in our consolidated financial statements since the respective date of each acquisition.
PIXIA Corp.
On June 27, 2019, we paid cash of $
From June 27, 2019 through January 3, 2020, we accounted for our
The following table summarizes the fair values of assets acquired and liabilities assumed at the acquisition date (in millions):
Backlog |
| $ | |
|
Customer relationships | | |||
Developed technology | | |||
Trade name | | |||
Accounts receivable, prepaids and other assets | | |||
Deferred taxes | ( | |||
Other net assets acquired (liabilities assumed) |
| ( | ||
Net identifiable assets acquired |
| | ||
Goodwill |
| | ||
Net assets acquired | $ | |
The fair values of purchased intangibles were determined using the valuation methodology deemed to be the most appropriate for each type of asset being valued. The trade name valuation used the relief from royalty method, the
9
customer relationships and non-compete agreements valuations used the lost profits valuation method and the technology and backlog valuations used the excess earnings method.
The intangible assets are being amortized using straight-line methods based on the expected period of undiscounted cash flows that will be generated by the assets, over a weighted average useful life of approximately
The goodwill resulting from the acquisition consists primarily of the synergies expected from combining the operations of Pixia with our existing CMPS business and strengthening our capability of developing and integrating products in our CMPS 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 CMPS segment and is not expected to be deductible for tax purposes.
Delerrok Inc.
In fiscal 2018 and 2019 we invested a total of $
The following table summarizes the fair values of the assets acquired and liabilities assumed at the acquisition date (in millions):
Technology |
| $ | |
|
Trade name | | |||
Accounts receivable | | |||
Other net assets acquired (liabilities assumed) |
| ( | ||
Deferred tax liability | ( | |||
Net identifiable assets acquired |
| | ||
Goodwill |
| | ||
Net assets acquired | $ | |
The 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
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.
Operating Results
10
The sales and results of operations from Delerrok and Pixia included in our operating results were as follows (in millions):
| Three Months Ended | ||||||
December 31, 2020 | |||||||
Delerrok | Pixia | ||||||
Sales | $ | | $ | | |||
Operating loss | ( | ( | |||||
Net loss after taxes |
| ( | ( |
The operating results above included the following amounts (in millions):
| Three Months Ended | ||||||
December 31, 2020 | |||||||
Delerrok | Pixia | ||||||
Amortization | $ | | $ | | |||
Acquisition-related expenses | | | |||||
Gain from changes in fair value of contingent consideration |
| ( | — |
The estimated amortization expense related to the intangible assets recorded in connection with our acquisitions are as follows (in millions):
Year Ending September 30, |
| Delerrok | Pixia |
|
| |||
2021 | $ | | $ | | ||||
2022 |
| | | |||||
2023 |
| | | |||||
2024 |
| | | |||||
2025 |
| | | |||||
Thereafter | | |
Pro Forma Information
The following unaudited pro forma information presents our consolidated results of operations as if Pixia and Delerrok had been included in our consolidated results since October 1, 2019 (in millions):
Three Months Ended |
| ||||||
December 31, |
| ||||||
2020 |
| 2019 |
| ||||
Net sales | $ | | $ | | |||
Net loss | $ | ( | $ | ( |
The pro forma information includes adjustments to give effect to events that are directly attributable to the acquisitions and have a continuing impact on our operations including the amortization of purchased intangibles.
11
Goodwill
Changes in goodwill for the three months ended December 31, 2020 were as follows for each of our reporting units (in thousands):
|
|
|
| |||||||
Cubic Transportation | Cubic Mission |
| ||||||||
Systems | Performance Solutions | Total |
| |||||||
Net balances at October 1, 2020 | $ | | $ | | $ | | ||||
Acquisitions | ( | — | ( | |||||||
Foreign currency exchange rate changes |
| |
| |
| | ||||
Net balances at December 31, 2020 | $ | | $ | | $ | |
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.
We complete our annual goodwill impairment test each year as of July 1 separately for each of our reporting units.
For our fiscal 2020 impairment test we concluded there was
Note 3 – Variable Interest Entities
In accordance with Accounting Standards Codification (“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 they are a variable interest entity (a “VIE”). We consider a partnership or joint venture to be a VIE if it has any of the following characteristics: (a) the total equity investment is not sufficient to permit the entity to finance its activities without additional subordinated financial support, (b) characteristics of a controlling financial interest are missing, or (c) the voting rights of the equity holders are not proportional to their obligations to absorb the expected losses of the entity.
We continually assess each VIE to determine if we are its primary beneficiary. We conclude that we are the primary beneficiary and consolidate the VIE if we have both (a) the power to direct the activities that most significantly impact the VIE’s economic performance and (b) the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. We consider the VIE design, ownership and voting structure, contractual relationships, distribution of profits and losses, risks, responsibilities, and indebtedness in determining if we are the primary beneficiary.
In March 2018, Cubic and John Laing, an unaffiliated company that specializes in contracting under public-private partnerships, jointly formed Boston AFC 2.0 HoldCo. LLC (“Boston HoldCo”). Also in March 2018, Boston HoldCo’s created a 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
The Amended MBTA Contract consists of a design and build phase of approximately
12
full service commencement date, fixed payments of $
Boston OpCo subcontracted all of its contractual responsibilities regarding the design and build and the operation and maintenance of the fare system under the Amended MBTA Contract to Cubic. Under its subcontract with Boston OpCo, Cubic will receive fixed payments in the aggregate amount of $
Upon creation of the P3 Venture and upon execution of the Amended MBTA Contract, John Laing made loans to Boston HoldCo totaling $
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
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.
Upon execution of the Boston OpCo Amended Credit Agreement, Boston OpCo terminated its existing interest rate swaps and paid termination costs of $
Boston OpCo holds a restricted cash balance which is required by the Amended MBTA Contract to allow for the delivery of future change orders directed by MBTA.
13
The assets and liabilities of Boston OpCo that are included in our condensed consolidated balance sheets are as follows:
December 31, | September 30, |
| |||||
| 2020 |
| 2020 |
| |||
(in thousands) | |||||||
Cash | $ | | $ | | |||
Restricted cash | | | |||||
Other current assets | | | |||||
Long-term contracts financing receivable | | | |||||
Total assets | $ | | $ | | |||
Trade accounts payable | $ | | $ | | |||
Accrued compensation and other current liabilities | | | |||||
Due to Cubic | | | |||||
Other noncurrent liabilities | | | |||||
Long-term debt | | | |||||
Total liabilities | $ | | $ | | |||
Total Cubic equity | | | |||||
Noncontrolling interests | | | |||||
Total liabilities and owners' equity | $ | | $ | |
The assets of Boston OpCo are restricted for its use only and are not available for our general operations. Boston OpCo’s debt is non-recourse to Cubic. Our maximum exposure to loss as a result of our equity interest in the P3 Venture is limited to the $
Boston OpCo’s results of operations included in our Condensed Consolidated Statements of Operations are as follows (in thousands):
Three Months Ended |
| ||||||
December 31, | |||||||
2020 |
| 2019 | |||||
Revenue | $ | | $ | | |||
Operating income |
| |
| | |||
Other income (expense), net |
| |
| | |||
Interest income |
| |
| | |||
Interest expense |
| ( |
| ( |
Note 4 — 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.
