vulnerable to adverse changes in our revenues, income and cash flows if a significant number of our government contracts, subcontracts or prospects are delayed or canceled for budgetary or other reasons.

The factors that could cause us to lose these contracts and could decrease our backlog or otherwise materially harm our business, prospects, financial condition or results of operations include:

●

budget constraints affecting government spending generally, or specific departments or agencies such as U.S. or foreign defense and ~~transit~~transportation agencies and regional ~~transit~~transportation agencies, and changes in fiscal policies or a reduction of available funding;

●

re-allocation of government resources as the result of actual or threatened terrorism or hostile activities or for other reasons;

●	·Congress and the executive branch may reach an impasse on increasing the national debt limit which would restrict the U.S. government’s ability to pay contractors for prior work;

●

disruptions in our customers’ ability to access funding from capital markets;

●

curtailment of governments’ use of outsourced service providers and governments’ in-sourcing of certain services;

●

the adoption of new laws or regulations pertaining to government procurement;

●

government appropriations delays or blanket reductions in departmental budgets;

●

·if Congress does not agree on a budget or continuing resolution, it may result in a partial shutdown of the U.S. government and cause the termination or suspension of our contracts with the U.S. government or automatic cuts to the U.S. defense budget, which could require us to furlough affected employees for an indefinite time, terminate or suspend subcontracts, or incur contract wind-down costs. It is uncertain if we would be compensated or reimbursed for any loss of revenue during such periods. If we were not compensated or reimbursed, it could result in significant adverse effects on our revenues, operating costs and cash flows.

●

suspension or prohibition from contracting with the government or any significant agency with which we conduct business;

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increased use of shorter duration awards by the federal government in the defense industry, which increases the frequency we may need to compete for work;

●

impairment of our reputation or relationships with any significant government agency with which we conduct business;

●

increased use of small business set asides by government agencies, resulting in ~~Cubic being eligible~~limitations on our ability to bid on contracts or to perform ~~no more than 49% of the~~ work as a subcontractor;

●

increased use of lowest-priced, technically acceptable contract award criteria by government agencies;

●

increased aggressiveness by the government in seeking rights in technical data, computer software, and computer software documentation that we deliver under a contract, which may result in “leveling the playing field” for competitors on follow-on procurements;

●

impairment of our ability to provide third-party guarantees and letters of credit; and

●

delays in the payment of our invoices by government payment offices.

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In addition, some of our international work is done at the request and at the expense of the U.S. government and its agencies. Therefore, risks associated with performing work for the U.S. government and its agencies may also apply to our international contracts.

Government spending priorities and terms may change in a manner adverse to our businesses.

At times, our businesses have been adversely affected by significant changes in U.S. and foreign government spending during periods of declining budgets. A significant decline in overall spending, or the decision not to exercise options to renew contracts, or the loss of or substantial decline in spending on a large program in which we participate could materially adversely affect our business, prospects, financial condition or results of operations. For example, the U.S. defense and national security budgets in general, and spending in specific agencies with which we work, such as those that are a part of the DoD, have declined from time to time for extended periods, resulting in program delays, program cancellations and a slowing of new program starts. Future levels of expenditures and authorizations for defense-related programs by the U.S. and foreign governments may decrease, remain constant or shift to programs in areas where we do not currently provide products or services, thereby reducing the chances that we will be awarded new contracts.

Even though our contract periods of performance for a program may exceed one year, Congress and certain foreign governments must usually approve funds for a given program each fiscal year and may significantly reduce funding of a program in a particular year. Significant reductions in these appropriations or the amount of new defense contracts awarded may affect our ability to complete contracts, obtain new work and grow our business. Congress and such foreign governments do not always enact spending bills by the beginning of the new fiscal year. Such delays leave the affected agencies under-funded which delays their ability to contract. Future delays and uncertainties in funding could impose additional business risks on us.

In addition, the DoD has an increased emphasis on awarding contracts to small ~~businesses; awarding contracts for defense-related services to the lowest-priced, technically acceptable offeror;~~businesses and awarding shorter duration contracts, each of which has the potential to reduce the amount of revenue we could otherwise earn from such contracts. Shorter duration contracts lower our backlog numbers and increase the risk associated with re-competing for a contract, as we would need to do so more often. In addition, as we may need to expend capital resources at higher levels upon the award of a new contract, the shorter the duration of the contract, the less time we have to recoup such expenditures and turn a profit under such contract.

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~~Failure to raise the national debt limit may cause the U.S. government to be unable to pay funds due to us.~~

Congress and the executive branch may reach an impasse on increasing the national debt limit which would restrict the U.S. government’s ability to pay contractors for prior work. A failure to receive such payments for an extended period of time could result in substantial layoffs of our employees, drawdowns of our credit lines and our inability to pay debts when due, which could materially adversely affect our business, prospects, financial condition or results of operations.

A deadlock in the U.S. Congress over budgets and spending could cause another partial shutdown of the U.S. government or sequestration, which could result in a termination or suspension of some or all of our contracts with the U.S. government.

If Congress does not agree on a budget or continuing resolution, it may result in a partial shutdown of the U.S. government or sequestration and cause the termination or suspension of our contracts with the U.S. government or automatic cuts to the U.S. defense budget, which could impact some or all of our contracts. Under such circumstances, we could be required to furlough affected employees for an indefinite time, terminate or suspend subcontracts, or incur contract wind-down costs. It is uncertain if we would be compensated or reimbursed for any loss of revenue during such periods. If we were not compensated or reimbursed, it could result in significant adverse effects on our revenues, operating costs and cash flows.

Our contracts with government agencies may be terminated or modified prior to completion, which could adversely affect our business.

Government contracts typically contain provisions and are subject to laws and regulations that give the government agencies rights and remedies not typically found in commercial contracts, including providing the government agency with the ability to unilaterally:

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terminate our existing contracts;

●

reduce the value of our existing contracts;

●

modify some of the terms and conditions in our existing contracts;

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suspend or permanently prohibit us from doing business with the government or with any specific government agency;

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control and potentially prohibit the export of our products;

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cancel or delay existing multi-year contracts and related orders if the necessary funds for contract performance for any subsequent year are not appropriated;

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decline to exercise an option to extend an existing multi-year contract; and

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claim rights in technologies and systems invented, developed or produced by us.

Most U.S. government agencies and some other agencies with which we contract can terminate their contracts with us for convenience, and in that event we generally may recover only our incurred or committed costs, settlement expenses and profit on the work completed prior to termination. If an agency terminates a contract with us for default, we may be denied any recovery and may be liable for excess costs incurred by the agency in procuring undelivered items from an alternative source. We may receive show-cause or cure notices under contracts that, if not addressed to the agency’s satisfaction, could give the agency the right to terminate those contracts for default or to cease procuring our services under those contracts.

In the event that any of our contracts were to be terminated or adversely modified, there may be significant adverse effects on our revenues, operating costs and income that would not be recoverable.

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We have made assumptions concerning behavior by ~~public transit~~transportation authorities which may not hold true over time.

In our transportation business we have made certain assumptions that support the growth of the business. For example, we have assumed that governments will continue to charge passengers for using public transit. We have also assumed that ~~transit~~transportation agencies will continue to outsource operations and services. Should these assumptions not hold true, our transportation business could experience a material loss of business.

The use of ride sharing, microtransit, and other shared mobility services and the development of autonomous vehicles could erode the demand for traditional public transit.

Ride sharing, microtransit, and other shared mobility services are creating options for public transit patrons which may be leading to the decline of ridership in some markets. The development and acceptance of autonomous vehicles could also lead to a decline in ridership for public transit systems. If these trends ~~continue~~accelerate or expand, public transit agencies may decide to defer or reduce plans to upgrade their fare collection systems and our prospects for growth in our transportation business could diminish.

Changes in future business or other market conditions could cause business investments and/or recorded goodwill or other long-term assets to become impaired, resulting in substantial losses and write-downs that would reduce our results of operations.

As part of our strategy, we will, from time to time, acquire a minority or majority interest in a business. These investments are made upon careful analysis and due diligence procedures designed to achieve a desired return or strategic objective. These procedures often involve certain assumptions and judgment in determining acquisition price. After acquisition, unforeseen issues could arise which adversely affect the anticipated returns or which are otherwise not recoverable as an adjustment to the purchase price. Even after careful integration efforts, actual operating results may vary significantly from initial estimates.

We evaluate our recorded goodwill balances for potential impairment annually as of July 1, or when circumstances indicate that the carrying value may not be recoverable. The goodwill impairment test is performed by comparing the fair value of each reporting unit to its carrying value, including recorded goodwill. In the fourth quarter of fiscal 2013, we recognized a goodwill impairment in our CGD Services segment of $50.9 million. This goodwill impairment, and any impairment that might be necessary in the future, is measured by comparing the implied fair value of goodwill to its carrying value, and any impairment determined is recorded in the current period.

No goodwill impairment has been recognized subsequent to the fourth quarter of fiscal 2013. Any future impairment could result in substantial losses and write-downs that would reduce our results of operations. For more information on the accounting policies we have in place for impairment of goodwill, see our discussion under “Valuation of Goodwill” in Item 7 of this Form 10-K.

Failure to retain existing contracts or win new contracts under competitive bidding processes may adversely affect our revenue.

We obtain most of our contracts through a competitive bidding process, and substantially all of the business that we expect to seek in the foreseeable future likely will be subject to a competitive bidding process. Competitive bidding presents a number of risks, including:

●

the need to compete against companies or teams of companies with more financial and marketing resources and more experience in bidding on and performing major contracts than we have;

●

the need to compete against companies or teams of companies that may be long-term, entrenched incumbents for a particular contract for which we are competing and that have, as a result, greater domain expertise and better customer relations;

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the need to compete to retain existing contracts that have in the past been awarded to us on a sole-source basis or as to which we have been incumbent for a long time;

●

the U.S. government’s increased emphasis on awarding contracts to small businesses could preclude us from bidding on certain work or reduce the scope of work we can bid as a prime contractor and limit the amount of revenue we could otherwise earn as a prime contractor for such contracts;

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the award of contracts on a “lowest-priced technically acceptable” basis which may lower the profit we may generate under a contract awarded using this evaluation method or prevent us from submitting a bid for such work due to us deeming such work to be unprofitable;

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the reduction of margins achievable under any contracts awarded to us;

●

the expense and delay that may arise if our competitors protest or otherwise challenge new contract awards;

●

the need to bid on some programs in advance of the completion of their design, which may result in higher R&D expenditures, unforeseen technological difficulties, or increased costs which lower our profitability;

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the substantial cost and managerial time and effort, including design, development and marketing activities, necessary to prepare bids and proposals for contracts that may not be awarded to us;

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the need to develop, introduce and implement new and enhanced solutions to our customers’ needs;

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the need to locate and contract with teaming partners and subcontractors; and

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the need to accurately estimate the resources and cost structure that will be required to perform any fixed-price contract that we are awarded.

We may not be afforded the opportunity in the future to bid on contracts that are held by other companies and are scheduled to expire if the agency decides to extend the existing contract. If we are unable to win particular contracts that are awarded through the competitive bidding process, we may not be able to operate in the market for services that are provided under those contracts for a number of years. If we win a contract, and upon expiration the customer requires further services of the type provided by the contract, there is frequently a competitive rebidding process and there can be no assurance that we will win any particular bid, or that we will be able to replace business lost upon expiration or completion of a contract.

As a result of the complexity and scheduling of contracting with government agencies, we occasionally incur costs before receiving contractual funding by the government agency. In some circumstances, we may not be able to recover these costs in whole or in part under subsequent contractual actions.

In addition, the customers currently serviced by our CTS segment are finite in number. The loss of any one of these customers, or the failure to win replacement awards upon expiration of contracts with such customers, could adversely impact us.

If we are unable to consistently retain existing contracts or win new contract awards, our business, prospects, financial condition and results of operations will be adversely affected.

Many of our U.S. government customers spend their procurement budgets through multiple-award or ID/IQ contracts, under which we are required to compete among the awardees for post-award orders. Failure to win post-award orders could affect our ability to increase our sales.

The U.S. government can select multiple winners under multiple-award contracts, federal supply schedules and other agency-specific ID/IQ contracts, as well as award subsequent purchase orders among such multiple winners. This means that there is no guarantee that these ID/IQ, multiple-award contracts will result in the actual orders equal to the ceiling

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value under the contract, or result in any actual orders. We are only eligible to compete for work (purchase orders and delivery orders) as an awardee pursuant to government-wide acquisition contracts already awarded to us. Our failure to compete effectively in this procurement environment could reduce our sales, which would adversely affect our business, results of operations and financial condition.

The U.S. government’s emphasis on awarding contracts to small businesses could preclude us from acting as a prime contractor and increase the number of contracts we receive as a subcontractor to small businesses, which could decrease the amount of our revenues from such contracts. Some of these small businesses may not be financially sound, which could adversely affect our business.

There is emphasis by the U.S. government on awarding contracts to small businesses, which may preclude companies the size of ours from obtaining certain work, other than as a subcontractor to these small businesses for no more than 49% of the total contract price. There are inherent risks in contracting with small companies that may not have the capability or financial resources to perform these contracts or administer them correctly. If a small business with which we have a subcontract fails to perform, fails to bill the government properly or fails financially, we may have difficulty receiving timely payments or may incur bad debt write-offs if the small business is unable or unwilling to pay us for work we perform. In addition, being a subcontractor may limit the amount of revenue we could otherwise earn as a prime contractor for such contracts. When we only act as a subcontractor, we may only receive up to 49% of the value of the contract award, and such percentage may be less should the small business partner or partners be able to service a larger piece of the award. Failure to maintain good relationships with small business partners operating in our industries could preclude us from winning work as a subcontractor as part of a large contracting consortium. This could result in significant adverse effects on our revenues, operating costs and cash flows.

Government audits of our contracts could result in a material charge to our earnings, have a negative effect on our cash position following an audit adjustment or adversely affect our ability to conduct future business.

U.S. government agencies, including the DoD and others, routinely audit and review a contractor’s performance on government contracts, contract costs, indirect rates and pricing practices, and compliance with applicable contracting and procurement laws, regulations and standards. Based on the results of such audits, the ~~auditing~~relevant government agency ~~is authorized~~could

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adjust our contract costs, and any costs found to ~~adjust~~be unreasonable, improperly allocated, or unallowable under government cost accounting standards or contractual provisions will not be reimbursed. The government could also potentially refuse to agree to our proposed unit prices if the auditing agency does not find them to be “fair and reasonable.” The ~~auditing agency is~~government may also ~~authorized to require us to~~demand that we refund what the government claims are any excess proceeds we received on a particular ~~item over its final adjusted~~items where the government claims we did not properly disclose required information in negotiating the unit price.

The DoD, in particular, also reviews the adequacy of, and compliance with, our internal control systems and policies, including our purchasing, accounting, financial capability, pricing, labor pool, overhead rate and management information systems. Our failure to obtain an “adequate” determination of our various accounting and management internal control systems from the responsible U.S. government agency could significantly and adversely affect our business, including our ability to bid on new contracts and our competitive position in the bidding process. Failure to comply with applicable contracting and procurement laws, regulations and standards could also result in the U.S. government imposing penalties and sanctions against us, including suspension of payments and increased government scrutiny that could delay or adversely affect our ability to invoice and receive timely payment on contracts or perform contracts, or could result in suspension or debarment from competing for contracts with the U.S. government. In addition, we could suffer serious harm to our reputation if allegations of impropriety were made against us, whether or not true.

In addition, transit authorities have the right to audit our work under their respective contracts. If, as the result of an adverse audit finding, we were suspended, debarred, proposed for debarment, or otherwise prohibited from contracting with the U.S. government, any significant government agency or a transit authority terminated its contract with us, or our reputation or relationship with such agencies and authorities was impaired or they otherwise ceased doing business with us or significantly decreased the amount of business done with us, it would adversely affect our business, results of operations and financial condition.

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Our international business exposes us to additional risks, including exchange rate fluctuations, foreign tax and legal regulations and political or economic instability that could harm our operating results.

Our international operations subject us to risks associated with operating in and selling products or services in foreign countries, including:

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devaluations and fluctuations in currency exchange rates;

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changes in foreign laws that adversely affect our ability to sell our products or services or our ability to repatriate profits to the United States;

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increases or impositions of withholding and other taxes on remittances and other payments by foreign subsidiaries or joint ventures to us;

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increases in investment and other restrictions or requirements by foreign governments in order to operate in the territory or own the subsidiary;

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costs of compliance with local laws, including labor laws, privacy laws, and import/export regulations;

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compliance with applicable U.S. and foreign anti-corruption laws, anti-trust/competition laws, anti-Boycott Israel laws, anti-money laundering laws and sanctions;

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export control regulations and policies which govern our ability to supply foreign customers;

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unfamiliar and unknown business practices and customs;

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compliance with domestic and foreign government policies, including requirements to expend a portion of contract funds locally and governmental industrial cooperation or offset requirements;

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the complexity and necessity of using foreign representatives and consultants or being prohibited from such use;

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the difficulty of ensuring that our foreign representatives, consultants and partners comply with applicable U.S. and foreign anti-corruption laws and anti-trust/competition laws;

●	·increased risk of cyber or other security threats;

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the need to form joint ventures or other special purpose companies with local, in-country partners to pursue projects as a prime contractor;

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the uncertainty of the ability of foreign customers to finance purchases;

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imposition of tariffs or embargoes, export controls and other trade restrictions;

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potentially being prohibited from bidding for international work due to perceived conflicts or national security concerns resulting from the significant amount of work we do for the U.S. government and its agencies;

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the difficulty of management and operation of an enterprise in various countries; and

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economic and geopolitical developments and conditions, including ongoing instability in global economies and financial markets, international hostilities, acts of terrorism and governmental reactions, inflation, trade relationships and military and political alliances.

Our foreign subsidiaries generally enter into contracts and make purchase commitments that are denominated in foreign currencies. Accordingly, we are exposed to fluctuations in exchange rates, which could have a significant impact on our results of operations. We have no control over the factors that generally affect this risk, such as economic, financial and

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political events and the supply of and demand for applicable currencies. While we use foreign exchange forward and option contracts to hedge significant contract sales and purchase commitments that are denominated in foreign currencies, our hedging strategy may not prevent us from incurring losses due to exchange fluctuations.

The ~~results~~impacts of the United Kingdom’s ~~referendum on~~proposed withdrawal from the European Union (EU) may have a negative effect on global economic conditions, financial markets and our business.

In June 2016, a majority of voters in the United Kingdom elected to withdraw from the EU in a national referendum. In March 2017, the United Kingdom formally notified the European Union of its intention to withdraw pursuant to Article 50 of the Lisbon Treaty. The referendum was advisory, and the terms of any withdrawal are subject to a negotiation period that ~~could last at least two years after the government of the United Kingdom formally initiates~~is ongoing with a ~~withdrawal process. Nevertheless, the~~possible further extension to January 31, 2020. The referendum has created significant uncertainty about the future relationship between the United Kingdom and the EU ~~and has given rise to calls for the governments~~with a number of ~~other EU member states to consider withdrawal.~~outcomes still possible.

These developments, or the perception that any of them could occur, have had and may continue to have a material adverse effect on global economic conditions and the stability of global financial markets, and could significantly reduce global market liquidity and restrict the ability of key market participants to operate in certain financial markets. Asset valuations, currency exchange rates and credit ratings have been and may continue to be ~~especially~~ subject to increased market volatility. Lack of clarity about future United Kingdom laws and regulations as the United Kingdom determines which EU laws to replace or replicate in the event of a withdrawal, could depress economic activity, restrict our access to capital or adversely affect our contracts or relationships with customers in the United Kingdom or elsewhere in the European economic ~~area, including, for~~area. For example, our ~~contracts with Transport for London, which~~total sales to customers in the United Kingdom accounted for ~~$147.3~~$218.2 million, ~~$156.3~~$240.7 million and ~~$183.2~~$219.4 million of our consolidated sales in ~~2017, 2016~~2019, 2018 and ~~2015,~~2017, respectively. If the United Kingdom and the EU are unable to negotiate acceptable withdrawal terms, ~~or if other EU member states pursue withdrawal,~~ barrier-free access between the United Kingdom and other EU member states or among the European economic area overall could be diminished or eliminated. Any of these factors could have a material adverse effect on our business, financial condition and results of operations.

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Our business and stock price may be adversely affected if our internal control over financial reporting is not effective.

The accuracy of our financial reporting is dependent on the effectiveness of our internal controls. We are required to provide a report from management to our shareholders on our internal control over financial reporting that includes an assessment of the effectiveness of these controls. Internal control over financial reporting has inherent limitations, including human error, the possibility that controls could be circumvented or become inadequate because of changed conditions, and fraud. Because of these inherent limitations, internal control over financial reporting might not prevent or detect all misstatements or fraud. If we cannot maintain and execute adequate internal control over financial reporting or implement required new or improved controls that provide reasonable assurance of the reliability of the financial reporting and preparation of our financial statements for external use, we could suffer harm to our reputation, incur incremental compliance costs, fail to meet our public reporting requirements on a timely basis, be unable to properly report on our business and our results of operations, or be required to restate our financial statements, and our results of operations, our share price and our ability to obtain new business could be materially adversely affected.

We are subject to new and evolving laws and regulations governing personal data privacy both in the United States and internationally, which may expose us to legal claims, penalties, increased costs of business, and other harm to our business.

The changing legal landscape in the area of data privacy may affect the way we do business or impose increased costs. As an example, the EU’s General Data Protection Regulation (GDPR) was implemented in May 2018 and has created a variety of new compliance obligations as well as increased financial penalties for noncompliance (which include fines up to 4% of global turnover of the preceding financial year or €20 million, whichever is greater, for serious violations). While there is still significant uncertainty around the United Kingdom’s exit from the EU, the United Kingdom privacy obligations will remain substantially similar to those in the GDPR. Noncompliance with such laws could result in fines, legal claims, loss of contracts and reputational harm.

We may not be able to receive the necessary licenses required for us to sell our export-controlled products and services overseas. In addition, the loss of our registration as either an exporter or a broker under the International Traffic in Arms Regulations (ITAR) or the Export Administration Regulations (EAR), would adversely affect our business, results of operations and financial condition.

U.S. government agencies, primarily the Directorate of Defense Trade Controls within the State Department and the Bureau of Industry Security within the U.S. Department of Commerce, must license shipments of certain export-controlled products that we export. These licenses are required due to both the products we export and to the foreign customers we service. If we do not receive a license for an export-controlled product, we cannot ship that product. We cannot be sure of our ability to gain any licenses required to export our products, and failure to receive a required license would eliminate our ability to make that sale. A delay in obtaining the necessary licenses to sell our export-controlled products abroad could result in delayed deliveries and delayed recognition of revenue, which could cause us reputational damage and could result in a customer’s decision not to do business with us in the future. We may also be subject to inquiries by such U.S. government agencies relating to issues involving the export-controlled products and services we export and failure to satisfactorily resolve such inquiries would adversely affect our business, results of operations and financial condition.

In addition to obtaining a license for certain of our exports outside of the United States, we are also required to maintain a standing registry under the ITAR and the EAR as an exporter. We operate as an exporter when we ship certain products to our customers outside the United States. If we were to lose our registration as an exporter under the ITAR or the EAR, we would not be able to sell export-controlled products abroad, which would adversely affect our business, results of operations and financial condition.

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The loss of required licenses from the Bureau of Alcohol, Tobacco, Firearms and Explosives could limit our ability to perform on contracts requiring the use of controlled firearms.

In our training business we use certain firearms which are regulated by the Bureau of Alcohol, Tobacco, Firearms and Explosives. If we fail to properly manage the firearms pursuant to the regulations, we could face fines and the possible

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loss of the licenses. The loss of the licenses could result in our inability to perform on certain contracts, which would have an adverse business, reputational and financial impact.

Our operating margins may decline under our fixed-price contracts if we fail to accurately estimate the time and resources necessary to satisfy our obligations.

Approximately ~~83%~~97% of our revenues in fiscal year ~~2017~~2019 were from fixed-price contracts under which we bear the risk of cost overruns. Our profits are adversely affected if our costs under these contracts exceed the assumptions we used in bidding for the contract. We may therefore need to absorb any increases in our supply costs and may not be able to pass such costs increases along to our customers. Sometimes we are required to fix the price for a contract before the project specifications are finalized, which increases the risk that we will incorrectly price these contracts. The complexity of many of our engagements makes accurately estimating the time and resources required more difficult.

We may not receive the full amounts estimated under the contracts in our total backlog, which could reduce our sales in future periods below the levels anticipated and which makes backlog an uncertain indicator of future operating results.

As of September 30, ~~2017,~~2019, our total backlog was approximately ~~$3.1~~$3.4 billion. Orders may be cancelled, and scope adjustments may occur, and we may not realize the full amounts of sales that we may anticipate in our backlog numbers. There can be no assurance that the projects underlying the contracts and purchase orders will be placed or completed or that amounts included in our backlog ultimately will be billed and collected. Additionally, the timing of receipt of sales, if any, on contracts included in our backlog could change. The failure to realize amounts reflected in our backlog could materially adversely affect our business, financial condition and results of operations in future periods.

We may be liable for civil or criminal penalties under a variety of complex laws and regulations, and changes in governmental regulations could adversely affect our business and financial condition.

Our businesses must comply with and are affected by various U.S. government and foreign regulations that impact our operating costs, profit margins and our internal organization and operation of our businesses. These regulations affect how we do business and, in some instances, impose added costs. Any changes in applicable laws could adversely affect our business and financial condition. Any material failure to comply with applicable laws could result in contract termination, price or fee reductions or suspension or debarment from contracting. The more significant regulations include:

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the ~~Federal Acquisition Regulations (FAR)~~FAR and all department and agency supplements, which comprehensively regulate the formation, administration and performance of U.S. government contracts;

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the Truth in Negotiations Act and implementing regulations, which require certification and disclosure of all cost and pricing data in connection with certain contract negotiations;

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the ITAR, which control the export of items on the U.S. Munitions Control List administered by the U.S. Department of State;

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the Export Administration Regulations which control commercial, dual-use and select defense related articles;

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the Bureau of Alcohol, Tobacco, Firearms and Explosives regulations that control the manufacture, possession and sale of firearms and explosive devices and materials;

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laws, regulations and executive orders restricting the use and dissemination of information classified for national security purposes and the exportation of certain products and technical data;

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regulations of most state and regional agencies and foreign governments similar to those described above;

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the trade sanctions laws and regulations administered by the U.S. Department of the Treasury’s Office of Foreign Assets Control;

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the Sherman Act and Clayton Act, which proscribe unlawful, anti-competitive conduct and business practices;

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the Foreign Corrupt Practices Act, ~~and~~ the U.K. Bribery ~~Act;~~

Act, and similar anti-bribery and anti-corruption laws in other countries in which we operate;

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the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Wall Street Reform and Protection Act;

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healthcare reform laws and regulations, including those enacted under the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act of 2010;

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the Fair Labor Standards Act, the Equal Pay Act and similar state wage and hour laws;

●	·Title VII of the Civil Rights Act of 1964 and similar state and federal employment laws in the U.S., and in other countries in which we operate;

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tax laws and regulations in the U.S. and in other countries in which we operate;

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privacy laws in the ~~EU’s General Data Protection Regulation~~U.S. and in other countries in which we operate, such as the California Consumer Privacy Act, the GDPR and any attendant European country legislation:

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the civil False Claims Act, which provides for substantial civil penalties and treble damages for violations, including for submission of a false or fraudulent claim to the U.S. government for payment or ~~approval;~~

approval, and allows private litigants to pursue violations as “whistleblower” or qui tam actions on behalf of the U.S. government;

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the Procurement Integrity Act, which requires evaluation of ethical conflicts surrounding procurement activity and establishing certain employment restrictions for individuals who participate in the procurement process; and

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the Small Business Act and the Small Business Administration, size status regulations, which regulate eligibility for performance of government contracts which are set aside for, or a preference is given in the evaluation process if awarded to, specific types of contractors such as small businesses and minority-owned businesses.

Many of our U.S. government contracts contain organizational conflicts of interest clauses that may limit our ability to compete for or perform certain other contracts. Organizational conflicts of interest arise when we engage in activities that provide us with an unfair competitive advantage. A conflict of interest issue that precludes our competition for or performance on a significant program or contract could harm our prospects and negative publicity about a conflict of interest issue could damage our reputation.

In addition, the U.S. and foreign governments may revise existing contract rules and regulations or adopt new contract rules and regulations at any time and may also face restrictions or pressure regarding the type and amount of services it may obtain from private contractors. For instance, Congressional legislation and initiatives dealing with procurement reform and shifts in the buying practices of U.S. government agencies resulting from those proposals could have adverse effects on government contractors, including us. Any of these changes could impair our ability to obtain new contracts or renew contracts under which we currently perform when those contracts are eligible for re-competition. Any new contracting methods could be costly or administratively difficult for us to implement, which would adversely affect our business, results of operations and financial condition.

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Our failure to identify, attract and retain qualified technical and management personnel could adversely affect our existing businesses, financial condition and results of operations.

We may not be able to identify, attract or retain qualified technical personnel, including engineers, computer programmers and personnel with security clearances required for classified work, or management personnel to supervise such activities that are necessary for maintaining and growing our existing businesses, which could adversely affect our

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financial condition and results of operations. The technically complex nature of our operations results in difficulties finding qualified staff. In our defense businesses especially, experienced personnel possessing required security clearances are finite in number. A number of our employees maintain a ~~top secret~~top-secret clearance level. Obtaining and maintaining security clearances for employees involves a lengthy process, and it is difficult to identify, recruit and retain employees who already hold security clearances. If our cleared employees lose or are unable to timely obtain security clearances or we lose a facility clearance, our U.S. government customers may terminate ~~the contract~~their contracts with us or decide not to renew itsuch contracts upon ~~its~~their expiration. As a result, to the extent we cannot obtain or maintain the required security clearances for a particular contract, or we fail to obtain them on a timely basis, we may not generate the sales anticipated from the contract, which could harm our operating results. To the extent we are not able to obtain facility security clearances or engage employees with the required security clearances for a particular contract, we will be unable to perform that contract and we may not be able to compete for or win new awards for similar work.

In addition, in our transportation business, we frequently need to recruit new highly skilled people into technical roles in order to perform our contractual obligations. An inability to recruit such people and quickly integrate them into the business may cause us to not be able to meet contractual deadlines which could lead to the imposition of liquidated damages or termination of our contracts for default in certain cases.

Our business could be negatively affected by cyber or other security threats or other disruptions.

We face cyber threats, threats to the physical security of our facilities and employees, including senior executives, and terrorist acts, as well as the potential for business disruptions associated with information technology failures, damaging weather or other acts of nature, and pandemics or other public health crises, which may adversely affect our business.

We routinely experience cyber security threats, threats to our information technology infrastructure and attempts to gain access to our company sensitive information, as do our customers, suppliers, subcontractors and joint venture partners. We may experience similar security threats at customer sites that we operate and manage as a contractual requirement.

Prior ~~cyber attacks~~cyber-attacks directed at us have not had a material impact on our financial results, and we believe our threat detection and mitigation processes and procedures are robust. ~~Due to~~However, because of the evolving nature and sophistication of security threats, which can be difficult to detect, there can be no assurance that our policies, procedures and controls have detected or will detect or prevent any of these ~~security~~ threats ~~however,~~and we cannot predict the full impact of any such past or future ~~incident cannot~~incident.

In addition, we could be ~~predicted.~~

~~Although~~impacted by cyber security threats or other disruptions or vulnerabilities found in products we ~~work cooperatively with~~use or in the systems of our customers, ~~and our~~ suppliers, subcontractors and joint venture partners that are used in connection with our business. Although we work cooperatively with these third parties to seek to minimize the impacts of cyber threats, other security threats or business disruptions, in addition to our internal processes, procedures and systems, we must also rely on the safeguards put in place by those entities.

The costs related to cyber or other security threats or disruptions may not be fully mitigated by insurance or other means. Occurrence of any of these events could adversely affect our internal operations, the services we provide to customers, loss of competitive advantages derived from our R&D efforts, early obsolescence of our products and services, our future financial results, our reputation or our stock price. The occurrence of any of these events could also result in civil and/or criminal liabilities.

Internal system or service failures could disrupt our business and impair our ability to effectively provide our services and products to our customers, which could damage our reputation and adversely affect our revenues and profitability.

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Any system or service disruptions, if not anticipated and appropriately mitigated, could have a material adverse effect on our business. We are also subject to systems failures, including network, software or hardware failures, whether caused by us, our customers, suppliers, subcontractors or joint venture partners, cybersecurity threats, malicious insiders, power shortages, terrorist acts or other events, which could cause loss of data and interruptions or delays in our business, cause us to incur remediation costs, subject us to claims and damage our reputation. In addition, the failure or disruption of our systems or services, or those of our customers, suppliers, subcontractors or joint venture partners, could cause us to interrupt or suspend our operations or otherwise adversely affect our business. Our insurance may be inadequate to compensate us for all losses that may occur as a result of any system or operational failure or disruption and, as a result, our revenues and profitability could be adversely affected.

We may incur significant costs in protecting our intellectual property which could adversely affect our profit margins. Our inability to obtain, maintain and enforce our patents and other proprietary rights could adversely affect our businesses’ prospects and competitive positions.

We seek to protect our proprietary technology and inventions through patents and other proprietary-right protection, and also rely on trademark laws to protect our brand. However, we may fail to obtain the intellectual property rights necessary to provide us with a competitive advantage, and any of our owned or licensed intellectual property rights could be challenged, invalidated, circumvented, infringed or misappropriated.

We may also fail to apply for or obtain intellectual property protection in important foreign countries, and the laws of some foreign countries do not protect proprietary rights to the same extent as the laws of the United States. If we are unable to obtain or maintain these protections, we may not be able to prevent third parties from using our technology and inventions, which could adversely affect our business.

The U.S. government, and the DoD in particular, has become more aggressive in seeking rights in all technical data, computer software, and computer software documentation that we may deliver under U.S. government contracts. The U.S. government generally takes the position that it has the right to royalty-free use of technologies that are developed under U.S. government contracts. Those rights include, but are not limited to, the ability of the government to provide that technical data, computer software, and computer software documentation to our competitors which may

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result in “leveling the playing field” for competitors and reducing our incumbency advantage during re-procurements for those goods or services. Thus, we may not have the right to prohibit the U.S. government from using certain technologies developed by us, and we may not be able to prohibit third party companies, including our competitors, from using those technologies in providing products and services to the U.S. government.

We may incur significant expense in obtaining, maintaining, defending and enforcing our intellectual property rights. We may fail to take the actions necessary to enforce our intellectual property rights and even if we attempt to enforce such rights, we may ultimately be unsuccessful, and such efforts may result in our intellectual property rights being challenged, limited in scope, or declared invalid or unenforceable. Also, some aspects of our business and services may rely on technologies and software developed by or licensed from third parties, and we may not be able to maintain our relationships with such third parties or enter into similar relationships in the future on reasonable terms or at all.

We also rely on trade secrets, proprietary know-how and continuing technological innovation to remain competitive. We have taken measures to protect our trade secrets and know-how, including seeking to enter into confidentiality agreements with our employees, consultants and advisors, but the measures we have taken may not be sufficient. For example, confidentiality agreements may not provide adequate protection or may be breached. We generally control and limit access to our product documentation and other proprietary information, but other parties may independently develop our know-how or otherwise obtain access to our technology, which could adversely affect our businesses’ prospects and competitive position.

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Assertions by third parties that we violate their intellectual property rights could have a material adverse effect on our business, financial condition and results of operations.

Third parties may claim that we, our customers, licensees or parties indemnified by us are infringing upon or otherwise violating their intellectual property rights. Such claims may be made by competitors seeking to obtain a competitive advantage or by other parties. Additionally, in recent years, individuals and groups have begun purchasing intellectual property assets for the purpose of making claims of infringement and attempting to extract settlements from companies like ours.

Any claims that we violate a third party’s intellectual property rights can be time consuming and costly to defend and distract management’s attention and resources, even if the claims are without merit. Such claims may also require us to redesign affected products and services, enter into costly settlement or license agreements or pay costly damage awards, or face a temporary or permanent injunction prohibiting us from marketing or providing the affected products and services. Even if we have an agreement to indemnify us against such costs, the indemnifying party may not have sufficient financial resources or otherwise be unable to uphold its contractual obligations. If we cannot or do not license the infringed technology on favorable terms or cannot or do not substitute similar technology from another source, our revenue and earnings could be adversely impacted.

We compete primarily for government contracts against many companies that are larger, better capitalized and better known than us. If we are unable to compete effectively, our business and prospects will be adversely affected.

Our businesses operate in highly competitive markets. Many of our competitors are larger, better financed and ~~better known~~better-known companies who may compete more effectively than we can. In order to remain competitive, we must keep our capabilities technically advanced and compete on price and on value added to our customers. Our ability to compete may be adversely affected by limits on our capital resources and our ability to invest in maintaining and expanding our market share. Consolidation in the industries in which we operate, and government budget cuts ~~have led~~may lead to pressure being placed on the margins we may earn on any contracts we win. In addition, should the transportation market move towards requiring contractors to provide up-front financing for contracts they are awarded (for example, our contract for the Chicago Open Standards Fare ~~System)~~System and our contract for a fare payment system in Boston), we may need to compete more heavily on the basis of our financial strength or alternate financial structures, which may limit the contracts we can service at any one time.

The terms of our financing arrangements may restrict our financial and operational flexibility, including our ability to invest in new business opportunities.

~~In March 2013,~~At September 30, 2019 we ~~entered into a note purchase and private shelf agreement pursuant to which we issued $100.0~~had $200.0 million of senior unsecured notes ~~bearing interest at~~payable to a ~~rate~~group of ~~3.35% and maturing on March 12, 2025. In addition, pursuant to~~

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the agreement, on July 17, 2015, we issued an additional $25.0 million of senior unsecured notes, bearing interest at a rate of 3.70% and maturing on March 12, 2025. Interest payments on the notes issued in 2013 and 2015 are due semi-annually and principal payments are due from 2021 through 2025. The agreement pertaining to the aforementioned notesinsurance companies. We also contained a provision that the coupon rate would increase by a further 0.50% should the company’s leverage ratio exceed a certain level. On February 2, 2016 we revised the note purchase agreement and we issued an additional $75.0 million of senior unsecured notes bearing interest at 3.93% and maturing on March 12, 2026. Interest payments on these notes are due semi-annually and principal payments are due from 2020 through 2026. At the time of the issuance of this last series of notes, certain terms and conditions of the note purchase and private shelf agreement were revised in coordination with the revision and expansion of the revolving credit agreement as discussed below in order to increase our leverage capacity.

We have a committed revolving credit agreement with a group of financial institutions in the amount of ~~$400.0~~$800.0 million which ~~expires~~is scheduled to expire in ~~August 2021~~April 2024 (Revolving Credit Agreement). ~~At September 30, 2017, the weighted average interest rate on outstanding borrowings~~The available line of credit is reduced by any letters of credit issued under the Revolving Credit ~~Agreement was 3.24%.~~Agreement. As of September 30, ~~2017,~~2019, there were $195.5 million of borrowings ~~totaling $55.0 million~~ under this agreement and there were letters of credit outstanding totaling ~~$81.3~~$31.5 million, which reduce the available line of credit to ~~$263.7~~$573.0 million. The $31.5 million of letters of credit includes both financial letters of credit and performance guarantees.

Our revolving credit agreement and note purchase and private shelf agreement each contain a number of customary covenants, including requirements for us to maintain certain interest coverage and leverage ratios and restrictions on our and certain of our subsidiaries’ abilities to, among other things, incur additional debt, create liens, consolidate or merge with any other entity, or transfer or sell substantially all of their assets, in each case subject to certain exceptions and limitations.

The occurrence of any event of default under these agreements may result in all of the indebtedness then outstanding becoming immediately due and payable, or the increase of the coupon rate for such indebtedness. For example, at March 31, 2017 we did not maintain the required leverage ratio. Therefore, in May 2017 certain terms and conditions of the Revolving Credit Agreement and note purchase and private shelf agreement were further revised to allow us to maintain

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a higher level of leverage as of March 31, 2017 and for the remainder of the 2017 fiscal year. The revisions to the agreements dodid not impact the required leverage ratios in fiscal 2018 ~~and~~or subsequent years. ~~This revision also contains a provision~~

Additionally, we may continue to use alternative financing structures in order to fund certain projects related to the redevelopment of our corporate campus. Any such financing arrangements may further restrict our financial and operational flexibility.

Our corporate campus redevelopment plan may be subject to certain unanticipated financial, environmental, regulatory, and construction risks that are beyond the ~~coupon rate~~scope of our typical business activities.

We are in the process of developing our corporate campus in San Diego and this redevelopment project may ~~increase on all~~be subject to various risks associated with real property development including but not limited to financing, compliance with environmental laws and regulations, obtaining permits and other governmental approvals, regulatory compliance, changes in market conditions, labor and material shortages, legal claims, delays in completion, distracting management’s and employees’ attention and resources, natural disasters, cost overruns, socio-political risks, and construction defects. Any of the ~~term notes discussed above by up~~abovementioned risks, or other risks generally associated with real property development, could increase our operational expenses, expose us to ~~0.75% should~~fines and penalties, disrupt our ~~leverage ratio exceed certain levels.~~business operations, require us to expend additional resources, or expose us to other unanticipated liabilities that are not encountered in our typical business activities.

Our development contracts may be difficult for us to comply with and may expose us to third-party claims for damages.

We are often party to government and commercial contracts involving the development of new products and systems. These contracts typically contain strict performance obligations and project milestones. We cannot assure you we will comply with these performance obligations or meet these project milestones in the future. If we are unable to comply with these performance obligations or meet these milestones, our customers may terminate these contracts and, under some circumstances, recover damages or other penalties from us. If other parties elect to terminate their contracts or seek damages from us, it could materially harm our business and negatively impact our stock price.

Our revenues could be less than expected if we are not able to deliver services or products as scheduled due to disruptions in supply.

Since our internal manufacturing capacity is limited, we use ~~contract manufacturers.~~third parties to supply certain products or components we use. While we use care in selecting our ~~manufacturers,~~suppliers, we have less control over the reliability of supply, quality and price of products or components than if we manufactured them. In some cases, we obtain products from a sole supplier or a limited group of suppliers. Consequently, we risk disruptions in our supply of key products and components if our suppliers fail or are unable to perform because of shortages in raw materials, operational problems, strikes, natural disasters, financial condition or other factors. We may have disputes with our ~~vendors~~suppliers arising from, among other things, the quality of products and services or customer concerns about the ~~vendor.~~supplier. If any of our ~~vendors~~suppliers fail to timely meet their contractual obligations or have regulatory compliance or other problems, our ability to fulfill our obligations may be jeopardized. Economic downturns can adversely affect a ~~vendor’s~~supplier’s ability to manufacture or deliver products. Further, ~~vendors~~suppliers may also be enjoined from manufacturing and distributing products to us as a result of litigation filed by third parties, including intellectual property litigation. If we were to experience difficulty in obtaining certain products, there could be an

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adverse effect on our results of operations, ~~and on our~~ customer relationships and ~~our~~ reputation. Additionally, our ~~key vendors~~suppliers could also increase pricing of their products, which could negatively affect our ability to win contracts by offering competitive prices.

Any material supply disruptions could adversely affect our ability to perform our obligations under our contracts and could result in cancellation of contracts or purchase orders, penalties, delays in realizing revenues, payment delays, as well as adversely affect our ongoing product cost structure.

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Failure to perform by our subcontractors could materially and adversely affect our contract performance and our ability to obtain future business.

Our performance of contracts often involves subcontractors, upon which we rely to complete delivery of products or services to our customers. We may have disputes with subcontractors. A failure by a subcontractor to satisfactorily deliver products or services can adversely affect our ability to perform our obligations as a prime contractor. Any subcontractor performance deficiencies could result in the customer terminating our contract for default, which could expose us to liability for excess costs of ~~reprocurement~~re-procurement by the customer and have a material adverse effect on our ability to compete for other contracts.

Our future success will depend on our ability to develop new products, systems and services that achieve market acceptance in our current and future markets.

Both our commercial and government businesses are characterized by rapidly changing technologies and evolving industry standards. Accordingly, our performance depends on a number of factors, including our ability to:

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identify emerging technological trends and business models in our current and target markets;

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develop and maintain competitive products, systems and services;

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enhance our offerings by adding technological innovations that differentiate our products, systems and services from those of our competitors; and

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develop, manufacture and bring to market cost-effective offerings quickly.

We believe that, in order to remain competitive in the future, we will need to continue to develop new products, systems and services, and in some cases transition to a product-oriented approach as opposed to our historical, project oriented approach, all of which will require the investment of significant financial resources. The need to make these expenditures could divert our attention and resources from other projects, and we cannot be sure that these expenditures ultimately will lead to the timely development of new products, systems or services. In recent years, we have spent an amount equal to approximately 1%3% to 4%5% of our annual sales on internal R&D efforts. There can be no assurances that this percentage will not increase should we require increased innovations to successfully compete in the markets we serve. We may also experience delays in completing development and introducing certain new products, systems or services in the future due to their design complexity. Any delays could result in increased costs of development or redirect resources from other projects. In addition, we cannot provide assurances that the markets for our products, systems or services will develop as we currently anticipate, which could significantly reduce our revenue and harm our business. Furthermore, we cannot be sure that our competitors will not develop competing products, systems or services that gain market acceptance in advance of ours, or that cause our existing products, systems or services to become non-competitive or obsolete, which could adversely affect our results of operations.

If we deliver products or systems with defects, our reputation will be harmed, revenue from, and market acceptance of, our products and systems will decrease and we could expend significant capital and resources as a result of such defects.

Our products and systems are complex and frequently operate in high-performance, challenging environments. Notwithstanding our internal quality specifications, our products and systems have sometimes contained errors, defects

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and bugs when introduced. If we deliver products or systems with errors, defects or bugs, our reputation and the market acceptance and sales of our products and systems would be harmed. Further, if our products or systems contain errors, defects or bugs, we may be required to expend significant capital and resources to alleviate such problems and incur significant costs for product recalls and inventory write-offs. Defects could also lead to product liability lawsuits against us or against our customers, and could also damage our reputation. We have agreed to indemnify our customers in some circumstances against liability arising from defects in our products and systems. In the event of a successful product liability claim, we could be obligated to pay damages significantly in excess of our product liability insurance limits.

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We face certain significant risk exposures and potential liabilities that may not be covered adequately by insurance or indemnity.

We are exposed to liabilities that are unique to the products, systems and services we provide. A significant portion of our business relates to designing, developing, manufacturing, operating and maintaining advanced defense and transportation systems and products. New technologies associated with these systems and products may be untested or unproven. In addition, certain activities in connection with which our training systems are used or our services are provided are inherently dangerous.

While in some circumstances we may receive indemnification from U.S. and foreign governments, and we maintain insurance for certain risks, the amount of our insurance or indemnity may not be adequate to cover all claims or liabilities, and we may be forced to bear substantial costs from an accident or incident. It also is not possible for us to obtain insurance to protect against all operational risks and liabilities. Substantial claims resulting from an incident in excess of the indemnification we receive ~~and~~from our insurance coverage would harm our financial condition, results of operations and cash flows. Moreover, any accident or incident for which we are liable, even if fully insured, could negatively affect our standing with our customers and the public, thereby making it more difficult for us to compete effectively, and could significantly impact the cost and availability of adequate insurance in the future.

We may acquire other companies, which could increase our costs or liabilities or be disruptive to our business.

Part of our strategy involves the acquisition of other companies. For example, from fiscal 2015 through ~~2017,~~fiscal 2019 we acquired GATR, DTECH, ~~GATR,~~ TeraLogics, Vocality, MotionDSP, Shield Aviation and ~~Vocality~~Nuvotronics in connection with our strategic efforts to build and expand our ~~command, control, communication, computers, intelligence, surveillance~~C4ISR business. In fiscal 2019 we acquired GRIDSMART and ~~reconnaissance (C4ISR)~~Trafficware to complement our integrated traffic solutions business.

We may not be able to integrate acquired companies successfully without substantial expense, delay or operational or financial problems. Such expenses, delays or operational or financial problems may include the following:

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we may need to divert management resources to integration, which may adversely affect our ability to pursue other more profitable activities;

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integration may be difficult as a result of the necessity of coordinating geographically separated organizations, integrating personnel with disparate business backgrounds and combining different corporate cultures;

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we may not be able to eliminate redundant costs anticipated at the time we select acquisition candidates; and

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one or more of our ~~acquisition candidates~~acquisitions may have unexpected liabilities, fraud risk, or adverse operating issues that we fail to discover through our due diligence procedures prior to the acquisition.

As a result, the integration of acquired businesses may be costly and may adversely impact our results of operations and financial condition. Acquisitions also could result in dilutive issuances of equity securities or the incurrence of debt, which could adversely affect our operating results. In addition, we may not achieve the anticipated benefits from any acquisition, in which case our results of operations, business, and financial condition may suffer.

Changes in future business or other market conditions could cause business acquisitions or investments and/or recorded goodwill or other long-term assets to become impaired, resulting in substantial losses and write-downs that would reduce our results of operations.

As part of our strategy, we have in the past acquired, and expect to continue to acquire, from time to time, businesses, or a minority or majority interest in a business. These acquisitions or investments are made upon analysis and due diligence procedures designed to achieve a desired return or strategic objective. These procedures often involve certain assumptions and judgment in determining acquisition price. After acquisition, unforeseen issues could arise which adversely affect the anticipated returns or which are otherwise not recoverable as an adjustment to the purchase price. Even after careful integration efforts, actual operating results may vary significantly from initial estimates.

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A significant portion of the purchase price of companies we acquire may be allocated to acquired goodwill. We evaluate our recorded goodwill balances for potential impairment annually as of July 1, or when circumstances indicate that the carrying value may not be recoverable. Any goodwill impairment could result in substantial losses and write-downs that would reduce our results of operations. For more information on the accounting policies we have in place for impairment of goodwill, see our discussion under “Valuation of Goodwill” in Item 7 of this Form 10-K.

Our employees or third-party contractors may engage in misconduct or other improper activities, which could harm our business, financial condition and results of operations.

We are exposed to the risk of employee and third-party contractor fraud or other misconduct. Employee and third-party contractor misconduct could include intentionally failing to comply with U.S. government procurement regulations, engaging in unauthorized activities, attempting to

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obtain reimbursement for improper expenses, or submitting falsified time records, which could result in legal proceedings against us, lost contracts or reduced revenues.

Employee and third-party contractor misconduct could also involve improper use of our customers’ sensitive or classified information, which could result in regulatory sanctions against us and serious harm to our reputation. Misconduct could also involve making payments, or offering something of value, to government officials or third parties that would expose us to being in violation of the Foreign Corrupt Practices Act, the UK Anti-Bribery Act or similar laws in other countries.

It is not always possible to deter employee or third-party contractor misconduct, and the precautions we take to prevent and detect this activity may not be effective in controlling unknown or unmanaged risks or losses, which could harm our business, financial condition and results of operations. In addition, alleged or actual employee or third-party contractor misconduct could result in investigations or prosecutions of employees or third-party contractors engaged in the subject activities, which could result in unanticipated consequences or expenses and management distraction for us regardless of whether we are alleged to have any responsibility.

Unanticipated changes in our tax provisions or exposure to additional tax liabilities could affect our profitability.

Our business operates in many locations under government jurisdictions that impose taxes based on income and other criteria. Changes in domestic or foreign tax laws and regulations, or their interpretation, could result in higher or lower tax rates assessed, changes in the taxability of certain revenues or activities, or changes in the deductibility of certain expenses, thereby affecting our tax expense and profitability. In addition, audits by tax authorities could result in unanticipated increases in our tax expense.

Continued narrowing of the definition of a “commercial item” for federal government contracting purposes could affect our profitability.

If the federal government continues to narrow of the definition of a “commercial item” for government contracting purposes and increases the aggressiveness in challenging our assertions that items we furnish to the government as “commercial items” our profitability on the affected contracts could be reduced.

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Changes in accounting principles and guidance, or their interpretation, could result in unfavorable accounting charges or effects, including changes to previously filed financial statements, which could cause our stock price to decline.

We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States. These principles are subject to interpretation by the SEC and various bodies formed to create and interpret appropriate accounting principles and guidance. A change in these principles or guidance, or in their interpretations, may have a significant effect on our reported results, as well as our processes and related controls, and may retroactively affect previously reported results.

For example, in May 2014, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers, as amended (commonly referred to as ASC 606). We adopted ASC 606 effective October 1, 2018 using the modified retrospective transition method. The adoption of ASC 606 resulted in a change in our significant accounting policy regarding revenue recognition and resulted in changes in our accounting policies regarding contract estimates, backlog, inventory, contract assets, long-term capitalized contract costs, and contract liabilities. The cumulative effect of applying the standard was an increase of $24.5 million to shareholders’ equity as of October 1, 2018. However, the adoption of ASC 606 or any other new or revised accounting standard could adversely affect our financial position or operating results in the future or may retroactively adversely affect previously reported results, which could cause our stock price to decline.

For a discussion of the impact that the adoption of ASC 606 has had and is expected to have on our consolidated financial statements and related disclosures, see “Recently Adopted Accounting Pronouncements” in Note 1 of the Consolidated Financial Statements of this Form 10-K.

Our results of operations have historically fluctuated and may continue to fluctuate significantly in the future, which could adversely affect our stock price.

Our results of operations are affected by factors such as the unpredictability of contract awards due to the long procurement process for most of our products and services, the potential fluctuation of governmental agency budgets, any timing differences between our work performed and costs incurred under a contract and our ability to recognize revenue and generate cash flow from such contract, the time it takes for the new markets we target to develop and for us to develop and provide products and services for those markets, competition and general economic conditions. Our contract type/product mix and unit volume, our ability to keep expenses within budget and our pricing affect our operating margins. Significant growth in costs to complete our contracts may adversely affect our results of operations in future periods and cause our financial results to fluctuate significantly on a quarterly or annual basis. In addition, certain contracts in our CTS segment are structured such that we incur significant expenses during the design and build phases of the contract that are not offset by revenue recognized or cash flows generated under the contract until we deliver a product or perform operational or maintenance services during the latter phases of the contract. Consequently, we do not believe that comparison of our results of operations from period to period is necessarily meaningful or predictive of our likely future results of operations. In future financial periods our operating results or cash flows may be below the expectations of public market analysts or investors, which could cause the price of our stock to decline significantly.

The funding and costs associated with our pension plans may cause our earnings, cash flows, and shareholders’ equity to fluctuate significantly from year to year.

Certain of our employees in the U.S. are covered by a noncontributory defined benefit pension plan and approximately one-half of our European employees are covered by a contributory defined benefit pension plan. The impact of these plans on our GAAP earnings may be volatile in that the amount of expense we record for our pension plans may materially change from year to year because those calculations are sensitive to changes in several key economic assumptions, including discount rates, inflation, salary growth, expected return on plan assets, retirement rates and mortality rates. Changes in these factors affect our plan funding, cash flows, earnings, and shareholders’ equity.

We have taken certain actions to mitigate the effect of our defined benefit pension plans on our financial results. For example, benefits under the U.S. plan were frozen as of December 31, 2006, so no new benefits have accrued after that

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date, and benefits under the European plan were frozen as of September 30, 2010, though the European plan is a final pay plan, which means that benefits will be adjusted for increases in the salaries of participants until their retirement or

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departure from the company. U.S. and European employees hired subsequent to the dates of freezing of the respective plans are not eligible for participation in the defined benefit plans. For more information on how these factors could impact earnings, cash flows and shareholders’ equity, see “Pension costs” in Item 7 of this Form 10-K.

We are subject to various investigations, claims and litigation that could ultimately be resolved against us.

The size, nature and complexity of our business make us susceptible to investigations, claims, and litigation, particularly those involving governments. We are and may become subject to investigations, claims and administrative, civil or criminal litigation globally and across a broad array of matters, including, but not limited to, government contracts, false claims, products liability, fraud, environmental, intellectual property, tax, export/import, anti-corruption, anti-trust, breach of contract, labor, wage and hour, health and safety, employee benefits and plans, including plan administration, and improper payments. These matters could divert financial and management resources; result in fines, penalties, compensatory, treble or other damages or non-monetary relief; and otherwise disrupt our business. Government regulations also provide that certain allegations against a contractor may lead to suspension or debarment from government contracts or suspension of export privileges for a company or one or more of its components. Suspension, debarment, or being proposed for debarment could have a material adverse effect on our company because of our reliance on government contracts and export authorizations. An investigation claim or litigation, even if fully indemnified or insured, could also negatively impact our reputation among our customers and the public, and make it more difficult for us to compete effectively or obtain adequate insurance in the future. Investigations, claims or litigation could have a material adverse effect on our financial position, results of operations and/or cash flows.

Risks relating to our common stock

The price of our common stock may fluctuate significantly

An active, liquid and orderly market for our common stock may not be sustained, which could depress the trading price of our common stock.

Volatility in the market price of our common stock may prevent you from being able to sell your shares at or above the price you paid for your shares or at all. The market price of our common stock could fluctuate significantly for various reasons, which include:

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our quarterly or annual earnings or those of our competitors;

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the public’s reaction to our press releases, our other public announcements and our filings with the SEC;

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changes in earnings estimates or recommendations by research analysts who track our common stock or the stocks of our competitors;

●	·failure to meet the expectations of research analysts:

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inaccuracy of our guidance regarding future operating results;

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new laws or regulations or new interpretations of laws or regulations applicable to our business;

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changes in accounting standards, policies, guidance, interpretations or principles;

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changes in general conditions in the domestic and global economies or financial markets, including those resulting from war, incidents of terrorism or responses to such events;

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litigation involving our company or investigations or audits by regulators into the operations of our company or our competitors;

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strategic action by our competitors; and

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sales of common stock by our directors, executive officers and significant shareholders.

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In addition, the stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry factors may seriously affect the market price of our common stock, regardless of actual operating performance. In addition, in the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class action litigation has often been instituted against these companies. If litigation is instituted against us, it could result in substantial costs and a diversion of our management’s attention and resources.

~~Our Chairman of the Board of Directors beneficially owns a large percentage of our common stock and as a result can exert significant influence over us.~~

At October 6, 2017, Walter C. Zable, our Chairman of the Board of Directors, and Karen F. Cox, Mr. Zable’s sister, beneficially owned an aggregate of 3,005,776 shares, or approximately 11.1%, of our outstanding common stock. Accordingly, Mr. Zable and Ms. Cox may be able to substantially influence all matters requiring approval by our shareholders, including the election of directors and the approval of mergers or other business combination transactions. Circumstances may arise in which the interests of these shareholders could conflict with the interests of our other shareholders. These shareholders could delay or prevent a change in control of Cubic even if such a transaction would be beneficial to our other shareholders.

Your percentage ownership in us may be diluted by future issuances of capital stock, which could reduce your influence over matters on which shareholders vote.

Our board of directors has the authority, without action or vote of our shareholders, to issue all or any part of our authorized but unissued shares of common stock, including shares issuable upon the exercise of options and the vesting of restricted stock units, shares that may be issued in the future under our Amended and Restated 2015 Incentive Award Plan or shares of our authorized but unissued preferred stock. For example, in December 2018, we completed the sale of approximately 3.8 million shares of our common stock in an underwritten public offering. Issuances of common stock or preferred voting stock could reduce your influence over matters on which our shareholders vote and, in the case of issuances of preferred stock, likely could result in your interest in us being subject to the prior rights of holders of that preferred stock.

Provisions in our charter documents and Delaware law could delay or prevent a change in control of Cubic.

Provisions of our amended and restated certificate of incorporation and amended and restated bylaws may discourage, delay or prevent a merger, acquisition or other change in control that shareholders may consider favorable, including transactions in which shareholders might otherwise receive a premium for their shares. In addition, these provisions may frustrate or prevent any attempt by our shareholders to replace or remove our current management by making it more difficult to replace or remove our board of directors. These provisions include:

●

prior to the date of the transaction, an affirmative vote of the holders of at least 66~~2/3~~%the majority of our outstanding common stock is required for the approval, adoption or authorization of a business combination;

●

a prohibition on shareholder action through written consent;

●

a requirement that special meetings of shareholders be called only by our board of directors or by a committee of our board of directors that has been duly designated to do so by our board of directors;

●

the authority of our board of directors to issue preferred stock with such terms as our board of directors may determine; and

●

a requirement for the affirmative vote of the holders of at least 66~~2/3~~%the majority of the total voting power of all outstanding shares of our voting stock to amend our amended and restated bylaws, or to amend specific provisions of our amended and restated certificate of incorporation.

In addition, Delaware law prohibits a publicly held Delaware corporation from engaging in a business combination with an interested shareholder, generally a person who, together with its affiliates, owns or within the last three years has

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owned 15% of our voting stock, for a period of three years after the date of the transaction in which the person became an interested shareholder, unless the business combination is approved in a prescribed manner. Accordingly, Delaware law may discourage, delay or prevent a change in control of our company.

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If we are unable to pay semiannual dividends at the targeted level, our reputation and stock price may be harmed.

We have consistently paid cash dividends to our shareholders since 1971, and, in fiscal ~~2017,~~2019, we paid ~~$7.3~~$8.4 million of cash dividends to our shareholders.

The dividend program requires the use of a portion of our cash flows. Our ability to continue to pay semiannual dividends will depend on our ability to generate sufficient cash flows from operations in the future. This ability may be subject to certain economic, financial, competitive and other factors that are beyond our control. Our board of directors may, at its discretion, decrease the targeted semiannual dividend amount or entirely discontinue the payment of dividends at any time. Any failure to pay dividends after we have announced our intention to do so may adversely affect our reputation and investor confidence in us, and negatively impact our stock price.

~~If securities or industry analysts cease to publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.~~

The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us or our business. If one or more of the analysts who cover us downgrade our stock or publish inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our stock could decrease, which might cause our stock price and trading volume to decline.

CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING INFORMATION

This report, including the documents incorporated by reference herein, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are subject to the safe harbor created by such Act. Any statements about our expectations, beliefs, plans, objectives, assumptions, future events or our future financial and/or operating performance, including those concerning new programs and growth in the markets in which we do business, Goal 2020 and our five key priorities, 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, U.S. and foreign government funding, supplies of raw materials and purchased parts, cash needs, financial condition, liquidity, prospects, and the trends that may affect us or the industries in which we operate, are not historical and may be forward-looking.

These statements are often, but not always, made through the use of words or phrases such as “may,” “will,” “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “predict,” “potential,” “opportunity” and similar words or phrases or the negatives of these words or phrases. These forward-looking statements involve risks, estimates, assumptions and uncertainties, including those discussed in “Risk factors” and elsewhere throughout this report and in the documents incorporated by reference herein, that could cause actual results to differ materially from those expressed in these statements.

Such risks, estimates, assumptions and uncertainties include, among others: our dependence on U.S. and foreign government contracts; delays in approving U.S. and foreign government budgets and cuts in U.S. and foreign government defense expenditures; the ability of certain government agencies to unilaterally terminate or modify our contracts with them; the effects of potential sequestration on our contracts; our assumptions covering behavior by public transit authorities; our ability to successfully integrate new companies into our business and to properly assess the effects of such integration on our financial condition; the U.S. government’s increased emphasis on awarding contracts to small

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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; the change in the way transit agencies pay for transit ~~systems;~~ 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; unanticipated issues related to the restatement of our financial statements; our ability to monitor and evaluate the effectiveness of new processes and procedures we

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have implemented to remediate the material weaknesses that existed in our internal control over financial reporting; and other factors discussed elsewhere in this report.

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 and/or operating performance is not necessarily a reliable indicator of future performance and you should not use our historical performance to anticipate results or future period trends.

Further, any forward-looking statement speaks only as of the date on which it is made, and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict which factors will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

Item 1B. UNRESOLVED STAFF COMMENTS.

None

Item 2. PROPERTIES.

We conduct our operations in approximately ~~2.2~~2.0 million square feet of both owned and leased properties located in the United States and foreign countries. We own approximately ~~51%~~22% of the square footage, including about ~~500,000~~265,000 square feet ~~located~~ in San Diego, ~~California and 423,000~~CA, 101,000 square feet ~~located~~in Tullahoma, TN, and 69,000 square feet in Salfords, Surrey, UK. All other properties are leased. In fiscal 2019, we entered into agreements related to the construction and leasing of two buildings on our existing corporate campus in San Diego, California. Under these agreements, a financial institution will own the buildings, and we will lease the property for a term of five years upon their completion. In fiscal 2019 we also sold the land and buildings comprising our separate CTS campus in San Diego. We have entered into a lease with the buyer of this campus and CTS employees will continue to occupy this separate campus until the new buildings on our corporate campus are ready for occupancy in fiscal 2021. In addition we also sold land and buildings in Orlando, ~~Florida.~~ Florida in fiscal 2019 and we are entering a lease for new space in Orlando to accommodate our employees and operations in Orlando.

All owned and leased properties are considered in good condition and adequately utilized. ~~The following table identifies~~As of September 30, 2019 we had significant properties ~~by business segment:~~at the following locations:


~~Location of Property~~		~~Owned or Leased~~
~~Corporate Headquarters:~~
~~Arlington, VA~~		~~Leased~~
~~San Diego, CA~~		~~Owned~~

~~Investment properties:~~
~~New York, NY~~		~~Owned~~
~~Teterboro, NJ~~		~~Leased~~

~~Transportation Systems:~~
~~Atlanta, GA~~		~~Leased~~
~~Balcatta, Australia~~		~~Leased~~

Corporate: Arlington, VA; Orlando, FL; and San Diego, CA.

Investment Properties: Terterboro, NJ.

CTS: Amherst, NY; Amsterdam, Netherlands; Atlanta, GA; Balcatta, Australia; Boston, MA; Brisbane, Australia; Burnaby, BC, Canada; Cheshire, UK; Chicago, IL; Concord, CA; Concord, NH; Concord, Ontario, Canada; Cumbernauld, Scotland; Greenford, UK; Hamburg, Germany; Hyderabad, India; Kingswinford, UK; Knoxville, TN; London, UK; Los Angeles, CA; Malden, MA; Mallusk, Ireland; Malmo, Sweden; New York, NY; Norwalk, CA; Oakland, CA; Portsmouth, NH; Queensland, Australia; Quincy, MA; Rozelle, Australia; San Francisco, CA; Silverwater, Australia; Stockton-on-Tees, UK; Sugar Land, TX; Surrey, UK; Sydney, Australia; Tullahoma, TN; and West Sussex, UK.

CMS: Aberdeen, MD; Ashburn, VA; Blacksburg, VA; Dallas, TX; Durham, NC; Fayetteville, NC; Hanover, MD; Huntsville, AL; Pendleton, OR; Radford, VA; San Diego, CA; and Tampa, FL; Woburn, MA.

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~~Location of Property~~		~~Owned or Leased~~
~~Brisbane, Australia~~		~~Leased~~
~~Burnaby, BC, Canada~~		~~Leased~~
~~Chicago, IL~~		~~Leased~~
~~Concord, CA~~		~~Leased~~
~~Concord, Canada~~		~~Leased~~
~~Concord, NH~~		~~Leased~~
~~Cumbermauld, Scotland~~		~~Leased~~
~~Emeryville, CA~~		~~Leased~~
~~Frankfurt, Germany~~		~~Leased~~
~~Glostrup, Denmark~~		~~Leased~~
~~Greenford, London, England~~		~~Leased~~
~~Hamburg, Germany~~		~~Leased~~
~~Hyderabad, India~~		~~Leased~~
~~Inglewood, CA~~		~~Leased~~
~~Kingswood, Australia~~		~~Leased~~
~~London, England~~		~~Leased~~
~~Mallusk Newtonabbey, Ireland~~		~~Leased~~
~~Malmo, Sweden~~		~~Leased~~
~~Mascot, Australia~~		~~Leased~~
~~Merthsham, Surrey, England~~		~~Leased~~
~~Murrarie, Australia~~		~~Leased~~
~~New York, NY~~		~~Leased~~
~~Norwalk, CA~~		~~Leased~~
~~Oakland, CA~~		~~Leased~~
~~Salfords, Surrey, England~~		~~Owned~~
~~San Diego, CA~~		~~Owned~~
~~San Francisco, CA~~		~~Leased~~
~~Sydney, Australia~~		~~Leased~~
~~Tullahoma, TN~~		~~Leased and Owned~~
~~Vancouver, BC~~		~~Leased~~
~~Wollongong, Australia~~		~~Leased~~

~~Cubic Global Defense Systems:~~
~~Aberdeen, MD~~		~~Leased~~
~~Abu Dhabi UAE~~		~~Leased~~
~~Ashburn, VA~~		~~Leased~~
~~Auckland, New Zealand~~		~~Leased~~
~~Austin, TX~~		~~Leased~~
~~Brisbane, Australia~~		~~Leased~~
~~Canberra, Australia~~		~~Leased~~
~~Chippenham Wiltshire, England~~		~~Leased~~
~~Farnham, Surrey, England~~		~~Leased~~
~~Fayetteville, NC~~		~~Leased~~
~~Fyschwyck, Australia~~		~~Leased~~
~~Hanover, MD~~		~~Leased~~
~~Heisingor, Denmark~~		~~Leased~~
~~Herndon, VA~~		~~Leased~~
~~Huntsville, AL~~		~~Leased~~
~~Orlando, FL~~		~~Owned~~
~~Riyadh, Saudi Arabia~~		~~Leased~~
~~Rome, Italy~~		~~Leased~~
~~Salisbury, UK~~		~~Leased~~
~~San Diego, CA~~		~~Owned~~

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~~Location of Property~~		~~Owned or Leased~~
~~Shackleford, England~~		~~Leased~~
~~Singapore, Asia~~		~~Leased~~
~~Tijuana, Mexico~~		~~Leased~~
~~Townsville, Australia~~		~~Leased~~

~~Cubic Global Defense Services:~~

~~Colorado Springs, CO~~		~~Leased~~
~~Fayetteville, NC~~		~~Leased~~
~~Fountain, CO~~		~~Leased~~
~~Hampton, VA~~		~~Leased~~
~~Herndon, VA~~		~~Leased~~
~~Honolulu, HI~~		~~Leased~~
~~Kingstowne, VA~~		~~Leased~~
~~Leavenworth, KS~~		~~Leased~~
~~Olympia, WA~~		~~Leased~~
~~Orlando, FL~~		~~Leased~~
~~San Diego, CA~~		~~Leased~~
~~Tampa, FL~~		~~Leased~~

CGD: Abu Dhabi, UAE; Amesbury, UK; Auckland, New Zealand; Austin, TX; Beavercreek, OH; Chippenham Wilshire, UK; Fyschwyck, Australia; Helsinger, Denmark; Orlando, FL; Riyadh, Saudi Arabia; Rome, Italy; Shackleford, UK; Singapore, Asia; Tijuana, Mexico; and Townsville, Australia.

Item 3. LEGAL PROCEEDINGS.

In ~~October 2014,~~August 2019, a ~~lawsuit was filed in the United States District Court, Northern District~~transit authority asserted loss of ~~Illinois against us~~revenue due to alleged accidental undercharging of their customers for specific transactions by a fare system which we operate for them and ~~one of~~has requested a corresponding recoupment from us. Based upon our transit customers alleging infringement of various patents held by the plaintiff, seeking judgment that we have infringed on plaintiff’s patents; regular and treble damages; requiring an accounting of sales, profits, royalties and damages owed plaintiffs; pre and post judgment interest; an award of costs, fees and expenses, an injunction prohibiting the continuing infringement of the patents; and any other relief the court deems just and equitable. We are vigorously defending the lawsuit. We are also undertaking defense of our customer ininvestigation into this matter, ~~pursuant to~~we believe this matter will not have a materially adverse effect on our ~~contractual obligations to that customer. The court made several rulings in our favor concerning the validity~~financial position, results of ~~the plaintiff’s patents at issue. The plaintiff appealed those rulings and the Federal Circuit Court~~operations, or cash flows. No liability for this claim has been recorded as of Appeals upheld the District Court’s rulings. While these are favorable ruling for us, the case has yet to be dismissed as the plaintiff evaluates its legal options. Accordingly, we cannot estimate the probability of loss or any range of estimate of possible loss at this time.September 30, 2019.

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

Item 4. MINE SAFETY DISCLOSURES.

Not Applicable.

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PART II

Item 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

The principal market on which our common stock is being traded is the New York Stock Exchange under the symbol CUB. The closing high and low sales prices for the stock, as reported in the consolidated transaction reporting system of the New York Stock Exchange for the quarterly periods during the past two fiscal years, and dividend information for those periods, are as follows:

MARKET AND DIVIDEND INFORMATION


	Sales Price of Common Shares
	Fiscal 2017				Fiscal 2016				Dividends per Share

													Sales Price of Common Shares
													Fiscal 2019				Fiscal 2018				Dividends per Share
Quarter	High		Low		High		Low		Fiscal 2017		Fiscal 2016		High		Low		High		Low		Fiscal 2019		Fiscal 2018
First	$	50.40	$	40.03	$	49.16	$	40.71		—		—	$	72.29	$	50.85	$	63.00	$	51.90		—		—
Second		55.25		46.45		47.87		30.80	$	0.14	$	0.14		65.25		53.09		65.65		54.05	$	0.14	$	0.14
Third		53.15		44.25		42.94		38.19		—		—		64.48		53.43		71.85		59.80		—		—
Fourth		51.95		40.20		48.36		38.89	$	0.14	$	0.14		73.00		63.36		76.85		65.90	$	0.14	$	0.14

On November ~~2, 2017,~~1, 2019, the closing price of our common stock on the New York Stock Exchange was ~~$55.60.~~$74.26. There were ~~574~~495 shareholders of record of our common stock as of November ~~2, 2017.~~1, 2019.

Performance Graph

The following graph illustrates the cumulative total shareholder return over the last five years of Cubic's common stock, the S&P 500 Index, and the Russell 2000 Index. The graph assumes an investment of $100 on October 1, 2014.

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Item 6. SELECTED FINANCIAL DATA.

FINANCIAL HIGHLIGHTS AND SUMMARY OF CONSOLIDATED OPERATIONS

(amounts in thousands, except per share data)

This summary should be read in conjunction with the related consolidated financial statements and accompanying notes in Item 8 of this Form 10-K.


	Years Ended September 30,
	2019 (3)		2018		2017		2016		2015
Results of Operations:
Sales	$	1,496,475	$	1,202,898	$	1,107,709	$	1,070,601	$	1,028,899
Cost of sales		1,065,060		835,392		779,323		766,477		729,179
Selling, general and administrative expenses (2)		270,064		258,644		240,196		253,163		195,752
Research and development		50,132		52,398		52,652		31,976		17,992
Amortization of purchased intangibles		42,106		27,064		30,245		29,356		19,860
Interest expense		20,453		10,424		15,027		11,199		4,400
Income taxes (1)		11,040		7,093		14,658		(14,357)		46,626
Net income (loss) from continuing operations (1) (2)		41,306		7,793		(25,740)		(12,080)		10,170
Net income (loss) from discontinued operations		(1,423)		4,243		14,531		13,815		12,744
Net income (loss) attributable to Cubic (1) (2)		49,694		12,310		(11,209)		1,735		22,885

Per Share Data:
Net income (loss) per share:
Basic
Continuing operations (1) (2)	$	1.68	$	0.30	$	(0.95)	$	(0.45)	$	0.38
Discontinued operations	$	(0.05)	$	0.16	$	0.54	$	0.51	$	0.47
Basic earnings per share (1) (2)	$	1.63	$	0.45	$	(0.41)	$	0.06	$	0.85

Diluted
Continuing operations (1) (2)	$	1.67	$	0.29	$	(0.95)	$	(0.45)	$	0.38
Discontinued operations	$	(0.05)	$	0.16	$	0.54	$	0.51	$	0.47
Diluted earnings per share (1) (2)	$	1.62	$	0.45	$	(0.41)	$	0.06	$	0.85

Cash dividends		0.27		0.27		0.27		0.27		0.27

Shares used in calculating net income (loss) per share:
Basic		30,495		27,229		27,106		26,976		26,872
Diluted		30,606		27,351		27,106		26,976		26,938

Balance Sheet Data:
Shareholders’ equity related to Cubic	$	961,649	$	700,121	$	689,631	$	689,896	$	756,288
Equity per share, basic		31.53		25.71		25.44		25.57		28.14
Total assets		1,847,170		1,304,883		1,336,285		1,504,408		1,300,276
Short-term borrowings		195,500		—		55,000		240,000		60,000
Long-term debt		199,824		199,793		199,761		200,741		126,705

Year Ended September 30,


2017

2016

2015

2014

2013

Results of Operations:

Sales

$
1,485,861

$
1,461,665

$
1,431,045

$
1,398,352

$
1,361,407

Cost of sales

1,122,142

1,116,906

1,091,326

1,082,535

1,055,313

Selling, general and administrative expenses

258,088

269,593

212,518

181,672

165,230

Research and development

52,652

31,976

17,992

17,959

24,445

Interest expense

15,027

11,199

4,400

4,084

3,427

Income taxes (1)

15,059

(9,212)

48,997

19,831

14,502

Net income (loss) attributable to Cubic (1) (2)

(11,209)

1,735

22,885

69,491

25,086

Per Share Data:

Net income (loss) per share, basic (1) (2)

$
(0.41)

$
0.06

$
0.85

$
2.59

$
0.94

Net income (loss) per share, diluted (1) (2)

(0.41)

0.06

0.85

2.59

0.94

Cash dividends

0.27

0.27

0.27

0.24

0.24

Shares used in calculating net income (loss) per share:

Basic

27,106

26,976

26,872

26,787

26,736

Diluted

27,106

27,040

26,938

26,845

26,760

Year-End Data:

Shareholders’ equity related to Cubic

$
689,631

$
689,896

$
756,288

$
782,278

$
716,946

Equity per share, basic

25.44

25.57

28.14

29.20

26.82

Total assets

1,336,285

1,504,408

1,300,276

1,194,606

1,109,618

Long-term debt, net of current portion

199,761

200,741

126,705

102,390

102,920

~~(1)~~

Our pretax income totaled $3.9 million in 2017 while our income tax provision in 2017 totaled $15.1 million. The provision for fiscal 2017 primarily resulted from tax on foreign earnings and U.S. tax expense related to the amortization of indefinite lived intangible assets, partially offset by benefit related to the release of reserves for uncertain tax positions due to the positions being effectively settled. Results for the year ended September 30, 2015 include the net impact on income tax expense of establishing valuation allowances on U.S. deferred tax assets totaling $35.8 million. This valuation allowance was reduced by $6.7 million in the year ended September 30, 2016. See Note 10 to the Consolidated Financial Statements in Item 8 of this Form 10-K for further discussion of these items.