14
Three Months Ended |
| ||||||
December 31, | |||||||
2020 |
| 2019 | |||||
Operating income (loss) | $ | | $ | ( | |||
Net income (loss) from continuing operations |
| |
| ( | |||
Net income (loss) from continuing operations attributable to Cubic | | ( | |||||
Diluted income (loss) per share attributable to Cubic |
| | ( |
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 December 31, 2020, our ending backlog was $
Accounts Receivable:
The components of accounts receivable are as follows (in thousands):
December 31, | September 30, | ||||||
| 2020 |
| 2020 |
| |||
Accounts receivable | |||||||
Billed | $ | | $ | | |||
Allowance for doubtful accounts | ( | ( | |||||
Net accounts receivable | $ | | $ |
Amounts billed include $
In our normal course of business, we may sell trade receivables to financial institutions as a cash management technique. We do not retain financial or legal obligations for these receivables that would result in material losses. Our ongoing involvement is limited to the remittance of customer payments to the financial institutions with respect to the sold trade receivables; therefore, our sold trade receivables are not included in our Condensed Consolidated Balance Sheet in any period presented. As of December 31, 2020 and September 30, 2020, we sold $
15
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.
| |||||||
December 31, | September 30, |
| |||||
| 2020 |
| 2020 |
| |||
| |||||||
Contract assets | $ | | $ | | |||
Contract liabilities | $ | | $ | |
Contract assets increased $
Contract liabilities increased $
Note 5 — 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 share price for each fiscal period using the treasury stock method. 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.
In periods with a net loss from continuing operations attributable to Cubic, common equivalent shares are not included in the computation of diluted EPS, because to do so would be anti-dilutive.
The weighted-average number of shares outstanding used to compute net income (loss) per common share were as follows (in thousands):
Three Months Ended |
| ||||||
December 31, | |||||||
| 2020 |
| 2019 |
| |||
Weighted average shares - basic |
| |
| | |||
Effect of dilutive securities |
| — |
| — | |||
Weighted average shares - diluted |
| |
| | |||
Number of anti-dilutive securities | | |
Note 6 — Balance Sheet Details
Restricted Cash
Cash and cash equivalents excluded $
16
September 30, 2020, respectively, which for purposes of our consolidated statements of cash flows, is included in cash, cash equivalents and restricted cash.
Inventories
Inventories consist of the following (in thousands):
December 31, | September 30, | ||||||
| 2020 |
| 2020 |
| |||
Finished products | $ | | $ | | |||
Work in process and inventoried costs under long-term contracts | | | |||||
Materials and purchased parts |
| |
| | |||
Net inventories | $ | | $ | |
At December 31, 2020, work in process and inventoried costs under long-term contracts included approximately $
Property, Plant and Equipment
Significant components of property, plant and equipment are as follows (in thousands):
December 31, | September 30, | ||||||
| 2020 |
| 2020 | ||||
Land and land improvements | $ | | $ | | |||
Buildings and improvements |
| |
| | |||
Machinery and other equipment |
| |
| | |||
Software | | | |||||
Leasehold improvements |
| |
| | |||
Construction and internal-use software development in progress | | | |||||
Accumulated depreciation and amortization |
| ( |
| ( | |||
$ | | $ | |
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 $
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 $
Note 7 — 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. |
17
● | Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable. |
● | Level 3 - Significant inputs to the valuation model are unobservable. |
The following table presents assets and liabilities measured and recorded at fair value on our Condensed Consolidated Balance Sheets on a recurring basis (in thousands):
December 31, 2020 |
| September 30, 2020 |
| ||||||||||||||||||||||
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| |||||||||
Assets | |||||||||||||||||||||||||
Current derivative assets | $ | — | $ | | $ | — | $ | | $ | — | $ | | $ | — | $ | | |||||||||
Noncurrent derivative assets |
| — |
| |
| — |
| |
| — |
| |
| — |
| | |||||||||
Total assets measured at fair value | $ | — | $ | | $ | — | $ | | $ | — | $ | | $ | — | $ | | |||||||||
Liabilities | |||||||||||||||||||||||||
Current derivative liabilities | — | | — | |
| — | | — |
| | |||||||||||||||
Noncurrent derivative liabilities |
| — |
| |
| — |
| |
| — |
| |
| — |
| | |||||||||
Contingent consideration to seller of H4 Global | — |
| — |
| |
| | — |
| — |
| | | ||||||||||||
Contingent consideration to seller of Deltenna |
| — |
| — |
| |
| |
| — |
| — |
| |
| | |||||||||
Contingent consideration to seller of Shield |
| — |
| — |
| |
| |
| — |
| — |
| |
| | |||||||||
Contingent consideration to seller of Delerrok | — | — | — | — | — |
| — |
| | | |||||||||||||||
Total liabilities measured at fair value | $ | — | $ | | $ | | $ | | $ | — | $ | | $ | | $ | |
Derivative financial instruments are measured at fair value, the material portions of which are based on active or inactive markets for identical or similar instruments or model-derived valuations whose inputs are observable. Where model-derived valuations are appropriate, we use the applicable credit spread as the discount rate. Credit risk related to derivative financial instruments is considered minimal and is managed by requiring high credit standards for counterparties and through periodic settlements of positions.
The fair value of contingent consideration liabilities to the sellers of businesses that we have acquired are revalued to their fair value each period and any increase or decrease is recorded into selling, general and administrative expense. Any changes in the assumed timing and amount of the probability of payment scenarios could impact the fair value.
At December 31, 2020, we have the following remaining contingent consideration arrangements with the sellers of companies which we acquired:
H4 Global: A payment of $
Deltenna: Payments of up to $
Shield: Payments of up to $
18
probability distribution of values based on
Nuvotronics: Payments of up to $
Delerrok: As of December 31, 2020, the value of the Delerrok contingent consideration was determined to be
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.
As of December 31, 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, 2020 |
| $ | | $ | | $ | | $ | — | $ | | $ | |
| |||||
Total remeasurement (gain) loss recognized in earnings |
| |
| |
| — |
| — |
| ( |
| ( | |||||||
Balance as of December 31, 2020 | $ | | $ | | $ | | $ | — | $ | — | $ | |
We carry certain financial instruments, including accounts receivable, short-term borrowings, accounts payable and accrued liabilities at cost, which we believe approximates fair value because of the short-term maturity of these instruments. The fair value of our variable rate long-term debt approximates its carrying value at December 31, 2020.
In fiscal 2019 and 2020, we invested $
We did not have any significant non-financial assets or liabilities measured at fair value on a non-recurring basis in the first quarter of fiscal 2021 or fiscal 2020 other than assets and liabilities acquired in business acquisitions described in Note 2 and the RSUs that contain performance and market-based vesting criteria described in Note 11.
Note 8 — Financing Arrangements
On March 27, 2020, we executed a Fifth Amended and Restated Credit Agreement (the “Credit Facility”) with a group of financial institutions. The Credit Facility provided for a new term loan in the aggregate amount of $
19
On April 1, 2020, we entered into interest rate swaps with a group of financial institutions to mitigate the variable interest rate risk associated with the Credit Facility. The interest rate swaps contain forward starting notional principal amounts which align with our fixed repayment schedules under the Credit Facility and as of December 31, 2020 have an interest rate of approximately
Debt issuance and modification costs of $
The available credit under our Revolving Line of Credit is reduced by any letters of credit issued under the Credit Facility. As of December 31, 2020, there were $
As of December 31, 2020, we had letters of credit and bank guarantees outstanding totaling $
We have entered into a short-term borrowing arrangement in the United Kingdom for up to £
We maintain a cash account with a bank in the United Kingdom for which the funds are restricted as to use. The account is required to secure the customer’s interest in cash deposited in the account to fund our activities related to our performance under a fare collection services contract in the United Kingdom. The balance in the account as of December 31, 2020 was $
The terms of the Credit Facility contain financial covenants setting a maximum total ratio of debt to adjusted earnings before interest, taxes, depreciation and amortization and a minimum interest coverage ratio. In addition, the terms contain covenants that restrict, among other things, our ability to sell assets, incur indebtedness, make investments, grant liens, pay dividends and make other restricted payments. As of December 31, 2020, we were in compliance with all covenants under the Credit Facility.