~~(2)~~

Results of the year ended September 30, 2016 included an $18.5 million charge related to a business acquisition purchase accounting charge. See Note 2 of the Consolidated Financial Statements in Item 8 of this Form 10-K for further discussion on this charge. Results for the year ended September 30, 2013 include the impact of a goodwill impairment charge of $50.9 million, before the impact of applicable income taxes.

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(1)Fiscal 2019 tax provision primarily resulted from tax on foreign earnings and state income tax, partially offset by $6.6 million of tax benefits in connection with acquisitions involving significant U.S. deferred tax liabilities which resulted in a release of deferred tax valuation allowance. Fiscal 2018 tax provision includes a one-time tax benefit of $7.1 million related to U.S. Tax Reform. Fiscal 2017 pretax loss totaled $11.1 million while the income tax provision totaled $14.7 million. The provision primarily resulted from tax on foreign earnings and U.S. tax expense related to the amortization of indefinite lived intangible assets, partially offset by tax benefit related to the release of reserves for uncertain tax positions due to the positions being effectively settled. Fiscal 2016 tax provision included $6.3 million of expense related to nondeductible acquisition-related compensation, as well as $23.8 million of tax benefit in connection with an acquisition involving significant U.S. deferred tax liabilities which allowed for a subsequent release of deferred tax valuation allowance. Fiscal 2015 tax provision included the effect of establishing a deferred tax valuation allowances on U.S. deferred tax assets totaling $35.8 million.

(2)Results of the year ended September 30, 2016 included an $18.5 million charge related to a business acquisition purchase accounting charge, before applicable income taxes.

(3)We adopted Accounting Standards Update 2014-09, Revenue from Contracts with Customers (commonly known as Accounting Standards Codification (ASC) 606), effective October 1, 2018 using the modified retrospective transition method. Results for reporting periods beginning after September 30, 2018 are presented under ASC 606, while prior period comparative information has not been restated and continues to be reported in accordance with ASC 605, the accounting standard in effect for periods ending prior to October 1, 2018. Based on contracts in process at September 30, 2018, upon adoption of ASC 606 we recorded a net increase to shareholders’ equity of $24.5 million, which includes the acceleration of net sales of approximately $114.9 million and the related cost of sales of $90.4 million. In accordance with the modified retrospective transition provisions of ASC 606, we will not recognize any of the accelerated net sales and related cost of sales through October 1, 2018 in our Consolidated Statements of Operations for any historical or future period. For more information on the impact of our adoption of ASC 606, see Note 2 to the Consolidated Financial Statements in Item 8 of this Form 10-K.

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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

~~Company~~Business Overview

~~We are~~Cubic is a technology-driven, market-leading ~~technology~~global provider of ~~integrated~~innovative, mission-critical solutions that ~~increase situational understandingfor transportation, defense C4ISR and training customers worldwide to decrease urban~~reduce congestion and ~~improve the militaries’~~increase operational readiness and effectiveness ~~and operational readiness.~~through superior situational understanding. Cubic ~~Corporation~~ designs, integrates and operates systems, products and services focused in the transportation, ~~defense C4ISR and training markets.~~ We serve the needs of various federal and regional government agencies in the U.S. and allied nations around the world with products and services that have both defense and civil applications. For the fiscal year ended September 30, 2017, 40% of sales were derived from transportation systems and related services, while 60% were derived from defense systems and services. The U.S. government remains our largest customer, accounting for approximately 48% of sales in 2017, 45% of sales in 2016, and 47% of sales in 2015. In fiscal year 2017, 54% of our total sales were derived from services, with product sales accounting for the remaining 46%.

We operate in three reportable business segments: transportation systems, defense systems and defense services. We organize our business segments based on the nature of the products and services offered.

We are operating in an environment that is characterized by continuing economic pressures in the U.S. and globally. A significant component of our strategy in this environment is to focus on program execution, improving the quality and predictability of the delivery of our products and services, and providing opportunities for customers to outsource services where we can provide a lower cost and more effective solution. Recognizing that many of our U.S. based customers are resource constrained, we are continuing our focus on developing and extending our portfolio in international and adjacent markets. Our international sales, including Foreign Military Sales (FMS), comprised 42% of our total sales for fiscal year 2017. Sales to countries outside the U.S. amounted to 66%, 9% and 38% of the total sales of Cubic Transportation Systems (CTS), Cubic Global Defense Services (CGD Services) and Cubic Global Defense Systems (CGD Systems), respectively, for fiscal year 2017. To the extent our business and contracts include operations in countries outside the U.S., other risks are introduced into our business, including changing economic conditions, fluctuations in relative currency values, regulation by foreign countries, and the potential for deterioration of political relations.

We continuously strive to strengthen our portfolio of products and services to meet the current and future needs of our customers. We accomplish this in part by our independent R&D activities, and through acquisitions. Company-sponsored R&D spending totaled $52.7 million in 2017. In 2014 through our acquisition of Intific, Inc. (Intific), we significantly broadened our advanced research capabilities. Intific brings us a wide range of expertise including computer simulation, animation, human-machine interaction, robotics, neuroscience, visualization, gaming, and artificial intelligence. Intific performs work funded by the Defense Advanced Research Projects Agency (DARPA) and other U.S. government agencies; however, most of Intific’s R&D activities are included in cost of sales as they are directly related to contract performance.

We selectively pursue the acquisition of businesses that complement our current portfolio and allow access to new customers or technologies. In pursuing our business strategy, we routinely conduct discussions, evaluate targets, and enter into agreements regarding possible acquisitions. As part of our business strategy, we seek to identify acquisition opportunities that will expand or complement our existing products and services, or customer base, at attractive valuations. From fiscal year 2015 through 2017, we acquired DTECH LABS, Inc. (DTECH), GATR Technologies, Inc. (GATR), TeraLogics, LLC (Teralogics), and Vocality International (Vocality) in connection with our strategic efforts to build and expand our command, control, communication, computers, intelligence, surveillance and reconnaissance (C4ISR) ~~business. In fiscal 2016~~ ~~we formalized the structure of~~, and training markets. We offer integrated payment and information systems, expeditionary communications, cloud-based computing and intelligence delivery, as well as state-of-the-art training and readiness solutions. We operate in three reportable business segments: Cubic Transportation Systems (CTS), Cubic Mission Solutions (CMS), and Cubic Global Defense Systems (CGD).

For more information on our business, ~~unit which combines~~see our discussion in Item 1 of this Form 10-K.

FISCAL 2019 RESULTS COMPARED WITH FISCAL 2018 RESULTS

CONSOLIDATED RESULTS


	Fiscal 2019		Fiscal 2018		% Change
	(in millions, except per share data)
Sales	$	1,496.5	$	1,202.9		24	%
Operating income		86.2		24.4		253
Net income from continuing operations attributable to Cubic		51.1		8.1		534
Diluted earnings per share from continuing operations attributable to Cubic		1.67		0.29		466
Adjusted EBITDA		146.6		104.6		40
Adjusted Net Income		95.6		60.0		59
Adjusted EPS		3.13		2.19		43

Note on non-GAAP measures: Throughout the following results of operations discussion, we disclose certain non-GAAP financial measures, including Adjusted EBITDA, Adjusted Net Income and ~~integrates our C4ISR~~Adjusted EPS. For an explanation and ~~secure communications operations.~~reconciliation of such measures, see the section titled ‘Non-GAAP Financial Information’ below.

Note on comparability of fiscal 2019 and 2018 results:We ~~have also made a number of niche acquisitions of businesses during~~adopted Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (commonly known as Accounting Standards Codification (ASC) 606), effective October 1, 2018 using the ~~past several years, including Deltenna Limited (Deltenna)~~modified retrospective transition method. In accordance with the modified retrospective transition method, fiscal 2019 is presented under ASC 606, while fiscal 2018 is presented under ASC 605, Revenue Recognition, the accounting standard in ~~2017 and Intific in February 2014. Generally, our business acquisitions are dilutive~~effect for periods ending prior to ~~earnings in the short-term due to acquisition-related costs, integration costs, retention payments and often higher amortization of~~

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purchased intangibles in the early periods after acquisition and expenses related to earn-outs. However, we expect that each of these recent acquisitions will be accretive to earnings in the long-term.

~~Industry Considerations~~

October 1, 2018. The U.S. government continues to focus on discretionary spending, tax, and other initiatives to control spending and reduce the deficit. The president’s administration and Congress will likely continue to debate the size and expected growthcumulative effect of the ~~U.S. federal budget as well as~~change in accounting for periods prior to October 1, 2018 was recognized through shareholders’ equity at the defense budget over the next few years and balance decisions regarding defense, homeland security, and other federal spending priorities in a constrained fiscal environment imposed by the Budget Control Act (BCA) and various Bipartisan Budget Acts (BBA) since 2011. The most recent, agreed to on November 2, 2015, Bipartisan Budget Actdate of 2015 revised discretionary spending limits to avoid sequestration for fiscal year 2016 and fiscal year 2017. The ultimate effects of sequestration and any subsequent bipartisan budget acts beyond 2017 still cannot be determined. Absent a new BCA or BBA in 2017, sequestration still threatens to severely limit discretionary federal funding in 2018. Reductions to 2018 and beyond from current budget projections could have an impact on our customers’ procurement of products and services.adoption.

While these budgetary considerations have put downward pressure on growth in the defense industry and will likely continue to do so, we believe that much of our business is well positioned in areas that the DoD has indicated are areas of focus for future defense spending to help the DoD meet its critical future capability requirements for protecting U.S. security and the security of our allies in the years to come.

In transportation, we continue to believe that our products and services are critical to our customers to ensure that they maximize revenue and efficiencies in a resource constrained environment. Some customers have responded to the current market environment by seeking financing for their projects from the system supplier. An example of this is our contract with the Chicago Transit Authority, awarded in late 2011. We designed and manufactured a new fare collection system for the Chicago Transit Authority and are receiving monthly payments for the system over an approximate ten-year period which began in January 2014.

While future defense plans, changes in defense spending levels and changes in spending for mass transit projects could have a materially adverse effect on our consolidated financial position, we have and plan to continue to make strategic investments and acquisitions to align our businesses in growth areas of our respective markets that we believe are the most critical priorities and mission areas for our customers.

~~Segment Overview~~

~~Cubic Transportation Systems~~

CTS is a systems integrator of payment and information technology and services for intelligent travel solutions. We deliver integrated systems for transportation and traffic management, delivering tools for travelers to choose the smartest and easiest way to travel and pay for their journeys, and enabling transportation authorities and agencies to manage demand across the entire transportation network — all in real time. We offer fare collection and revenue management devices, software, systems and multiagency, multimodal integration technologies, as well as a full suite of operational services that help agencies and operators efficiently collect fares and revenue, manage operations, reduce revenue leakage and make transportation more convenient. Through our NextBus and Intelligent Transport Management Solutions (ITMS) businesses, respectively, we also deliver real-time passenger information systems for tracking and predicting vehicle arrival times and we are a leading provider of urban and inter-urban intelligent transportation and enforcement solutions and technology and infrastructure maintenance services to the United Kingdom and other international city, regional and national road and transportation agencies. Through our Urban Insights business we use big data and predictive analytics technology and a consulting model to help the transportation industry improve operations, reduce costs and better serve travelers.

The transportation markets we serve are undergoing a substantial change. Mounting pressure on transportation authorities to improve the customer experience while stretching their operating budgets is fueling a trend toward

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~~outsourced services and systems that enable innovation and lower~~The table below quantifies the impact of adopting ASC 606 on sales, operating ~~cost. We believe we are positioned at the forefront of this change.~~

We believe that we hold the leading market position in large-scale automated fare payment and revenue management systems and services for major metropolitan areas. CTS has delivered over 20 regional back officeincome, net income from continuing operations which together serve over 38 million people every day in major markets around the world. We have implemented and, in many cases, operate automated fare payment and revenue management systems for some of the world’s largest transportation systems, examples include London (Oyster/Contactless Payment), the Chicago region (Ventra), the San Francisco Bay Area (Clipper), the Los Angeles region (TAP), the New York region (Metrocard), the Washington D.C. region (Smartrip), the Vancouver region (Compass), the Sydney region (Opal Card) and the Brisbane region (Go Card). In fiscal 2016 we were awarded a contract by the New Hampshire State Department of Transportationattributable to ~~deploy our back-office system~~Cubic, for the purposes of toll revenue collection and in early fiscal 2018, we were awarded a contract by the New York Metropolitan Transportation Authority (MTA) to replace the MetroCard system with a New Fare Payment System (NFPS)..

Through our NextBus, ITMS and Urban Insights businesses we provide advanced transportation operational management and analytics capabilities and related services to over 110 customers including organizations such as Transport for London, Transport Scotland, Highways England, Transport for Greater Manchester, Transport for New South Wales, Los Angeles Metro, San Francisco Muni and the Toronto Transit Commission.

In addition to helping us secure similar projects in new markets, our comprehensive suite of new technologies and capabilities enables us to benefit from a recurring stream of revenues in established markets resulting from operations, innovative new services, technology obsolescence, equipment refurbishment and the introduction of new or adjacent applications.

~~In 2017, revenues from services provided by CTS were $330.7 million, or 57% of CTS sales.~~

We are currently designing and building major new systems in Singapore, Ireland and Miami and have now formally commenced the build of the new system for New York. Typically, profit margins during the design and build phase of major projects are lower than during the operate-and-maintain phase. This has in the past caused, and may in the future cause, swings in profitability from period to period. In addition, cash flows are often negative during portions of the design-and-build phase, until major milestones are reached and cash payments are received.

Cash payment terms offered by our transportation customers in a competitive environment are sometimes not favorable to us. The customers’ budget constraints often result in less funding available for the build of a new system, with more funds becoming available when the system becomes operational. This, coupled with the inherent risks in managing large infrastructure projects, can yield negative cash flows and lower and less predictable profit margins on contracts during the design and build phase. Conversely, during the operate-and-maintain phase, revenues and costs are typically more predictable and profit margins tend to be higher.

Gross profit margins from services sales in CTS were 28% and 26% for fiscal years 2017 and 2016, respectively, and gross profit margin from product sales was 29% and 32% in 2017 and 2016, respectively. Historically, the trend toward a greater mix of services revenues compared to product sales has helped to generate higher profit margins from the segment; however in 2017 and 2016 service gross margins were lower than product gross margins due to the improvement in margins on a number of system development contracts as we move out of the heavy engineering and software development phase of these contracts. Also, service sales gross margins in 2017 and 2016 are lower than recent historical service sales gross margins mostly due to the reduction in margins on our London follow-on contract. Margins were lower on the follow-on contract in 2017 and 2016 ~~in large part because it no longer includes the award of usage bonuses.~~ ~~The mix of product and services sales can produce fluctuations in margin from period-to-period; however, we expect the trend of increasing services sales to continue in the long-term.~~

~~Most of our sales in CTS for fiscal~~ year 2017 were from fixed-price contracts. However, some of our service contracts provide for variable payments, in addition to the fixed payments, based on meeting certain service level requirements and, in some cases, based on system usage. Service level requirements are generally contingent upon factors that are

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under our control, while system usage payments are contingent upon factors that are generally not under our control, other than basic system availability. Development and system integration contracts in CTS are usually accounted for on a percentage-of-completion basis using the cost-to-cost method to measure progress toward completion, which requires us to estimate our costs to complete these contracts on a regular basis. Our actual results can vary significantly from these estimates and changes in estimates can result in significant swings in revenues and profitability from period to period. Generally, we are at risk for increases in our costs, unless an increase results from customer-requested changes. At times, there can be disagreement with a customer over who is responsible for increases in costs. In these situations we must use judgment to determine if it is probable that we will recover our costs and any profit margin.

Revenue under contracts for services in CTS is generally recognized either as services are performed or when a contractually required event has occurred, depending on the contract. Revenue under such contracts is generally recognized on a straight-line basis over the period of contract performance, unless evidence suggests that the revenue is earned or the obligations are fulfilled in a different pattern. Costs incurred under these services contracts are expensed as incurred, and may vary from period to period. Incentive fees included in some of our CTS service contracts are recognized when they become fixed and determinable based on the provisions of the contract. As described above, often these fees are based on meeting certain contractually required service levels or based on system usage levels. Contractual terms can also result in variation of both revenues and expenses, resulting in fluctuations in earnings from period to period.

For the fare collection system for the Chicago Transit Authority, the contract specifies that we would not begin to be paid until we entered the service period. In accordance with authoritative accounting literature, we did not begin recognizing revenue on this contract until it entered the service period in August 2013. As ofended September 30, 2017, we had capitalized $56.5 million, net, in direct costs associated with developing the new fare collection system. Selling, general and administrative (SG&A) costs associated with this contract are not being capitalized, but are being expensed as incurred. Capitalized costs are being recognized as cost of sales based upon the ratio of revenue recorded during a period compared to the revenue expected to be recognized over the term of the contract.2019 (in millions):


	Fiscal 2019
					As Reported
	Under		Effect of		Under
	ASC 605		ASC 606		ASC 606
Sales:
Cubic Transportation Systems	$	788.0	$	61.8	$	849.8
Cubic Mission Solutions		327.2		1.6		328.8
Cubic Global Defense		272.1		45.8		317.9
Total sales	$	1,387.3	$	109.2	$	1,496.5

Operating income:
Cubic Transportation Systems	$	65.9	$	11.3	$	77.2
Cubic Mission Solutions		7.3		0.5		7.8
Cubic Global Defense		19.9		3.1		23.0
Unallocated corporate expenses		(21.8)		—		(21.8)
Total operating income	$	71.3	$	14.9	$	86.2

Net income from continuing operations attributable to Cubic	$	42.3	$	8.8	$	51.1

~~Cubic Global Defense Systems~~

CGD Systems is focused on two primary lines of business: training systems and secure communications. The segment is a diversified supplier of live and virtual military training systems as well as secure communication systems and products to the DoD, other U.S. government agencies and allied nations. We design and manufacture instrumented range systems for fighter aircraft, armored vehicles and infantry force-on-force live training weapons effects simulations, laser-based tactical and communication systems, and precision gunnery solutions.Sales: Our ~~secure communications products are aimed at intelligence, surveillance, ground combat, and search and rescue markets.~~ ~~In 2016~~ we formalized the structure of our CMS business unit which combines and integrates our C4ISR and secure communications operations. CMS’ C4ISR solutions provide information capture, assessment, exploitation and dissemination in a secure network-centric environment.

CGD Systems is continually building upon its role as a leader in air and ground combat training systems worldwide. Our products and systems help our customers to retain technological superiority with cost-effective solutions. We design, innovate, manufacture and field a diverse range of technologies that are critical to combat readiness, supply chain logistics and national security for the U.S. and allied nations. Our primary lines of business include air combat training ranges and after action review software, ground combat training systems, including a full range of laser engagement simulation systems, game-based learning systems, virtual small arms training systems, Intelligence, Surveillance and Reconnaissance (ISR) data links, networking and baseband communications equipment, full-motion video software and services, expeditionary satellite communication terminal solutions, personnel locator systems, and cross domain appliances for cyber security. We also provide ongoing support services for systems we have built for several of our international customers.

Our established international footprint in 35 allied nations is a key ingredient to our strategy. Our global footprint helps to insulate us from possible shifts or downturns in DoD spending. Sales to international customers of CGD Systems are a major part of our business with 38% of sales in 2017 to international customers. In addition, expansion into adjacent markets gives us an effective means to add scale to our business. We look for attractive acquisition candidates to expand

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our product offerings and we invest in the development of innovative new products that deliver real value to our customers. Through business acquisitions we made in the past three years, we now offer software and game-based solutions in modeling and simulation, training and education, cyber warfare, neuroscience, networking and satellite communications, and live fire training solutions to U.S. and international forces. Our recent acquisitions also expand our capabilities and product offerings for radio and antenna communications and unified communication platforms. These acquisitions deepen our training and communication capabilities and expand our customer base.

Fixed-price contracts accounted for 92% of CGD Systems revenue for fiscal year 2017. Development and system integration contracts in CGD Systems are generally accounted for on a percentage-of-completion basis using the cost-to-cost method to measure progress toward completion, which requires us to estimate our costs to complete these contracts on a regular basis. Our actual results can vary significantly from these estimates and changes in estimate can result in significant swings in revenues and profitability from period to period. Generally, we are at risk for increases in our costs, unless an increase results from customer-requested changes. At times, there can be disagreement with a customer over who is responsible for increases in costs. In these situations we must use judgment to determine if it is probable that we will recover our costs and any profit margin.

CGD Systems also has many long-term, fixed-price production contracts that do not require substantial development effort. For these contracts we use the units-of-delivery percentage-of-completion method as the basis to measure progress toward completing the contract and recognizing sales. The units-of-delivery measure recognizes revenues as deliveries are made to the customer generally using unit sales values in accordance with the contract terms. We estimate profit as the difference between total estimated revenue and total estimated cost of a contract and recognize that profit over the life of the contract based on deliveries.

Increasingly, CGD Systems is receiving contracts from foreign customers to not only develop and deliver a system, but also to maintain the system for a period of years after the delivery. While service contracts have not historically been a significant part of our CGD Systems business, this type of multiple-element contract has become more common in recent years. Revenues under contracts for services in CGD Systems are generally recognized as services are performed on a straight-line basis over the period of contract performance. Costs incurred under these services contracts are expensed as incurred, and may vary from period to period, resulting in fluctuations in earnings.

The gross profit margin in fiscal 2017 was 31%, compared to 28% in 2016 and 29% in 2015. At times, particularly favorable or unfavorable contracts can cause variation in this ratio, due to competition and the prevalence of fixed-price arrangements. Fixed-price contracts create both the risk of cost growth and the opportunity to increase margins if we are able to reduce our costs.

~~Cubic Global Defense Services~~

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

CGD Services is a highly specialized and customer centric business which we believe knows how to meet the unique requirements of each of its many customers. In the government services marketplace, reputation, quality and relationships are always important. We uphold our credentials for professional excellence by consistently providing high-value and cost-effective support for our customers.

CGD Services is focused on customers within the U.S. government, extending to the DoD, all branches of the U.S. Armed Services, the Department of Homeland Security, non-military agencies, and allied nations under FMS contracts funded by the U.S. government. CGD Services is the prime contractor at more than 40 military training and support facilities and supports some of the largest exercises and training events each year including the largest annual constructive simulation training event under our Korea Battle Simulation Center (KBSC) support contract. Cubic won the recomplete of the KBSC contract which has a base and four option periods. The segment supports all four of the U.S.

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Army’s combat training centers (CTCs) comprised of: the Joint Readiness Training Center (JRTC) in Fort Polk, Louisiana, which is the nation’s premier training center for light infantry forces; the National Training Center (NTC) in Fort Irwin, California, the Army’s premier heavy maneuver CTC; the Joint Multinational Readiness Center (JMRC) in Hohenfels, Germany, which is the U.S. Army Europe’s combat maneuver training center for realistic training from the individual to the brigade level; and the Mission Command Training Program (MCTP) in Fort Leavenworth, Kansas, which delivers mission command training to the Army’s senior commanders and is the Army’s only worldwide deployable CTC. We also currently provide and/or have provided defense modernization support for 13 NATO entrants in Central and Eastern Europe under FMS contracts. In 2011 and 2012, CGD Services began diversifying its business into the national security market with the acquisitions of Abraxas and NEK. These acquired businesses added to the segment’s specialized skills and further diversified the business to new customers and markets which are directly aligned with DoD’s emphasis on intelligence and the special operations forces communities where trusted credentials are a high barrier to entry. NEK provides Special Forces training-related services to the U.S. Army and other national security related customers and provides a platform to expand CGD Services work both in the U.S. and to key foreign allies.

We are adapting to a new era in defense and national security spending practices. In the past, many of the contracts we were awarded in CGD Services were long-term in nature, spanning periods of five to ten years. The DoD now relies heavily upon indefinite delivery/indefinite quantity (ID/IQ) and small business set aside contracts. For us that means a lower backlog of service contracts due to the shorter term nature of these ID/IQ Task Order awards. Shorter-term contracts combined with this tougher competitive environment, where the “lowest-priced, technically acceptable” bids often win, have resulted in a trend toward lower profit margins from the segment in recent periods. The gross profit margin in CGD Services has been about 10% in the period from 2015 through 2017. We must continue to work to keep our costs low to remain competitive under these market conditions. These conditions also provide the opportunity for us to increase our market share of the large DoD services market. To maximize our business opportunities under ID/IQ contract vehicles, we often seek new work both as a prime contractor and a subcontractor. By increasing our participation in multiple award ID/IQ contracts we improve our chances to develop new customers, programs and capabilities. Retaining customers is a critical component of our success; we remain vigilant in maintaining a high win rate on re-compete contracts to retain our customers. Despite the trend toward small business awards by the U.S. government, where we must take a role as a subcontractor, 89% of our revenues in fiscal year 2017 were as a prime contractor.

Cost reimbursable and time and materials contracts accounted for 48% of our sales in CGD Services for fiscal year 2017, with the remaining sales derived from fixed-price contracts. Revenues under cost reimbursable contracts are recognized as costs are incurred, plus the estimated fee earned under the contract terms. Often these are structured as award fees based on performance and are generally accrued during the performance of the contract based on our historical experience with such awards. Revenues under time and materials contracts are recognized as services are delivered based on the terms of the contract. Revenues under our fixed-price service contracts with the U.S. government are recorded using the cost-to-cost percentage-of-completion method.

~~Operating overview~~

~~Cubic Corporation~~ sales increased 2%24% to ~~$1.486~~$1.496 billion in fiscal year ~~2017~~2019 from ~~$1.462~~$1.203 billion in ~~2016.~~2018. The ~~increase~~increases in sales for ~~CGD Systems~~CTS and CMS of 9%27% and 59%, ~~was~~respectively, were partially offset by ~~1% and 3% decreases~~a decrease in ~~CTS~~CGD sales ~~and CGD Services sales, respectively. Revenues~~of 2%. Sales from businesses we acquired in ~~2017~~2019 and ~~2016, all within our CGD Systems operating segment, increased our consolidated sales by 3% from 2016~~2018 amounted to ~~2017. Organic sales decreased between~~$83.3 million and $0.6 million for fiscal years ~~2016~~2019 and ~~2017 primarily due to the negative impact of changes in foreign currency exchange rates.~~2018, respectively. The average exchange rates between the prevailing currencies in our foreign operations and the U.S. dollar between 2018 and 2019 had a negative impact on sales of ~~1%, or $19.9~~$25.3 million, ~~in 2017 compared to 2016.~~which was 2% of 2019 sales. The impacts of changes in foreign currency exchange rates on sales from ~~2016~~2018 to ~~2017~~2019 predominantly affected our CTS segment results. See the segment discussions below for further analysis of segment sales.

~~Cubic Corporation~~Gross Margin: Our gross margin percentage from product sales was 28% in ~~2016 were $1.462 billion~~2019, compared to ~~$1.431 billion~~33% in ~~2015,~~2018. The decrease in product sales gross margins was primarily due to sales mix. The gross margin on service sales was 31% in 2019 compared to 27% in 2018. The increase in service sales gross margins was primarily caused by an increase in service sales by CGD, which has a higher average margin percentage on services sales than our other business segments.

Selling, General, and Administrative: SG&A expenses increased to $270.1 million in 2019, compared to $258.6 million in 2018. However, as a percentage of ~~2%. Increases~~sales SG&A decreased to 18% in ~~sales for CTS and CGD Systems~~2019 compared to 22% in 2018. The increase in SG&A expense was primarily due to $29.2 million of ~~3% and 5%, respectively,~~SG&A expenses incurred by three businesses we acquired in fiscal 2019 including the impacts of business acquisition accounting which is further described in the segment discussions below. These increases in SG&A expenses were partially offset by the results of cost reduction activities undertaken in fiscal 2019 as well as reduced strategic and IT system resource expenses which totaled $8.2 million in 2019 compared to $24.1 million in 2018.

Amortization of Purchased Intangibles: Amortization of purchased intangibles totaled $42.1 million in 2019 compared to $27.1 million in 2018. The increase is due to the amortization of purchased intangibles for companies acquired by Cubic in fiscal year 2019.

Gain on the Sale of Fixed Assets: In line with our One Cubic strategic objective, in fiscal 2019, we entered into agreements related to the construction and leasing of two buildings on our existing corporate campus in San Diego, California that will allow us to co-locate our San Diego-based employees on a ~~3% decrease~~single modern campus to foster innovation and collaboration across our business. Under these agreements, a financial institution will own the buildings, and we will lease the facilities for a term of five years commencing upon their completion. In the third quarter of fiscal 2019, we sold land and buildings comprising our separate CTS campus in ~~CGD Services sales. Revenues from businesses we acquired in 2016~~San Diego. We have entered into a lease with the buyer of this campus and ~~2015, all within~~CTS employees will continue to occupy this separate campus until the new buildings on our CGD Systems operating segment, increased our consolidated sales by 3% from 2015 to 2016. Organic sales decreased between 2015 and 2016 due primarily to changes in foreign currency exchange rates. The impact of changes in foreign currency exchange rates,corporate

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~~particularly~~campus are ready for occupancy in fiscal 2021. In the ~~strengthening~~third quarter of fiscal 2019, we also sold land and buildings in Orlando, Florida and we are entering a lease for new space with a smaller footprint in Orlando to accommodate our employees and operations in Orlando. In connection with the ~~U.S. dollar against~~sale of these real estate campuses we received total net proceeds of $44.9 million and recognized net gains on the ~~British pound, had a negative impact on~~ sales ~~of 2%, or $32.3~~totaling $32.5 million within operating income.

Research & Development: Company-sponsored R&D spending totaled $50.1 million in ~~2016~~2019 compared to ~~2015.~~$52.4 million in 2018. For fiscal 2019 there was a shift in the mix of R&D expenditures between our business segments with CMS increasing its portion of our total R&D spend and CTS and CGD decreasing. In fiscal 2019 CMS’ R&D expenditures were driven by the development of secure communications and ISR-as-a-service technologies and CTS continued to make R&D investments in new transportation product development, including fare collection technologies, real-time passenger information and development of intelligent transport systems and analytic technologies. CGD’s R&D expenditures focused on next generation live, virtual and constructive training systems.

In addition to company-sponsored R&D, a significant portion of our new product development occurs in conjunction with the performance of work on our contracts. These costs are included in cost of sales in our Consolidated Statements of Operations as they are directly related to contract performance. The cost of contract R&D activities included in our cost of sales were $78.4 million in fiscal 2019 compared to $69.6 million in fiscal 2018. The increase in contract R&D activities is primarily due to significant development on CTS contracts in New York, Boston, San Francisco Bay Area and Brisbane.

Operating Income:Operating income increased ~~by over 140%~~ to ~~$17.5~~$86.2 million in ~~2017 from $7.2~~2019 compared to $24.4 million in ~~2016. CGD Systems had~~2018 driven by improvements in profitability from all three of our businesses. CTS operating income increased by 28% to $77.2 million in 2019 compared to $60.4 million in 2018, primarily due to increased volumes on contracts in New York, Boston, San Francisco Bay Area and Brisbane. CMS generated operating income of ~~$18.8~~$7.8 million in ~~2017~~fiscal 2019 compared to an operating loss of ~~$17.1~~$0.1 million in ~~2016.~~2018. The ~~CGD Systems~~increase in CMS profitability was driven by broad increases in sales volume across all of its major product lines. CGD’s operating ~~loss~~income increased 39% to $23.0 million in ~~2016 was~~2019 compared to $16.6 million in 2018 primarily ~~caused by~~due to the ~~impact~~results of ~~purchase accounting on businesses~~cost reduction efforts and reduced R&D expenditures. Businesses acquired in ~~this segment during fiscal 2016. Businesses we acquired in 2017~~2019 and ~~2016, which were all in our CGD Systems segment,~~2018 generated operating losses of ~~$4.6~~$22.9 million in ~~2017~~2019 compared to ~~$29.9~~$3.5 million in ~~2016.~~ ~~These operating losses for acquired businesses include acquisition transaction~~2018, including acquisition-related costs totaling $9.7 million in 2019 and ~~other acquisition-related charges,~~$1.0 million in 2018, and including ~~an $18.5~~amortization of purchased intangible assets of $22.0 million ~~charge incurred for~~in 2019 and $0.5 million in 2018. Excluding the ~~GATR acquisition in fiscal 2016 described in~~gain on sale of fixed assets noted above, the ~~CGD Systems segment section below.~~ ~~CTS operating income decreased by 31% primarily~~ ~~due to increased R&D investment in fiscal year 2017 and the impact of cost growth on a toll contract.~~ ~~CGD Services operating income decreased by 40% in 2017 due to~~ ~~decreased activity on certain U.S. Army and Special Operations Forces training contracts. Unallocated~~unallocated corporate and other costs were ~~$47.8~~$54.3 million in ~~2017~~2019 compared to ~~$44.4~~$52.5 million in ~~2016,~~2018, and included expenses related to strategic and IT system resource planning as part of our One Cubic initiative totaling ~~$34.4~~$8.2 million in ~~2017~~2019 and ~~$36.8~~$24.1 million in ~~2016.~~2018. Unallocated corporate costs also include restructuring charges of $8.9 million and $3.1 million in fiscal years 2019 and 2018, respectively. The average exchange rates between the prevailing currencies in our foreign operations and the U.S. dollar resulted in a decrease in operating income of ~~$1.4~~$3.7 million in ~~2017~~2019 compared to ~~2016.~~2018. See the segment discussions below for further analysis of segment operating income.

~~Operating~~Interest and Dividend Income and Interest Expense: Interest and dividend income was ~~$7.2~~$6.5 million in ~~2016~~2019 compared to ~~$75.4~~$1.6 million in 2015, a decrease of 90%. CGD Systems had an operating loss of $17.1 million in 2016 compared to operating income of $18.4 million in 2015 primarily due to the impact of purchase accounting on businesses acquired in this segment during fiscal 2016, as further described below. CTS operating income decreased by 25% between 2016 and 2015 primarily ~~related to lower profits on the transition to our follow-on fare collection contract in London, partially offset by improved profitability on contracts in Chicago, Sydney, and Vancouver~~. CGD Services operating income increased by 70% in 2016 due to decreased amortization of purchased intangibles and the impact of cost saving efforts. Unallocated corporate and other costs were $44.4 million in 2016 compared to $25.5 million in 2015.2018. The increase in ~~unallocated corporate costs is primarily related to strategic and IT system resource planning as part of our~~ ~~One Cubic~~ ~~initiative totaling $36.8 million~~interest income in 2016 compared to $13.2 million in 2015, partially offset by a reduction in legal and consulting expenses related to an investigation conducted by the Audit Committee in 2015, for which we incurred expenses of $3.0 million. The average exchange rates between the prevailing currencies in our foreign operations and the U.S. dollar resulted in a decrease in operating income of $4.0 million in 2016 compared to 2015.

Our net loss was $11.2 million (net loss of $0.41 cents per share) in 2017 compared to net income of $1.7 million (net income of $0.06 cents per share) in 2016. The change was related to the increase in income tax expense described below.

~~Net income decreased to $1.7 million ($0.06 cents per share) in 2016 from $22.9 million ($0.85 cents per share) in 2015. The change~~fiscal 2019 was primarily due to the ~~decrease in operating~~interest income ~~described above and an increase in interest expense described below, partially offset by a reduction in income tax expense described below.~~

~~The gross margin from product sales was 31% in 2017, compared to 28% in 2016. The increase in gross margin percentage was primarily due to increased product sales by our recently acquired businesses~~recorded on long-term contracts financing receivables in our ~~CGD Systems segment, which generally have higher gross margins than product sales from our other businesses.~~ ~~In addition, product sales gross margins were positively impacted~~consolidated balance sheet. Under ASC 606, in ~~2017 by an $8.0 million equitable contract adjustment on CGD Systems contract to provide virtual training software to the U.S. Navy. As such,~~fiscal year 2019 we recognized ~~$8.0 million in sales and operating profit related to this contract adjustment during fiscal 2017.~~ ~~The gross margin from service sales was down less than 1%. After rounding to whole percentages, the gross margin~~interest income on ~~service sales was 19% in 2017 compared to 20% in 2016.~~

The gross margin from product sales was 28% in 2016, compared to 26% in 2015. The increase in gross margin percentage was primarily due to improved profitability on transportation system sales in North America, Australia, and the U.K., and a reduction of losses incurred on the virtual combat training deliverables for the U.S. Navy described below. These increases were partially offset by lower gross margins on lower DTECH sales in 2016, as DTECH sales generally have a higher gross margin percentage than other Cubic product sales. The gross margin from service sales was 20% in 2016 compared to 22% in 2015. The decrease in the gross margin percentages on services sales was

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~~predominantly the result of~~ ~~lower profits on the transition to our follow-on transportation fare collection contract in London, as described below.~~

SG&A expenses decreased to $258.1 million or 17% of sales in 2017, compared to $269.6 million or 18% of sales in 2016. The decrease in total SG&A expenses is primarily due to lower SG&A expenses recognized in 2017 in connection with recent business acquisitions as compared to 2016. Business acquisition expenses include amounts recorded for business purchase accounting matters described in the CGD Systems section below and totaled $28.7 million in 2016. The net business acquisition expenses were not significant in fiscal 2017. SG&A expenses related to strategic and IT system resource planning as part of our ~~One Cubic~~ ~~initiative totaled $34.4 million in 2017 compared to $36.8 million in 2016.~~

SG&A expenses increased to $269.6 million or 18% of sales in 2016, compared to $212.5 million or 15% of sales in 2015. The increase in SG&A expense is primarily related to strategic and IT system resource planning as part of our ~~One Cubic~~ initiative for which expenses totaled $36.8 million in 2016 compared to $13.2 million in 2015 as well as approximately $28.7 million of SG&A expenses recognized in 2016 in connection with recent business acquisitions compared to $7.9 million in 2015. Business acquisition expenses in 2016 include amounts recorded for business purchase accounting matters described in the CGD Systems section below.