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 $
20
Note 9 — Leases
Our primary involvement with leases is as a lessee where we lease properties to support our business. A majority of our leases are operating leases of office space. For these leases, we have elected to account for the lease and non-lease components together as a single lease component. Our operating and financing leases expire at various dates through 2032 and 2025, respectively, 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 and our right-of-use assets for financing leases are included in other assets on our Condensed Consolidated Balance Sheets. Our lease liabilities for operating and financing leases are included in other current liabilities for the current portion and separately in operating and financing 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. Our finance lease expense consists of amortization of the right-of-use asset and interest expense. Amortization expense is recognized on a straight-line basis over the lease term and is included in cost of sales and selling, general and administrative expenses in our consolidated statement of operations. Interest expense is calculated using the effective interest method and is included in interest expense in our consolidated statement of operations. We also sublease certain immaterial properties and sublease income is included as a reduction of rental expense.
The following tables present our operating and finance leases, related lease expenses and other information (dollars in millions):
Operating Lease Portfolio
December 31, | September 30, | ||||||
2020 |
| 2020 | |||||
Right-of-use assets | $ | | $ | | |||
Short-term lease liability |
| |
| | |||
Long-term lease liability | | | |||||
Weighted average remaining lease term |
|
| |||||
Weighted average discount rate |
|
|
Finance Lease Portfolio
December 31, | September 30, | ||||||
2020 |
| 2020 | |||||
Right-of-use assets | $ | | $ | | |||
Short-term lease liability |
| |
| | |||
Long-term lease liability | | | |||||
Weighted average remaining lease term |
|
| |||||
Weighted average discount rate |
|
|
21
Lease Expense
Three Months Ended |
| ||||||
December 31, | |||||||
2020 |
| 2019 | |||||
Lease Expense | |||||||
Operating lease expense | $ | | $ | | |||
Finance lease expense | |||||||
Amortization of right-of-use asset | | — | |||||
Interest on lease liabilities | — | — | |||||
Short-term lease expense | — | | |||||
Variable lease expense | | | |||||
Total lease expense | $ | | $ | |
Other Information
Three Months Ended |
| ||||||
December 31, | |||||||
2020 |
| 2019 | |||||
Cash paid related to lease liabilities | |||||||
Finance lease - cash paid for interest | $ | — | $ | — | |||
Operating lease - cash paid for fixed payments | | | |||||
Finance lease - cash paid for finance lease liabilities | — | — | |||||
Right-of-use assets obtained in exchange for new finance lease liabilities | | — | |||||
Right-of-use assets obtained in exchange for new operating lease liabilities |
| |
| |
Maturities of Lease Liabilities
Our future minimum lease commitments of our operating and finance leases on an undiscounted basis, reconciled to the lease liability at December 31, 2020 were as follows (in millions):
Financing | Operating | ||||||
2021 |
| $ | | $ | |
| |
2022 | | | |||||
2023 | | | |||||
2024 | | | |||||
2025 | | | |||||
Thereafter |
| — | | ||||
Total lease payments | | | |||||
Less: imputed interest | ( | ( | |||||
Present value of lease liabilities | $ | | $ | |
In fiscal 2019, we entered into agreements related to the construction and leasing of
22
Note 10 — Pension Plans
The components of net periodic pension cost (benefit) are as follows (in thousands):
Three Months Ended |
| ||||||
December 31, | |||||||
2020 |
| 2019 | |||||
Service cost | $ | | $ | | |||
Interest cost |
| |
| | |||
Expected return on plan assets |
| ( |
| ( | |||
Amortization of actuarial loss |
| |
| | |||
Administrative expenses |
| |
| | |||
Net pension cost (benefit) | $ | | $ | ( |
Note 11 - 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
Time-based RSUs granted prior to fiscal 2020 generally vest in
The performance-based RSUs granted to participants vest over
The performance- and market-based RSUs granted to participants vest over
Participants who are
23
The grant date fair value of each RSU with time-based vesting or performance-based vesting is the fair market value of
The grant date fair value of each RSU with performance and market-based vesting was calculated using a Monte Carlo simulation valuation method. Under this method, the prices of the Index and shares of our common stock were simulated through the end of the performance period. The correlation matrix between shares of our common stock and the Index as well as the corresponding return volatilities were developed based upon an analysis of historical data.
| ||||
| ||||
| RSUs granted during fiscal 2021 |
| ||
Valuation Date |
| November 17, 2020 | ||
Grant date fair value per RSU |
| $ | ||
Performance period begins |
| October 1, 2020 | ||
Performance period ends |
| September 30, 2023 | ||
Risk-free interest rate | ||||
Expected volatility | ||||
| RSUs granted during fiscal 2020 | |||
Valuation Date |
| September 17, 2020 | ||
Grant date fair value per RSU |
| $ | ||
Performance period begins |
| October 1, 2019 | ||
Performance period ends |
| September 30, 2022 | ||
Risk-free interest rate | ||||
Expected volatility |
At December 31, 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
24
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, 2020 |
| |
| $ | | |
Granted |
| | | |||
Vested |
| ( | | |||
Forfeited |
| ( | | |||
Unvested at December 31, 2020 | | $ | |
Unvested RSUs with Performance-Based Vesting |
| |||||
|
| Weighted Average |
| |||
Number of Shares | Grant-Date Fair Value per Share |
| ||||
Unvested at September 30, 2020 |
| |
| $ | | |
Granted |
| — |
| — | ||
Vested |
| ( |
| | ||
Forfeited |
| ( |
| | ||
Unvested at December 31, 2020 | — | $ | — |
Unvested RSUs with Performance- and Market-Based Vesting |
| |||||
|
| Weighted Average |
| |||
Number of Shares | Grant-Date Fair Value per Share |
| ||||
Unvested at September 30, 2020 |
| |
| $ | | |
Granted |
| | | |||
Vested |
| — |
| — | ||
Forfeited |
| ( |
| | ||
Unvested at December 31, 2020 | | $ | |
We recorded non-cash compensation expense related to stock-based awards as follows (in thousands):
Three Months Ended | |||||||
December 31, | |||||||
2020 | 2019 | ||||||
Cost of sales | $ | |
| $ | | ||
Selling, general and administrative |
| |
| | |||
$ | | $ | |
As of December 31, 2020, there was $
We estimate forfeitures at the time of grant and revise those estimates in subsequent periods on a cumulative basis in the period the estimated forfeiture rate changes for all stock-based awards when significant events occur. We consider our historical experience with employee turnover as the basis to arrive at our estimated forfeiture rate. The forfeiture rate was estimated to be
Note 12 – Income Taxes
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 December 31, 2020, we concluded it is more appropriate to determine income tax expense for the period using a blend of the discrete effective tax rate method for U.S. operations and the estimated annual effective tax rate method for foreign operations.