Company-sponsored R&D spending totaled $52.7 million in 2017 compared to $32.0 million in 2016 and $18.0 million in 2015. Company-sponsored R&D spending for CTS was $26.3 million, $15.6 million, and $4.8 million for 2017, 2016, and 2015, respectively. R&D expenses for CTS in 2017 include $6.4 million of expenses through the third quarter related to our contact with the New York Metropolitan Transit Authority that was awarded in early fiscal 2018; expenses incurred in the fourth quarter were capitalized and will be expensed as a project cost in fiscal 2018. CTS R&D costs in 2015 were reduced $2.3 million by a settlement we received in 2015 related to the reimbursement of R&D expenses we incurred primarily in 2014 for a proposal prepared for a prospective customer of our transportation systems business. Company-sponsored R&D spending for CGD Systems was $26.3 million, $16.4 million, and $13.2 million, in 2017, 2016 and 2015, respectively. The 2017 CGD R&D expenses were ~~primarily related to the development of innovative ground live and virtual training technologies.~~

Interest and dividend income was $1.0 million in 2017 compared to $1.5 million in 2016 and $1.8 million in 2015. The changes in interest and dividend income between these years were correlated with decreases in our average cash balances in these years.such receivables. Interest expense was ~~$15.0~~$20.5 million in ~~2017~~2019 compared to ~~$11.2~~$10.4 million in ~~2016 and $4.4 million in 2015.~~2018. The ~~increases~~change in interest expense generally reflected the increase in our average outstanding debt ~~balances for these years. In addition,~~balances. The average outstanding borrowings under our revolving credit agreement increased during fiscal 2019 primarily to finance the ~~second quarter~~acquisition of fiscal 2016 we issued unsecured notes bearing an interest rate that is higher than the average interest rate of our previously issued notes. Our outstanding notes also contain a provision that the coupon rate increases if the company’s leverage ratio exceeds certain levels. In fiscal 2017 this leverage ratio feature impacted our average interest rate to a greater extent than in previous years.three businesses.

Other Income (Expense): Other income (expense) netted to ~~income~~expense of ~~$0.4~~$20.0 million in ~~2017 compared to expense of $2.3~~fiscal 2019 and $0.7 million in ~~2016 and~~fiscal 2018. The nonoperating expense in fiscal 2019 included unrealized losses of ~~$0.9~~$21.6 million caused by the change in ~~2015. During fiscal year 2016, we recognized~~the fair value of an interest rate swap held by a ~~loss within other expense of $2.7 million related to~~variable interest entity (VIE) that is consolidated by Cubic. The 90 percent noncontrolling interest in the partial settlement of our remaining obligations associated with our U.S. defined benefit pension plan. We offered certain retired, vested participants the opportunity to voluntarily elect to receive their benefits as an immediate lump sum distribution. The lump sum distribution was paid out from plan assets in September 2016 and resulted in a settlementnet loss of ~~$2.7 million. Other than this settlement~~the consolidated VIE, which is comprised primarily of the VIE’s loss ~~the changes in other income (expense) were caused primarily by the impact of foreign currency exchange~~on its interest rate ~~changes on cash advances~~swap, is added back to our ~~foreign subsidiaries that are not hedged.~~net income to arrive at net income attributable to Cubic.

Income Tax Provision: Our income tax provision totaled ~~$15.1~~$11.0 million (effective rate of 21%) for fiscal ~~2017,~~2019, compared to an income tax ~~benefit~~provision of ~~$9.2~~$7.1 million in(effective rate of 48%) for fiscal ~~2016.~~2018. The fiscal 2019 tax ~~benefit recorded in fiscal 2016~~provision primarily ~~related to acquired deferred tax liabilities of $23.8 million that reduced the U.S. valuation allowance. The expense for income taxes in fiscal 2017 primarily results~~resulted from tax on foreign earnings and state income tax, partially offset by tax benefits in connection with

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acquisitions involving significant U.S. deferred tax ~~expense~~liabilities which allowed for a subsequent release of deferred tax valuation allowance. The fiscal 2018 tax provision, as a result of the Tax Cuts and Jobs Act of 2017 (Tax Act), includes a one-time non-cash tax benefit of $7.1 million, primarily related to the ~~amortization~~re-measurement of certain U.S. deferred tax liabilities and the impact of the utilization of indefinite lived ~~intangible assets, partially offset by a benefit related to the release of reserves for uncertain tax positions due to the positions being effectively settled. Due to the effects of the~~ deferred tax ~~asset valuation allowance,~~liabilities as a source of future taxable income when assessing the ~~effective~~realizability of indefinite lived deferred tax ~~rate for fiscal 2016 and 2017 does not correlate to the amount of the pre-tax income or loss.~~assets. The change in the valuation allowance does not have any impact on our

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consolidated operations or cash flows, nor does such an allowance preclude us from using loss carryforwards or other deferred tax assets in the future. Until we re-establish a pattern of continuing profitability, in accordance with the applicable accounting guidance, U.S. income tax expense or benefit related to the recognition of deferred tax assets in the consolidated statement of operations for future periods will be offset by decreases or increases in the valuation allowance with no net effect on the consolidated statement of operations.

Our effective tax rate could be affected in future years by, among other factors, the mix of business between U.S. and foreign jurisdictions, fluctuations in the need for a valuation allowance against deferred tax assets, our ability to take advantage of available tax credits and audits of our records by taxing authorities.

~~Through~~As of September 30, ~~2017,~~2019, a total valuation allowance of ~~$58.8~~$69.1 million has been established against U.S. deferred tax assets, certain foreign operating losses and other foreign ~~deferred tax~~ assets. ~~For~~During fiscal ~~2017,~~2019, the valuation allowance ~~was increased~~decreased by ~~$11.0~~$12.7 million, ~~including $12.7~~of which $10.0 million was recorded as a net tax ~~expense~~benefit in our Consolidated Statement of Operations, offset by amounts recorded through ~~Other Comprehensive Income related to retirement benefits.~~acquisition accounting, retained earnings and other components of income. We will continue to assess the need for a valuation allowance on deferred tax assets and should circumstances change it is possible the valuation allowance, or a portion thereof, will be reversed.

~~Transportation Systems Segment~~Net Income from Continuing Operations attributable to Cubic: Our net income from continuing operations attributable to Cubic was $51.1 million ($1.67 per share) in 2019, compared to $8.1 million ($0.29 per share) in 2018. The increase in net income was primarily related to the increase in operating profits including the gain on the sale of fixed assets, partially offset by the increase in interest expense and the increase in our income tax provision, all of which are described above.

September 30,


2017

2016

2015

(in millions)

Transportation Systems Segment Sales

$
578.6

$
586.4

$
566.8

Transportation Systems Segment Operating Income

$
39.8

$
57.5

$
75.9

~~CTS sales decreased 1% to $578.6~~Net Income (Loss) from Discontinued Operations: Our net loss from discontinued operations was $1.4 million in ~~2017~~fiscal 2019 compared to ~~$586.4~~net income from discontinued operations of $4.2 million in ~~2016~~fiscal 2018. In fiscal 2018, net income from discontinued operations included the results of the operations of Cubic Global Defense Services (CGD Services) through the date of the sale as well as a loss on the sale of CGD Services of $6.1 million, which was calculated as the excess of the carrying value of the net assets of CGD Services at the sale date over the sales price, less estimated selling costs of $4.5 million. In fiscal 2019, we revised certain estimates related to the working capital settlement and reduced the receivable from the purchaser of CGD Services by $1.4 million and recognized a loss on the sale of CGD Services in the second quarter of fiscal 2019.

Adjusted EBITDA: Adjusted EBITDA increased 40% to $146.6 million in 2019 compared to $104.6 million in 2018 and included increases in Adjusted EBITDA for all three business segments as described in the segment disclosures below. The increase in Adjusted EBITDA was primarily due to the ~~adverse~~same factors that drove the increase in operating income described above, excluding the changes in amortization expense, acquisition transaction costs, and restructuring costs as such items are excluded from Adjusted EBITDA. In addition, Adjusted EBITDA increased by $5.9 million in 2019 as a result of the adoption of the new revenue recognition standard. Adjusted EBITDA is a non-GAAP financial measure.

Adjusted Net Income: Adjusted Net Income increased 59% to $95.6 million in 2019 compared to $60.0 million in 2018. The increase in Adjusted Net Income was primarily due to the same factors that drove the increase in net income from continuing operations attributable to Cubic described above including margin growth on increased sales, but excludes the changes in amortization expense, the gain on sale of fixed assets, acquisition transaction costs, restructuring costs, acquisition related costs, and nonoperating losses as such items are excluded from Adjusted Net Income. In addition, Adjusted Net Income increased by $9.1 million in 2019 as a result of the adoption of the new revenue recognition standard. Adjusted Net Income is a non-GAAP financial measure.

Adjusted EPS: Adjusted EPS increased 43% to $3.13 in 2019 compared to $2.19 in 2018. The increase in Adjusted EPS was due to the same factors that impacted Adjusted Net Income noted above. In addition, Adjusted EPS increased by

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$0.30 in 2019 as a result of the adoption of the new revenue recognition standard. Adjusted EPS is a non-GAAP financial measure.

SEGMENT RESULTS

Cubic Transportation Systems


	Fiscal 2019		Fiscal 2018		% Change
	(in millions)
Sales	$	849.8	$	670.7		27	%
Operating income		77.2		60.4		28
Adjusted EBITDA		110.5		73.3		51

Sales: CTS sales increased 27% to $849.8 million in 2019 compared to $670.7 million in 2018, including the impact of the adoption of ASC 606. The increase in sales was primarily driven by growth in both organic and inorganic business in North America. Sales in 2019 were higher in the U.S. primarily due to system development on contracts in New York, Boston, and the San Francisco Bay Area. Businesses acquired by CTS during fiscal year 2019, whose operations are all located in the U.S., had sales of $74.4 million in fiscal year 2019. Sales increased slightly in Australia between fiscal years 2018 and 2019 as increased system development work on a contract in Brisbane was partially offset by the negative impact of foreign currency exchange rates as well as a decrease in service sales. Sales were lower in the UK primarily due to a decrease in system development work in London and the negative impact of currency exchange rates. The average exchange rates between the prevailing currencies in our foreign operations and the U.S. dollar resulted in a decrease in CTS sales of ~~$21.1~~$22.2 million for ~~2017~~2019 compared to ~~2016,~~ 2018, primarily due to the ~~weakening~~strengthening of the ~~British Pound~~U.S. dollar against the ~~U.S. dollar.~~ ~~Absent~~British pound and Australian dollar.

Amortization of Purchased Intangibles: Amortization of purchased intangibles included in the CTS operating results totaled $22.0 million in 2019 and $5.2 million in 2018. The increase is due to the amortization of purchased intangibles for companies acquired by CTS in fiscal year 2019.

Operating Income: CTS operating income increased 28% in 2019 to $77.2 million compared to $60.4 million in 2018. The increase in operating income was primarily caused by higher margins on increased work on development projects in New York, Boston, the San Francisco Bay Area and Brisbane, as well as the impact of ~~exchange rates, sales would have increased~~the adoption of ASC 606. These increases in operating income were partially offset by 2%operating losses incurred by businesses acquired by CTS in fiscal ~~2017~~2019 as ~~compared to 2016.~~ ~~Sales in~~well as the ~~U.K. and North America decreased in fiscal 2017 from 2016, while sales in Australia increased in fiscal 2017 from 2016.~~ In 2017 and 2016 sales and operating profits were impacted by the finalization of negotiations to clarify project and variation, scope and pricing and service level provisions of certain customer contracts. Although we had been recognizing costs on these contracts as incurred, we had deferred revenue on these contracts until such negotiations were complete on each respective contract. The finalization of these contracts increased CTS sales and operating profit by $20.8 million in fiscal 2017 and by $10.4 million in fiscal 2016.

~~Absent the~~negative impact of exchange rates, sales in the U.K. would have increased 5% in fiscal 2017 as compared to fiscal 2016 primarily due to increased service work with a customer in London. Sales in North America decreased in fiscal 2017 due primarily to the reduction of development work on our contract in Vancouver, which is scheduled to decrease over time as the contract has transitioned from a primarily developmental phase to the a largely service provision phase. Sales in Australia increased primarily due to increased system development work in 2017 and the impact of certain of the customer negotiation resolutions noted above

~~CTS sales increased 3% to $586.4 million in 2016 compared to $566.8 million in 2015. Changes~~changes in foreign currency exchange rates. Businesses acquired by CTS in fiscal years 2019 incurred operating losses of $10.1 million in fiscal 2019, which included acquisition transaction costs of $8.1 million and amortization of intangible assets totaling $19.3 million. The average exchange rates between the prevailing currency in our foreign operations and the U.S. dollar resulted in a decrease in CTS operating income of $3.6 million for 2019 compared to 2018.

Adjusted EBITDA: CTS Adjusted EBITDA increased 51% to $110.5 million in 2019 compared to $73.3 million in 2018. The increase in Adjusted EBITDA was primarily driven by the same factors that drove the increase in operating income described above excluding the increases in amortization of purchased intangibles and acquisition transaction costs which are excluded from Adjusted EBITDA. Adjusted EBITDA for CTS increased by $2.3 million in 2019 as a result of the adoption of the new revenue recognition standard.

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Cubic Mission Solutions


	Fiscal 2019		Fiscal 2018		% Change
	(in millions)
Sales	$	328.8	$	207.0		59	%
Operating income (loss)		7.8		(0.1)		n/a
Adjusted EBITDA		34.4		26.2		31

Sales: CMS sales increased 59% to $328.8 million in fiscal 2019 compared to $207.0 million in 2018. The increase in sales resulted from increased product deliveries in all of our CMS product lines, and particularly expeditionary satellite communications products and secure network products. Businesses acquired during fiscal years 2019 and 2018 whose operations are included in our CMS operating segment had sales of $8.9 million and $0.6 million for fiscal years 2019 and 2018, respectively.

Amortization of Purchased Intangibles: Amortization of purchased intangibles included in the CMS results amounted to $19.5 million in 2019 and $20.8 million in 2018.

Operating Income: CMS had operating income of $7.8 million in 2019 compared to an operating loss of $0.1 million in 2018. The improvement in operating results was primarily from higher sales from expeditionary satellite communications products and secure networks products. The improvements in operating profits was partially offset by operating losses incurred by businesses that CMS acquired during fiscal 2019 and 2018. Businesses acquired by CMS in fiscal years 2019 and 2018 incurred operating losses of $12.8 million in fiscal 2019 compared to $3.5 million in fiscal 2018. Included in the operating loss incurred by acquired businesses are acquisition transaction costs of $1.6 million and $1.0 million incurred in fiscal years 2019 and 2018, respectively. In addition, the increase in operating profits was partially offset by an increase of $4.4 million in R&D expenditures from fiscal 2018 to fiscal 2019 related primarily to the development of secure communications and ISR-as-a-service technologies.

Adjusted EBITDA: CMS Adjusted EBITDA increased 31% to $34.4 million in 2019 compared to $26.2 million in 2018. The increase in CMS Adjusted EBITDA was primarily due to the same factors that drove the increase in operating income described above, excluding the changes in amortization expense and acquisition transaction costs as such items are excluded from Adjusted EBITDA. Adjusted EBITDA for CMS increased by $0.5 million in 2019 as a ~~significant adverse impact~~result of the adoption of the new revenue recognition standard. The increase in Adjusted EBITDA was partially offset by the increase in R&D expenditures described above.

Cubic Global Defense


	Fiscal 2019		Fiscal 2018		% Change
	(in millions)
Sales	$	317.9	$	325.2		(2)	%
Operating income		23.0		16.6		39
Adjusted EBITDA		32.8		26.3		25

Sales: CGD sales decreased 2% to $317.9 million in 2019 compared to $325.2 million in 2018. The timing of sales recognition was impacted by the adoption of ASC 606. Under ASC 606, a number of our CGD contracts, most significantly in air combat training and ground live training, for which revenue was historically recorded upon delivery of products to the customer, are now accounted for on ~~our~~the percentage-of-completion cost-to-cost method of revenue recognition. For fiscal 2019, sales ~~in 2016.~~were lower from air combat training systems, simulation product development contracts, and international services contracts, partially offset by higher sales from ground combat training systems. The average exchange rates between the prevailing currencies in our foreign operations and the U.S. dollar resulted in a decrease in ~~CTS~~CGD sales of ~~$28.6~~$3.2 million for ~~2016~~2019 compared to 2015. CTS had higher sales in North America in fiscal 2016 compared to fiscal 2015 primarily from equipment orders in New York and the San Francisco Bay Area and increased sales on contracts in Chicago and Vancouver. Sales were lower in the U.K. in fiscal 2016 compared to fiscal 2015 due to the weakening of the British pound against the U.S. dollar as well as the transition to our follow-on contract in London in fiscal 2016. Sales in Australia were slightly lower in fiscal 2016 than in fiscal 2015 due to the impact of foreign currency exchange rates. Australian sales increased by 4% between fiscal years 2015 and 2016 when measured in Australian dollars.2018.

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CTS operating income decreased 31% in 2017 to $39.8 million compared to $57.5 million in 2016. The average exchange rates between the prevailing currency in our foreign operations and the U.S. dollar resulted in a reduction in CTS operating incomeAmortization of ~~$2.1 million for 2017 compared to 2016.~~ A primary driver of the decrease in CTS operating income in fiscal 2017 was a $10.7 million increase in R&D expenditures related primarily to the development of next generation fare collection, mobile and NextBus technologies. Also, the increase in R&D expenses included $6.4 million of R&D expenses that CTS recognized during fiscal 2017 related to the contract with the New York Metropolitan Transit Authority that was awarded in early fiscal 2018.

Operating income between 2016 and 2017 decreased in North America and the U.K., partially offset by increased operating income in Australia driven by the increased development work and certain of the customer negotiation resolutions noted above. Operating income in fiscal 2017 decreased for the U.K. on a lower volume of system development work as compared to the amount of work performed in fiscal 2016, as well as the adverse impact of currency exchange rates described above. Operating income for fiscal 2017 decreased for North America primarily due to an increase in estimated costs on a toll contract.

CTS operating income decreased 24% in 2016 to $57.5 million compared to $75.9 million in 2015. The average exchange rates between the prevailing currency in our foreign operations and the U.S. dollar resulted in a reduction in CTS operating income of $3.9 million for 2016 compared to 2015. The decrease in operating income was primarily related to lower profits on the transition to our follow-on fare collection contract in London in late 2015, particularly because the follow-on contract does not include the award of usage bonuses. The decrease in operating income in fiscal 2016 compared to fiscal 2015 was partially offset by improved profitability on service contracts in Sydney, Chicago, and Vancouver. In addition, operating income improved in Australia in 2016 due to the finalization of system development contract negotiations. In the third quarter of fiscal 2016 we finalized negotiations regarding scope and pricing with a customer in Australia for system development work that the customer directed us to begin in the second quarter of fiscal 2015. We had inventoried costs and deferred revenue on this development work until such negotiations were complete. As a result of the finalization of the scoping and pricing, we realized increased sales and operating profits in the third quarter of fiscal 2016. CTS R&D expenses increased by $10.8 million in fiscal 2016 compared to 2015 due to the ramp-up of the development of new transportation technologies, and due to the impact of a settlement reimbursement from a prospective customer that had reduced fiscal 2015 R&D expenses by $2.3 million.

Purchased Intangibles: Amortization of purchased intangibles included in the ~~CTS operating~~CGD results ~~totaled $5.7 million, $7.1 million, and $8.6~~amounted to $0.6 million in ~~2017, 2016~~2019 and ~~2015, respectively.~~

~~Cubic Global Defense Systems Segment~~

September 30,


2017

2016

2015

(in millions)
Cubic Global Defense Systems Segment Sales

$
529.1

$
484.2

$
462.1

Cubic Global Defense Systems Segment Operating Income (Loss)

$
18.8

$
(17.1)

$
18.4

~~CGD Systems sales increased 9% to $529.1~~$1.1 million in ~~2017~~2018.

Operating Income: CGD operating income increased by 39% to $23.0 million in 2019 compared to ~~$484.2~~$16.6 million in ~~2016~~2018. For fiscal 2019, operating profits improved primarily due to ~~sales~~the results of cost reduction efforts, including headcount reductions designed to optimize our cost position, and reduced R&D expenditures. Operating profits were higher from ~~acquired businesses. Businesses acquired in our CGD Systems segment in fiscal years 2017 and 2016 contributed~~increased sales of ~~$108.9 million in 2017 compared to $59.3 million in 2016.~~ ~~Sales were higher in fiscal 2017 for secure communications products and networking communications equipment,~~ground combat training system sales but were lower ~~for immersive training systems. Sales of~~on decreased sales from air ~~and ground~~ combat training systems, were relatively flat in fiscal 2017 compared to fiscal 2016. In addition, in June 2017, funding was approved on an $8.0 million equitable contract adjustment for a virtual training contract with the U.S. Navy. As such, we recognized $8.0 million in salessimulation product development contracts, and ~~operating profit related to this contract adjustment during fiscal 2017.~~international services contracts. The average exchange rates between the prevailing currency in our foreign operations and the U.S. dollar had no significant impact on CGD ~~Systems sales~~operating income between ~~2016~~2018 and ~~2017.~~2019.

Adjusted EBITDA: CGD ~~Systems~~Adjusted EBITDA was $32.8 million in 2019 compared to $26.3 million in 2018. The increase in Adjusted EBITDA was primarily driven by the same factors that drove the increase in operating income described above. Adjusted EBITDA for CGD increased by $3.1 million in 2019 as a result of the adoption of the new revenue recognition standard.

FISCAL 2018 RESULTS COMPARED WITH FISCAL 2017 RESULTS

CONSOLIDATED RESULTS


	Fiscal 2018		Fiscal 2017		% Change
	(in millions, except per share data)
Sales	$	1,202.9	$	1,107.7		9	%
Operating income		24.4		2.6		838
Net income (loss) from continuing operations		8.1		(25.7)		n/a
Diluted earnings per share from continuing operations attributable to Cubic		0.29		(0.95)		n/a
Adjusted EBITDA		104.6		87.5		20
Adjusted Net Income		60.0		43.9		37
Adjusted EPS		2.19		1.62		35

Sales:Our sales increased 5%9% to ~~$484.2 million in 2016 compared to $462.1 million in 2015. Businesses acquired by CGD Systems~~$1.203 billion in fiscal ~~years 2016 and 2015 contributed sales of $79.6 million~~year 2018 from $1.108 billion in ~~2016 compared to $45.8 million in~~

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~~2015. Sales in fiscal 2016 were higher from air combat training systems in the U.S., Middle East, and Far East, live fire training systems and virtual simulation systems than in 2015. These~~2017. The increases in sales ~~in fiscal 2016~~for CTS and CMS of 16% and 23%, respectively, were partially offset by ~~lower~~a decrease in CGD sales of 10%. The average exchange rates between the prevailing currencies in our foreign operations and the U.S. dollar between 2017 and 2018 had a positive impact on sales of $11.9 million, which was 1% of 2018 sales. The impacts of changes in foreign currency exchange rates on sales from ~~ground combat~~2017 to 2018 predominantly affected our CTS segment results. See the segment discussions below for further analysis of segment sales.

Gross Margin: Our gross margin percentage from product sales was 33% in 2018, compared to 31% in 2017. The increase in product sales gross margins was primarily due to supply chain cost savings and improved sales mix of higher-margin products including secure networks and expeditionary satellite communications products. In addition, we drove improved profitability on certain larger CTS development contracts. The gross margin on service sales was 27% in 2018 compared to 28% in 2017. The slight decrease in gross margins on service sales was primarily driven by a change in mix in our service contracts.

Selling, General, and Administrative: SG&A expenses increased to $258.6 million or 22% of sales in 2018, compared to $240.2 million or 22% of sales in 2017. The increase in total SG&A expense was primarily due to increases in bid and proposal costs on new business pursuits and a $4.9 million increase in expense related to contingent consideration for recent business acquisitions between these periods. SG&A expense also increased as a result of the SG&A expenses of businesses acquired in fiscal 2018 and 2017. These increases in SG&A expenses were partially offset by a decrease in expenses related to strategic and IT system resource planning as part of our One Cubic initiative, which totaled $24.1 million in 2018 compared to $34.4 million in 2017.

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Amortization of Purchased Intangibles: Amortization of purchased intangibles totaled $27.1 million in 2018 compared to $30.2 million in 2017. The decrease in amortization expense is related to purchased intangible assets that are amortized based upon accelerated methods.

Research & Development: Company-sponsored R&D spending totaled $52.4 million in 2018 compared to $52.7 million in 2017. Company-sponsored R&D spending for CTS was $13.4 million in 2018 and $26.3 million in 2017. R&D expenses for CTS in 2017 included $6.4 million of expenses related to our contract with the New York Metropolitan Transit Authority that was awarded in early fiscal 2018; expenses incurred in 2018 are classified as cost of sales. CTS also continues to make significant R&D investments in new transportation product development, including fare collection technologies, real-time passenger information and development of tolling, Intelligent Traffic Systems and analytic technologies. Company-sponsored R&D spending for CGD was $16.3 million in 2018 and $14.4 million in 2017. The increase in CGD’s R&D expenditures was caused by the acceleration of our development of next generation live, virtual, constructive, and game-based training ~~systems, datalinks,~~systems. Company-sponsored R&D spending for CMS was $22.7 million in 2018 and ~~personnel locator systems.~~$11.9 million in 2017. The increase in CMS R&D expenses was largely related to the acceleration of our development of our software definable antenna technology.

In addition to company-sponsored R&D, a significant portion of our new product development occurs in conjunction with the performance of work on our contracts. These costs are included in cost of sales in our Consolidated Statements of Operations as they are directly related to contract performance. The cost of contract R&D activities included in our cost of sales were $69.6 million in fiscal 2018 compared to $68.0 million in fiscal 2017.

Operating Income:Operating income increased to $24.4 million in 2018 compared to $2.6 million in 2017 driven by improved profitability in our CTS and CMS businesses. CTS operating income increased by 52% to $60.4 million in 2018 compared to $39.8 million in 2017, primarily due to increased volumes, disciplined execution, the transition of investments to contracts and cost improvements that were realized following prior year investments in cost reduction activities. CMS had an operating loss of $0.1 million in fiscal 2018 compared to an operating loss of $9.3 million in 2017 driven by higher volume including the T2C2 Full Rate Production. CGD’s operating income decreased 41% to $16.6 million in 2018 compared to $28.1 million in 2017. CGD’s 2017 results included a one-time positive impact for a Request for Equitable Adjustment of $8.0 million. Businesses acquired in 2018 and 2017 generated operating losses of $4.6 million in 2018 compared to $3.1 million in 2017. Unallocated corporate and other costs were $52.5 million in 2018 compared to $56.0 million in 2017, and included expenses related to strategic and IT system resource planning as part of our One Cubic initiative totaling $24.1 million in 2018 and $34.4 million in 2017. 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 $2.1 million in 2018 compared to 2017. See the segment discussions below for further analysis of segment operating income (loss).

Interest and Dividend Income and Interest Expense: Interest and dividend income was $1.6 million in 2018 compared to $1.0 million in 2017. The increase in interest income in fiscal 2018 was primarily due to income on notes receivable from Shield Aviation that we held for a portion of fiscal year 2018 prior to our acquisition of that company. Interest expense was $10.4 million in 2018 compared to $15.0 million in 2017. The change in interest expense generally reflected the change in our average outstanding debt balances for these years, including the reduction in outstanding debt in 2018 caused by the use of proceeds from the sale of CGD Services to repay short-term borrowings in the third quarter of fiscal 2018.

Other Income (Expense): Other income (expense) netted to expense of $0.7 million in fiscal 2018 and $0.4 million in fiscal 2017. The changes in other income (expense) were caused primarily by the impact of foreign currency exchange rate changes on cash advances to our foreign subsidiaries that are not hedged.

Income Tax Provision: Our income tax provision totaled $7.1 million (effective rate of 48%) for fiscal 2018, compared to an income tax provision of $14.7 million (effective rate of negative 132%) for fiscal 2017. As a result of the Tax Act, tax expense for fiscal 2018 includes a one-time non-cash tax benefit of $7.1 million, primarily related to the re-measurement of certain U.S. deferred tax liabilities and the impact of the utilization of indefinite lived deferred tax liabilities as a source of future taxable income when assessing the realizability of indefinite lived deferred tax assets. The expense for income taxes in fiscal 2017 primarily results from tax on foreign earnings and U.S. tax expense related to the

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amortization of indefinite lived intangible assets, partially offset by a benefit related to the release of reserves for uncertain tax positions due to the positions being effectively settled. Generally, the year-over-year comparison of effective tax rates is not meaningful due to the impact of applying the accounting guidance provided by Accounting Standards Codification (ASC) 740-20-45-7, which requires allocation of tax expense amongst all components of income in certain situations and the impact of the U.S. deferred tax asset valuation allowance. The change in the valuation allowance does not have any impact on our consolidated operations or cash flows, nor does such an allowance preclude us from using loss carryforwards or other deferred tax assets in the future. Until we re-establish a pattern of continuing profitability, in accordance with the applicable accounting guidance, U.S. income tax expense or benefit related to the recognition of deferred tax assets in the consolidated statement of operations for future periods will be offset by decreases or increases in the valuation allowance with no net effect on the consolidated statement of operations.Our effective tax rate could be affected in future years by, among other factors, the mix of business between U.S. and foreign jurisdictions, fluctuations in the need for a valuation allowance against deferred tax assets, our ability to take advantage of available tax credits and audits of our records by taxing authorities.As of September 30, 2018, a total valuation allowance of $81.8 million has been established against U.S. deferred tax assets, certain foreign operating losses and other foreign assets. For fiscal 2018, the valuation allowance was increased by $24.7 million, of which $21.1 million was recorded as a net tax expense in our Consolidated Statement of Operations, offset by amounts recorded to other components of income. We will continue to assess the need for a valuation allowance on deferred tax assets and should circumstances change it is possible the valuation allowance, or a portion thereof, will be reversed.

Net Income (Loss) from Continuing Operations Attributable to Cubic: Our net income from continuing operations attributable to Cubic was $8.1 million ($0.29 per share) in 2018, compared to a net loss from continuing operations attributable to Cubic of $25.7 million ($0.95 per share) in 2017. The change in net income (loss) was primarily related to the changes in operating income (loss) and the changes in tax expense (benefit) described above.

Net Income from Discontinued Operations: Our net income from discontinued operations was $4.2 million in fiscal 2018 and $14.5 million in fiscal 2017. In fiscal 2018, net income from discontinued operations includes a loss on the sale of CGD Services of $6.1 million, which was calculated as the excess of the carrying value of the net assets of CGD Services at the sale date over the sales price, less estimated selling costs of $4.5 million. Earnings from discontinued operations before income taxes totaled $14.2 million in fiscal 2018 and $14.9 million in fiscal 2017. The increase in the average monthly earnings from discontinued operations before income taxes between 2017 and 2018 was attributable to increased readiness and training exercises. The income tax provision for discontinued operations was $1.6 million in fiscal 2018 and $0.4 million in fiscal 2017 based upon the application of accounting guidance.

Adjusted EBITDA: Adjusted EBITDA increased 20% to $104.6 million in 2018 compared to $87.5 million in 2017. The increases in Adjusted EBITDA in 2018 for CTS and CMS were partially offset by a decrease in Adjusted EBITDA for CGD. The increase in Adjusted EBITDA was primarily due to the same factors that drove the increase in operating income described above, excluding the changes in amortization expense, acquisition transaction costs, and restructuring costs as such items are excluded from Adjusted EBITDA.

Adjusted Net Income: Adjusted Net Income increased 37% to $60.0 million in 2018 compared to $43.9 million in 2017. The increase in Adjusted Net Income was primarily due to the same factors that drove the increase in net income from continuing operations attributable to Cubic described above including margin growth on increased sales, but excludes the changes in amortization expense, acquisition transaction costs, restructuring costs, acquisition related costs, and nonoperating losses as such items are excluded from Adjusted Net Income.

Adjusted EPS: Adjusted EPS increased 35% to $2.19 in 2018 compared to $1.62 in 2017. The increase in Adjusted EPS was due to the same factors that impacted Adjusted Net Income above.

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SEGMENT RESULTS

Cubic Transportation Systems


	Fiscal 2018		Fiscal 2017		% Change
	(in millions)
Sales	$	670.7	$	578.6		16	%
Operating income		60.4		39.8		52
Adjusted EBITDA		73.3		48.8		50

Sales: CTS sales increased 16% to $670.7 million in 2018 compared to $578.6 million in 2017 and were higher in North America and the U.K., but were slightly lower in Australia. Sales in 2018 were higher in the U.S. primarily due to system development on the New York New Fare Payment System contract, which was awarded in October 2017. Increased work on both development and service contracts, including work on new change orders in London also increased CTS sales for the year. Sales were also positively impacted in the U.K. and Australia due to the impact of exchange rates. The average exchange rates between the prevailing currencies in our foreign operations and the U.S. dollar resulted in an increase in CTS sales of $12.4 million for 2018 compared to 2017, primarily due to the strengthening of the British Pound against the U.S. dollar.

Amortization of Purchased Intangibles: Amortization of purchased intangibles included in the CTS operating results totaled $5.2 million in 2018 and $5.7 million in 2017.

Operating Income: CTS operating income increased 52% in 2018 to $60.4 million compared to $39.8 million in 2017. For 2018, operating income was higher from increased volumes of system development work and services, including work on new projects and change orders, primarily in North America and the U.K. Operating income was also higher due to operational efficiencies and reductions in R&D spending. R&D expenses for CTS in 2017 included $6.4 million of system development expenses related to our anticipated contract with the New York Metropolitan Transit Authority that was awarded in early fiscal 2018; such expenses incurred in 2018 on this contract are classified as cost of sales. During the first quarter of fiscal year 2018 CTS implemented our new enterprise resource planning (ERP) system, and as a result began depreciating the cost of certain capitalized software into its operating results. This resulted in a decrease in operating income of $4.2 million between fiscal 2017 and fiscal 2018. The average exchange rates between the prevailing currency in our foreign operations and the U.S. dollar resulted in ~~a decrease~~an increase in ~~sales of $3.7 million for 2016 compared to 2015.~~

~~CGD Systems had~~CTS operating income of ~~$18.8~~$2.2 million for 2018 compared to 2017.

Adjusted EBITDA: CTS Adjusted EBITDA increased 50% to $73.3 million in 2018 compared to $48.8 million in 2017 primarily due to the same items described in the operating income section above. The increase in Adjusted EBITDA was primarily driven by the same factors that drove the increase in operating income described above excluding the increase in depreciation and decrease in amortization which are excluded from Adjusted EBITDA.

Cubic Mission Solutions


	Fiscal 2018		Fiscal 2017		% Change
	(in millions)
Sales	$	207.0	$	168.9		23	%
Operating loss		(0.1)		(9.3)		(99)
Adjusted EBITDA		26.2		14.4		82

Sales: CMS sales increased 23% to $207.0 million in fiscal 2018 compared to $168.9 million in 2017. The increase in sales was primarily due to increased orders and shipments of expeditionary satellite communications products, tactical networking products, and Command and Control, Intelligence, Surveillance and Reconnaissance (C2ISR) products and services. Businesses acquired during fiscal years 2018 and 2017 whose operations are included in our CMS operating segment had sales of $5.6 million and $1.5 million for fiscal years 2018 and 2017, respectively.

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Amortization of Purchased Intangibles: Amortization of purchased intangibles included in the CMS results amounted to $20.8 million in 2018 and $23.6 million in 2017. The $2.8 million decrease in amortization expense is related to purchased intangible assets that are amortized based upon accelerated methods.

Operating Income: CMS had an operating loss of ~~$17.1~~$0.1 million in ~~2016.~~ ~~The change~~2018 compared to $9.3 million in ~~CGD Systems operating results was significantly influenced~~2017. CMS realized increased profits from expeditionary satellite communications products, tactical networking products, and C2ISR products and services. As mentioned above, amortization of purchased intangibles decreased to $20.8 million in 2018 compared to $23.6 million in 2017. CMS increased R&D expenditures between 2017 and 2018 by ~~the impacts~~$10.8 million, primarily driven by development of ~~accounting for business acquisitions~~new antenna technologies. Businesses acquired by CMS in fiscal ~~2016~~years 2018 and ~~2017. Acquired businesses~~2017 incurred operating losses of ~~$4.6~~$4.7 million in fiscal ~~2017~~2018 compared to ~~$29.9~~$2.9 million in fiscal ~~2016.~~2017. Included in the operating loss incurred by acquired businesses are acquisition transaction costs of ~~$27.8~~$1.6 million and $1.8 million incurred in fiscal ~~2016. There were no significant net~~years 2018 and 2017, respectively.

Adjusted EBITDA: CMS Adjusted EBITDA increased 82% to $26.2 million in 2018 compared to $14.4 million in 2017. The increase in CMS Adjusted EBITDA was primarily due to the same items described in the operating income section above, excluding the changes in amortization expense and acquisition transaction costs discussed above as such items are excluded from Adjusted EBITDA.

Cubic Global Defense


	Fiscal 2018		Fiscal 2017		% Change
	(in millions)
Sales	$	325.2	$	360.2		(10)	%
Operating income		16.6		28.1		(41)
Adjusted EBITDA		26.3		39.4		(33)

Sales: CGD sales decreased 10% to $325.2 million in ~~fiscal~~2018 compared to $360.2 million in 2017. ~~Business acquisition transaction costs consist of expenses incurred for retention bonus expenses, due diligence~~The year-over-year comparative sales 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, most significantly for fiscal 2016, expenses recognized in connection with our acquisition of GATR. GATR’s operating ~~loss for fiscal 2016 was~~income were significantly impacted by the GAAP accounting requirements regarding business combinations. Prior to our acquisition of GATR, GATR had a number of share-based payment awards in place to its employees. Due to the structure of certain of these share-based payment awards, we were required to recognize compensation expense, rather than purchase consideration, for the portion of our purchase price that we paid to the seller that was distributed to the recipients of these awards. Consequently, wean $8.0 million gain recognized ~~$18.5 million of compensation expense during fiscal 2016 related to this matter upon completing this acquisition.~~

~~In addition to the impacts of acquired businesses described above, operating income for fiscal 2017 increased due to the $8.0 million~~on an equitable contract adjustment in fiscal 2017 for our littoral combat ship virtual training contract ~~noted above. CGD Systems also had increased operating profit between~~with the U.S. Navy. Sales were lower in fiscal ~~years 2016 and 2017~~2018 on ~~higher~~virtual training sales, ~~of secure communication products and networking communications equipment. Also, although total sales of ground~~air combat training ~~systems were relatively flat between fiscal years 2016~~system sales, and 2017, there was an improved mix of sales of higher margin ground combat systems in 2017 as compared to 2016. Operating income from ground combat training systems in fiscal 2016 was negatively impacted by cost growth that was recognized in the second quarter of fiscal 2016 on a ground combat training system ~~that we developed in the Far East.~~

~~Partially offsetting the increase in CGD Systems operating profit was an increase in CGD Systems R&D expenditures~~sales, while sales of international training support services increased between fiscal ~~years 2016~~2017 and ~~2017 by $10.0 million related primarily to the development of innovative ground live and virtual training technologies.~~2018. The average exchange rates between the prevailing currency in our foreign operations and the U.S. dollar had no significant impact on CGD ~~Systems operating profit~~sales between ~~2016~~2017 and ~~2017.~~2018.

~~CGD Systems had an operating loss~~Amortization of $17.1 million in 2016 compared to operating income of $18.4 million in 2015. The changes in operating results between fiscal 2015 and fiscal 2016 were primarily caused by charges incurred in connection with the accounting for business acquisitions in fiscal 2016. Including these impacts of business acquisition accounting, the businesses we acquired in 2016 and 2015 had an operating loss of $32.7 million for 2016 compared to operating income of $0.9 million in 2015. ~~The operating results of the acquired businesses in fiscal 2016 include the $27.8 million of acquisition-related costs described above.~~

For fiscal 2016, operating income from air combat training systems was higher than fiscal 2015 on increased sales, and profitability improved from game-based virtual training system sales. In 2015 we had recorded a loss of $9.5 million related to an increase in estimated costs to complete a contract for the development of a virtual training system. In addition, CGD systems incurred $4.6 million of restructuring charges in fiscal 2015 as compared to $0.3 million of restructuring charges in fiscal 2016. In 2016, operating income declined as compared to 2015 on lower sales of ground combat training systems, datalinks, personnel locater systems, and modular networking and baseband communications equipment. Operating income from virtual simulator system sales was relatively consistent between 2016 and 2015.

Purchased Intangibles: Amortization of purchased intangibles included in the CGD ~~Systems~~ results amounted to ~~$24.5 million, $22.3 million, and $11.3~~$1.1 million in ~~2017, 2016~~2018 and ~~2015, respectively.~~

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~~Cubic Global Defense Services Segment~~

September 30,


2017

2016

2015

(in millions)

Cubic Global Defense Services Segment Sales

$
378.2

$
391.1

$
402.1

Cubic Global Defense Services Segment Operating Income

$
6.7

$
11.2

$
6.6

~~CGD Services sales decreased 3% to $378.2~~$0.9 million in ~~2017~~2017.

Operating Income: CGD had operating income of $16.6 million in 2018 compared to ~~$391.1~~$28.1 million in ~~2016. Sales for 2017 were lower~~ primarily because of decreased activity on U.S. Army contracts and special forces training work, other than our contract with the Joint Readiness Training Center (JRTC). JRTC sales increased 5% for fiscal 2017 compared to fiscal 2016 due to an increase in the number of training exercises.

CGD Services sales decreased 3% to $391.1 million in 2016 compared to $402.1 million in 2015. Sales for 2016 were lower primarily because of decreased activity supporting Special Operations Forces training and lower activity on U.S. Army support contracts, other than at the JRTC where activity and revenue was slightly higher than fiscal 2015. These decreases were partially offset by increased sales on increased intelligence support services.

~~CGD Services operating income decreased 40% to $6.7 million in 2017 compared to $11.2 million in 2016.~~ 2017. The decrease in operating income was primarily ~~driven~~caused by the ~~decreased activity on~~gain of $8.0 million recognized in fiscal 2017 due to the approval of a contract adjustment with the U.S. ~~Army and Special Operations Forces training contracts noted~~Navy described above. In ~~addition, certain contracts that we retained after recompete were won~~fiscal 2018 an arbitrator awarded $1.7 million to a former reseller of our air combat training systems in the ~~first quarter~~Far East, which was recorded as SG&A expense by CGD in 2018. In addition, CGD’s R&D expenditures increased approximately $1.8 million year-over-year. The increase in R&D expenditures is indicative of ~~fiscal 2017 at reduced pricing due to an extremely competitive bid environment.~~the acceleration of our development of next generation live, virtual, constructive, and game-based training systems. These ~~reductions~~decreases in operating ~~profit~~income in fiscal 2018 were partially offset by ~~an increase~~increased operating income from ground combat training systems, which was higher primarily due to improvements in expected total costs for the development of two ground combat training system contracts in the Far East. The average exchange rates between the prevailing currency in our foreign operations and the U.S. dollar had no significant impact on CGD operating income between 2017 and 2018.

Adjusted EBITDA: CGD Adjusted EBITDA was $26.3 million in 2018 compared to $39.4 million in 2017. The decrease in Adjusted EBITDA was primarily driven by the same factors that drove the decrease in operating income ~~on increased work on the JRTC contract as well as a decrease in the amortization expense on purchased intangible assets which are amortized based upon accelerated methods.~~

~~CGD Services operating income increased 70% to $11.2 million in 2016 compared to $6.6 million in 2015. The largest individual contributor to~~described above excluding the increase in ~~CGD Services~~amortization which is excluded from Adjusted EBITDA.

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Non-GAAP Financial Information

In addition to results reported under GAAP, this Annual Report on Form 10-K also contains non-GAAP measures. 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 ~~margins~~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 ~~2016 was~~strategic planning purposes, and as a ~~$2.9 million decrease~~factor in ~~the~~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 expense on purchased intangible assets for which amortization is based upon accelerated methods. In fiscal 2016 operating margins also increased on a number of fixed price contracts due to the impacts of cost efficiency efforts. In fiscal 2016, the increase in operating income was partially offset by an operating loss realized in the first quarter of fiscal 2016 on a Marine Corps training contract that was bid in an extremely competitive environment.

~~Amortization~~ of purchased intangibles, ~~included~~restructuring costs, acquisition related expenses, strategic and IT system resource planning expenses, gains or losses on the disposal of fixed assets, other non-operating expense (income), tax impacts related to acquisitions, and the impact of U.S. Tax Reform. Adjusted EPS is defined as Adjusted Net Income on a per share basis using the weighted average diluted shares outstanding. Adjusted EBITDA is defined as GAAP net income (loss) from continuing operations attributable to Cubic before interest expense (income), 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 ERP system and the redesign of our supply chain which include internal labor costs and external costs of materials and services that do not qualify for capitalization. Acquisition related expenses include business acquisition expenses including retention bonus expenses, due diligence and consulting costs incurred in connection with the acquisitions, and expenses recognized related to the change in the fair value of contingent consideration for acquisitions.

These non-GAAP measures are not measurements of financial performance under GAAP and should not be considered as measures of discretionary cash available to the company or as alternatives to net income as a measure of performance. In addition, other companies may define these non-GAAP measures differently and, as a result, our non-GAAP measures may not be directly comparable to the non-GAAP measures of other companies. Furthermore, non-GAAP financial measures have limitations as an analytical tool and you should not consider these measures in isolation, or as a substitute for analysis of our results as reported under GAAP. Investors are advised to carefully review our GAAP financial results that are disclosed in our SEC filings.

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. On May 31, 2018 Cubic sold the CGD Services business. The operating results ~~amounted to $2.8 million, $4.8 million,~~of this business and ~~$7.7 million in 2017, 2016 and 2015, respectively.~~loss on sale have been excluded from the figures for all periods presented.

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Adjusted Net Income Reconciliation



	Years Ended September 30,
	2019		2018		2017
	(in millions, except per share data)
GAAP EPS	$	1.67	$	0.29	$	(0.95)
GAAP Net income (loss) from continuing operations attributable to Cubic	$	51.1	$	8.1	$	(25.7)
Noncontrolling interest in the loss of the VIE		(9.8)		(0.3)		—
Amortization of purchased intangibles		42.1		27.1		30.2
Gain on sale of fixed assets		(32.5)		—		0.4
Restructuring costs		15.4		5.0		2.3
Acquisition related expenses, excluding amortization		13.4		4.5		(0.2)
Strategic and IT system resource planning expenses		8.3		24.1		34.4
Other non-operating expense (income), net		20.0		0.7		(0.4)
Noncontrolling interest in Adjusted Net Income of VIE		(9.7)		—		—
Tax impact related to acquisitions¹		(6.6)		(1.2)		(0.1)
Impact of US Tax Reform		—		(7.0)		—
Tax impact related to non-GAAP adjustments²		3.9		(1.0)		3.0
Adjusted net income	$	95.6	$	60.0	$	43.9
Adjusted EPS	$	3.13	$	2.19	$	1.62

Weighted Average Diluted Shares Outstanding (in thousands)		30,606		27,351		27,173

¹ Represents the tax accounting impact of significant discrete items recorded at the time of acquisition.

² The tax effect of the non-GAAP adjustments is generally based on the statutory tax rate of the jurisdiction of the event.

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Adjusted EBITDA Reconciliation



($ In Millions)	Years Ended September 30,
Cubic Transportation Systems		2019		2018		2017
Sales	$	849.8	$	670.7	$	578.6
Operating income	$	77.2	$	60.4	$	39.8
Depreciation and amortization		30.7		12.0		8.8
Noncontrolling interest in income of VIE		(8.9)		-		-
Acquisition related expenses, excluding amortization		8.3		0.5		(0.2)
Restructuring costs		3.2		0.4		0.4
Adjusted EBITDA	$	110.5	$	73.3	$	48.8
Adjusted EBITDA margin		13.0%		10.9%		8.4%

	Years Ended September 30,
Cubic Mission Solutions		2019		2018		2017
Sales	$	328.8	$	207.0	$	168.9
Operating income (loss)	$	7.8	$	(0.1)	$	(9.3)
Depreciation and amortization		23.3		22.4		23.8
Acquisition related expenses, excluding amortization		3.3		3.7		(0.1)
Restructuring costs		-		0.2		-
Adjusted EBITDA	$	34.4	$	26.2	$	14.4
Adjusted EBITDA margin		10.5%		12.7%		8.5%

	Years Ended September 30,
Cubic Global Defense		2019		2018		2017
Sales	$	317.9	$	325.2	$	360.2
Operating income	$	23.0	$	16.6	$	28.1
Depreciation and amortization		6.8		8.5		10.4
Acquisition related expenses, excluding amortization		1.7		(0.1)		-
Gain on sale of fixed assets		(2.0)		-		-
Restructuring costs		3.3		1.3		0.9
Adjusted EBITDA	$	32.8	$	26.3	$	39.4
Adjusted EBITDA margin		10.3%		8.1%		10.9%

	Years Ended September 30,
Cubic Consolidated		2019		2018		2017
Sales	$	1,496.5	$	1,202.9	$	1,107.7
Net income (loss) from continuing operations attributable to Cubic	$	51.1	$	8.1	$	(25.7)
Noncontrolling interest in loss of VIE		(9.8)		(0.3)		-
Provision for income taxes		11.0		7.1		14.6
Interest expense, net		13.9		8.8		14.1
Other non-operating expense (income), net		20.0		0.7		(0.4)
Operating income	$	86.2	$	24.4	$	2.6
Depreciation and amortization		64.7		46.6		48.0
Noncontrolling interest in EBITDA of VIE		(8.9)		-		-
Acquisition related expenses, excluding amortization		13.4		4.5		(0.2)
Strategic and IT system resource planning expenses		8.3		24.1		34.4
(Gain) loss on sale of fixed assets		(32.5)		-		0.4
Restructuring costs		15.4		5.0		2.3
Adjusted EBITDA	$	146.6	$	104.6	$	87.5
Adjusted EBITDA margin		9.8%		8.7%		7.9%

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Liquidity and Capital Resources

~~Our operating~~Operating activities from continuing operations used cash ~~flows have been the primary source~~ of ~~funding for our operations, and have been a source of funding for some of our business acquisitions and capital expenditures. We generated positive operating cash flows~~$31.9 million in fiscal ~~2017, 2016 and 2015. Operating activities~~2019, provided cash of ~~$24.7 million, $44.6 million and $89.7~~$8.6 million in fiscal ~~2017, 2016~~2018, and ~~2015, respectively.~~

used cash of $3.0 million in fiscal 2017. As further described below, ~~from 2015 to 2017~~ our operating cash flows have been significantly impacted by uses of cash related to our investment in ~~a new strategic and IT resource planning system, our~~software systems, accounting for recent business acquisitions, ~~and by~~ the payment terms on some of our larger customer ~~contracts.~~contracts, and by the impacts of our consolidation of a VIE.

Cash used in connection with the design and development of our new ~~enterprise resource planning~~ERP system ~~(ERP)~~ as well as information technology process and supply chain redesign totaled ~~$51.1~~$16.1 million in fiscal ~~2017.~~2019. Certain costs incurred in the development of internal-use software and software applications, including external direct costs of materials and services and applicable compensation costs of employees devoted to specific software development, are capitalized as computer software ~~costs.~~assets. Costs incurred outside of the application development stage, or that do not meet the capitalization requirements, are expensed as incurred. Of the ~~$51.1~~$16.1 million of cash used in ~~2017~~2019 in these efforts, ~~$34.4~~$8.2 million was recognized as expense and is reflected in our ~~2017~~2019 cash flows used in operations, while ~~$16.7~~$7.9 million was

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capitalized and is included in ~~2017~~2019 purchases of property, plant and equipment in investing cash flows. Cash used in connection with ERP design and development and information technology and supply chain redesign totaled ~~$55.1~~$33.6 million in ~~2016.~~2018. Of this amount, ~~$34.8~~$24.1 million was recognized as expense and is reflected in our ~~2016~~2018 cash flows from operations, and ~~$20.3~~$9.5 million was capitalized and is included in ~~2016~~2018 purchases of property, plant and equipment in investing cash flows. Cash used in connection with ~~these efforts~~ERP design and development and information technology and supply chain redesign totaled ~~$29.3~~$51.1 million in ~~2015.~~2017. Of this amount, ~~$13.3~~$34.4 million was recognized as expense and is reflected in our ~~2015~~2017 cash flows from operations, and ~~$16.0~~$16.7 million was capitalized and is included in ~~2015~~2017 purchases of property, plant and equipment in investing cash flows.

Under purchase accounting rules, certain cash flows for ~~businesses~~business acquisitions are considered “purchase consideration”. In our statement of cash flows, cash paid for purchase consideration is classified as cash used in investing activities. However, there are a number of transactions related to business acquisitions that are expensed as incurred and that are included in operating cash flows when paid. Costs that are expensed in connection with business acquisitions include retention bonus expense and due diligence and consulting costs incurred in connection with the acquisitions. Business ~~acquisitions~~acquisition costs expensed in ~~2016,~~fiscal 2019 and ~~2015~~fiscal 2018 totaled ~~$28.7~~$13.4 million and ~~$7.9~~$4.4 million, respectively. There were no significant net business acquisition costs expensed in 2017. In our statement of cash flows, the cash used in operations related to these expenses was generally reflected in the same period as these expenses. The expense amount for 2016 and the related operating cash outflow for 2016 reflected above includes amounts recognized related to payments to former owners of share-based payment awards for GATR. Prior to the acquisition, GATR made a number of share-based payment awards to its employees. Due to the structure of certain of these share-based payment awards, we were required to recognize compensation expense, rather than purchase consideration, for the portion of our purchase price that we paid to the seller that was distributed to the recipients of these awards. Consequently, upon completing the acquisition we recognized $18.5 million of compensation expense related to this matter during the quarter ended March 31, 2016.

The changes in operating cash flows between ~~2015~~2017, 2018 and ~~2017~~2019 were also impacted by the terms of some of our largest customer contracts. Our contract terms with our customers can have a significant impact on our operating cash flows. Contract terms, including payment terms on our long-term development contracts, are customized for each contract based upon negotiations with the respective customer. For some large long-term development contracts, primarily with our international customers, we receive significant up-front cash payments from customers based upon the negotiated terms of these contracts. The customized payment terms on long-term development projects also often include payment milestones based upon such items as the delivery of components of systems, ~~meeting~~passing specific ~~contractual requirements in~~system design reviews with the ~~contracts,~~customer, or other ~~events.~~events defined by the contracts. These milestone payments can vary significantly based upon the negotiated terms of the contracts. Changes in the amount of unbilled accounts receivable and contract assets are reflective of the difference between when costs are incurred and when we are entitled to receive milestone payments.

~~In 2017, 2016, and 2015, CTS and CGD Services contributed to positive operating cash flows, while CGD Systems~~Investing activities from continuing operations used cash ~~primarily due~~of $458.8 million in 2019, $47.1 million in 2018 and $43.7 million in 2017. In 2019, cash used in investing activities from continuing operations included $237.2 million of cash paid related to the ~~acquisition-related expenses~~acquisition of Trafficware and $86.8 million of cash paid related to the acquisition of GRIDSMART in our CTS segment, $61.9 million of cash paid related to the acquisition of Nuvotronics in our CMS segment, and $8.0 million of payments of holdback amounts made to the former owners of DTECH. We also invested $60.7 million in non-marketable equity securities including $50.0 million in Pixia, a private software company based in Herndon, Virginia, in 2019. In the third quarter of fiscal 2019 we received net proceeds on the sale of land and buildings in San Diego, California and Orlando, Florida totaling $44.9 million. In 2019, cash used in investing activities included capital expenditures of $49.1 million, including $7.9 million of capitalized software costs described above.

~~Investing~~56

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Cash used in investing activities ~~used cash of $42.5~~during fiscal 2018 included $16.3 million in ~~2017, $260.6~~purchase consideration paid for acquisitions of businesses in our CMS segment, and capital expenditures of $31.7 million, ~~in 2016 and $125.1~~including $7.5 million of capitalized software costs described above.

Cash used in ~~2015. In 2017,~~ investing activities during fiscal 2017 included $16.8 million in purchase consideration paid for acquisitions of businesses, and capital expenditures of $36.9 million, including $16.7 million of capitalized ~~ERP~~software costs described above. Cash used in investing activities in 2017 was partially offset by $12.7 million of net proceeds from sales or maturities of marketable securities.

~~Cash used in investing~~Financing activities ~~during fiscal 2016 included $243.5~~provided cash of $448.5 million in ~~purchase consideration paid for acquisitions of businesses,~~2019 and capital expenditures of $32.1 million, including the $20.3 million of capitalized ERP costs described above. Cash used in investing activities in 2016 was partially offset by $15.0 million net proceeds from sales or maturities of marketable securities.

In 2015, significant investing activities included $90.4 million of purchase consideration paid related to the acquisition of DTECH in our CGD Systems segment, $1.7 million of cash paid in 2015 related to business acquisitions made in 2013 and 2014, and capital expenditures of $22.2 million, including the $16.0 million of capitalized ERP costs described above.

~~Financing activities~~ used cash of ~~$129.8~~$31.7 million and $196.1 million in 2018 and 2017, ~~and provided cash of $233.1 million and $73.3 million in 2016 and 2015.~~ respectively. Financing activities for fiscal year 2019 included the proceeds of net short-term borrowings of $195.5 million as well as the borrowings on the non-recourse debt of our consolidated VIE described below. Financing activities in 2019 also included $215.8 million of net proceeds from our underwritten public offering of 3,795,000 shares of our common stock at a price to the public of $60.00 per share, which we completed in December 2018. We used the net proceeds from the offering to repay a portion of our outstanding borrowings under our revolving credit agreement, which was used to finance the acquisition of Trafficware, and the remainder for general corporate purposes. Financing activities for fiscal year 2018 and 2017 consisted primarily of net principal repayments of $55.0 million and $185.0 million, respectively, on

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short-term ~~borrowings using cash that~~ ~~was previously held on deposit in the U.K. as collateral in support of a letter of credit facility~~borrowings. Also, as further described below, because we consolidate Boston AFC 2.0 OpCo. LLC (OpCo) into Cubic’s financial statements, any payments from OpCo to Cubic are excluded from our cash flows provided by operating activities in our Consolidated Statements of Cash Flows.

In March 2018, Cubic and ~~using other cash~~John Laing, an unrelated company that specializes in contracting under public-private partnerships (P3), jointly formed Boston AFC 2.0 HoldCo LLC (HoldCo). Also in March 2018, HoldCo created a wholly owned entity, 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 MBTA Contract). We have consolidated OpCo into our financial statements.

The MBTA Contract consists of a design and build phase of approximately three years and an operate and maintain phase of approximately ten years. The design and build phase is planned to be completed in 2021 and the operate and maintain phase will span from 2021 through 2031. MBTA will make fixed payments of $558.5 million, adjusted for incremental transaction-based fees, inflation, and performance penalties, to OpCo in connection with the MBTA Contract over the ten-year operate and maintain phase. All of OpCo’s contractual responsibilities regarding the design and development and the operation and maintenance of the fare system have been subcontracted to Cubic by OpCo. Cubic will receive fixed payments of $427.6 million, adjusted for incremental transaction-based fees, inflation, and performance penalties under its subcontract with OpCo.

Upon creation of the P3 Venture, OpCo entered into a credit agreement with a group of financial institutions (the OpCo Credit Agreement) which includes a long-term debt facility and a revolving credit facility. The long-term debt facility allows for draws up to a maximum amount of $212.4 million; draws may only be made during the design and build phase of the MBTA Contract. The long-term debt facility, including interest and fees incurred during the design and build phase, is required to be repaid on a fixed monthly schedule over the operate and maintain phase of the MBTA Contract. At September 30, 2019, the outstanding balance on the long-term debt facility was ~~repatriated from the U.K. and Australia during 2017.~~ ~~In 2016 and 2015, we borrowed a~~$62.0 million, which is presented net of ~~$180.0 million~~unamortized deferred financing costs of $8.8 million. OpCo’s borrowings are reflected as cash used in financing activities in our Consolidated Statements of Cash Flows.

The OpCo Credit Agreement contains a number of covenants which require that OpCo and ~~$60.0 million, respectively,~~Cubic maintain progress on the delivery of the MBTA Contract within a ~~short-term basis that,~~specified timeline and budget and provide regular reporting on such progress. The OpCo Credit Agreement also contains a number of customary events of default including, but not limited to, the delivery of a customized fare collection system to MBTA by a pre-determined date. Failure to meet such delivery date will result in ~~addition~~OpCo, and Cubic via its subcontract with OpCo, incurring penalties due to ~~existing cash resources, was used to finance acquisitions.~~ the lenders.

In ~~fiscal 2016 we revised a note purchase agreement~~2019, 2018 and issued $75.0 million of unsecured notes bearing interest at 3.93%, maturing on March 12, 2026. Interest payments on these notes are due semi-annually and principal payments are due from 2020 through 2026. In 2015 we issued $25.0 million of senior unsecured notes, bearing interest at a rate of 3.70% and maturing on March 12, 2025. In 2017, ~~2016 and 2015,~~ respectively, we repurchased $3.7 million, $2.4 million ~~$1.6 million~~ and ~~$2.7~~$2.4 million of common stock in connection with our stock-based compensation plan. ~~We made payments on long-term borrowings of $0.9 million, $0.5 million, and $0.5 million in 2017, 2016 and 2015, respectively.~~ Dividends paid to shareholders amounted to $8.4 million ($0.27 cents per share) in 2019 and $7.3 million ($0.27 cents per share) in ~~2017, 2016~~2018 and ~~2015.~~2017.

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The change in exchange rates between foreign currencies and the U.S. dollar resulted in a decrease of $1.8 million to our cash balance as of September 30, 2019 compared to September 30, 2018, a decrease of $2.9 million to our cash balance as of September 30, 2018 compared to September 30, 2017, and an increase of ~~$10.6~~$9.7 million to our cash balance as of September 30, 2017 compared to September 30, 2016, a decrease of $38.5 million to our cash balance as of September 30, 2016 compared to September 30, 2015 and a decrease of $11.0 million to our cash balance as of September 30, 2015 compared to September 30, 2014.2016.

We have a committed revolving credit agreement with a group of financial institutions in the amount of ~~$400.0~~$800.0 million which ~~expires~~is scheduled to expire in ~~August 2021~~April 2024 (Revolving Credit Agreement). ~~At September 30, 2017,~~Under the ~~weighted average interest rate on outstanding borrowings under~~terms of the Revolving Credit Agreement, ~~was 3.24%. Debt issuance~~the company may elect that the debts comprising each borrowing bear interest generally at a rate equal to (i) London Interbank Offer Rate (“LIBOR”) based upon tenor plus a margin that fluctuates between 1.00% and ~~modification costs of $2.3 million and $1.3 million were incurred~~2.00%, as determined by the company’s Leverage Ratio (as defined in ~~connection with February 2, 2016 and August 11, 2016 amendments to~~ the Revolving Credit ~~Agreement, respectively. Costs incurred~~Agreement) as set forth in ~~connection with establishment~~the company’s most recently delivered compliance certificate or (ii) the Alternate Base Rate (defined as a rate equal to the highest of (a) the Prime Rate (b) the NYFRB rate plus 0.50% (c) the Adjusted LIBOR Rate plus 1.00%), plus a margin that fluctuates between 0.00% and ~~amendments to this credit agreement are recorded~~1.00%, as determined by the company’s Leverage Ratio as set forth in other assets on our Consolidated Balance Sheets, and are being amortized as interest expense using the effective interest method over the stated term of the Revolving Credit Agreement. At September 30, 2017, the Company’s total debt issuance costs have an unamortized balance of $2.8 million. its most recently delivered compliance certificate. The available line of credit is reduced by any letters of credit issued under the Revolving Credit Agreement. As of September 30, ~~2017,~~2019, there were $195.5 million of borrowings ~~totaling $55.0 million~~ under this agreement and there were letters of credit outstanding totaling ~~$81.3~~$31.5 million, which reduce the available line of credit to ~~$263.7~~$573.0 million. ~~The $81.3 million of letters of credit includes both financial letters of credit as well as performance guarantees.~~

Until June 2017, we had a secured letter of credit facility agreement with a bank in the U.K. At September 30, 2016, there were letters of credit outstanding under this agreement of $62.7 million. Restricted cash at September 30, 2016 of $69.4 million was held on deposit in the U.K. as collateral in support of this facility. In June 2017, this agreement was terminated and the associated letters of credit were transferred to the Revolving Credit Agreement described above. The cash that formerly collateralized the secured credit facility was used to make principal payments to reduce our outstanding short-term borrowings.

As of September 30, ~~2017,~~2019, we had letters of credit and bank guarantees outstanding totaling ~~$94.5~~$39.9 million, which includes the ~~$81.3~~$31.5 million of letters of credit on the Revolving Credit Agreement described above and ~~$13.2~~$8.4 million of letters of credit issued under other facilities. The total of ~~$94.5~~$39.9 million of letters of credit and bank guarantees includes ~~$77.4~~$34.4 million that guarantees either our performance or customer advances under certain contracts and financial letters of credit of ~~$17.1~~$5.5 million which primarily guarantee our payment of certain self-insured liabilities. ~~We have never had a drawing on a letter of credit instrument, nor are any anticipated; therefore, we estimate the fair value of these instruments to be zero.~~

We maintain a short-term borrowing arrangement in New Zealand totaling $0.5 million New Zealand dollars (equivalent to approximately $0.4 million) to help meet the short-term working capital requirements of our subsidiary in New Zealand. At September 30, 2017, no amounts were outstanding under this borrowing arrangement.

Our ~~revolving credit agreement~~Revolving Credit Agreement and note purchase and private shelf agreement each contain a number of customary covenants, including requirements for Cubic to maintain certain interest coverage and leverage ratios and restrictions on Cubic’s and certain of its subsidiaries’ abilities to, among other things, incur additional debt, create liens, consolidate or merge with any other entity, or transfer or sell substantially all of their assets, in each case subject to certain exceptions and limitations. These agreements also contain customary events of default, including, without limitation: (a) failure by

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Cubic to pay principal or interest on the Notes when due; (b) failure by Cubic or certain of its subsidiaries to comply with the covenants in the agreements; (c) failure of the representations and warranties made by Cubic or certain of its subsidiaries to be correct in any material respect; (d) cross-defaults with other indebtedness of Cubic or certain of its subsidiaries resulting in the acceleration of the maturity thereof; (e) certain bankruptcy and insolvency events with respect to Cubic or certain of its subsidiaries; (f) failure by Cubic or certain of its subsidiaries to satisfy certain final judgments when due; and (g) a change in control of Cubic, in each case subject to certain exceptions and limitations. The occurrence of any event of default under these agreements may result in all of the indebtedness then outstanding becoming immediately due and payable.

We maintain a cash account with a bank in the U.K. for which the funds are restricted as to use. The account is required to secure the customer’s interest in cash deposited in the account to fund our activities related to our performance under a fare collection services contract in the United Kingdom. The balance in the account as of September 30, 2019 was $19.5 million and is classified as restricted cash in our Consolidated Balance Sheets.

The accumulated deficit in other comprehensive loss ~~decreased $13.2~~increased a total of $29.1 million in ~~2017~~2019 primarily due to ~~a decrease~~an increase in the recorded liability for our pension plans. Unrealized translation adjustments ~~totaled $1.4~~contributed $11.3 million of this deficit but these increases were partially offset by ~~$1.4~~$1.7 million of changes in the fair value of cash flow hedges.

Our financial condition remains strong with net working capital of ~~$245.1~~$195.2 million and a current ratio of ~~1.7~~1.4 to 1 at September 30, ~~2017.~~2019. We expect that cash on hand and our ~~revolving credit agreement~~Revolving Credit Agreement will be adequate to meet our working capital requirements for the foreseeable future. Our total debt to capital ratio at September 30, ~~2017~~2019 was ~~29%~~20%. Our cash is invested primarily in highly liquid bank deposits and government instruments in the U.S., U.K., New Zealand and Australia.

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In the normal course of our business, we may sell trade receivables to financial institutions as a cash management technique. We do not retain financial or legal obligations for these receivables that would result in material losses. Our ongoing involvement is limited to the remittance of customer payments to the financial institutions with respect to the sold trade receivables; therefore, our sold trade receivables are not included in our Consolidated Balance Sheet in any period presented. As of September 30, 2019, we sold $31.1 million of outstanding trade receivables to financial institutions. The cash received for the sale of trade receivables is included in cash provided by operating activities in our Consolidated Statements of Cash Flows.

As of September 30, ~~2017,~~2019, virtually all of the ~~$68.6~~$85.3 million of our cash, ~~and~~ cash equivalents ~~including~~and restricted cash, excluding cash held by our consolidated VIE, was held by our foreign subsidiaries, primarily in the U.K., New Zealand and Australia.

During fiscal year 2017, in order to maintain the required leverage ratio in our Revolving Credit Agreement and note purchase and private shelf agreements, we decided to access cash resources in our foreign subsidiaries to provide increased assurance of compliance with our loan covenants in the future. As a result, we are no longer able to assert that accumulated or current earnings in our foreign subsidiaries are indefinitely reinvested.

In addition, during fiscal year 2017, foreign earnings of approximately $258.7 million were repatriated, of which $250.5 million relate to earnings from the U.K. and we have provided for the associated incremental U.S. taxes. At the end of the year, we have recorded a deferred tax liability in the amount of $11.9 million for the estimated U.S. taxes that would be due if we were to repatriate the remainder of the accumulated earnings in foreign subsidiaries. We do not have plans to repatriate any additional amounts at this time: however, we may do so if circumstances change or we determine it is in the company’s best interests to do so.

The following is a schedule of our contractual obligations outstanding as of September 30, ~~2017:~~2019:


			Less than 1
	Total		Year		1 - 3 years		4 - 5 years		After 5 years
	(in millions)

													Less than 1
											Total		Year		1 - 3 years		4 - 5 years		After 5 years
											(in millions)
Short-term borrowings	$	55.0	$	55.0	$	—	$	—	$	—	$	195.5	$	195.5	$	—	$	—	$	—
Long-term debt		200.0		—		10.7		71.4		117.9
Long-term debt, including current portion												200.0		10.7		71.4		71.4		46.5
Interest payments		40.7		8.2		14.2		11.1		7.2		25.3		7.0		11.1		5.9		1.3
Operating leases		54.5		12.8		18.2		12.2		11.3		113.9		18.1		32.3		25.6		37.9
Deferred compensation		12.7		1.3		2.5		1.3		7.6		12.2		1.3		2.6		1.9		6.4
	$	362.9	$	77.3	$	45.7	$	96.0	$	143.9
											$	546.9	$	232.6	$	117.4	$	104.8	$	92.1

As of September 30, ~~2017,~~2019, we had approximately ~~$7.5~~$0.9 million of recorded liabilities and related interest and penalties pertaining to uncertain tax positions which are excluded from the table above. None of these liabilities and related interest and penalties isare expected to be paid within one year. We are unable to make a reasonable estimate as to when cash settlement with the tax authorities might occur due to the uncertainties related to these tax matters. ~~Payments of these obligations would result from settlements with taxing authorities.~~ For more information on our uncertain tax positions, see Note 1013 to the Consolidated Financial Statements in Item 8 of this Form 10-K. The table above also excludes estimated minimum funding requirements for retirement plans as set forth by statutory requirements. For further information about future minimum contributions for these plans, see Note 1215 to the Consolidated Financial Statements in Item 8 of this Form 10-K.

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The terms of the purchase agreements in certain of our recent business acquisitions provide that we will pay the sellers contingent consideration should the acquired companies meet specified goals. As of September 30, ~~2017,~~2019, the maximum future contingent consideration that would be payable if all such goals were met is ~~$23.8~~$27.3 million. However, we are unable to make a reasonable estimate as to the timing and magnitude of such future payments.

Backlog

September 30,

September 30,

2017

2016

(in millions)

Total backlog

Transportation Systems

$
2,043.9

$
1,793.3

Cubic Global Defense Systems

492.6

576.8

Cubic Global Defense Services

567.1

570.3

Total

$
3,103.6

$
2,940.4

Funded backlog

Transportation Systems

$
2,043.9

$
1,793.3

Cubic Global Defense Systems

492.6

576.8

Cubic Global Defense Services

119.6

139.2

Total

$
2,656.1

$
2,509.3


	September 30,		September 30,
	2019		2018
	(in millions)
Total backlog
Cubic Transportation Systems	$	2,953.3	$	3,544.9
Cubic Mission Solutions		103.7		77.0
Cubic Global Defense		344.0		442.6
Total	$	3,401.0	$	4,064.5

As reflected in the table above, total backlog ~~increased $163.2 million and funded backlog increased $146.8~~decreased $663.5 million from September 30, ~~2016~~2018 to September 30, ~~2017.~~2019. The ~~increase in total backlog in CTS was partially offset by a~~ decrease in backlog ~~for CGD Systems and CGD Services. In September~~is primarily due to progression of ~~2017,~~work in 2019 on four large contracts awarded to CTS and TfL entered an agreement to extend Cubic’s contract to operate and maintain TfL’s ticketing and fare collection system for a further three years through August 2025 and to modify prospective pricing on the contract. The contract extension added approximately $255 million to backlog. Vocality and Deltenna, businesses acquired by our CGD Systems segment in fiscal ~~year 2017, had $1.0~~2018. In addition, we recorded a net decrease to backlog of $104.5 million on October 1, 2018 for the impact of ~~total backlog on their respective acquisition dates.~~the adoption of ASC 606. Changes in exchange rates between the prevailing currency in our foreign operations and the U.S. dollar as of ~~the end of fiscal 2017, increased~~September 30, 2019 decreased backlog by ~~approximately $36.9~~$79.7 million compared to September 30, ~~2016, primarily in our Transportation Systems Segment.~~2018.

~~The difference between total backlog and funded backlog represents options under multiyear CGD Services contracts. Funding for these contracts comes from annual operating budgets~~59

Table of the U.S. government and the options are normally exercised annually. Funded backlog includes unfilled firm orders for our products and services for which funding has been both authorized and appropriated by the customer (Congress, in the case of U.S. government agencies). Options for the purchase of additional systems or equipment are not included in backlog until exercised. In addition to the amounts identified above, we have been selected as a participant in or, in some cases, the sole contractor for several substantial (ID/IQ) contracts. ID/IQ contracts are not included in backlog until an order is received. In the past, many of the contracts we were awarded in CGD Services were long-term in nature, spanning periods of five to ten years. The U.S. DoD now awards shorter-term contracts for the services we provide and increasingly relies upon ID/IQ contracts which can result in a lower backlog and/or lower funded backlog due to the shorter-term nature of task orders issued under these ID/IQ awards.Contents

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements (as defined by the applicable regulations of the SEC) that are reasonably likely to have a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.

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Recent Accounting Pronouncements

~~In May 2014, the FASB issued ASU 2014-09,~~ ~~Revenue from Contracts with Customers.~~ ASU 2014-09 outlines a comprehensive revenue recognition model and supersedes most current revenue recognition guidance. The new guidance will require revenue to be recognized when promised goods or services are transferred to customersSee “Recent Accounting Pronouncements” in ~~amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods or services. Adoption~~Note 1 of the ~~new rules could~~Consolidated Financial Statements in Item 8 of this Form 10-K, which are hereby incorporated by reference.

Critical Accounting Policies, Estimates and Judgments

Our financial statements are prepared in accordance with accounting principles that are generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the ~~timing~~reported amounts of ~~revenue recognition for certain transactions. Adoption of ASU 2014-09 will be required for us beginning in the first quarter of fiscal 2019~~assets and we have determined that we will not adopt ASU 2014-09 earlier than required. ASU 2014-09 allows for two methods of adoption: (a) “full retrospective” adoption, meaning the standard is applied to all periods presented, or (b) “modified retrospective” adoption, meaning the cumulative effect of applying ASU 2014-09 is recognized as an adjustment to the opening retained earnings balance in the year of adoption. We have not yet determined which method of adoption we will select.

~~In January 2016, the FASB issued Accounting Standards Update ASU 2016-01,~~ ~~Financial Instruments – Overall (Subtopic 825-10)~~ ~~which updates certain aspects of recognition, measurement, presentation~~liabilities, and disclosure of ~~financial instruments. ASU 2016-01 will be effective for us beginning October 1, 2018~~contingent assets and ~~with~~liabilities at the ~~exception of a specific portion~~date of the ~~amendment, early adoption is not permitted.~~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 ~~currently evaluating~~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 ~~impact this guidance will have on~~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.