25
The income tax expense recognized on the pre-tax loss from continuing operations for the three months ended December 31, 2020 resulted in tax expense of $
Note 13 — 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
The following table shows the notional principal amounts of our outstanding derivative instruments as of December 31, 2020 and September 30, 2020 (in thousands):
Notional Principal |
| ||||||
December 31, 2020 | September 30, 2020 | ||||||
Instruments receiving hedge accounting treatment: | |||||||
Foreign currency forwards | $ | | $ | | |||
Interest rate swaps |
| |
| | |||
Instruments not receiving hedge accounting treatment: | |||||||
Foreign currency forwards | $ | | $ | |
Included in the amounts not receiving hedge accounting treatment at December 31, 2020 and September 30, 2020 were foreign currency forwards with notional principal amounts of $
We hold pay-fixed/receive-variable interest rate swaps with a group of financial institutions to mitigate variable interest rate risk associated with the lease obligations for our
In April 2020, we entered into interest rate swaps with a group of financial institutions to mitigate variable interest rate risk associated with the Credit Facility. At December 31, 2020 and September 30, 2020, the interest rate swaps contain outstanding notional principal amounts of $
The notional principal amounts for outstanding derivative instruments provide one measure of the transaction volume outstanding and do not represent the amount of our exposure to credit or market loss. Credit risk represents our gross 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 as of December 31, 2020 and September 30, 2020. 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.
26
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 December 31, 2020 or September 30, 2020.
The table below presents the fair value of our derivative financial instruments that qualify for hedge accounting as well as their classification in the condensed consolidated balance sheets (in thousands):
Fair Value |
| ||||||||
| Balance Sheet Location |
| December 31, 2020 |
| September 30, 2020 |
| |||
Asset derivatives: | |||||||||
Foreign currency forwards |
| Other current assets | $ | | $ | | |||
Foreign currency forwards |
| Other assets |
| |
| | |||
Total | $ | | $ | | |||||
Liability derivatives: | |||||||||
Foreign currency forwards |
| Accrued compensation and current liabilities | $ | | $ | | |||
Foreign currency forwards |
| Other noncurrent liabilities |
| |
| | |||
Interest rate swaps |
| Other noncurrent liabilities |
| |
| | |||
Total | $ | | $ | |
The tables below present gains and losses recognized in other comprehensive income (loss) related to derivative financial instruments designated as cash flow hedges, as well as the amount of gains and losses reclassified into earnings (in thousands):
| Three Months Ended | ||||||||||||
December 31, 2020 | December 31, 2019 | ||||||||||||
Gains (losses) | Gains (losses) | Gains (losses) | |||||||||||
recognized in | reclassified into | Gains (losses) | reclassified into | ||||||||||
Derivative Type |
| OCI |
| earnings |
| recognized in OCI |
| earnings | |||||
Foreign currency forwards | $ | ( | $ | | $ | ( | $ | ( | |||||
Interest rate swaps |
| |
| — |
| — |
| — | |||||
Total | $ | | $ | | $ | ( | $ | ( |
Foreign currency forwards designated as accounting hedges had realized gains of $
The amount of unrealized gains and losses from derivative instruments and hedging activities classified as not highly effective did not have a material impact on the results of operations for the three-months ended December 31, 2020 or 2019. The amount of estimated unrealized net gains from cash flow hedges which are expected to be reclassified to earnings in the next twelve months is $
27
Note 14 — Segment Information
We define our operating segments and reportable segments based on the way our Chief Executive Officer, who we have concluded is our chief operating decision maker, manages our operations for purposes of allocating resources and assessing performance and we continually reassess our operating segment and reportable segment designation based upon these criteria. In August 2020, we implemented a plan to realign and combine our legacy CMS and CGD segments into our new CMPS segment. At September 30, 2020, we concluded that CMS and CGD remained separate operating segments based upon factors including the nature of information presented to our chief executive officer and Board of Directors and the consequential level at which certain resource allocations and performance assessments were made. In the first quarter of fiscal 2021, we began providing financial information to our chief executive officer and Board of Directors at the CMPS level, which allowed resource allocation decisions and performance assessments to be made at that level. As such, we concluded that CMPS became an operating segment beginning on October 1, 2020. Applicable prior period amounts have been adjusted retrospectively to reflect the reportable segment change.
We evaluate performance and allocate resources based on total segment operating income or loss. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies in Note 1. Intersegment sales and transfers are immaterial and are eliminated in consolidation.
Our reportable segments are business units that offer different products and services. Operating results for each segment are reported separately to senior corporate management to make decisions as to the allocation of corporate resources and to assess performance.
Business segment financial data is as follows (in millions):
Three Months Ended |
| ||||||
December 31, | |||||||
| 2020 |
| 2019 | ||||
Sales: | |||||||
Cubic Transportation Systems | $ | | $ | | |||
Cubic Mission and Performance Solutions |
| |
| | |||
Total sales | $ | | $ | | |||
Operating income (loss): | |||||||
Cubic Transportation Systems | $ | | $ | | |||
Cubic Mission and Performance Solutions |
| ( |
| ( | |||
Unallocated corporate expenses |
| ( |
| ( | |||
Total operating income (loss) | $ | | $ | ( | |||
Depreciation and amortization: | |||||||
Cubic Transportation Systems | $ | | $ | | |||
Cubic Mission and Performance Solutions |
| |
| | |||
Corporate |
| |
| | |||
Total depreciation and amortization | $ | | $ | |
Disaggregation of Total Net Sales: We disaggregate our sales from contracts with customers by end customer, contract type, deliverable type and revenue recognition method for each of our segments, as we believe these factors can affect the nature, amount, timing and uncertainty of our revenue and cash flows.
28
Sales by Geographic Region (in millions):
Three months ended December 31, 2020 | ||||||||||
| CTS |
| CMPS |
| Total | |||||
United States | $ | | $ | | $ | | ||||
United Kingdom |
| |
| |
| | ||||
Australia |
| |
| |
| | ||||
Far East/Middle East |
| |
| |
| | ||||
Other |
| |
| |
| | ||||
Total sales | $ | | $ | | $ | | ||||
Three months ended December 31, 2019 | ||||||||||
CTS |
| CMPS |
| Total | ||||||
United States | $ | | $ | | $ | | ||||
United Kingdom |
| |
| |
| | ||||
Australia |
| |
| |
| | ||||
Far East/Middle East |
| |
| |
| | ||||
Other |
| |
| |
| | ||||
Total sales | $ | | $ | | $ | |
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 December 31, 2020 | ||||||||||
CTS |
| CMPS |
| Total | ||||||
U.S. Federal Government and State and Local Municipalities | $ | | $ | | $ | | ||||
Other |
| |
| |
| | ||||
Total sales | $ | | $ | | $ | | ||||
Three months ended December 31, 2019 | ||||||||||
CTS |
| CMPS |
| Total | ||||||
U.S. Federal Government and State and Local Municipalities | $ | | $ | | $ | | ||||
Other |
| |
| |
| | ||||
Total sales | $ | | $ | | $ | |
29
Sales by Contract Type: The vast majority 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 December 31, 2020 | ||||||||||
CTS |
| CMPS |
| Total | ||||||
Fixed Price | $ | | $ | | $ | | ||||
Other |
| |
| |
| | ||||
Total sales | $ | | $ | | $ | | ||||
Three months ended December 31, 2019 | ||||||||||
CTS |
| CMPS |
| Total | ||||||
Fixed Price | $ | | $ | | $ | | ||||
Other |
| |
| |
| | ||||
Total sales | $ | | $ | | $ | |
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 December 31, 2020 | ||||||||||
CTS |
| CMPS |
| Total | ||||||
Product | $ | | $ | | $ | | ||||
Service |
| |
| |
| | ||||
Total sales | $ | | $ | | $ | | ||||
Three months ended December 31, 2019 | ||||||||||
CTS |
| CMPS |
| Total | ||||||
Product | $ | | $ | | $ | | ||||
Service |
| |
| |
| | ||||
Total sales | $ | | $ | | $ | |
30
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 December 31, 2020 | ||||||||||
CTS |
| CMPS |
| Total | ||||||
Point in Time | $ | | $ | | $ | | ||||
Over Time |
| |
| |
| | ||||
Total sales | $ | | $ | | $ | | ||||
Three months ended December 31, 2019 | ||||||||||
CTS |
| CMPS |
| Total | ||||||
Point in Time | $ | | $ | | $ | | ||||
Over Time |
| |
| |
| | ||||
Total sales | $ | | $ | | $ | |
Note 15 — Restructuring Costs
In the fourth quarter of fiscal 2020, we announced our NextCUBIC transformation to restructure the way we work and operate as a business. Part of this initiative included establishing a Transformation Office and appointing a Chief Transformation Officer to identify, vet, plan and implement improvement initiatives across Cubic. Coinciding with this initiative, we also announced the combination of CGD and CMS into CMPS. This combination will help us optimize customer access and presence, leverage key enablers across the combined businesses and realize untapped cross-segment technical synergies to capture organizational efficiencies. The significant portion of the costs associated with these restructuring activities are related to consultants that we have engaged in connection with these efforts, and such costs have been recognized by our corporate entity. Other restructuring charges related to headcount reductions initiated to optimize our cost positions. Our NextCUBIC transformation initiatives will continue through fiscal 2021, and our consulting fees that will be incurred in the future are generally contingent upon the achievement of future cost savings, the total expected restructuring costs related to these initiatives cannot currently be estimated.