~~In February 2016, the FASB issued ASU 2016-02,~~ ~~Leases~~. Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (a) a lease liability, which is a lessee’s obligation to make lease payments arisingRevenue Recognition

We adopted Accounting Standards Update (ASU) 2014-09, Revenue from a lease, measured on a discounted basis; and (b) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The ASU will beContracts with Customers (commonly known as ASC 606), effective ~~for us beginning~~ October 1, ~~2019 with early adoption permitted. ASU 2016-02 will be adopted on a~~2018 using the modified retrospective transition ~~basis~~method. In accordance with the modified retrospective transition method, our Consolidated Statement of Operations for ~~leases existing at, or entered into after,~~ the ~~beginning~~year ended September 30, 2019 and our Consolidated Balance Sheet as of September 30, 2019 are presented under ASC 606, while our Consolidated Statement of Operations for the years ended September 30, 2018 and 2017 and our Consolidated Balance Sheet as of September 30, 2018 are presented under ASC 605, Revenue Recognition, the accounting standard in effect for periods ending prior to October 1, 2018. The cumulative effect of the ~~earliest comparative period presented~~change in the financial statements. We are currently evaluating the impact of the application of this accounting standard update on our consolidated financial statements as well as whether to adopt the new guidance early.

~~In March 2016, the FASB issued ASU 2016-09,~~ ~~Compensation-Stock Compensation. The new guidance simplifies several aspects of the~~ accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The amendments in this standard are effective for our annual year and first fiscal quarter beginning on October 1, 2017. We are currently evaluating the impact of the application of this accounting standard update on our consolidated financial statements.

~~In August 2016, the FASB issued ASU 2016-15,~~ ~~Classification of Certain Cash Receipts and Cash Payments~~, which provides clarifying guidance on how entities should classify certain cash receipts and cash payments on the statement of cash flows. The guidance also clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. The guidance will be effective for us in our fiscal year

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~~beginning~~periods prior to October 1, 2018 ~~and early adoption is permitted. We are currently evaluating~~was recognized through retained earnings at the ~~impact~~date of ~~the application of this accounting standard update on our consolidated financial statements as well as whether to adopt the new guidance early.~~adoption.

~~In October 2016, the FASB issued ASU 2016-16,~~ ~~Intra-Entity Transfers of Assets Other Than Inventory,~~ ~~which~~ ~~requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs~~. The guidance will be effective for us in our fiscal year beginning October 1, 2018, and early adoption is permitted. We are currently evaluating the impact of the application of this accounting standard update on our consolidated financial statements as well as whether to adopt the new guidance early.

~~In November 2016, the FASB issued ASU 2016-18,~~ ~~Restricted Cash~~, which requires amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the total beginning and ending amounts for the periods shown on the statement of cash flows. The guidance will be effective for us in our fiscal year beginning October 1, 2018, and early adoption is permitted. The adoption of this standard is anticipated to affect our presentation of restricted cash within our statement of cash flows. We are currently evaluating whether to adopt the new guidance early.

~~In January 2017, the FASB issued ASU 2017-01,~~ ~~Business Combinations (Topic 805) Clarifying the Definition of a Business~~. This ASU clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The guidance will be effective for us in our fiscal year beginning October 1, 2018 and early adoption is allowed for certain transactions. We are currently evaluating the impact of the application of this accounting standard update on our consolidated financial statements.

~~In January 2017, the FASB issued ASU 2017-04,~~ ~~Simplifying the Test for Goodwill Impairment.~~ 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 value exceeds its fair value, not to exceed the carrying amount of goodwill. The guidance will be effective for us in our fiscal year beginning October 1, 2020 with early adoption permitted. We are currently evaluating the impact of the application of this accounting standard update on our consolidated financial statements as well as whether to adopt the new guidance early.

~~In March 2017, the FASB issued ASU 2017-07, Compensation – Retirement Benefits (Topic 715):Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost~~. The update requires employers to present the service cost component of the net periodic benefit cost in the same income statement line item as other employee compensation costs arising from services rendered during the period. The other components of net benefit cost, including interest cost, expected return on plan assets, amortization of prior service cost/credit and actuarial gain/loss, and settlement and curtailment effects, are to be presented outside of any subtotal of operating income. Employers will have to disclose the line(s) used to present the other components of net periodic benefit cost, if the components are not presented separately in the income statement. ~~ASU 2017-07 will be effective for us beginning October 1, 2018, and early adoption is permitted.~~ ~~We are currently evaluating the impact of the application of this accounting standard update on our consolidated financial statements as well as whether to adopt the new guidance early.~~

~~Critical Accounting Policies, Estimates and Judgments~~

Our consolidated financial statements are based on the application of GAAP, which require us to make estimates and assumptions about future events that affect the amounts reported in our consolidated financial statements and the accompanying notes. Future events and their effects cannot be determined with certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results could differ from those estimates, and any such differences may be material to our consolidated financial statements. We believe the estimates set forth below may involve a higher degree of judgment and complexity in their application than our other accounting estimates and represent the critical accounting estimates used in the preparation of our consolidated financial statements. We believe our judgments related

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~~to these accounting estimates are appropriate. However, if different assumptions or conditions were to prevail, the results could be materially different from the amounts recorded.~~

~~Revenue Recognition~~

We generate revenue from the sale of ~~products~~integrated solutions such as mass transit fare collection systems, air and ground combat training systems, and ~~secure communications products.~~products with C4ISR capabilities. A significant portion of our revenues are generated from long-term fixed-price contracts with customers that require us to design, develop, manufacture, modify, upgrade, test and integrate complex systems according to the customer’s specifications. We also generate revenue from services we provide, ~~services~~ such as ~~specialized military training exercises, including live, virtual~~the operation and ~~constructive training exercises and support, and we operate and maintain~~maintenance of fare systems for mass transit customers and the support of specialized military training exercises mainly for international customers. Our contracts are primarily with the U.S. government, state and local municipalities, international government customers, and international local municipal transit agencies. We classify sales as products or services in our Consolidated Statements of Operations based on the attributes of the underlying contracts.

~~A significant portion of our business is derived from long-term development, production and system integration contracts.~~ We ~~consider the nature of these contracts, and the types of products and services provided, when we determine the proper accounting~~account for a particular contract. Many of our long-term fixed-price contracts require us to deliver quantities of products over a long period of time or to perform a substantial level of development effort in relation tocontract when it has approval and commitment from both parties, the ~~total value~~rights of the ~~contract.~~parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. For ~~long-term fixed-price~~certain contracts ~~requiring substantial development effort,~~that meet the foregoing requirements, primarily international direct commercial sale contracts, we ~~generally record revenue on a percentage-of-completion basis using the cost-to-cost method~~are required to ~~measure progress toward completion. Under the cost-to-cost method~~obtain certain regulatory approvals. In these cases where regulatory approval is required in addition to

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approval from both parties, we recognize revenue based on the likelihood of obtaining timely regulatory approvals based upon all known facts and circumstances.

To determine the proper revenue recognition method, we evaluate each contractual arrangement to identify all performance obligations. A performance obligation is a ~~ratio of the costs incurred~~promise in a contract to transfer a distinct good or service to the ~~estimated total costs at completion. For certain~~customer. The majority of our contracts have a single performance obligation because the promise to transfer the individual good or service is not separately identifiable from other ~~long-term, fixed-price production contracts not requiring substantial development effort we use the units-of-delivery percentage-of-completion method as the basis to measure progress toward completing~~promises within the contract and ~~recognizing sales.~~ is, therefore, not distinct. These contractual arrangements either require the use of a highly specialized engineering, development and manufacturing process to provide goods according to customer specifications or represent a bundle of contracted goods and services that are integrated and together represent a combined output, which may include the delivery of multiple units.

Some of our contracts have multiple performance obligations, primarily (i) related to the provision of multiple goods or services or (ii) due to the contract covering multiple phases of the product lifecycle (for instance: development and engineering, production, maintenance and support). For contracts with more than one performance obligation, we allocate the transaction price to the performance obligations based upon their relative standalone selling prices. For such contracts we evaluate whether the stated selling prices for the products or services represent their standalone selling prices. In cases where a contract requires a customized good or service, our primary method used to estimate the standalone selling price is the expected cost plus a margin approach. In cases where we sell a standard product or service offering, the standalone selling price is based on an observable standalone selling price. A number of our contracts with the U.S. government, including contracts under the U.S. Department of Defense’s Foreign Military Sales program (FMS Contracts), are subject to the Federal Acquisition Regulations (FAR) and the price is typically based on estimated or actual costs plus a reasonable profit margin. As a result of these regulations, the standalone selling price of products or services in our contracts with the U.S. government and FMS Contracts are typically equal to the selling price stated in the contract. Therefore, we typically do not need to allocate (or reallocate) the transaction price to multiple performance obligations in our contracts with the U.S. government.

The ~~units-of-delivery measure recognizes revenues as deliveries~~majority of our sales are ~~made~~from performance obligations satisfied over time. Sales are recognized over time when control is continuously transferred to the customer ~~generally using unit sales values in accordance with~~during the contract ~~terms. We estimate profit as~~or the ~~difference between total estimated revenue and total estimated cost~~contracted good does not have alternative use to us. For U.S. government contracts, the continuous transfer of acontrol to the customer is supported by contract ~~and recognize~~clauses that ~~profit over~~provide for (i) progress or performance-based payments or (ii) the ~~life~~unilateral right of the customer to terminate the contract ~~based on deliveries.~~

~~Generally,~~for its convenience, in which case we recognize sales and profits earlier in a production cycle when we use the cost-to-cost method of percentage-of-completion accounting than when we use the units-of-delivery method. In addition, our profits and margins may vary materially depending on the types of long-term contracts undertaken, the costs incurred in their performance, the achievement of other performance objectives, and the stage of performance at whichhave the right to receive ~~fees, particularly under award~~payment for costs incurred plus a reasonable profit for products and ~~incentive fee~~services that do not have alternative uses to us. Our contracts with international governments and local municipal transit agencies contain similar termination for convenience clauses, or we have a legally enforceable right to receive payment for costs incurred and a reasonable profit for products or services that do not have alternative uses to us.

For those contracts for which control transfers over time, revenue is ~~finally determined.~~

~~Award fees and incentives related to performance~~recognized based on ~~contracts, which are generally awarded at~~ the ~~discretion~~extent of progress towards completion of the ~~customer, as well as penalties related~~performance obligation. The selection of the method to ~~contract performance, are considered in estimating sales~~measure progress towards completion requires judgment and ~~profit rates. Estimates of award fees are~~is based on ~~actual awards and anticipated performance. Incentive provisions that increase or decrease earnings based solely on a single significant event are generally not recognized until~~ the ~~event occurs. Those incentives and penalties are recorded when there is sufficient information for us to assess anticipated performance.~~

~~Accounting for long-term contracts requires judgment relative to assessing risks, estimating contract revenues and costs, and making assumptions for schedule and technical issues. Due to the scope and~~ nature of the ~~work required~~products or services to be ~~performed~~provided. For our design and build type contracts, we generally use the cost-to-cost measure of progress because it best depicts the transfer of control to the customer which occurs as we incur costs on ~~many~~our contracts. Under the cost-to-cost measure of ~~our contracts,~~progress, the ~~estimation~~extent of progress towards completion is measured based on the ratio of costs incurred to date to the total ~~revenue and cost~~estimated costs at completion ~~is complicated and subject to many variables.~~of the performance obligation. Revenues, including estimated fees or profits, are recorded proportionally as costs are incurred. Contract costs include material, labor and subcontracting costs, as well as an allocation of indirect ~~costs.~~costs, and are generally expensed as incurred for these contracts. For contracts with the U.S. government, general and administrative costs are ~~considered~~included in contract costs; however, for purposes of revenue measurement, general and administrative costs are not ~~considered~~included in contract costs for any other customers.

Sales from performance obligations satisfied at a point in time are typically for standard goods and are recognized when the customer obtains control, which is generally upon delivery and acceptance. Costs of sales are recorded in the period in which revenue is recognized.

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We record sales under cost-reimbursement-type contracts as we incur the costs. For cost-reimbursement-type contracts with the U.S. government, the FAR provides guidance on the types of costs that will be reimbursed in establishing the contract price.

Sales under service contracts are generally recognized as services are performed or value is provided to our customers. We measure the delivery of value to our customers using a number of metrics including ridership, units of work performed, and costs incurred. We determine which metric represents the most meaningful measure of value delivery based on the nature of the underlying service activities required under each individual contract. In certain circumstances we recognize revenue based on the right to bill when such amounts correspond to the value being delivered in a billing cycle. Certain of our transportation systems service contracts contain service level penalties or bonuses, which we recognize in each period incurred or earned. These contract penalties or bonuses are generally incurred or earned on a monthly basis; however, certain contracts may be based on a quarterly or annual evaluation. Sales under service contracts that do not contain measurable units of work performed are recognized on a straight-line basis over the contractual service period, unless evidence suggests that the revenue is earned, or obligations fulfilled, in a different manner. Costs incurred under these service contracts are generally expensed as incurred.

Due to the nature of the work required to be performed on many of our performance obligations, the estimation of total revenue and cost at completion is complex, subject to many variables and requires significant judgment. It is common for our long-term contracts to contain bonuses, penalties, transactional variable based fees, or other provisions that can either increase or decrease the transaction price. These variable amounts generally are incurred or earned upon certain performance metrics, program milestones, transactional based activities and other similar contractual events. We estimate variable consideration at the most likely amount to which we expect to be entitled. We include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information (historical, current and forecasted) that is reasonably available to us.

Billing timetables and payment terms on our contracts vary based on a number of factors, including the contract type. Typical payment terms under fixed-price design and build type contracts provide that the customer pays either performance-based payments based on the achievement of contract milestones or progress payments based on a percentage of costs we incur. For the majority of our service contracts, we generally bill on a monthly basis which corresponds with the satisfaction of our monthly performance obligation under these contracts. We recognize a liability for payments received in excess of revenue recognized, which is presented as a contract liability on the balance sheet. The portion of payments retained by the customer until final contract settlement is not considered a significant financing component because the intent is to protect the customer from our failure to adequately complete some or all of the obligations under the contract. Payments received from customers in advance of revenue recognition are not considered to be significant financing components because they are used to meet working capital demands that can be higher in the early stages of a contract. For certain of our multiple-element arrangements, the contract specifies that we will not be paid upon the delivery of certain performance obligations, but rather we will be paid when subsequent performance obligations are satisfied. Generally, in these cases we have determined that a separate financing component exists as a performance obligation under the contract. In these instances, we allocate a portion of the transaction price to this financing component. We determine the value of the embedded financing component by discounting the repayment of the financed amount over the implied repayment term using the effective interest method. This discounting methodology uses an implied interest rate which reflects the credit quality of the customer and represents an interest rate that would be similar to what we would offer the customer in a separate financing transaction. Unpaid principal and interest amounts associated with the financed performance obligation and the value of the embedded financing component are presented as long-term contracts financing receivables in our consolidated balance sheet. We recognize the allocated transaction price of the financing component as interest income over the implied financing term.

For fixed-price and cost-reimbursable contracts, we present revenues recognized in excess of billings as contract assets on the balance sheet. Amounts billed and due from our customers under both contract types are classified as receivables on the balance sheet.

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We only include amounts representing contract change orders, claims or other items in the contract value when we believe the rights and obligations become enforceable. Contract modifications routinely occur to account for changes in contract specifications or requirements. In most cases, contract modifications are for goods or services that are not distinct and, therefore, are accounted for as part of the existing contract. Transaction price estimates include additional consideration for submitted contract modifications or claims when we believe there is an enforceable right to the modification or claim, the amount can be reliably estimated, and its realization is reasonably assured. Amounts representing modifications accounted for as part of the existing contract are included in the transaction price and recognized as an adjustment to sales on a cumulative catch-up basis.

In addition, we are subject to audits of incurred costs related to many of our U.S. government contracts. These audits could produce different results than we have estimated for revenue recognized on our cost-based contracts with the U.S. government; however, our experience has been that our costs are acceptable to the government.

Contract Estimates

Use of the cost-to-cost or other similar methods of revenue recognition requires us to make reasonably dependable estimates regarding the revenue and cost associated with the design, manufacture and delivery of our products and services. Revisions or adjustments to estimates of the transaction price, estimated costs at completion and estimated profit or loss of a performance obligation are often required as work progresses under a contract, as experience is gained, as facts and circumstances change and as new information is obtained, even though the scope of work required under the contract may not change. In determining the estimated costs at completion, we have to make assumptions regarding labor productivity and availability, the complexity of the work to be performed, the availability of materials, estimated increases in wages and prices for materials, performance by our subcontractors, and the availability and timing of funding from our customer, among other variables. ~~For~~Revisions or adjustments to our estimated transaction price and estimated costs at completion may also be required if contract ~~change orders, claims, or similar items, we apply judgment in estimating the amounts and assessing the potential for realization. These amounts are only included~~modifications occur. The revisions in contract ~~value when they~~estimates, if significant, can ~~be reliably estimated~~materially affect our results of operations and ~~realization is considered probable.~~cash flows, and in some cases result in liabilities to complete contracts in a loss position. Based upon our history, we believe we have the ability to make reasonable estimates for these items. We have accounting policies and controls in place to address these, as well as other contractual and business arrangements to properly account for long-term contracts, and we continue to monitor and improve such policies, controls, and arrangements. For other information on such policies, controls and arrangements, see our discussion in Item 9A of this Form 10-K.

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Products and services provided under long-term, fixed-price contracts represented approximately ~~83%~~97% of our sales for ~~2017.~~2019. Because of the significance of the judgments and estimation processes, it is likely that materially different amounts could be recorded if we used different assumptions or if our underlying circumstances were to change. For example, if underlying assumptions were to change such that our estimated profit rate at completion for all fixed-price contracts accounted for under the cost-to-cost percentage-of-completion method was higher or lower by one percentage point, our ~~2017 net earnings~~2019 operating income would have increased or decreased by approximately ~~$8.0~~$6.5 million. When adjustments in estimated contract revenues or estimated costs at completion are required, any changes from prior estimates are recognized by recording adjustments in the current period for the inception-to-date effect of the changes on current and prior periods using the cumulative catch-up method of accounting. When estimates of total costs to be incurred on a contract exceed total estimates of revenue to be earned, a provision for the entire loss on the contract is recorded in the period the loss is determined.

~~Changes~~The aggregate impact of net changes in contract estimates on contracts for which revenue is recognized using the cost-to-cost percentage-of-completion method decreased operating income by approximately $0.1 million, $2.8 million and $14.5 million in 2017, 2016 and 2015, respectively. These adjustments decreased net income by approximately $0.3 million ($0.01 per share), $1.6 million ($0.06 per share) and $8.0 million ($0.30 per share) in 2017, 2016 and 2015, respectively.

We occasionally enter into contracts that include multiple deliverables such as the construction or upgrade of a system and subsequent services related to the delivered system. In recent years we have seen an increaseare presented in the number of customer requests for proposal that include this type of contractual arrangement. For these arrangements revenue is allocated at the inception of the contract to the different contract elements based on their relative selling price. The relative selling price for each deliverable is determined using vendor specific objective evidence (VSOE) of selling price or third-party evidence of selling price if VSOE does not exist. If neither VSOE nor third-party evidence of selling price exists for a deliverable, which is typically the case for our contracts, the guidance requires us to determine the best estimate of the selling price, which is the price at which we would sell the deliverable if it were sold on a standalone basis. In estimating the selling price of the deliverable on a standalone basis, we consider our overall pricing models and objectives, including the factors we contemplatetable below (amounts in negotiating our contracts with our customers. The pricing models and objectives that we use are generally based upon a cost-plus margin approach, with the estimated margin based in part on qualitative factors such as perceived customer pricing sensitivity and competitive pressures. Once the contract value is allocated to the separate deliverables, revenue recognition guidance relevant to each contractual element is followed. For example, for the long-term construction portion of a contract we generally use the cost-to-cost percentage-of-completion method and for the services portion we generally recognize the service revenues on a straight-line basis over the contractual service period or based on measurable units of work performed or incentives earned. The judgment we apply in allocating the relative selling price to each deliverable can have a significant impact on the timing of recognizing revenues and operating income on a contract. The revenue recognized for each unit of accounting is classified as products or services sales in our Consolidated Statements of Operations based upon the predominant attributes of the unit of accounting. If product and service deliverables are combined for revenue recognition purposes, revenue recognized is allocated to products or services in our Consolidated Statements of Operations based upon a relative-selling-price method.thousands).


	Years Ended September 30,
	2019		2018		2017
Operating income (loss)	$	(2,235)	$	(6,986)	$	5,737
Net income (loss) from continuing operations		(2,351)		(5,146)		3,208
Diluted earnings per share		(0.08)		(0.19)		0.12

For certain of our multiple-element arrangements, the contract specifies that we will not be paid upon the delivery of certain units of accounting, but rather we will be paid when subsequent performance obligations are satisfied. Generally, in these cases the allocation of arrangement consideration to the up-front deliverables is limited, in some cases to zero, and revenue is reduced, in some cases to zero for the delivery of up-front units of accounting. In such situations, if the costs associated with the delivered item exceed the amount of allocable arrangement consideration, we defer the direct and incremental costs associated with the delivered item that are in excess of the allocated arrangement consideration as capitalized contract costs. We assess recoverability of these costs by comparing the recorded asset to the deferred revenue in excess of the transaction price allocated to the remaining deliverables in the arrangement. Capitalized contract costs are subsequently recognized in income in a manner that is consistent with revenue recognition pattern for the arrangement as a whole. If no pattern of revenue recognition can be reasonably predicted for the arrangement, the capitalized costs are amortized on a straight-line basis.

We provide services under contracts including outsourcing-type arrangements and operations and maintenance contracts. Revenue under our service contracts with the U.S. government, which is generally in our CGD Services segment, is

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recorded under the cost-to-cost percentage-of-completion method. Award fees and incentives related to performance on services contracts at CGD Services are generally accrued during the performance of the contract based on our historical experience with such awards.

Revenue under contracts for services other than those with the U.S. government and those associated with long-term development projects is recognized either as services are performed or when a contractually required event has occurred, depending on the contract. These types of service contracts are entered into primarily by our CTS segment and to a lesser extent by our CGD Systems segment. Revenue under such contracts is generally recognized on a straight-line basis over the period of contract performance, unless evidence suggests that the revenue is earned or the obligations are fulfilled in a different pattern. Costs incurred under these services contracts are expensed as incurred. Earnings related to services contracts may fluctuate from period to period, particularly in the earlier phases of the contract. Certain of our transportation systems service contracts contain service level or system usage incentives, for which we recognize revenues when the incentive award is fixed or determinable. These contract incentives are generally based upon monthly service levels or monthly performance and become fixed or determinable on a monthly basis. However, one of our legacy transportation systems service contracts that terminated in late fiscal 2015 contained annual system usage incentive which were based upon system usage compared to annual baseline amounts. For this contract the annual system usage incentives were not considered fixed or determinable until the end of the contract year for which the incentives are measured, which fell within the second quarter of our fiscal year. Often these fees are based on meeting certain contractually required service levels or based on system usage levels.

Approximately half of our total sales are driven by pricing based on costs incurred to produce products or perform services under contracts with the U.S. government. Cost-based pricing is determined under the Federal Acquisition Regulation (FAR). The FAR provides guidance on the types of costs that are allowable in establishing prices for goods and services under U.S. government contracts. For example, costs such as those related to charitable contributions, interest expense and certain advertising activities are unallowable and, therefore, not recoverable through sales. We closely monitor compliance with, and the consistent application of, our critical accounting policies related to contract accounting. Business segment personnel evaluate our contracts through periodic contract status and performance reviews. Corporate management and our internal auditors also monitor compliance with our revenue recognition policies and review contract status with segment personnel. Costs incurred and allocated to contracts are reviewed for compliance with U.S. government regulations by our personnel, and many of them are subject to audit by the Defense Contract Audit Agency. For other information on accounting policies we have in place for recognizing sales and profits and the impact of our adoption of ASC 606, see our discussion under “Revenue Recognition” in Note 1 to the Consolidated Financial Statements.

Income Taxes

The asset and liability approach is used to recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Tax law and rate changes are reflected in income in the period such changes are enacted. We record a valuation allowance to reduce deferred tax assets to the amount that is more likely than not to be ~~realized.~~realized pursuant to relevant accounting guidance. If sufficient positive evidence arises in the future, any existing valuation allowance could be reversed as appropriate, decreasing income tax expense in the period that such conclusion is reached. We include interest and penalties related to income taxes, including unrecognized tax benefits, within the income tax provision.

Our income tax returns are based on calculations and assumptions that are subject to examination by the Internal Revenue Service and other tax authorities. In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We recognize liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. While we believe we have appropriate support for the positions taken on our tax returns, we regularly assess the potential outcomes of examinations by tax authorities in determining the adequacy of the provision for income taxes. We continually assess the likelihood and amount of potential adjustments and adjust the income tax provision, income taxes payable and deferred taxes in the period in which the facts that give rise to a revision become known.

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~~Beginning in~~Prior to the ~~second quarter of fiscal 2017~~Tax Act, we ~~began providing for U.S. income~~provided deferred taxes on all undistributed foreign earnings, as we did not consider these amounts permanently reinvested. Under the transition to a modified territorial tax system, all previously untaxed undistributed foreign earnings are subject to a transition tax charge at reduced rates and future repatriations of foreign ~~subsidiaries which are not considered indefinitely reinvested outside~~earnings will generally be exempt from U.S. tax. We will continue to provide applicable deferred taxes based on the ~~U.S. Deferred income taxes, net of foreign tax credits, are provided for foreign earnings available for distribution. As of September 30, 2017, we have recorded a deferred~~ tax liability or withholding taxes that would be due upon repatriation of ~~$11.9 million related to future taxes on our unremitted~~the undistributed foreign earnings.

Purchased Intangibles

We generally fund acquisitions using a combination of cash on hand and with the proceeds of debt. Assets acquired and liabilities assumed in connection with an acquisition are recorded at their fair values determined by management as of the date of acquisition. The excess of the transaction consideration over the fair value of the net assets acquired is recorded as goodwill. We amortize intangible assets acquired as part of business combinations over their estimated useful lives unless their useful lives are determined to be indefinite. For certain business combinations, we utilize independent valuations to assist us in estimating the fair value of purchased intangibles. Our purchased intangibles primarily relate to contracts and programs acquired and customer relationships, which are amortized over periods of 15 years or less. The determination of the value and useful life of purchased intangibles is judgmental in nature and, therefore, the amount of annual amortization expense we record is affected by these judgments. For example, if the weighted average amortization period for our purchased intangibles was one year less than we have determined, our ~~2017~~2019 amortization expense would have increased by approximately ~~$4.2~~$2.0 million.

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Valuation of Goodwill

Goodwill balances by reporting unit are as follows:


September 30,	2019		2018		2017
	(in millions)
Cubic Transportation Systems	$	254.6	$	49.8	$	50.9
Cubic Mission Solutions		181.4		138.1		—
Cubic Global Defense		142.1		145.7		270.7
Total goodwill	$	578.1	$	333.6	$	321.6

Goodwill represents the purchase price paid in excess of the fair value of net tangible and intangible assets acquired. Goodwill is not amortized but is subject to an impairment test at a reporting unit level on an annual basis and when circumstances indicate that an impairment is ~~more likely than not.~~more-likely-than-not. Such circumstances that might indicate an impairment is more-likely-than-not include a significant adverse change in the business climate for one of our reporting units or a decision to dispose of a reporting unit or a significant portion of a reporting unit. The test for goodwill impairment is a two-step process. The first step of the test is performed by comparing the fair value of each reporting unit to its carrying ~~value,~~amount, including recorded goodwill. If the carrying ~~value~~amount of a reporting unit exceeds its fair value, the second step is performed to measure the amount of the impairment, if any, by comparing the implied fair value of goodwill to its carrying ~~value.~~amount. Any resulting impairment ~~determined~~ would be recorded in the current period.

~~Goodwill balances by reporting unit are as follows:~~

September 30,

2017

2016

2015

(in millions)

Cubic Transportation Systems

$
50.9

$
49.6

$
56.0

Cubic Global Defense Systems

270.6

262.9

87.5

Cubic Global Defense Services

94.4

94.4

94.4

Total goodwill

$
415.9

$
406.9

$
237.9

Determining the fair value of a reporting unit for purposes of the goodwill impairment test or for changes in our operating structure is judgmental in nature and involves the use of estimates and assumptions. These estimates and assumptions could have a significant impact on whether or not an impairment charge is recognized and also the magnitude of any such charge. Estimates of fair value are primarily determined using discounted cash flows and market multiples from publicly traded comparable companies. These approaches use significant estimates and assumptions including projected future cash flows, discount rate reflecting the inherent risk in future cash flows, perpetual growth rate and determination of appropriate market comparables.

~~For~~We evaluate our reporting units when changes in our operating structure occur, and if necessary, reassign goodwill using a relative fair value allocation approach. As described in Note 18 to our Consolidated Financial Statements in Item 8 of this Form 10-K, beginning on October 1, 2017, we concluded that CMS became a separate operating segment. In conjunction with the ~~first step~~changes to reporting units, we reassigned goodwill between CGD and CMS based on their relative fair values as of ~~our fiscal~~October 1, 2017. We estimated the fair value of CGD and CMS at October 1, 2017 ~~annual impairment test, the~~based upon market multiples from publicly traded comparable companies in addition to discounted cash flows ~~used in the fair value analyses were~~models for CMS and for a combination of CGD and CMS based on discrete financial forecasts developed by management for planning purposes. ~~We used three year forecasts for our reporting units.~~ Cash flows beyond the discrete forecasts were estimated based on projected growth rates and financial ratios, influenced by an analysis of historical ratios and by calculating a terminal value at the end of the ~~three year~~discrete financial forecasts. For the October 1, 2017 valuations, future cash flows were discounted to present value using a discount rate of 13% for our CMS reporting unit and 11% for the combination of our CGD and CMS reporting units.

For the first step of our fiscal 2019 annual impairment test, we estimated the fair value of CTS based upon market multiples from publicly traded comparable companies and for CGD and CMS, we estimated the fair value based upon a combination of market multiples from publicly traded comparable companies and discounted cash flow models. The discounted cash flows were based on discrete three-year financial forecasts developed by management for planning purposes. Cash flows beyond the discrete forecasts were estimated based on projected growth rates and financial ratios, influenced by an analysis of historical ratios and by calculating a terminal value at the end of the three-year forecasts. The future cash flows were discounted to present value using a discount rate of ~~11.0%~~15% for CGD and 12.5% for CMS. The results of our ~~CGD Systems and CTS reporting units and 10.5% for our CGD Services reporting unit. The~~2019 annual impairment test indicated that the estimated fair value for our

~~Table of Contents~~

~~Transportation Systems~~ CTS and CGD reporting ~~unit~~units exceeded ~~its~~their carrying ~~value~~amounts by over 100%, while the estimated fair value of our ~~CGD Systems and CGD Services~~CMS reporting ~~units both~~unit exceeded ~~their~~its carrying ~~values~~amount by over ~~10%~~60%.

Significant management judgment is required in the forecast of future operating results that are used in our impairment analysis. The estimates we used are consistent with the plans and estimates that we use to manage our business. For our CGD Services reporting unit, significant assumptions utilized in our discounted cash flow approach included growth rates for sales and margins at greater levels than we have achieved in the past seven years, but at levels that are less than the average annual growth we achieved over the period from fiscal 2000 through fiscal 2010. Another significant assumption that we used was that CGD Services would be awarded a contract in early fiscal 2018 to continue support of US Army’s Joint Readiness Training Center. This contract was awarded to CGD Services in November 2017. Although we believe our underlying assumptions supporting this assessment are reasonable, if our forecasted sales and margins, timing of growth, or the discount rate vary from our forecasts, we may be required to perform an interim analysis in fiscal 2018 that could expose us to material impairment charges in the future. Assumptions used in our discounted cash flow approach for our CGD Systems reporting unit also included growth rates for sales and margins at greater levels that we have achieved in recent years due to our expectation that businesses recently acquired by this reporting unit will achieve growth at higher rates than the unit’s legacy operations. In performing the 2017 annual test for our CGD Services and CGD Systems reporting units, small changes in the discount rate, growth rate or gross margin assumptions could have a significant impact on the determination of the estimated fair values of these reporting units. For example a decrease in each future year’s projected cash flows by 10% for either the CGD Services reporting unit or for the CGD systems reporting unit would have resulted in us being required to complete step two of the analysis for the respective reporting unit.

Unforeseen negative changes in future business or other market conditions for any of our reporting units including margin compression or loss of business, could cause recorded goodwill to be impaired in the future. Also, changes in

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estimates and assumptions we make in conducting our goodwill assessment could affect the estimated fair value of our reporting units and could result in a goodwill impairment charge in a future period.

Pension Costs

The measurement of our pension obligations and costs is dependent on a variety of assumptions used in our valuations. These assumptions include estimates of the present value of projected future pension payments to plan participants, taking into consideration the likelihood of potential future events such as salary increases and demographic experience. These assumptions may have an effect on the amount and timing of future contributions.

The assumptions used in developing the required estimates include the following key factors:

●

Discount rates

●

Inflation

●

Salary growth

●

Expected return on plan assets

●

Retirement rates

●

Mortality rates

The discount rate represents the interest rate that is used to determine the present value of future cash flows currently expected to be required to settle pension obligations. We base the discount rate assumption on investment yields available at year-end on high quality corporate long-term bonds. Our inflation assumption is based on an evaluation of external market indicators. The salary growth assumptions reflect our long-term actual experience in relation to the inflation assumption. The expected return on plan assets reflects asset allocations, our historical experience, our investment strategy and the views of investment managers and large pension sponsors. Mortality rates are based on published mortality tables. Retirement rates are based primarily on actual plan experience. The effects of actual results differing from our assumptions are accumulated and amortized over future periods and, therefore, generally affect our recognized expense in such future periods.

~~Table of Contents~~

Changes in the above assumptions can affect our financial statements, although the relatively small size of our defined benefit pension plans limits the impact any individual assumption changes would have on earnings. For example, if the assumed rate of return on pension assets was 25 basis points higher or lower than we have assumed, our ~~2017~~2019 net earnings would have increased or decreased by approximately ~~$0.5~~$0.6 million, assuming all other assumptions were held constant.

Holding all other assumptions constant, an increase or decrease of 25 basis points in the discount rate assumption for ~~2017~~2019 would increase or decrease net earnings for ~~2018~~2020 by approximately $0.5 million, and would have decreased or increased the amount of the benefit obligation recorded at September 30, ~~2017,~~2019, by approximately ~~$9.5~~$9.9 million.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

WeAt times we invest in money market instruments and short-term marketable debt securities whose return is tied to short-term interest rates being offered at the time the investment is made. We maintain short-term borrowing arrangements in the U.S. and ~~New Zealand~~U.K. which are also tied to short-term rates (the U.S. dollar LIBOR rate and the ~~New Zealand base rate)~~Bank of England Base Rate). We also have senior unsecured notes payable to insurance companies which have fixed coupon interest rates. See Note 811 to the Consolidated Financial Statements for more information.

Interest income earned on our short-term investments is affected by changes in the general level of interest rates in the U.S., the U.K., Australia and New Zealand. These income streams are generally not hedged. Interest expense incurred under the short-term borrowing arrangements is affected by changes in the general level of interest rates in the U.S. and ~~New Zealand.~~U.K. The expense related to these cost streams is usually not hedged since it is either payable within three months and/or immediately callable by the lender at any time. Interest expense incurred under the long-term notes payable is not

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affected by changes in any interest rate because it is fixed. We believe that we are not significantly exposed to interest rate risk at this point in time.

Foreign Currency Exchange Risk

In the ordinary course of business, we enter into firm sale and purchase commitments denominated in many foreign currencies. We have a policy to hedge those commitments greater than an equivalent value of $50,000 by using foreign currency ~~exchange~~ forward and option contracts that are denominated in currencies other than the functional currency of the subsidiary responsible for the commitment, typically the British pound, Canadian dollar, Singapore dollar, Euro, ~~Swedish krona,~~ New Zealand dollar and Australian dollar. These contracts are designed to be effective hedges regardless of the direction or magnitude of any foreign currency exchange rate change, because they result in an equal and opposite income or cost stream that offsets the change in the value of the underlying commitment. See Note 1 to the Consolidated Financial Statements for more information on our foreign currency translation and transaction accounting policies.

Investments in our foreign subsidiaries in the U.K., Australia, New Zealand and Canada are not hedged. We generally have control over the timing and amount of earnings repatriation, if any, and expect to use this control to mitigate foreign currency exchange risk.

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Item 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

CUBIC CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(amounts in thousands, except per share data)


	Years Ended September 30,
	2019		2018		2017
Net sales:
Products	$	1,011,069	$	704,941	$	681,559
Services		485,406		497,957		426,150
		1,496,475		1,202,898		1,107,709
Costs and expenses:
Products		732,137		472,698		473,670
Services		332,923		362,694		305,653
Selling, general and administrative expenses		270,064		258,644		240,196
Research and development		50,132		52,398		52,652
Amortization of purchased intangibles		42,106		27,064		30,245
(Gain) loss on sale of property, plant and equipment		(32,510)		—		405
Restructuring costs		15,386		5,018		2,260
		1,410,238		1,178,516		1,105,081

Operating income		86,237		24,382		2,628

Other income (expenses):
Interest and dividend income		6,519		1,615		953
Interest expense		(20,453)		(10,424)		(15,027)
Other income (expense), net		(19,957)		(687)		364

Income (loss) from continuing operations before income taxes		52,346		14,886		(11,082)

Income tax provision		11,040		7,093		14,658

Income (loss) from continuing operations		41,306		7,793		(25,740)
Net income (loss) from discontinued operations		(1,423)		4,243		14,531
Net income (loss)		39,883		12,036		(11,209)

Less noncontrolling interest in loss of VIE		(9,811)		(274)		—

Net income (loss) attributable to Cubic	$	49,694	$	12,310	$	(11,209)

Amounts attributable to Cubic:
Net income (loss) from continuing operations		51,117		8,067		(25,740)
Net income (loss) from discontinued operations		(1,423)		4,243		14,531
Net income (loss) attributable to Cubic	$	49,694	$	12,310	$	(11,209)

Net income (loss) per share:
Basic
Continuing operations attributable to Cubic	$	1.68	$	0.30	$	(0.95)
Discontinued operations	$	(0.05)	$	0.16	$	0.54
Basic earnings per share attributable to Cubic	$	1.63	$	0.45	$	(0.41)

Diluted
Continuing operations attributable to Cubic	$	1.67	$	0.29	$	(0.95)
Discontinued operations	$	(0.05)	$	0.16	$	0.54
Diluted earnings per share attributable to Cubic	$	1.62	$	0.45	$	(0.41)

Weighted average shares used in per share calculations:
Basic		30,495		27,229		27,106
Diluted		30,606		27,351		27,106

See accompanying notes.

Years Ended September 30,

2017

2016

2015

Net sales:

Products

$
681,559

$
661,904

$
607,226

Services

804,302

799,761

823,819

1,485,861

1,461,665

1,431,045

Costs and expenses:

Products

473,670

473,444

451,295

Services

648,472

643,462

640,031

Selling, general and administrative expenses

258,088

269,593

212,518

Research and development

52,652

31,976

17,992

Amortization of purchased intangibles

32,997

34,120

27,550

Restructuring costs

2,468

1,852

6,272

1,468,347

1,454,447

1,355,658

Operating income

17,514

7,218

75,387

Other income (expenses):

Interest and dividend income

994

1,476

1,809

Interest expense

(15,027)

(11,199)

(4,400)

Pension settlement loss

—

(2,671)

—

Other income (expense), net

369

(2,301)

(885)

Income (loss) before income taxes

3,850

(7,477)

71,911

Income tax provision (benefit)

15,059

(9,212)

48,997

Net income (loss)

(11,209)

1,735

22,914

Less noncontrolling interest in income of VIE

—

—

29

Net income (loss) attributable to Cubic

$
(11,209)

$
1,735

$
22,885

Net income (loss) per share:

Basic

$
(0.41)

$
0.06

$
0.85

Diluted

(0.41)

0.06

0.85

Weighted average shares used in per share calculations:

Basic

27,106

26,976

26,872

Diluted

27,106

27,040

26,938

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CUBIC CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)


	Years Ended September 30,
	2019		2018		2017
Net income (loss)	$	39,883	$	12,036	$	(11,209)
Other comprehensive income (loss):
Adjustment to pension liability, net of tax		(19,481)		5,540		13,180
Foreign currency translation		(11,286)		(8,126)		1,440
Change in unrealized gains/losses from cash flow hedges:
Change in fair value of cash flow hedges, net of tax		3,103		34		(1,071)
Adjustment for net gains/losses realized and included in net income, net of tax		(1,386)		929		(358)
Total change in unrealized gains/losses realized from cash flow hedges, net of tax		1,717		963		(1,429)
Total other comprehensive income (loss)		(29,050)		(1,623)		13,191
Total comprehensive income		10,833		10,413		1,982
Noncontrolling interest in comprehensive loss of consolidated VIE, net of tax		(9,811)		(274)		—
Comprehensive income attributable to Cubic, net of tax	$	20,644	$	10,687	$	1,982

See accompanying notes.

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CUBIC CORPORATION

CONSOLIDATED ~~STATEMENTS OF COMPREHENSIVE INCOME (LOSS)~~BALANCE SHEETS

(in thousands)

Years Ended September 30,


2017

2016

2015
Net income (loss)

$
(11,209)

$
1,735

$
22,914
Other comprehensive income (loss):

Adjustment to pension liability, net of tax

13,180

(19,584)

(15,791)
Foreign currency translation

1,440

(47,872)

(31,430)
Change in unrealized gains/losses from cash flow hedges:

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

(1,071)

464

1,574
Adjustment for net gains/losses realized and included in net income, net of tax

(358)

(989)

(817)
Total change in unrealized gains/losses realized from cash flow hedges, net of tax

(1,429)

(525)

757
Total other comprehensive income (loss)

13,191

(67,981)

(46,464)
Total comprehensive income (loss)

$
1,982

$
(66,246)

$
(23,550)


	September 30,
	2019		2018
ASSETS
Current assets:
Cash and cash equivalents	$	65,800	$	111,834
Cash in consolidated VIE		347		374
Restricted cash		19,507		17,400
Restricted cash in consolidated VIE		9,967		10,000
Accounts receivable:
Long-term contracts		127,406		393,691
Allowance for doubtful accounts		(1,392)		(1,324)
		126,014		392,367

Contract assets		349,559		—
Recoverable income taxes		7,754		91
Inventories		106,794		84,199
Assets held for sale		—		8,177
Other current assets		38,534		43,705
Other current assets in consolidated VIE		33		—
Total current assets		724,309		668,147

Long-term contracts receivables		—		6,134
Long-term contracts financing receivables		36,285		—
Long-term contracts financing receivables in consolidated VIE		115,508		—
Long-term capitalized contract costs		—		84,924
Long-term capitalized contract costs in consolidated VIE		—		1,258
Property, plant and equipment, net		144,969		117,546
Deferred income taxes		4,098		4,713
Goodwill		578,097		333,626
Purchased intangibles, net		165,613		73,533
Other assets		76,872		14,192
Other assets in consolidated VIE		1,419		810
Total assets	$	1,847,170	$	1,304,883

See accompanying notes.

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CUBIC CORPORATION

~~CONSOLIDATED BALANCE SHEETS~~

~~(in thousands)~~

September 30,

September 30,

2017

2016

ASSETS

Current assets:

Cash and cash equivalents

$
60,143

$
197,127

Restricted cash

8,434

75,648

Marketable securities

—

12,996

Accounts receivable:

Trade and other receivables

12,378

15,488

Long-term contracts

416,808

367,419

Allowance for doubtful accounts

(436)

(326)

428,750

382,581

Recoverable income taxes

5,360

9,706

Inventories

87,715

66,362

Other current assets

31,141

38,231

Total current assets

621,543

782,651

Long-term contract receivables

17,457

20,926

Long-term capitalized contract costs

56,471

65,382

Property, plant and equipment, net

113,686

96,316

Deferred income taxes

2,206

2,194

Goodwill

415,912

406,946

Purchased intangibles, net

98,495

123,403

Other assets

10,515

6,590

Total assets

$
1,336,285

$
1,504,408

~~See accompanying notes.~~

~~Table of Contents~~

~~CUBIC CORPORATION~~

CONSOLIDATED BALANCE SHEETS—continued

(in thousands)

September 30,

September 30,

2017

2016

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:

Short-term borrowings

$
55,000

$
240,000

Trade accounts payable

95,837

81,172

Customer advances

57,477

49,481

Accrued compensation

79,577

73,619

Other current liabilities

78,750

74,071

Income taxes payable

9,838

1,450

Current maturities of long-term debt

—

450

Total current liabilities

376,479

520,243

Long-term debt

199,761

200,291

Accrued pension liability

25,375

46,865

Deferred compensation

11,435

10,643

Income taxes payable

7,465

11,855

Deferred income taxes

10,407

3,980

Other non-current liabilities

15,732

20,635

Commitments and contingencies

Shareholders’ equity:

Preferred stock, no par value:

Authorized--5,000 shares

Issued and outstanding--none

—

—

Common stock, no par value:

Authorized--50,000 shares

36,072 issued and 27,127 outstanding at September 30, 2017

35,937 issued and 26,992 outstanding at September 30, 2016

37,850

32,756

Retained earnings

794,485

813,035

Accumulated other comprehensive loss

(106,626)

(119,817)

Treasury stock at cost - 8,945 shares

(36,078)

(36,078)

Total shareholders’ equity

689,631

689,896

Total liabilities and shareholders’ equity

$
1,336,285

$
1,504,408


	September 30,
	2019			2018
LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:
Short-term borrowings	$	195,500		$	—
Trade accounts payable		180,773			125,414
Trade accounts payable in consolidated VIE		25			165
Contract liabilities		46,170			—
Customer advances		—			75,941
Accrued compensation		58,343			65,277
Other current liabilities		36,670			52,956
Other current liabilities in consolidated VIE		191			—
Income taxes payable		773			8,586
Current portion of long-term debt		10,714			—
Current liabilities of discontinued operations		—			—
Total current liabilities		529,159			328,339

Long-term debt		189,110			199,793
Long-term debt in consolidated VIE		61,994			9,056
Accrued pension liability		25,386			7,802
Deferred compensation		11,040			11,476
Income taxes payable		937			2,406
Deferred income taxes		4,554			2,689
Other noncurrent liabilities		22,817			19,113
Other noncurrent liabilities in consolidated VIE		21,605			13

Commitments and contingencies

Shareholders’ equity:
Preferred stock, 0 par value:
Authorized--5,000 shares
Issued and outstanding--NaN		—			—
Common stock, 0 par value:
Authorized--50,000 shares
40,124 issued and 31,178 outstanding at September 30, 2019
36,201 issued and 27,255 outstanding at September 30, 2018		274,472			45,008
Retained earnings		862,948			801,834
Accumulated other comprehensive loss		(139,693)			(110,643)
Treasury stock at cost - 8,945 shares		(36,078)			(36,078)
Shareholders’ equity related to Cubic		961,649			700,121
Noncontrolling interest in VIE		18,919			24,075
Total shareholders’ equity		980,568			724,196
			��
Total liabilities and shareholders’ equity	$	1,847,170		$	1,304,883

See accompanying notes.

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CUBIC CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

Years Ended September 30,


2017

2016

2015
Operating Activities:

Net income (loss)

$
(11,209)

$
1,735

$
22,914
Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Depreciation and amortization

51,099

45,478

37,662
Share-based compensation expense

5,269

8,762

8,325
Change in fair value of contingent consideration

(3,878)

1,274

3,607
Loss on disposal of assets

405

—

—
Deferred income taxes

5,540

(23,988)

33,816
Net pension cost (benefit)

(1,046)

1,102

(3,224)
Excess tax benefits from equity incentive plans

(35)

3

33
Changes in operating assets and liabilities, net of effects from acquisitions:

Accounts receivable

(40,015)

4,409

(2,230)
Inventories

(18,867)

(62)

(21,669)
Prepaid expenses and other current assets

7,763

3,403

(15,045)
Long-term capitalized contract costs

8,911

7,635

3,192
Accounts payable and other current liabilities

10,919

19,874

25,599
Customer advances

7,364

(24,900)

(10,200)
Income taxes

8,240

(5,519)

8,847
Other items, net

(5,724)

5,396

(1,938)
NET CASH PROVIDED BY OPERATING ACTIVITIES

24,736

44,602

89,689

Investing Activities:

Acquisition of businesses, net of cash acquired

(16,830)

(243,459)

(92,178)
Purchases of marketable securities

(19,121)

(28,470)

(58,855)
Proceeds from sales or maturities of marketable securities

31,868

43,456

51,173
Purchases of property, plant and equipment

(36,932)

(32,093)

(22,202)
Proceeds from sale of assets

1,233

—

—
Purchase of non-marketable debt and equity securities

(2,700)

—

—
Purchases of other assets

—

—

(2,993)
NET CASH USED IN INVESTING ACTIVITIES

(42,482)

(260,566)

(125,055)

Financing Activities:

Proceeds from short-term borrowings

130,780

288,900

111,300
Principal payments on short-term borrowings

(315,780)

(108,900)

(51,300)
Proceeds from long-term borrowings

—

75,000

25,000
Principal payments on long-term debt

(978)

(494)

(537)
Deferred financing fees

—

(3,647)

—
Stock issued under employee stock purchase plan

2,234

—

—
Purchase of common stock

(2,444)

(1,563)

(2,652)
Dividends paid

(7,341)

(7,285)

(7,256)
Excess tax benefits from equity incentive plans

35

(3)

(33)
Contingent consideration payments related to acquisitions of businesses

(2,625)

(2,479)

—
Purchase of noncontrolling interest

—

—

(1,029)
Net change in restricted cash

66,293

(6,403)

(189)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

(129,826)

233,126

73,304

Effect of exchange rates on cash

10,588

(38,511)

(10,950)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

(136,984)

(21,349)

26,988

Cash and cash equivalents at the beginning of the period

197,127

218,476

191,488

CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD

$
60,143

$
197,127

$
218,476


	Years Ended September 30,
	2019		2018		2017
Operating Activities:
Net income (loss)	$	39,883	$	12,036	$	(11,209)
Net (income) loss from discontinued operations		1,423		(4,243)		(14,531)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		64,742		46,600		48,045
Share-based compensation expense		15,488		7,515		5,012
Change in fair value of contingent consideration		(1,005)		1,029		(3,878)
(Gain) loss on sale of property, plant and equipment		(32,510)		—		405
Gain on sale of investment in real estate		—		(1,474)		—
Deferred income taxes		(3,363)		(6,860)		(917)
Net pension benefit		(1,337)		(2,770)		(1,046)
Excess tax benefits from equity incentive plans		—		—		(35)
Changes in operating assets and liabilities, net of effects from acquisitions
Accounts receivable		44,473		(34,762)		(45,443)
Contract assets		(83,697)		—		—
Inventories		(31,544)		3,023		(18,867)
Prepaid expenses and other current assets		5,317		(15,455)		7,286
Long-term financing receivables		(56,575)		—		—
Long-term capitalized contract costs		—		(29,552)		8,911
Accounts payable and other current liabilities		27,792		30,423		13,389
Contract liabilities		(15,359)		21,566		7,383
Income taxes		(17,268)		(361)		8,240
Other items, net		11,689		(18,126)		(5,756)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES FROM CONTINUING OPERATIONS		(31,851)		8,589		(3,011)
NET CASH PROVIDED BY OPERATING ACTIVITIES FROM DISCONTINUED OPERATIONS		—		10,376		27,747
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES		(31,851)		18,965		24,736

Investing Activities:
Acquisition of businesses, net of cash acquired		(393,908)		(16,322)		(16,830)
Purchases of marketable securities		—		—		(19,121)
Proceeds from sales or maturities of marketable securities		—		—		31,868
Proceeds from sale of property, plant and equipment		44,891		—		—
Purchases of property, plant and equipment		(49,084)		(31,696)		(36,916)
Proceeds from sale of investment in real estate		—		2,400		—
Purchase of non-marketable debt and equity securities		(60,694)		(1,500)		(2,700)
NET CASH USED IN INVESTING ACTIVITIES FROM CONTINUING OPERATIONS		(458,795)		(47,118)		(43,699)
NET CASH PROVIDED BY INVESTING ACTIVITIES FROM DISCONTINUED OPERATIONS		—		133,795		1,217
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES		(458,795)		86,677		(42,482)

Financing Activities:
Proceeds from short-term borrowings		898,000		269,770		130,780
Principal payments on short-term borrowings		(702,500)		(324,770)		(315,780)
Principal payments on long-term debt		—		—		(978)
Proceeds from long-term borrowings in consolidated VIE		50,162		13,196		—
Deferred financing fees		(1,907)		—		—
Deferred financing fees in consolidated VIE		—		(4,778)		—
Proceeds from stock issued under employee stock purchase plan		1,832		1,517		2,234
Purchase of common stock		(3,688)		(2,449)		(2,444)

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Supplemental disclosure of non-cash investing and financing activities:

Liability incurred to acquire Deltenna, net

$
1,327

$
—

$
—
Liability incurred to acquire Vocality, net

$
271

$
—

$
—
Liability incurred to acquire GATR, net

$
—

$
6,788

$
—
Liability incurred to acquire TeraLogics, net

$
—

$
4,998

$
—
Liability incurred to acquire H4 Global, net

$
—

$
952

$
—
Liability incurred to acquire DTECH, net

$
—

$
—

$
11,808

Dividends paid		(8,414)		(7,355)		(7,341)
Excess tax benefits from equity incentive plans		—		—		35
Contingent consideration payments related to acquisitions of businesses		(820)		(1,156)		(2,625)
Equity contribution from Boston VIE partner		—		24,349		—
Proceeds from equity offering, net		215,832		—		—
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		448,497		(31,676)		(196,119)

Effect of exchange rates on cash		(1,838)		(2,935)		9,667

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(43,987)		71,031		(204,198)

Cash, cash equivalents and restricted cash at the beginning of the period		139,608		68,577		272,775

CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT THE END OF THE PERIOD	$	95,621	$	139,608	$	68,577

Supplemental disclosure of non-cash investing and financing activities:
Liability recognized in connection with the acquisition of Nuvotronics, net	$	4,900	$	—	$	—
Liability recognized in connection with the acquisition of Shield Aviation, net	$	—	$	6,248	$	—
Liability recognized in connection with the acquisition of Deltenna, net	$	—	$	—	$	1,327
Liability recognized in connection with the acquisition of Vocality, net	$	—	$	—	$	271

See accompanying notes.

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CUBIC CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(in thousands, except per share amounts)

Accumulated









Other

Noncontrolling

Number

Common

Retained

Comprehensive

Treasury

Interest in

of Shares

(in thousands except per share amounts)

Stock

Earnings

Loss

Stock

VIE

Outstanding

October 1, 2014

$
20,669

$
803,059

$
(5,372)

$
(36,078)

$
223

26,789

Net income

—

22,885

—

—

29

—

Other comprehensive loss, net of tax

—

—

(46,464)

—

—

—

Stock issued under equity incentive plans

—

(46)

—

—

—

160

Purchase of common stock

(2,652)

—

—

—

—

(66)

Stock-based compensation

8,325

—

—

—

—

—

Purchase of noncontrolling interest

(749)

—

—

—

(252)

—

Tax expense from equity incentive plans

(33)

—

—

—

—

—

Cash dividends paid -- $.24 per share of common stock

—

(7,256)

—

—

—

—

September 30, 2015

25,560

818,642

(51,836)

(36,078)

—

26,883

Net income

—

1,735

—

—

—

—

Other comprehensive loss, net of tax

—

—

(67,981)

—

—

—

Stock issued under equity incentive plans

—

(57)

—

—

—

152

Purchase of common stock

(1,563)

—

—

—

—

(43)

Stock-based compensation

8,762

—

—

—

—

—

Tax expense from equity incentive plans

(3)

—

—

—

—

—

Cash dividends paid -- $.27 per share of common stock

—

(7,285)

—

—

—

—

September 30, 2016

32,756

813,035

(119,817)

(36,078)

—

26,992

Net loss

—

(11,209)

—

—

—

—

Other comprehensive income, net of tax

—

—

13,191

—

—

—

Stock issued under equity incentive plans

—

—

—

—

—

158

Stock issued under employee stock purchase plan

2,234

—

—

—

—

32

Purchase of common stock

(2,444)

—

—

—

—

(55)

Stock-based compensation

5,269

—

—

—

—

—

Tax benefit from equity incentive plans

35

—

—

—

—

—

Cash dividends paid -- $.27 per share of common stock

—

(7,341)

—

—

—

—

September 30, 2017

$
37,850

$
794,485

$
(106,626)

$
(36,078)

$
—

27,127


					Accumulated
					Other				Noncontrolling		Number
	Common		Retained		Comprehensive		Treasury		Interest in		of Shares
	Stock		Earnings		Loss		Stock		VIE		Outstanding

October 1, 2016	$	32,756	$	813,035	$	(119,817)	$	(36,078)	$	—	26,992

Net loss		—		(11,209)		—		—		—	—
Other comprehensive income, net of tax		—		—		13,191		—		—	—
Stock issued under equity incentive plans		—		—		—		—		—	158
Stock issued under employee stock purchase plan		2,234		—		—		—		—	32
Purchase of common stock		(2,444)		—		—		—		—	(55)
Stock-based compensation		5,269		—		—		—		—	—
Tax expense from equity incentive plans		35		—		—		—		—	—
Cash dividends paid -- $.27 per share of common stock		—		(7,341)		—		—		—	—

September 30, 2017		37,850		794,485		(106,626)		(36,078)		—	27,127

Net income (loss)		—		12,310		—		—		(274)	—
Other comprehensive loss, net of tax		—		—		(1,623)		—		—	—
Stock issued under equity incentive plans		—		—		—		—		—	158
Stock issued under employee stock purchase plan		1,517		—		—		—		—	26
Purchase of common stock		(2,449)		—		—		—		—	(56)
Stock-based compensation		8,090		—		—		—		—	—
Equity contribution of noncontrolling interest		—		—		—		—		24,349	—
Cumulative effect of accounting standard adoption		—		2,394		(2,394)		—		—	—
Cash dividends paid -- $.27 per share of common stock		—		(7,355)		—		—		—	—

September 30, 2018		45,008		801,834		(110,643)		(36,078)		24,075	27,255

Net income (loss)		—		49,694		—		—		(9,811)	—
Other comprehensive loss, net of tax		—		—		(29,050)		—		—	—
Stock issued under equity incentive plans		—		—		—		—		—	145
Stock issued under employee stock purchase plan		1,832		—		—		—		—	32
Purchase of common stock		(3,688)		—		—		—		—	(49)
Stock-based compensation		15,488		—		—		—		—	—
Cumulative effect of accounting standard adoption		—		19,834		—		—		4,655	—
Stock issued under equity offering, net		215,832		—		—		—		—	3,795
Cash dividends paid -- $.27 per share of common stock		—		(8,414)		—		—		—	—

September 30, 2019	$	274,472	$	862,948	$	(139,693)	$	(36,078)	$	18,919	31,178

See accompanying notes.

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CUBIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2017~~2019

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Nature of the Business: We design, ~~develop~~integrate and ~~manufacture products which are mainly electronic in nature such as mass transit fare collection~~operate systems, ~~air and ground combat training systems, and networked Command, Control, Communications, Computers, Intelligence, Surveillance, and Reconnaissance (C4ISR)~~ products and ~~systems.~~services focused in the transportation, command, control, communication, computers, intelligence, surveillance and reconnaissance (C4ISR), and training markets. We ~~provide services such~~offer integrated payment and information systems, expeditionary communications, cloud-based computing and intelligence delivery, as ~~specialized military~~well as training ~~exercises, including live, virtual~~ and ~~constructive training exercises and support, and we operate and maintain fare systems for mass transit customers. Our~~readiness solutions.

Through September 30, 2017 our principal lines of business ~~are~~were transportation ~~fare collection~~ systems and services, defense systems, and defense services. ~~Our transportation fare collection systems and services are~~On May 31, 2018, we sold ~~primarily to large local government agencies worldwide. Our principal customers for defense products and services are~~ the U.S. and foreign governments. In February 2015, we implemented a plan to restructure our defense services and defense systems businesses into a single business called Cubic Global Defense (CGD) to better align our defense business organizational structure with customer requirements, increase operational efficiencies and improve collaboration and innovation across the company. After this restructuring there is now a single, combined management structure for our legacy Cubic Defense Systems (CDS) and legacy Mission Support Services (MSS) segments. However, for segment financial reporting purposes, we continue to report the financial results of our defense systems and defense services segments separately since this mirrors the way that we continue to internally analyze much of the financial information related to these business divisions. These two reporting segments have been renamed Cubic Global Defense Systems (CGD Systems) and Cubic Global Defense Services (CGD Services) business. In March 2018, all of the criteria were met for the classification of CGD Services as a discontinued operation. As a result, the operating results, assets, liabilities, and cash flows of CGD Services have been classified as discontinued operations and have been excluded from amounts described below. In addition, we concluded that Cubic Mission Solutions became a separate operating and reportable segment beginning on October 1, 2017. As a result, we now operate in 3 reportable business segments: Cubic Transportation Systems (CTS), ~~respectively. CGD~~Cubic Global Defense Systems ~~includes~~ (CGD), and Cubic Mission Solutions (CMS)~~, a business division that includes our C4ISR subsidiaries~~.

Refer to “Note 3 – Acquisitions and ~~product offerings.~~ ~~There have been no significant changes in~~Divestitures” for additional information about the ~~operations that are included in each~~sale of ~~these reporting segments as a result~~CGD Services and the related discontinued operation classification and “Note 18 – Business Segment Information” for additional information on the separate disclosure of ~~the restructuring.~~operating and reportable segment information for CMS.

Principles of Consolidation: The consolidated financial statements include the accounts of Cubic Corporation, subsidiaries we control, and variable interest entities ~~(VIE’s)~~(VIEs) for which Cubic is the primary beneficiary. All significant intercompany balances and transactions have been eliminated in consolidation.

Foreign Currency Transactions and Translation: Our reporting currency is the U.S. dollar. Assets and liabilities of foreign subsidiaries are translated at the spot rate in effect at the applicable reporting date, and our Consolidated Statements of Operations are translated at the average exchange rates in effect during the applicable periods. The resulting unrealized cumulative translation adjustments are recorded as a component of other comprehensive income (loss) in our Consolidated Statements of Comprehensive ~~Income (Loss).~~Income. Cash flows from our operations in foreign countries are translated at the average rate for the applicable period. The effect of exchange rates on cash balances held in foreign currencies are separately reported in our Consolidated Statements of Cash Flows.

Transactions denominated in currencies other than our own subsidiaries’ functional currencies are recorded based on exchange rates at the time such transactions arise. Changes in exchange rates with respect to amounts recorded in our Consolidated Balance Sheets related to such transactions result in transaction gains and losses that are reflected in our Consolidated Statements of Operations as a component of other income (expense). Total transaction gains and losses, which are related primarily to advances to foreign subsidiaries and advances between foreign subsidiaries amounted to a gain of $0.7 million in ~~2017, and losses~~2019, a loss of ~~$0.9 million and $3.2~~$2.2 million in ~~2016~~2018, and ~~2015, respectively.~~a gain of $0.7 million in 2017.

Use of Estimates: The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant estimates include the estimated total costs at completion of our long-term contracts, estimated loss contingencies, estimated self-insurance liabilities, estimated discounted future cash flows of our reporting units used for goodwill impairment testing and estimated future cash flows for our long-lived asset impairment testing, estimated discounted cash flows used for valuation of intangible assets and contingent consideration in business combinations, and estimated rates of return and discount rates related to our defined benefit pension plans. Actual results could differ from our estimates.

Revenue Recognition: Effective October 1, 2018, we adopted Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers, as amended (commonly known as ASC 606), using the modified retrospective transition

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method. The adoption of ASC 606 resulted in a change in our significant accounting policy regarding revenue recognition, and resulted in changes in our accounting policies regarding contract estimates, backlog, inventory, contract assets, long-term capitalized contract costs, and contract liabilities as described below.

The cumulative effect of applying the standard was an increase of $24.5 million to shareholders' equity as of October 1, 2018. In accordance with the modified retrospective transition method, our Consolidated Statement of Operations for the year ended September 30, 2019 and our Consolidated Balance Sheet as of September 30, 2019 are presented under ASC 606, while our Consolidated Statement of Operations for the years ended September 30, 2018 and 2017 and our Consolidated Balance Sheet as of September 30, 2018 are presented under ASC 605, Revenue Recognition, the accounting standard in effect for periods ending prior to October 1, 2018. See Note 2 for disclosure of the impact of the adoption of ASC 606 on our Consolidated Statements of Operations for the year ended September 30, 2019 and our Consolidated Balance Sheets as of October 1, 2018 and September 30, 2019.

We generate revenue from the sale of integrated solutions such as mass transit fare collection systems, air and ground combat training systems, and products with C4ISR capabilities. A significant portion of our revenues are generated from long-term fixed-price contracts with customers that require us to design, develop, manufacture, modify, upgrade, test and integrate complex systems according to the customer’s specifications. We also generate revenue from services we provide, such as the operation and maintenance of fare systems for mass transit customers and the support of specialized military training exercises mainly for international customers. Our contracts are primarily with the U.S. government, state and local municipalities, international government customers, and international local municipal transit agencies. We classify sales as products or services in our Consolidated Statements of Operations based on the attributes of the underlying contracts.

We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. For certain contracts that meet the foregoing requirements, primarily international direct commercial sale contracts, we are required to obtain certain regulatory approvals. In these cases where regulatory approval is required in addition to approval from both parties, we recognize revenue based on the likelihood of obtaining timely regulatory approvals based upon all known facts and circumstances.

To determine the proper revenue recognition method, we evaluate each contractual arrangement to identify all performance obligations. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. The majority of our contracts have a single performance obligation because the promise to transfer the individual good or service is not separately identifiable from other promises within the contract and is therefore, not distinct. These contractual arrangements either require the use of a highly specialized engineering, development and manufacturing process to provide goods according to customer specifications or represent a bundle of contracted goods and services that are integrated and together represent a combined output, which may include the delivery of multiple units.

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The majority of our sales are from performance obligations satisfied over time. Sales are recognized over time when control is continuously transferred to the customer during the contract or the contracted good does not have alternative use to us. For U.S. government contracts, the continuous transfer of control to the customer is supported by contract clauses that provide for (i) progress or performance-based payments or (ii) the unilateral right of the customer to terminate the contract for its convenience, in which case we have the right to receive payment for costs incurred plus a reasonable profit for products and services that do not have alternative uses to us. Our contracts with international governments and local municipal transit agencies contain similar termination for convenience clauses, or we have a legally enforceable right to receive payment for costs incurred and a reasonable profit for products or services that do not have alternative uses to us.

For those contracts for which control transfers over time, revenue is recognized based on the extent of progress towards completion of the performance obligation. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. For our design and build type contracts, we generally use the cost-to-cost measure of progress because it best depicts the transfer of control to the customer which occurs as we incur costs on our contracts. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Revenues, including estimated fees or profits, are recorded proportionally as costs are incurred. Contract costs include material, labor and subcontracting costs, as well as an allocation of indirect costs, and are generally expensed as incurred for these contracts. For contracts with the U.S. government, general and administrative costs are included in contract costs; however, for purposes of revenue measurement, general and administrative costs are not considered contract costs for any other customers.

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Contract Estimates: Use of the cost-to-cost or other similar methods of revenue recognition requires us to make reasonably dependable estimates regarding the revenue and cost associated with the design, manufacture and delivery of our products and services. Revisions or adjustments to estimates of the transaction price, estimated costs at completion and estimated profit or loss of a performance obligation are often required as work progresses under a contract, as experience is gained, as facts and circumstances change and as new information is obtained, even though the scope of work required under the contract may not change. Revisions or adjustments may also be required if contract modifications occur. The impact of revisions in profit or loss estimates are recognized on a cumulative catch-up basis in the period in which the revisions are made. The revisions in contract estimates, if significant, can materially affect our results of operations and cash flows, and in some cases result in liabilities to complete contracts in a loss position. The aggregate impact of net changes in contract estimates are presented in the table below (amounts in thousands).

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	Years Ended September 30,
	2019		2018		2017
Operating income (loss)	$	(2,235)	$	(6,986)	$	5,737
Net income (loss) from continuing operations		(2,351)		(5,146)		3,208
Diluted earnings per share		(0.08)		(0.19)		0.12

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 September 30, 2019, our ending backlog was $3.401 billion. We expect to recognize approximately 30% of our September 30, 2019 backlog over the next 12 months and approximately 45% over the next 24 months as revenue, with the remainder recognized thereafter.

Disaggregation of Revenue: See Note 18 for information regarding our sales by customer type, contract type and geographic region for each of our segments. We believe those categories best depict how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors.

Cash Equivalents: We consider highly liquid investments with maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents excludes $29.5 million and $27.4 million of restricted cash at September 30, 2019 and 2018, respectively, which for purposes of our consolidated statements of cash flows, is included in cash, cash equivalents and restricted cash.

Restricted Cash: Restricted cash represents cash that is restricted as to usage for legal or contractual reasons. Restricted cash is classified either as current or ~~non-current,~~noncurrent, depending upon the date of the lapse of the respective restriction.

~~Concentration of Credit Risk:~~ We have established guidelines pursuant to which our cash and cash equivalents are diversified among various money market instruments and investment funds. These guidelines emphasize the preservation of capital by requiring minimum credit ratings assigned by established credit organizations. We achieve diversification by specifying maximum investments in each instrument type and issuer. The majority of these investments are not on deposit in federally insured accounts.

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

~~Accounts Receivable:~~ ~~Receivables consist primarily of~~billed amounts due from ~~U.S. and foreign governments for defense products and services and local government agencies for transportation systems.~~our customers. Due to the nature of our customers, we generally do not require collateral. We have limited exposure to credit risk as we have historically collected substantially all of our ~~receivables from government agencies.~~receivables. We generally require nominimal allowance for doubtful accounts for ~~these customers.~~our customers, which amounted to $1.4 million and $1.3 million as of September 30, 2019 and September 30, 2018, respectively.

Contract Assets: Contract assets include unbilled amounts typically resulting from sales under contracts when the percentage-of-completion cost-to-cost method of revenue recognition is utilized and revenue recognized exceeds the amount billed to the customer. Contract assets are classified as current assets and, in accordance with industry practice, include amounts that may be billed and collected beyond one year due to the long-cycle nature of many of our contracts.

Inventories: We state our inventories at the lower of cost or market. We determine cost using the first-in, first-out (FIFO) method, which approximates current replacement cost. We value our work in process at the actual production and engineering costs incurred to date, including applicable overhead. ~~For contracts with the U.S. government our work in process also includes general and administrative costs.~~ Any inventoried costs in excess of estimated realizable value are immediately charged to cost of sales. We include qualifying contract costs allocable to units-of-delivery contracts as inventory. We receive performance-based payments and progress payments associated with certain of these contracts based on the billing terms in the underlying contracts. Pursuant to contract provisions, agencies of the U.S. government and certain other customers have title to, or security interest in, inventories related to such contracts as a result of advances, performance-based payments, and progress payments. Contract advances, performance-based payments and progress payments received are recorded as an offset against the related inventory balances for contracts that use the units-of-delivery method to recognize revenue. This determination is performed on a contract by contract basis. Any amount of payments received in excess of the cumulative amount of accounts receivable and inventoried costs for a contract is classified as customer advances, which is a liability on the balance sheet.

Long-term capitalized contract costs: ~~Long-term~~ Through September 30, 2018, and prior to the adoption of ASC 606 long-term capitalized contract costs ~~include~~included costs incurred on contracts to develop and manufacture transportation systems for customers for which customer payments and revenue recognition ~~does~~did not begin until the customers ~~begin~~began operating the systems. ~~Once operation~~Upon adoption of ~~the systems commence, the~~ASC 606, revenue recognition and cost recognition are no longer deferred in these situations and therefore we no longer have long-term capitalized ~~costs are recognized in cost of sales based upon the ratio of revenue recorded during a period compared to the revenue expected to be recognized over the term of the contracts.~~contract costs.

Property, Plant and Equipment: We carry property, plant and equipment at cost. We provide depreciation in amounts sufficient to amortize the cost of the depreciable assets over their estimated useful lives. Generally, we use straight-line

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methods for depreciable real property over estimated useful lives or the term of the underlying lease, if shorter than the estimated useful lives, for leasehold improvements. We use accelerated methods (declining balance and sum-of-the-years-digits) for machinery and equipment over their estimated useful lives.

Certain costs incurred in the development of internal-use software and software applications, including external direct costs of materials and services and applicable compensation costs of employees devoted to specific software development, are capitalized as computer software costs. Costs incurred outside of the application development stage are expensed as incurred. The amounts capitalized are included in property, plant and equipment and are ~~amortized~~depreciated on a

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straight-line basis over the estimated useful life of the software, which ranges from three to seven years. No ~~amortization~~depreciation expense is recorded until the software is ready for its intended use.

Goodwill and Purchased Intangibles: We evaluate goodwill for potential impairment annually as of July 1, or when circumstances indicate that the carrying ~~value~~amount may not be recoverable. The test is performed by comparing the fair value of each of our reporting units ~~which are consistent with our operating segments,~~ to its carrying ~~value,~~amount, including recorded goodwill. If the carrying ~~value~~amount exceeds the fair value, we measure impairment by comparing the implied fair value of goodwill to its carrying ~~value,~~amount, and any impairment determined would be recorded in the current period. Our purchased intangible assets are subject to amortization. In cases that we determine that a pattern in which the intangible asset will be consumed can be reliably determined we use an amortization method that best matches that expected pattern. If we believe that such a pattern cannot be reliably determined, we use a straight-line method of amortization.

Impairment of Long-Lived Assets: We generally evaluate the carrying values of long-lived assets other than goodwill for impairment only if events or changes in facts and circumstances indicate that carrying values may not be recoverable. If we determined there was any impairment, we would measure it by comparing the fair value of the related asset to its carrying value and record the difference in the current period. Fair value is generally determined by identifying estimated discounted cash flows to be generated by those assets. We have ~~not~~0t recorded any impairment of long-lived assets for the years ended September 30, ~~2017, 2016 and 2015.~~2019, 2018 or 2017.

Recognizing assets acquired and liabilities assumed in a business combination: Acquired assets and assumed liabilities are recognized in a business combination on the basis of their fair values at the date of acquisition. We assess fair value, which is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, using a variety of methods including income approaches such as present value techniques or cost approaches such as the estimation of current selling prices and replacement values. Fair value of the assets acquired and liabilities assumed, including intangible assets and contingent payments, are measured based on the assumptions and estimations with regards to the variable factors such as the amount and timing of future cash flows for the asset or liability being measured, appropriate risk-adjusted discount rates, nonperformance risk, or other factors that market participants would consider. Upon acquisition, we determine the estimated economic lives of the acquired intangible assets for amortization purposes, which are based on the underlying expected cash flows of such assets. Adjustments to inventory are based on the fair market value of inventory and amortized into income based on the period in which the underlying inventory is sold. Adjustments to deferred revenue are based on the fair value of the deferred revenue and amortized into income over the underlying deferred revenue period. Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. Actual results may vary from projected results and assumptions used in the fair value assessments.

~~Customer Advances~~Contract Liabilities: ~~We receive~~Contract liabilities (formerly referred to as customer advances ~~performance-based~~prior to the adoption of ASC 606) include advance payments and ~~progress payments from customers that may exceed revenues recognized to date on certain contracts, including contracts with agencies~~billings in excess of ~~the U.S. government. We classify such advances, other than those reflected as a reduction of receivables or inventories,~~revenue recognized. Contract liabilities are classified as current ~~liabilities.~~based on our contract operating cycle and reported on a contract-by-contract basis, net of revenue recognized, at the end of each reporting period.

~~Contingencies~~: Contingencies: We establish reserves for loss contingencies when, in the opinion of management, the likelihood of liability is probable and the extent of such liability is reasonably estimable. Estimates, by their nature, are based on judgment and currently available information and involve a variety of factors, including the type and nature of the litigation, claim or proceeding, the progress of the matter, the advice of legal counsel, our defenses and our experience in similar cases or proceedings as well as our assessment of matters, including settlements, involving other defendants in

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similar or related cases or proceedings. We may increase or decrease our legal reserves in the future, on a matter-by-matter basis, to account for developments in such matters.

Derivative Financial Instruments: All derivatives are recorded at fair value, however, the classification of gains and losses resulting from changes in the fair values of derivatives are dependent on the intended use of the derivative and its resulting designation. If a derivative is designated as a fair value hedge, then a change in the fair value of the derivative is offset against the change in the fair value of the underlying hedged item and only the ineffective portion of the hedge, if any, is recognized in cost of sales. If a derivative is designated as a cash flow hedge, then the effective portion of a change in the fair value of the derivative is recognized as a component of accumulated other comprehensive income (loss) until the underlying hedged item is recognized in cost of sales, or the forecasted transaction is no longer probable of occurring. If a derivative does not qualify as a highly effective hedge, a change in fair value is immediately recognized

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in earnings. We formally document hedging relationships for all derivative hedges and the underlying hedged items, as well as the risk management objectives and strategies for undertaking the hedge transactions.

Defined Benefit Pension Plans: Some of our employees are covered by defined benefit pension plans. The net periodic cost of our plans is determined using several actuarial assumptions, the most significant of which are the discount rate and the long-term rate of return on plan assets. We recognize on a plan-by-plan basis the funded status of our defined benefit pension plans as either an asset or liability on our balance sheets, with a corresponding adjustment to accumulated other comprehensive income (loss), net of tax, in shareholders’ equity. The funded status is measured as the difference between the fair value of the plan assets and the benefit obligation of the plan.