In the first quarter of fiscal 2021, CMPS also incurred costs related to modifying its go-to market and legal structure in the Middle East. The total cost of these efforts is not expected to be significantly greater than those incurred through December 31, 2020.
Restructuring charges incurred by our business segments were as follows (in millions):
Three Months Ended | ||||||
December 31, | ||||||
| 2020 |
| 2019 | |||
Restructuring costs: | ||||||
Cubic Transportation Systems |
| $ | | | ||
Cubic Mission and Performance Solutions |
| | | |||
Unallocated corporate expenses |
| | | |||
Total restructuring costs |
| $ | |
| $ | |
31
The following table presents a rollforward of our restructuring liability as of December 31, 2020, which is included within accrued compensation and other current liabilities within our condensed consolidated balance sheet (in millions):
Restructuring Liability | Restructuring Liability | ||||||
| Employee Separation and Other |
| Consulting Costs | ||||
Balance as of October 1, 2020 |
| $ | | $ | | ||
Accrued costs |
| |
| — | |||
Cash payments | ( | ( | |||||
Balance as of December 31, 2020 | $ | | $ | — |
Certain restructuring costs are based upon estimates. Actual amounts paid may ultimately differ from these estimates. If additional costs are incurred or recognized amounts exceed costs, such changes in estimates will be recognized when incurred.
Note 16 — Legal Matters
We consider all current legal matters to be ordinary proceedings incidental to our business. We believe the outcome of these proceedings will not have a materially adverse effect on our financial position, results of operations or cash flows.
Note 17 — Subsequent Event – Agreement and Plan of Merger
On February 7, 2021, we executed an Agreement and Plan of Merger by and among the Company, Atlas CC Acquisition Corp. and Atlas Merger Sub Inc., pursuant to which the Company will be acquired by Veritas Capital and Evergreen Coast Capital Corporation at a price of $
There can be no assurance that the transaction will close in the timeframe contemplated or on the terms anticipated, if at all.
32
CUBIC CORPORATION
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
December 31, 2020
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 two reportable business segments: Cubic Transportation Systems (“CTS”) and Cubic Mission and Performance Solutions (“CMPS”).
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.
CMPS provides networked C4ISR capabilities for defense, intelligence, security and commercial missions and is a leading provider of live, virtual, constructive and game-based training solutions for the U.S. and allied forces. CMPS’s core competencies include protected wide-band communications for space, aircraft, unmanned aerial vehicle, 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 and offers cloud-based platforms designed to manage and share large amounts of imagery data, wide-area motion imagery and geospatial data. It’s LVC training solutions blend virtual and constructive elements into live training to provide the highest fidelity and most threat realistic secure training environments.
We have concluded that the combination of our legacy Cubic Mission Solutions (“CMS”) and our legacy Cubic Global Defense (“CGD”) segments into our new Cubic Mission and Performance Solutions (“CMPS”) segment resulted in CMPS becoming a single operating segment beginning on October 1, 2020. Applicable prior period amounts have been adjusted retrospectively to reflect the reportable segment change.
The three months ended December 31, 2020 and 2019 represent the first quarters of our fiscal years ending September 30, 2021 (“fiscal 2021”) and September 30, 2020 (“fiscal 2020”), respectively.
COVID-19 Update
33
The COVID-19 pandemic has presented challenges and impacts on each of our businesses, including delays of customer orders, slowdown of certain projects and impacts due to travel restrictions and remote work. We have taken proactive measures in order to reduce the potential impacts of the pandemic. To date we have not experienced significant disruptions in our supply chain, nor have we experienced any significant disruptions at our manufacturing facilities.
The vast majority of revenue from our CTS businesses is earned under fixed-price contracts. However, approximately 2% of our annual revenue is directly tied to the level of transit ridership. While transit ridership levels have improved from the lows of the pandemic, they remain significantly below normal levels impacting our transit agency customer’s revenue, with uncertainty surrounding the pace and timing of recovery. While we continue to believe that CTS’s backlog is largely insulated from the impacts of COVID-19 due to the critical service of fare collection, there could be potential delays in the award of new business. While the U.S. National Defense Strategy continues to drive demand, our CMPS business has experienced some delays in timing of orders and shipments due to the COVID-19 pandemic.
We believe that the fundamentals of our Company remain strong in the midst of the global pandemic. We expect to have sufficient liquidity on hand to continue business operations during this volatile period and we have taken a number of steps to strengthen liquidity and manage cash flow.
The extent to which COVID-19 will adversely impact our business depends on future developments, which are highly uncertain and unpredictable, including the severity and duration of the outbreak and the effectiveness of actions to contain or mitigate its effects. While we expect the pandemic to continue to negatively impact our results, the current level of uncertainty over the economic and operational impacts of COVID-19 could lead to variability in results.
Consolidated Financial Results
Three Months Ended |
| ||||||||||
December 31, | |||||||||||
2020 |
| 2019 |
| % Change | |||||||
(in millions, except per share data) | |||||||||||
Sales | $ | 318.8 | $ | 328.8 | (3) | % | |||||
Operating income (loss) | 1.3 | (6.5) | nm | ||||||||
Net loss from continuing operations attributable to Cubic | (13.0) | (20.0) | 35 | % | |||||||
Diluted loss per share from continuing operations attributable to Cubic | (0.41) | (0.64) | 36 | % | |||||||
Adjusted EBITDA | 29.7 | 11.4 | 161 | % | |||||||
Adjusted net income (loss) | 11.9 | (3.7) | nm | ||||||||
Adjusted EPS | 0.38 | (0.12) | nm |
Note on non-GAAP measures: Throughout the following results of operations discussion, we disclose certain non-U.S. generally accepted accounting principles (“GAAP”) financial measures, including Adjusted EBITDA, Adjusted Net Income and Adjusted EPS. For an explanation and reconciliation of such measures, see the section titled ‘Non-GAAP Financial Information’ below.
Sales: Sales for the first quarter of fiscal 2021 decreased 3% to $318.8 million from $328.8 million in the same period last year. The decrease in sales from CMPS of 13% was partially offset by an increase in sales from CTS of 5%. The average exchange rates between the prevailing currencies in our foreign operations and the U.S. dollar had a favorable impact on sales of $3.9 million for the first quarter of fiscal 2021 compared to the same period last year. Sales generated by businesses we acquired during fiscal 2020 totaled $2.6 million for the first quarter of fiscal 2021, compared to no sales in the first fiscal quarter of last year.
See the segment discussions below for further analysis of segment sales.
Gross Margin: Our gross margin percentage on product sales increased to 24% in the first quarter of fiscal 2021, as compared to 17% in the same period last year. The increase was primarily due to improved contract performance on a number of CTS design and build contracts and on secure communications contracts at CMPS. Our gross margin percentage on service sales increased to 39% in the first quarter of fiscal 2021, as compared to 36% in the first quarter of last year, driven primarily by the impact of productivity initiatives in CTS.
34
Selling, General and Administrative: Selling, General and Administrative (“SG&A”) expenses decreased in the first quarter of fiscal 2021 to $63.7 million compared to $65.9 million in the same period last year. As a percentage of sales, SG&A expenses were 20% in both the first quarter of fiscal 2021 and 2020. The decrease in SG&A expense was driven by cost reduction initiatives at both CTS and CMPS.
Restructuring: Restructuring expenses increased to $4.1 million in the first quarter of fiscal 2021 compared to $1.6 million in the same period last year. In the first quarter of fiscal 2021, CMPS also incurred costs related to modifying its go-to market and legal structure in the Middle East.
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 | |||||||
December 31, | |||||||
| 2020 |
| 2019 |
| |||
Company-Sponsored Research and Development Expense: | |||||||
Cubic Transportation Systems | $ | 2,664 | $ | 1,234 | |||
Cubic Mission and Performance Solutions |
| 9,417 |
| 6,746 | |||
Unallocated corporate expenses |
| 65 |
| 442 | |||
Total company-sponsored research and development expense | $ | 12,146 | $ | 8,422 |
The increase in Company-sponsored R&D expense in the first quarter of fiscal 2021 was primarily due to the acceleration of work on CMPS secure communication 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 | |||||||
| December 31, |
| |||||
2020 |
| 2019 | |||||
Cost of Contract Research and Development Activities: | |||||||
Cubic Transportation Systems | $ | 13,921 | $ | 14,790 | |||
Cubic Mission and Performance Solutions |
| 19,473 |
| 15,186 | |||
Total cost of contract research and development activities | $ | 33,394 | $ | 29,976 |
Amortization of Purchased Intangibles: Amortization of purchased intangibles for the first quarter of fiscal 2021 increased to $16.1 million from $10.1 million in the same period last year. The increase in amortization expense was driven by the completion of our acquisitions of Delerrok and Pixia in January 2020.
Operating Income (Loss): Our operating income increased to $1.3 million in the first quarter of fiscal 2021 compared to an operating loss of $6.5 million in the same period last year. CTS operating income increased to $31.7 million for the first quarter of fiscal 2021 compared to $14.3 million last year primarily due to improved contract performance. This increase was partially offset by an increased operating loss from CMPS of $16.5 million in the first quarter compared to $8.6 million in the same period last year. Our operating results, and particularly the CMPS operating results, were significantly impacted by accounting for businesses acquired in fiscal 2020. On a consolidated basis, the businesses that we acquired during fiscal 2020 had operating losses totaling $9.1 million in the first quarter of fiscal 2021, as compared to no amounts in the same period last year. The operating losses include acquisition-related expenses, including amortization of intangible assets, of $7.6 million in the first quarter of fiscal 2021, as compared to no amounts in the same period last year.
35
Unallocated corporate and other costs for the first quarter of fiscal 2021 were $13.9 million compared to $12.0 million in the same period last year. The increase was primarily driven by strategic advisory services incurred in the first quarter of fiscal 2021.
The average exchange rates between the prevailing currencies in our foreign operations and the U.S. dollar had a net favorable impact on operating income in the first quarter of fiscal 2021 of $0.8 million as 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 $1.8 million in the first quarter of fiscal 2021 compared to $2.2 million in the same period last year. Interest expense was $8.2 million in the first quarter of fiscal 2021 compared to $5.4 million in the same period last year. The increase in interest expense was due to higher average debt balances in the first quarter of fiscal 2021, 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.
Other Income (Expense): Other income (expense) netted to income of $1.3 million in the first quarter of fiscal 2021 compared to expense of $0.1 million in the first quarter of fiscal 2020. 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 months ended December 31, 2020 resulted in an effective tax rate of negative 92%, which differs from the effective tax rates of 186% and negative 64% for the year ended September 30, 2020 and for the three months ended December 31, 2019, respectively. The variability in effective tax rates primarily relates to the difference in both the level and jurisdictional mix of earnings, discrete impacts related to current year changes to the existing U.S. deferred tax valuation allowance, and the impact of deferred tax liabilities acquired in business combinations.
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 changes in U.S. or foreign tax law, the impact of acquisitions, fluctuations in the need for a valuation allowance against deferred tax assets, and our ability to take advantage of available tax attributes. After considering these impacts, we have determined that a reliable estimate of the annual effective tax rate for fiscal 2021 cannot be made.
Net Loss from Continuing Operations attributable to Cubic: Our net loss from continuing operations attributable to Cubic in the first quarter of fiscal 2021 was $13.0 million compared to a loss of $20.0 million in the first quarter of fiscal 2020. The decrease in net loss from continuing operations attributable to Cubic was primarily due to the increase in operating income as described above.
Adjusted EBITDA: Adjusted EBITDA increased to $29.7 million in the first quarter of fiscal 2021 compared to $11.4 million in the same period last year. The increase in Adjusted EBITDA was due to the same factors described above in operating income (loss), but excludes amortization expense, restructuring costs and acquisition-related expenses.
Adjusted Net Income (Loss): Our Adjusted Net Income increased to $11.9 million in the first quarter of fiscal 2021 compared to Adjusted Net Loss of $3.7 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, acquisition-related expenses and non-operating gains and losses.
Adjusted EPS: Adjusted EPS increased to $0.38 in the first quarter of fiscal 2021 compared to negative $0.12 in the first quarter last year. The changes in Adjusted EPS was due to the same factors that impacted Adjusted Net Income (Loss) noted above.
36
CTS Segment
Three Months Ended |
| ||||||||||
December 31, | |||||||||||
2020 |
| 2019 |
| % Change | |||||||
(in millions) | |||||||||||
Sales | $ | 197.1 | $ | 188.6 | 5 | % | |||||
Operating income | 31.7 | 14.3 | 122 | % | |||||||
Adjusted EBITDA | 35.8 | 22.2 | 61 | % |
Sales: CTS sales for the first quarter of fiscal 2021 increased 5% to $197.1 million from $188.6 million in the first quarter last year. Sales were higher in the U.S. due to increased work on our system development contracts in Boston, the Bay Area, and Chicago. Sales were lower in Australia due to lower work on our system development contract in Brisbane, and sales were relatively flat in the U.K. The average exchange rates between the prevailing currencies in our foreign operations and the U.S. dollar resulted in an increase in sales of $3.2 million for the first quarter of fiscal 2021, compared to the first quarter last year.
Operating Income: CTS operating income for the first quarter of fiscal 2021 increased 122% to $31.7 million compared to $14.3 million in the first quarter last year. Operating income was higher in the U.S., U.K., and Australia due to increased work and higher profitability on our system development contracts in the U.S. and the impact of cost savings initiatives in all our regions. The average exchange rates between the prevailing currencies in our foreign operations and the U.S. dollar resulted in an increase in operating income of $0.7 million for the first quarter of fiscal 2021 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 first quarter of fiscal 2021 compared to $4.4 million in the first quarter of fiscal 2020. The increase in amortization expense is a result of the amortization of intangible assets acquired in our purchase of Delerrok in January 2020.
Adjusted EBITDA: CTS Adjusted EBITDA increased 61% to $35.8 million in the first quarter of fiscal 2021 compared to $22.2 million in the first quarter of fiscal 2020. The increase in Adjusted EBITDA was primarily driven by the same factors that drove the increase in operating income described above.
CMPS Segment
Three Months Ended |
| ||||||||||
December 31, | |||||||||||
2020 |
| 2019 |
| % Change | |||||||
(in millions) | |||||||||||
Sales | $ | 121.7 | $ | 140.2 | (13) | % | |||||
Operating loss | (16.5) | (8.6) | 92 | % | |||||||
Adjusted EBITDA | 2.7 | (1.8) | nm |
Sales: CMPS sales for the first quarter of fiscal 2021 decreased 13% to $121.7 million from $140.2 million in the first quarter last year. The decrease in sales primarily resulted from reduced work on an air combat training system program in the far east, which was partially offset by higher sales from our C2ISR business. Businesses acquired by CMPS in fiscal 2020 had sales of $2.3 million for the first quarter of fiscal 2021 and had no sales in the first quarter of fiscal 2020.
Operating Loss: The CMPS operating loss for the first quarter of fiscal 2021 increased to $16.5 million compared to an operating loss of $8.6 million in the same period last year. The increase in operating loss was driven by a $3.0 million increase in restructuring expense, a $2.6 million increase in R&D expense, and $8.0 million in operating losses incurred
37
by Pixia in the first quarter of fiscal 2021 driven primarily by $7.2 million of amortization of purchased intangibles and $0.5 million of acquisition-related costs. Partially offsetting these losses were cost saving initiatives that resulted in $4.3 million in reduced SG&A expense as well as an increase in profits on higher sales from our C2ISR business.
Amortization of Purchased Intangibles: Amortization of purchased intangibles included in the CMPS results amounted to $11.3 million in the first quarter of fiscal 2021 compared to $5.7 million in the first quarter of fiscal 2020. The increase in amortization was due to the amortization of purchased intangibles related to our acquisition of Pixia in January 2020.
Adjusted EBITDA: CMPS Adjusted EBITDA was $2.7 million in the first quarter of fiscal 2021 compared to a loss of $1.8 million in the first quarter of fiscal 2020. The change in Adjusted EBITDA was primarily driven by the same factors that drove the change in operating loss described above, excluding amortization of purchased intangibles, acquisition-related expenses, and restructuring expenses.
Backlog
December 31, | September 30, |
| |||||
| 2020 |
| 2020 |
| |||
(in millions) |
| ||||||
Total backlog | |||||||
Cubic Transportation Systems | $ | 3,173.0 | $ | 3,139.9 | |||
Cubic Mission and Performance Solutions |
| 508.5 |
| 527.1 | |||
Total | $ | 3,681.5 | $ | 3,667.0 |
Total backlog increased by $14.5 million from September 30, 2020 to December 31, 2020 including the impact of foreign currency exchange rates. Changes in exchange rates between the prevailing currencies in our foreign operations and the U.S. dollar as of December 31, 2020 increased backlog by a net $76.1 million as compared to September 30, 2020.
Reconciliation of 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 incurred in connection with the acquisitions, expenses recognized related to the change in the fair value of contingent consideration for acquisitions, and corporate strategic advisory costs.
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
38
performance. In addition, other companies may define these non-GAAP measures differently and, as a result, our non-GAAP measures may not be directly comparable to the non-GAAP measures of other companies. Furthermore, non-GAAP financial measures have limitations as an analytical tool and you should not consider these measures in isolation, or as a substitute for analysis of our results as reported under GAAP. A reconciliation of these non-GAAP measures to the most directly comparable GAAP measures is included below.
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 | |||||||
December 31, | |||||||
| 2020 |
| 2019 | ||||
(in millions, except per share data) | |||||||
GAAP EPS | $ | (0.41) | $ | (0.64) | |||
GAAP Net loss from continuing operations attributable to Cubic | $ | (13.0) | $ | (20.0) | |||
Noncontrolling interest in net income of VIE | 5.7 | 4.0 | |||||
Amortization of purchased intangibles | 16.1 | 10.1 | |||||
Gain on sale of fixed assets | — | (0.2) | |||||
Restructuring costs | 4.1 | 1.6 | |||||
Acquisition-related expenses (gains), excluding amortization | 2.4 | (0.7) | |||||
Strategic and IT system resource planning expenses | 0.6 | 1.1 | |||||
Other non-operating expense (income), net | (1.3) | 0.1 | |||||
Noncontrolling interest in Adjusted Net Income of VIE | (2.8) | (1.2) | |||||
Tax impact related to acquisitions1 | 0.3 | — | |||||
Tax impact related to non-GAAP adjustments2 | (0.2) | 1.5 | |||||
Adjusted Net Income (Loss) | $ | 11.9 | $ | (3.7) | |||
Adjusted EPS | $ | 0.38 | $ | (0.12) | |||
Weighted Average Diluted Shares Outstanding (in thousands) | 31,562 | 31,273 |
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 | |||||||
(in millions, except margin data) | December 31, | ||||||
Cubic Transportation Systems | 2020 |
| 2019 | ||||
Sales | $ | 197.1 | $ | 188.6 | |||
Operating income | $ | 31.7 | $ | 14.3 | |||
Depreciation and amortization | 7.5 | 7.1 | |||||
Noncontrolling interest in EBITDA of VIE | (3.4) | (0.9) | |||||
Acquisition-related expenses (gains), excluding amortization | (0.2) | 1.3 | |||||
Restructuring costs | 0.2 | 0.4 | |||||
Adjusted EBITDA | $ | 35.8 | $ | 22.2 | |||
Adjusted EBITDA margin | 18.2% | 11.8% | |||||
Three Months Ended | |||||||
December 31, | |||||||
Cubic Mission and Performance Solutions | 2020 |
| 2019 | ||||
Sales | $ | 121.7 | $ | 140.2 | |||
Operating loss | $ | (16.5) | $ | (8.6) | |||
Depreciation and amortization | 15.1 | 9.2 | |||||
Acquisition-related expenses (gains), excluding amortization | 1.0 | (2.2) | |||||
Gain on sale of fixed assets | - | (0.2) | |||||
Restructuring costs | 3.1 | - | |||||
Adjusted EBITDA | $ | 2.7 | $ | (1.8) | |||
Adjusted EBITDA margin | 2.2% | (1.3)% | |||||
Three Months Ended | |||||||
December 31, | |||||||
Cubic Consolidated | 2020 |
| 2019 | ||||
Sales | $ | 318.8 | $ | 328.8 | |||
Net loss from continuing operations attributable to Cubic | $ | (13.0) | $ | (20.0) | |||
Noncontrolling interest in net income of VIE | 5.7 | 4.0 | |||||
Income tax provision | 3.5 | 6.2 | |||||
Interest expense, net | 6.4 | 3.1 | |||||
Other non-operating expense (income), net | (1.3) | 0.1 | |||||
Operating income (loss) | $ | 1.3 | $ | (6.5) | |||
Depreciation and amortization | 24.7 | 17.0 | |||||
Noncontrolling interest in EBITDA of VIE | (3.4) | (0.9) | |||||
Acquisition-related expenses (gains), excluding amortization | 2.4 | (0.7) | |||||
Strategic and IT system resource planning expenses | 0.6 | 1.1 | |||||
Gain on sale of fixed assets | - | (0.2) | |||||
Restructuring costs | 4.1 | 1.6 | |||||
Adjusted EBITDA | $ | 29.7 | $ | 11.4 | |||
Adjusted EBITDA margin | 9.3% | 3.5% |
Note: Amounts may not sum due to rounding
Liquidity and Capital Resources
Operating activities used cash of $22.2 million for the first quarter of fiscal 2021 primarily due to payments to vendors and contractors for goods and services received related to our significant work on customer contracts in the fourth quarter of fiscal 2020, which was partially offset by increased collections for those goods and services. Our use of cash from operating activities includes cash outflows of $20.3 million from our consolidated VIE. As further described below, our consolidated operating cash flows exclude $19.7 million of cash received by Cubic from our consolidated VIE in the first quarter of fiscal 2021.
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Investing activities used cash of $4.8 million for the first quarter of fiscal 2021, including capital expenditures of $6.6 million, partially offset by $1.8 million of proceeds received related to the sale of trade receivables to banks which are required to be classified as investing activities under GAAP, as further described below.
Financing activities provided cash of $8.7 million for the first quarter of fiscal 2021 and included net payments of $8.8 million and $2.0 million on short-term and long-term borrowings, respectively. Net long-term borrowings undertaken by our consolidated VIE were $22.5 million for the first quarter of fiscal 2021. See discussion of our consolidated VIE in the section below.
Consolidated Variable Interest Entity
In March 2018, Cubic and John Laing, an unrelated 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 created a wholly owned entity, Boston AFC 2.0 OpCo. LLC (“Boston OpCo”), which 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.
Because we consolidate Boston OpCo, any payments from Boston OpCo to Cubic are excluded from our cash flows provided by operating activities, and the cash received by Boston OpCo in connection with its draws on its non-recourse debt are reflected as cash provided by financing activities. Boston OpCo’s draws on its non-recourse debt amounted to $22.6 million in the first quarter of fiscal 2021. Payments we received from Boston OpCo that were not included in our cash provided by operating activities totaled $19.7 million in the first quarter of fiscal 2021 and have totaled a cumulative $157.0 million since the inception of our contract with Boston OpCo in March 2018.
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. The long-term debt facilities allow for draws up to an aggregate of $421.6 million during the design and build phase. The long-term debt facilities, including all interest and fees incurred, are required to be repaid on a fixed monthly schedule commencing once the design and build phase is completed in 2024. The long-term debt facilities bear interest at variable rates of LIBOR plus a margin of 1.75% to 2.0%. At December 31, 2020, the outstanding balance on the long-term debt facilities was $204.7 million, which is presented net of unamortized deferred financing costs of $17.0 million. The revolving credit facility allows for draws up to a maximum aggregate amount of $15.8 million during the operate and maintain phase. Boston OpCo’s debt is nonrecourse with respect to Cubic and our subsidiaries.
The Boston OpCo Amended Credit Agreement contains covenants that require Boston OpCo and Cubic to maintain progress on the delivery within a specified timeline and budget and provide regular reporting on such progress. It also contains events of default, including the delivery of a customized fare collection system to the MBTA by a pre-determined date as well as other customary events of default. Failure to meet such delivery date will result in incurring penalties due to the lenders thereunder.
Upon execution of 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. At December 31, 2020, the outstanding notional principal amounts on open interest rate swaps were $215.0 million.
Financing Arrangements
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 December 31, 2020, the
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weighted average interest rate on outstanding borrowings under the Credit Facility was 1.95%. The Credit Facility is unsecured, but it is guaranteed by certain significant domestic subsidiaries of Cubic.
On April 1, 2020, we entered into interest rate swaps with a group of financial institutions to mitigate the variable interest rate risk associated with the Credit Facility. The interest rate swaps contain forward starting notional principal amounts which align with our fixed repayment schedules under the Credit Facility and as of December 31, 2020 have an interest rate of approximately 2.49% and outstanding notional principal amounts of $500.0 million.
The available credit under our Revolving Line of Credit is reduced by any letters of credit issued under the Credit Facility. As of December 31, 2020, there were $441. 6 million of borrowings under the Term Loan and $207.0 million of borrowings under the Revolving Line of Credit. Letters of credit outstanding under the Credit Facility totaled $94.6 million at December 31, 2020, which reduced our available line of credit to $548.4 million. The $94.6 million of letters of credit includes both financial letters of credit and performance guarantees.
As of December 31, 2020, we had letters of credit and bank guarantees outstanding totaling $101.2 million, which includes the $94.6 million of letters of credit issued under the Revolving Line of Credit and $6.6 million of letters of credit issued under other facilities. The $101.2 million of letters of credit and bank guarantees includes $97.5 million that guarantees either our performance or customer advances under certain contracts and $3.7 million of financial letters of credit that primarily guarantees our payment of certain self-insured liabilities. We have never had a drawing on a letter of credit instrument, nor are any anticipated; therefore, we estimate the fair value of these instruments to be zero. We also use surety bonds as an alternative to letters of credit.
We have entered into a short-term borrowing arrangement in the United Kingdom for up to £15.0 million British Pounds (equivalent to approximately $20.5 million at December 31, 2020) to help meet the short-term working capital requirements of our subsidiary located in the United Kingdom. At December 31, 2020, no amounts were outstanding under this arrangement.
We maintain a cash account with a bank in the U.K. for which the funds are restricted as to use. The account is required to secure the customer’s interest in cash deposited in the account to fund our activities related to our performance under a fare collection services contract in the United Kingdom. The balance in the account as of December 31, 2020 was $29.6 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 December 31, 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 December 31, 2020, we sold $6.4 million of outstanding trade receivables to financial institutions.
Our financial condition remains strong with net working capital of $188.6 million and a current ratio of 1.4 to 1 at December 31, 2020. We expect that cash on hand and our Revolving Credit Agreement will be adequate to meet our working capital requirements for the foreseeable future. Our total debt to capital ratio at December 31, 2020 was 65%.
As of December 31, 2020, the majority of the $142.1 million of our cash, cash equivalents and restricted cash was held by our foreign subsidiaries, primarily in the U.K., New Zealand and Australia
Future repatriations of foreign earnings will generally be exempt from U.S. tax. We will continue to provide applicable deferred taxes based on the tax liability or withholding taxes that would be due upon repatriation of the undistributed foreign earnings.
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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.
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 2020.
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 2020 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; |
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● | delays in approving U.S. and foreign government budgets and cuts in U.S. and foreign government defense expenditures; |
● | the ability of certain government agencies to unilaterally terminate or modify our contracts with them; |
● | the effects of potential sequestration on our contracts; |
● | our assumptions covering behavior by public transit authorities; |
● | our ability to successfully integrate new companies into our business and to properly assess the effects of such integration on our financial condition; |
● | the U.S. government’s increased emphasis on awarding contracts to small businesses, and our ability to retain existing contracts or win new contracts under competitive bidding processes; |
● | negative audits by the U.S. government; |
● | the effects of politics and economic conditions on negotiations and business dealings in the various countries in which we do business or intend to do business; |
● | competition 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
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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 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 December 31, 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 2020.
ITEM 4. CONTROLS AND PROCEDURES
We performed an evaluation of the effectiveness of our disclosure controls and procedures as of December 31, 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 December 31, 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 2020.
ITEM 6. EXHIBITS
Exhibit Index
Exhibit No. |
| Description |
---|---|---|
3.1 | ||
3.2 | ||
3.3 | ||
10.1* | ||
10.2* | ||
10.3* | ||
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 December 31, 2020, formatted in Inline eXtensible Business Reporting Language (Inline XBRL): (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. |
* Indicates management contract or compensatory plan or arrangement.
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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: | February 8, 2021 | /s/ Anshooman Aga | |
Anshooman Aga | |||
Executive Vice President and Chief Financial Officer | |||
(Principal Financial Officer) | |||
Date: | February 8, 2021 | /s/ Mark A. Harrison | |
Mark A. Harrison | |||
Senior Vice President and Chief Accounting Officer | |||
(Principal Accounting Officer) |
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