Comprehensive Income (Loss): Other comprehensive income (loss), which is comprised of unrealized gains and losses on foreign currency translation adjustments, unrealized gains and losses on cash flow hedges, net of tax, unrealized gains and losses on available-for-sale securities, net of tax and pension liability adjustments, net of tax is included in our Consolidated Statement of Comprehensive Income ~~(Loss)~~ as other comprehensive income (loss).

~~Revenue Recognition:~~ We generate revenue from the sale of products such as mass transit fare collection systems, air and ground combat training systems, and products with C4ISR capabilities. We also generate revenue from services we provide such as specialized military training exercises, including live, virtual and constructive training exercises and support, and we operate and maintain fare systems for mass transit customers. We classify sales as products or services in our Consolidated Statements of Operations based on the attributes of the underlying contracts.

We recognize sales and profits under our long-term fixed-price contracts which require a significant amount of development effort in relation to total contract value using the cost-to-cost percentage-of-completion method of accounting. We record sales and profits based on the ratio of contract costs incurred to estimated total contract costs at completion. Contract costs include material, labor and subcontracting costs, as well as an allocation of indirect costs. For contracts with the U.S. federal government, general and administrative costs are included in contract costs; however, for purposes of revenue measurement, general and administrative costs are not considered contract costs for any other customers. Costs are recognized as incurred for contracts accounted for under the cost-to-cost percentage-of-completion method.

For certain other long-term, fixed price production contracts not requiring substantial development effort we use the units-of-delivery percentage-of-completion method as the basis to measure progress toward completing the contract and recognizing sales. The units-of delivery measure recognizes revenues as deliveries are made to the customer generally using unit sales values in accordance with the contract terms. Costs of sales are recorded as deliveries are made. We estimate profit as the difference between total estimated revenue and total estimated cost of a contract and recognize that profit over the life of the contract based on deliveries.

For long-term fixed price contracts, we only include amounts representing contract change orders, claims or other items in the contract value when they can be reliably estimated and we consider realization probable. Changes in estimates of sales, costs and profits are recognized using the cumulative catch-up method of accounting. This method recognizes in the current period the cumulative effect of the changes on current and prior periods. A significant change in one or more of these estimates could have a material effect on our consolidated financial position or results of operations.

We record sales under cost-reimbursement-type contracts as we incur the costs. The Federal Acquisition Regulations provide guidance on the types of costs that we will be reimbursed in establishing the contract price. We consider incentives or penalties and awards applicable to performance on contracts in estimating sales and profits, and record them when there is sufficient information to assess anticipated contract performance. We do not recognize incentive provisions that increase or decrease earnings based solely on a single significant event until the event occurs.

We occasionally enter into contracts that include multiple deliverables such as the construction or upgrade of a system and subsequent services to operate and maintain the delivered system. For such contracts, arrangement consideration is allocated at the inception of the arrangement to all deliverables using the relative-selling-price method. Under the relative-selling-price method, the selling price for each deliverable is determined using vendor specific objective evidence (VSOE) of selling price or third-party evidence of selling price if VSOE does not exist. If neither VSOE nor third-party evidence of selling price exists for a deliverable, which is typically the case for our contracts, the guidance

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requires us to determine the best estimate of the selling price, which is the price at which we would sell the deliverable if it were sold on a standalone basis. In estimating the selling price of the deliverable on a standalone basis, we consider our overall pricing models and objectives, including the factors we contemplate in negotiating our contracts with our customers. The pricing models and objectives that we use are generally based upon a cost-plus margin approach, with the estimated margin based in part on qualitative factors such as perceived customer pricing sensitivity and competitive pressures.

Once the contract value is allocated to the separate deliverables under a multiple-element arrangement, revenue recognition guidance relevant to each contractual element is followed. For example, for the long-term construction portion of a contract we generally use the percentage-of completion method and for the services portion we generally recognize the service revenues on a straight-line basis over the contractual service period or based on measurable units of work performed or incentives earned.

For certain of our multiple-element arrangements, the contract specifies that we will not be paid upon the delivery of certain units of accounting, but rather we will be paid when subsequent performance obligations are satisfied. Generally, in these cases the allocation of arrangement consideration to the up-front deliverables is limited, in some cases to zero, and revenue is reduced, in some cases to zero for the delivery of up-front units of accounting. In such situations, if the costs associated with the delivered item exceed the amount of allocable arrangement consideration, we defer the direct and incremental costs associated with the delivered item that are in excess of the allocated arrangement consideration as capitalized contract costs. We assess recoverability of these costs by comparing the recorded asset to the deferred revenue in excess of the transaction price allocated to the remaining deliverables in the arrangement. Capitalized contract costs are subsequently recognized in income in a manner that is consistent with the revenue recognition pattern for the arrangement as a whole. If no pattern of revenue recognition can be reasonably predicted for the arrangement, the capitalized costs are amortized on a straight-line basis.

Revenue under our service contracts with the U.S. government is recorded under the cost-to cost percentage-of-completion method. Award fees and incentives related to performance under these service contracts are accrued during the performance of the contract based on our historical experience and estimates of success with such awards.

Revenue under contracts for services other than those with the U.S. government and those associated with design, development, or production activities is recognized either as services are performed or when a contractually required event has occurred, depending on the contract. For non-U.S. government service contracts that contain measurable units of work performed we recognize sales when the units of work are completed. Certain of our transportation systems service contracts contain service level or system usage incentives, for which we recognize revenues when the incentive award is fixed or determinable. These contract incentives are generally based upon monthly service levels or monthly performance and become fixed or determinable on a monthly basis. However, one of our legacy transportation systems service contracts that terminated in late fiscal 2015 contained annual system usage incentive which were based upon system usage compared to annual baseline amounts. For this contract the annual system usage incentives were not considered fixed or determinable until the end of the contract year for which the incentives are measured, which fell within the second quarter of our fiscal year. The follow-on contract to this transportation systems service contract did not include an annual system usage incentive. Revenue under non-U.S. government service contracts that do not contain measurable units of work performed, which is generally the case for our service contracts, is recognized on a straight-line basis over the contractual service period, unless evidence suggests that the revenue is earned, or obligations fulfilled, in a different manner. Costs incurred under these services contracts are expensed as incurred.

We make provisions in the current period to fully recognize any anticipated losses on contracts, other than non-U.S. government service contracts. If we receive cash on a contract prior to revenue recognition, and for contracts that are accounted for on a units-of-delivery method, that is in excess of inventoried costs, we classify it as a customer advance on the balance sheet.

In addition, we are subject to audit of incurred costs related to many of our U.S. government contracts. These audits could produce different results than we have estimated for revenue recognized on our cost-based contracts with the U.S. government; however, our experience has been that our costs are acceptable to the government.

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Research and Development (R&D): We record the cost of ~~company sponsored~~company-sponsored R&D activities as the expenses are incurred. The cost of engineering and product development activities incurred in connection with the performance of work on our contracts is included in cost of sales as they are directly related to contract performance.

Stock-Based Compensation: Restricted stock units (RSUs) are granted to eligible employees and directors and represent rights to receive shares of common stock at a future date if vesting occurs. We have three general categories of awards: RSUs ~~granted to date have either~~with time-based vesting, orRSUs with performance-based vesting, and RSUs with performance and market-based vesting. Compensation expense for all RSUs is measured at fair value at the grant date and recognized based upon the number of RSUs that ultimately vest. We determine the fair value of RSUs based on the closing market price of our common stock on the grant date. The grant date of the performance-based RSUs takes place when the grant is authorized and the specific achievement goals are communicated. See Note 16 for further information on our stock based compensation plans.

Compensation expense for time-based vesting awards is recorded on a straight-line basis over the requisite service period, adjusted by estimated forfeiture rates. Vesting of performance-based RSUs is tied to achievement of specific company goals over the measurement period, which is generally a three-year period from the date of the grant. For purposes of measuring compensation expense for performance-based RSUs, at each reporting date we estimate the number of shares for which vesting is deemed probable based on management’s expectations regarding achievement of the relevant performance criteria, adjusted by estimated forfeiture rates. Compensation expense for the number of shares ultimately expected to vest is recognized on a straight-line basis over the requisite service period for the performance-based RSUs. The recognition of compensation expense associated with performance-based RSUs requires judgment in assessing the probability of meeting the performance goals. For performance-based RSUs, there may be significant expense recognition or reversal of recognized expense in periods in which there are changes in the assessed probability of meeting performance-based vesting criteria.

Income Taxes: Our provision for income taxes includes federal, state, local and foreign income taxes. We provide deferred income taxes on temporary differences between assets and liabilities for financial reporting and tax purposes as measured by enacted tax rates we expect to apply when the temporary differences are settled or realized. Tax law and rate changes are reflected in income in the period such changes are enacted. We establish valuation allowances for deferred tax assets when the amount of future taxable income we expect is not likely to support the realization of the temporary differences. ~~Beginning in~~After the ~~second quarter~~enactment of ~~fiscal year~~the Tax Cuts and Jobs Act of 2017 (Tax Act), we ~~began providing~~have provided for ~~U.S.~~ deferred taxes on unremitted ~~foreign earnings.~~earnings, as applicable. We include interest and penalties related to income taxes, including unrecognized tax benefits, within the income tax provision. Accounting Standards Codification (ASC) 740-20 requires total income tax expense or benefit to be allocated among continuing operations, discontinued operations, extraordinary items, other comprehensive income and items charged directly to shareholders’ equity.

Net Income (Loss) Per Share: Basic net income (loss) per share (EPS) is computed by dividing the net income (loss) attributable to Cubic for the period by the weighted average number of common shares outstanding during the period, including vested RSUs.

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In periods with a net income from continuing operations attributable to Cubic, diluted EPS is computed by dividing the net income for the period by the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares consist of dilutive RSUs. Dilutive RSUs are calculated based on the average share price for each fiscal period using the treasury stock method. For RSUs with performance-based vesting, no common equivalent shares are included in the computation of diluted EPS until the related performance criteria have been met. For RSUs with performance and market-based vesting, no common equivalent shares are included in the computation of diluted EPS until the performance criteria have been met, and once the criteria are met the dilutive restricted stock units are calculated using the treasury stock method, modified by the multiplier that is calculated at the end of the accounting period as if the vesting date was at the end of the accounting period. The multiplier on RSUs with performance and market-based vesting is further described in Note 16.

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. ~~For the year ended September 30,~~

The weighted-average number of shares outstanding used to compute net income (loss) per common share were as follows (in thousands):


	Years Ended September 30,
	2019		2018		2017

Weighted average shares - basic		30,495		27,229		27,106
Effect of dilutive securities		111		122		—
Weighted average shares - diluted		30,606		27,351		27,106

Number of anti-dilutive securities		—		—		967

Recent Accounting Pronouncements:

Recently Adopted Accounting Pronouncements

On December 22, 2017 the ~~effect of 0.4 million shares of unvested restricted stock were excluded from diluted loss per share that would have been included if we had been in a net income position.~~

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

Year Ended September 30,


2017

2016

2015

Net income (loss)

$
(11,209)

$
1,735

$
22,885

Weighted average shares - basic

27,106

26,976

26,872

Effect of dilutive securities

—

64

66

Weighted average shares - diluted

27,106

27,040

26,938

Net income (loss) per share, basic

$
(0.41)

$
0.06

$
0.85

Effect of dilutive securities

—

—

—

Net income (loss) per share, diluted

$
(0.41)

$
0.06

$
0.85

~~Recent Accounting Pronouncements:~~

~~In May 2014,~~U.S. government enacted the ~~FASB issued ASU 2014-09,~~ ~~Revenue from Contracts with Customers.~~ ~~ASU 2014-09 outlines a comprehensive revenue recognition model and supersedes most current revenue recognition guidance. The new guidance will require revenue~~Tax Act. Due to ~~be recognized when promised goods or services are transferred to customers in amounts that reflect~~ the ~~consideration to which the company expects to be entitled in exchange for those goods or services. Adoption~~complexity of the ~~new rules could affect~~Tax Act, the ~~timing of revenue recognition for certain transactions. Adoption of ASU 2014-09 will be required for us beginning~~SEC issued guidance in the first quarter of fiscal 2019 and we have determined that we will not adopt ASU 2014-09 earlier than required. ASU 2014-09 allows for two methods of adoption: (a) “full retrospective” adoption, meaning the standard is applied to all periods presented, or (b) “modified retrospective” adoption, meaning the cumulative effect of applying ASU 2014-09 is recognized as an adjustment to the opening retained earnings balance in the year of adoption. We have not yet determinedStaff Accounting Bulletin (SAB) 118 which ~~method of adoption we will select.~~

We have assigned a task force within management to lead our implementation efforts and we have engaged outside advisors to assist. We are currently in the process of analyzing the impact of the adoption of the new standard on our various revenue streams. Under ASU 2014-09, revenue is recognized as control transfers to the customer. As such, revenue for our fixed-price development and production contracts will generally be recognized over time as costs are incurred, which is consistent with the revenue recognition model we currently use for the majority of these contracts. For certain of our fixed-price production contracts where we currently recognize revenue as units are delivered, in most casesclarified the accounting for ~~those contracts will change~~income taxes under ~~ASU 2014-09 such that we will recognize revenue as costs are incurred. This change will generally result~~ASC 740 if certain information was not yet available, prepared or analyzed in ~~an acceleration of revenue as compared with our current revenue recognition method~~reasonable detail to complete the accounting for ~~those contracts. Approximately 22% of our net sales used the units-of-delivery method to recognize revenue in fiscal 2017. We continue to analyze the impact~~income tax effects of the ~~new standard on our remaining revenue streams and, as~~Tax Act. SAB 118 provided for a measurement period of up to one year after the standard will supersede substantially all existing revenue guidance affecting us under GAAP, we expect that it will impact revenue and cost recognition on a significant number of our contracts across our business segments, in addition to our business processes and our information technology systems. Our process of evaluating the effectenactment of the ~~new standard will continue through~~Tax Act, during which time the required analyses and accounting must be completed. During fiscal year 2018, we recorded provisional amounts for the income tax effects of the changes in tax law and tax rates, as reasonable estimates were determined by management during this period. The SAB 118 measurement period subsequently ended on December 22, 2018. Although we no longer consider these amounts to be provisional, the determination of the Tax Act’s income tax effects may change following future legislation or further interpretation of the Tax Act based on the publication of recently proposed U.S. Treasury regulations and guidance from the Internal Revenue Service and state tax authorities.

In ~~May 2015,~~November 2016, the ~~FASB issued~~Financial Accounting Standards ~~Update~~Board (FASB) issued ASU ~~2015-07,~~ ~~Disclosures~~2016-18,Restricted Cash, which requires amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the total beginning and ending amounts for ~~Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent).~~ the periods shown on the statement of cash flows. ASU 2015-07 removes the requirement to categorize investments for which the fair values are measured using the net asset value per share practical expedient within the fair value hierarchy. It also limits certain disclosures to investments for which the entity has elected to measure the fair value using the practical expedient. ~~This guidance~~2016-18 was adopted ~~retrospectively in fiscal year 2017. The adoption did not have a material impact on our consolidated financial statements.~~

~~Table~~cash, cash equivalents and restricted cash are now reflected in our Statements of ~~Contents~~

~~portion of the amendment, early adoption is not permitted. We are currently evaluating the impact this guidance will have on our financial statements and related disclosures.~~Cash Flows for all periods presented.

Recent Accounting Pronouncements – Not Yet Adopted

In February 2016, the FASB issued ASU 2016-02, Leases. Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (a) a lease liability,

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which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (b) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The ASU will be effective for us beginning October 1, 2019 ~~with early adoption permitted. ASU 2016-02~~and will be adopted on a modified retrospective transition basis for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. We expect to elect the practical expedients which provide that entities need not reassess whether existing contracts contain a lease, lease classification of existing leases, or the treatment of initial direct costs on existing leases. We are ~~currently~~substantially complete with our review of lease contracts, evaluating other contracts for potentially embedded leases, implementing a new lease accounting and administration software solution, and establishing new processes and internal controls. Upon adoption, we expect to record a right of use asset of approximately $80 million and a lease liability of approximately $88 million. We do not expect material changes to the ~~impact~~recognition of ~~the application of this accounting standard update on~~lease expense in our consolidated ~~financial~~ statements ~~as well as whether to adopt the new guidance early.~~of income.

In ~~March 2016,~~August 2017, the FASB issued ASU ~~2016-09,~~ ~~Compensation-Stock Compensation. The new guidance simplifies several aspects~~2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which aims to improve the financial reporting of hedging relationships to better portray the ~~accounting for share-based payment transactions, including the income tax consequences, classification~~economic results of ~~awards as either equity or liabilities, and classification on the statement of cash flows.~~an entity’s risk management activities in its financial statements. The amendments in this ~~standard~~ASU are ~~effective~~intended to better align an entity’s risk management activities and financial reporting for ~~our annual year~~hedging relationships through changes to both the designation and ~~first fiscal quarter beginning on October 1, 2017. We are currently evaluating~~measurement guidance for qualifying hedging relationships and the ~~impact~~presentation of hedge results. To satisfy that objective, the amendments expand and refine hedge accounting for both non-financial and financial risk components, and align the recognition and presentation of the ~~application~~effects of ~~this accounting standard update on our consolidated~~the hedging instrument and the hedged item in the financial statements.

~~In August 2016,~~ Additionally, the ~~FASB issued~~amendments (1) permit hedge accounting for risk components in hedging relationships involving non-financial risk and interest rate risk; (2) change the guidance for designating fair value hedges of interest rate risk and for measuring the change in fair value of the hedged item in fair value hedges of interest rate risk; (3) continue to allow an entity to exclude option premiums and forward points from the assessment of hedge effectiveness; and (4) permit an entity to exclude the portion of the change in fair value of a currency swap that is attributable to a cross-currency basis spread from the assessment of hedge effectiveness. The amendments in this ASU ~~2016-15,~~ ~~Classification of Certain Cash Receipts and Cash Payments~~, which provides clarifying guidance on how entities should classify certain cash receipts and cash payments on the statement of cash flows. The guidance also clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. The guidance will beare effective for us in our ~~fiscal year~~annual period beginning October 1, ~~2018,~~2019 and ~~early~~interim periods within that year. We do not expect the adoption ~~is permitted. We are currently evaluating the impact of the application~~ of this ~~accounting~~ standard ~~update~~to have a significant impact on our consolidated financial ~~statements as well as whether to adopt the new guidance early.~~statements.

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. 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 ~~value~~amount exceeds its fair value, not to exceed the carrying amount of goodwill. The guidance will be effective for us in our fiscal year beginning October 1, 2020 with

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early adoption permitted. ~~We are currently evaluating the~~Adoption of ASU 2017-04 will have no immediate impact ~~of the application of this accounting standard update~~ on our consolidated financial statements ~~as well as~~and would only have the potential to impact the amount of any goodwill impairment recorded after the adoption of the ASU. We are currently evaluating whether to adopt the ~~new~~ guidance early.

In ~~March 2017,~~August 2018, the FASB issued ASU ~~2017-07~~2018-13, ~~Compensation – Retirement Benefits~~Fair Value Measurement - Disclosure Framework (Topic 820). The updated guidance modifies the disclosure requirements on fair value measurements. The amendments in this accounting standard update are effective for us in our annual period beginning October 1, 2020 and interim periods within that annual period. Early adoption is permitted for any removed or modified disclosures. We do not expect the adoption of this standard to have a significant impact on our consolidated financial statements.

In August 2018, the FASB issued ASU 2018-14, Defined Benefit Plan - Disclosure Framework (Topic 715):~~Improving~~, which modifies the ~~Presentation~~disclosure requirements for employers that sponsor defined benefit pension or other postretirement benefit plans. The guidance removes disclosures that are no longer considered cost beneficial, clarifies the specific requirements of ~~Net Periodic Pension Cost~~disclosures and ~~Net Periodic Postretirement Benefit Cost~~.adds disclosure requirements identified as relevant. The amendments in this accounting standard update ~~requires employers~~are effective for us in our annual period beginning October 1, 2020. Early adoption is permitted. We do not expect the adoption of this standard to ~~present~~have a significant impact on our consolidated financial statements.

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NOTE 2—IMPLEMENTATION OF THE NEW REVENUE RECOGNITION STANDARD

In May 2014, the ~~service cost component of~~FASB issued ASU 2014-09, Revenue from Contracts with Customers, as amended (commonly referred to as ASC 606), which replaces numerous requirements in U.S. GAAP, including industry-specific requirements, and provides companies with a single revenue recognition model for recognizing revenue from contracts with customers and significantly expands the ~~net periodic benefit cost in the same income statement line item~~disclosure requirements for revenue arrangements. The new standard, as other employee compensation costs arising from services rendered during the period. The other components of net benefit cost, including interest cost, expected return on plan assets, amortization of prior service cost/credit and actuarial gain/loss, and settlement and curtailment effects, are to be presented outside of any subtotal of operating income. Employers will have to disclose the line(s) used to present the other components of net periodic benefit cost, if the components are not presented separately in the income statement. ~~ASU 2017-07 will be~~amended, was effective for us beginning on October 1, 2018.

As discussed in Note 1, we adopted ASC 606 using the modified retrospective transition method. Results for reporting periods beginning after September 30, 2018 are presented under ASC 606, while prior period comparative information has not been restated and continues to be reported in accordance with ASC 605, the accounting standard in effect for periods ending prior to October 1, 2018.

Based on contracts in process at September 30, 2018, upon adoption of ASC 606 we recorded a net increase to shareholder’s equity of $24.5 million, which includes the acceleration of net sales of approximately $114.9 million and the related cost of sales of $90.4 million. The adjustment to shareholder’s equity primarily relates to multiple element transportation contracts that previously required the deferral of revenue and costs during the design and build phase, as the collection of all customer payments occurs during the subsequent operate and maintain phase. Under ASC 606, deferral of such revenue and costs is not appropriate. In addition, the adjustment to shareholder’s equity is attributed to contracts previously accounted for under the units-of-delivery method, which are now recognized under ASC 606 earlier in the performance period as costs are incurred, as opposed to when the units are delivered under ASC 605. In accordance with the modified retrospective transition provisions of ASC 606, we will not recognize any of the accelerated net sales and related cost of sales through October 1, 2018 in our Consolidated Statements of Operations for any historical or future period.

We made certain presentation changes to our Consolidated Balance Sheet on October 1, 2018 to comply with ASC 606. The component of accounts receivable that consisted of unbilled contract receivables as reported under ASC 605 has been reclassified as contract assets under ASC 606, after certain adjustments described below. The adoption of ASC 606 resulted in an increase in unbilled contract receivables (referred to as contract assets under ASC 606) primarily from converting contracts previously applying the units-of-delivery method to the cost-to-cost method with a corresponding reduction in inventoried contract costs. Additionally, the adoption of ASC 606 resulted in an increase in unbilled receivables from converting multiple element transportation contracts that previously deferred all revenue and ~~early~~costs during the design and build phase, with a corresponding reduction in long-term capitalized contract costs. Advance payments and deferred revenue, previously primarily classified in customer advances, are now presented as contract liabilities.

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The table below presents the cumulative effect of the changes made to our Consolidated Balance Sheet as of October 1, 2018 due to the adoption ~~is permitted.~~ ~~We are currently evaluating~~of ASC 606 (in thousands):


	September 30,		Adjustments		October 1, 2018
	2018		Due to		As Adjusted
	Under ASC 605		ASC 606		Under ASC 606
ASSETS
Current assets:
Cash and cash equivalents	$	111,834	$	—	$	111,834
Cash in consolidated VIE		374		—		374
Restricted cash		17,400		—		17,400
Restricted cash in consolidated VIE		10,000		—		10,000
Accounts receivable, net		392,367		(236,743)		155,624
Contract assets		—		272,210		272,210
Recoverable income taxes		91		—		91
Inventories		84,199		(22,511)		61,688
Assets held for sale		8,177		—		8,177
Other current assets		43,705		—		43,705
Total current assets		668,147		12,956		681,103

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

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

Long-term debt		199,793		—		199,793
Long-term debt in consolidated VIE		9,056		—		9,056
Accrued pension liability		7,802		—		7,802
Deferred compensation		11,476		—		11,476
Income taxes payable		2,406		—		2,406
Deferred income taxes		2,689		—		2,689
Other noncurrent liabilities		19,113		—		19,113
Other noncurrent liabilities in consolidated VIE		13		—		13

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

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The table below presents how the adoption of ASC 606 affected our Consolidated Statement of Operations for the twelve months ended September 30, 2019 (in thousands, except per share data):


	Twelve months ended September 30, 2019
					As Reported
	Under		Effect of		Under
	ASC 605		ASC 606		ASC 606
Net sales:
Products	$	902,913	$	108,156	$	1,011,069
Services		484,363		1,043		485,406
		1,387,276		109,199		1,496,475
Costs and expenses:
Products		638,621		93,516		732,137
Services		332,923		—		332,923
Selling, general and administrative expenses		269,266		798		270,064
Research and development		50,132		—		50,132
Amortization of purchased intangibles		42,106		—		42,106
Gain on sale of fixed assets		(32,510)		—		(32,510)
Restructuring costs		15,386		—		15,386
		1,315,924		94,314		1,410,238

Operating income		71,352		14,885		86,237

Other income (expenses):
Interest and dividend income		394		6,125		6,519
Interest expense		(20,453)		—		(20,453)
Other income (expense), net		(19,957)		—		(19,957)

Income from continuing operations before income taxes		31,336		21,010		52,346

Income tax provision (benefit)		11,059		(19)		11,040

Income from continuing operations		20,277		21,029		41,306
Net loss from discontinued operations		(1,423)		—		(1,423)
Net income		18,854		21,029		39,883

Less noncontrolling interest in loss of VIE		(22,076)		12,265		(9,811)

Net income attributable to Cubic	$	40,930	$	8,764	$	49,694

Amounts attributable to Cubic:
Net income from continuing operations		42,353		8,764		51,117
Net loss from discontinued operations		(1,423)		—		(1,423)
Net income attributable to Cubic	$	40,930	$	8,764	$	49,694

Net income per share:
Basic earnings per share attributable to Cubic	$	1.34	$	0.29	$	1.63
Diluted earnings per share attributable to Cubic	$	1.34	$	0.29	$	1.62

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The table below quantifies the impact of adopting ASC 606 on segment net sales and operating income (loss) for the twelve months ended September 30, 2019 (in thousands):


	Twelve months ended September 30, 2019
					As Reported
	Under		Effect of		Under
	ASC 605		ASC 606		ASC 606
Sales:
Cubic Transportation Systems	$	787,936	$	61,843	$	849,779
Cubic Mission Solutions		327,139		1,632		328,771
Cubic Global Defense		272,201		45,724		317,925
Total sales	$	1,387,276	$	109,199	$	1,496,475

Operating income:
Cubic Transportation Systems	$	65,974	$	11,259	$	77,233
Cubic Mission Solutions		7,244		515		7,759
Cubic Global Defense		19,858		3,111		22,969
Unallocated corporate expenses		(21,724)		—		(21,724)
Total operating income	$	71,352	$	14,885	$	86,237

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The table below presents how the impact of the ~~application~~adoption of ASC 606 affected certain line items on our Consolidated Balance Sheet at September 30, 2019 (in thousands):


					As Reported
	Under		Effect of		Under
	ASC 605		ASC 606		ASC 606
ASSETS
Current assets:
Cash and cash equivalents	$	65,800	$	—	$	65,800
Cash in consolidated VIE		347		—		347
Restricted cash		19,507		—		19,507
Restricted cash in consolidated VIE		9,967		—		9,967
Accounts receivable, net		399,639		(273,625)		126,014
Contract assets		—		349,559		349,559
Recoverable income taxes		6,725		1,029		7,754
Inventories		158,713		(51,919)		106,794
Assets held for sale		—		—		—
Other current assets		38,534		—		38,534
Other current assets in consolidated VIE		33		—		33
Total current assets		699,265		25,044		724,309

Long-term contracts receivables		3,077		(3,077)		—
Long-term contracts financing receivables		—		36,285		36,285
Long-term contracts financing receivables in consolidated VIE		—		115,508		115,508
Long-term capitalized contract costs		136,804		(136,804)		—
Long-term capitalized contract costs in consolidated VIE		2,545		(2,545)		—
Property, plant and equipment, net		144,969		—		144,969
Deferred income taxes		4,098		—		4,098
Goodwill		578,097		—		578,097
Purchased intangibles, net		165,613		—		165,613
Other assets		76,872		—		76,872
Other assets in consolidated VIE		1,419		—		1,419
Total assets	$	1,812,759	$	34,411	$	1,847,170

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Short-term borrowings	$	195,500	$	—	$	195,500
Trade accounts payable		182,671		(1,898)		180,773
Trade accounts payable in consolidated VIE		25		—		25
Contract liabilities		—		46,170		46,170
Customer advances		56,001		(56,001)		—
Accrued compensation		58,343		—		58,343
Other current liabilities		36,670		—		36,670
Other current liabilities in consolidated VIE		191		—		191
Income taxes payable		152		621		773
Current portion of long-term debt		10,714		—		10,714
Total current liabilities		540,267		(11,108)		529,159

Long-term debt		189,110		—		189,110
Long-term debt in consolidated VIE		61,994		—		61,994
Accrued pension liability		25,386		—		25,386
Deferred compensation		11,040		—		11,040
Income taxes payable		937		—		937
Deferred income taxes		4,554		—		4,554
Other noncurrent liabilities		22,817		—		22,817
Other noncurrent liabilities in consolidated VIE		21,605		—		21,605

Shareholders’ equity:
Common stock		274,472		—		274,472
Retained earnings		834,349		28,599		862,948
Accumulated other comprehensive loss		(139,693)		—		(139,693)
Treasury stock at cost		(36,078)		—		(36,078)
Shareholders’ equity related to Cubic		933,050		28,599		961,649
Noncontrolling interest in VIE		1,999		16,920		18,919
Total shareholders’ equity		935,049		45,519		980,568
Total liabilities and shareholders’ equity	$	1,812,759	$	34,411	$	1,847,170

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NOTE 3—ACQUISITIONS AND DIVESTITURES

Sale of CGD Services

On April 18, 2018, we entered into a stock purchase agreement with Nova Global Supply & Services, LLC (Purchaser), an entity affiliated with GC Valiant, LP, under which we agreed to sell our CGD Services business to the Purchaser. We concluded that the sale of the CGD Services business met all of the required conditions for discontinued operations presentation in the second quarter of fiscal 2018. Consequently, in the second quarter of fiscal 2018, we recognized a $6.9 million loss within discontinued operations, which was calculated as the excess of the carrying value of the net assets of CGD Services less the estimated sales price in the stock purchase agreement less estimated selling costs.

The sale closed on May 31, 2018. In accordance with the terms of the stock purchase agreement, the Purchaser agreed to pay us $135.0 million in cash upon the closing of the transaction, adjusted for the estimated working capital of CGD Services at the date of the sale compared to a working capital target. In the third quarter of fiscal 2018, we received $133.8 million in connection with the sale and we recorded a receivable from the Purchaser for the estimated amount due related to the working capital settlement. The balance of this ~~accounting standard update~~receivable was $3.7 million at September 30, 2018. During fiscal 2019, we worked with the Purchaser and revised certain estimates related to the working capital settlement. In connection with the revision of these estimates, we reduced the receivable from the Purchaser by $1.4 million and recognized a corresponding loss on the sale of CGD Services in fiscal 2019. Certain remaining working capital settlement estimates, primarily related to the fair value of accounts receivable, have not yet been settled with the Purchaser.

In addition to the amounts described above, we are eligible to receive an additional cash payment of $3.0 million based on the achievement of pre-determined earn-out conditions related to the award of certain government contracts. NaN amount has been recorded as a receivable related to the potential achievement of earn-out conditions based upon our assessment of the probability of achievement of the required conditions.

The operations and cash flows of CGD Services are reflected in our Consolidated Statements of Operations and Consolidated Statements of Cash Flows as discontinued operations through May 31, 2018, the date of the sale. The following table presents the composition of net income from discontinued operations, net of taxes (in thousands):


	Years Ended September 30,
	2019		2018		2017

Net sales	$	—	$	262,228	$	378,152
Costs and expenses:
Cost of sales		—		235,279		342,819
Selling, general and administrative expenses		—		11,365		17,487
Amortization of purchased intangibles		—		1,373		2,752
Restructuring costs		—		7		208
Other income		—		(15)		(46)
Earnings from discontinued operations before income taxes		—		14,219		14,932
Net loss on sale		1,423		6,131		—
Income tax provision		—		3,845		401
Net income (loss) from discontinued operations	$	(1,423)	$	4,243	$	14,531

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Business Acquisitions

PIXIA Corp.

On June 27, 2019, we paid cash of $50.0 million to purchase 20% of the outstanding capital stock of PIXIA Corp (Pixia), a private software company based in Herndon, Virginia, which provides high performance advanced data indexing, warehousing, processing and dissemination software solutions for large volumes of imagery data within traditional or cloud-based architectures.

We account for our investment in Pixia using the equity method of accounting. In accordance with ASC 323, Investments – Equity Method and Joint Ventures, we accounted for the basis difference between the cost of our investment in Pixia and our equity share of Pixia’s net assets as if Pixia was a consolidated subsidiary. At the date of our investment, we calculated the fair value of our share of Pixia’s identifiable intangible assets as $17.0 million, which will be amortized in other expense over a weighted average remaining useful life of approximately five years. The remaining identifiable intangible assets subject to amortization was $15.4 million as of September 30, 2019. Our share of the remaining basis difference of $32.3 million is identified as goodwill and will not be amortized.

We recognize our interest in Pixia’s operating results less the amortization of our share of Pixia’s intangible assets within other income (expense) in our Consolidated Statements of Operations. The net amount we recognized in fiscal 2019 for our interest in Pixia’s operating results less the amortization of our share of Pixia’s intangible assets was $1.2 million. We also received a dividend of $2.0 million, which was recognized as a reduction in our investment in Pixia. At September 30, 2019 our investment in Pixia amounted to $49.2 million and is recorded within other assets on our ~~consolidated financial statements as well as whether~~Consolidated Balance Sheet.

Our purchase agreement with Pixia includes an option to ~~adopt~~purchase the ~~new guidance early.~~remaining 80% of its capital stock for $200.0 million, which we exercised in November 2019. We expect our acquisition of the remaining capital stock of Pixia to close in February 2020.

~~NOTE 2—ACQUISITIONS~~Delerrok Inc.

During fiscal years 2018 and 2019, we invested $1.5 million and $5.0 million, respectively, to purchase a total of 17.5% of the outstanding common stock of Delerrok Inc. (Delerrok), a private technology company based in Vista, California, that specializes in electronic fare collection systems. We elected the measurement alternative provided by ASC 321, Investments – Equity Securities, and recorded our investment in Delerrok at cost, adjusted for observable price changes or any impairments, within other assets on our Consolidated Balance Sheet. At September 30, 2019, our investment in Delerrok amounted to $6.5 million. We did not recognize any income or loss from our investment in Delerrok in fiscal 2018 or fiscal 2019.

Our purchase agreement includes an option to purchase the remaining 82.5% of Delerrok’s common stock, which we exercised in November 2019. We will pay cash of $36.4 million at closing which will be funded from borrowings under Cubic’s existing credit facilities, and up to an additional $2.0 million if Delerrok’s sales exceed certain levels in the future. We expect our acquisition of the remaining common stock of Delerrok to close in December 2019.

Consolidated Business Acquisitions

Each of the following acquisitions has been treated as a business combination for accounting purposes. The results of operations of each acquired business has been included in our consolidated financial statements since the respective date of each acquisition.

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Nuvotronics, Inc.

~~Deltenna Ltd~~

In ~~July 2017,~~March 2019, we acquired all of the outstanding capital stock of ~~Deltenna Ltd (Deltenna)~~Nuvotronics, Inc. (Nuvotronics), a ~~wireless infrastructure company specializing~~provider of microfabricated radio frequency (RF) products. Based in Durham, North Carolina, Nuvotronics’ patented PolyStrata technology enables the design and ~~delivery~~production of ~~radio~~uniquely packaged RF devices, such as antennas, filters, and ~~antenna communication solutions. Deltenna designs and manufactures cutting-edge integrated wireless products including compact LTE base stations, broadband range extenders for areas~~combiners, all of ~~poor coverage and rugged antennas. The addition of Deltenna, headquartered~~which are components in ~~Chippenham, U.K., will enhance tactical communication and training~~Cubic’s advanced technology product offerings. Nuvotronics is expected to provide synergies from combining its capabilities ofwith our ~~CGD Systems businesses by effectively delivering high-capacity data networks within challenging and rigorous environments.~~existing CMS business.

~~Deltenna’s~~Nuvotronics’ sales and results of operations included in our operating results ~~for the years ended September 30, 2017, 2016 and 2015~~ were as follows ~~(in~~(in millions):


	September 30,
	2017		2016		2015

							Years Ended September 30,
							2019		2018		2017
Sales	$	0.1	$	—	$	—	$	7.4	$	—	$	—
Operating loss		(0.2)		—		—		(6.9)		—		—
Net loss after taxes		(0.2)		—		—		(6.9)		—		—

~~Deltenna’s~~Nuvotronics’ operating results above included the following amounts ~~for the years ended September 30, 2017, 2016 and 2015~~ ~~(in~~(in millions):


	September 30,
	2017		2016		2015

							Years Ended September 30,
							2019		2018		2017
Amortization	$	—	$	—	$	—	$	1.2	$	—	$	—
Acquisition-related expenses		0.2		—		—		3.0		—		—

The ~~estimated~~ acquisition-date fair value of consideration is ~~$5.3~~$66.8 million, which is comprised of net cash paid of ~~$4.0~~$61.5 million, plus the estimated fair value of contingent consideration of ~~$1.3 million.~~$4.9 million, plus a $0.4 million estimated payable due to the sellers for the difference between the net working capital acquired and the targeted working capital amounts. The acquisition was financed primarily with proceeds from draws on our line of credit. Under the purchase agreement, we will pay the sellers up to ~~$7.0~~$8.0 million of contingent consideration if ~~Deltenna~~Nuvotronics meets certain ~~sales~~gross profit goals ~~from~~for the ~~date of acquisition through the year ending September 30, 2022.~~12-month periods ended December 31, 2020 and December 31, 2021. The contingent consideration liability will be re-measured to fair value at each reporting date until the contingencies are resolved and any subsequent changes in fair value are recognized in earnings.

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~~The acquisition of Deltenna was paid for with funds from existing cash resources.~~ The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date (in millions):



Technology			$	22.7
Trade name				1.5
Backlog				1.4
Non-compete agreements				0.5
Customer relationships	$	1.0		0.6
Technology		1.1
Accounts receivable and contract assets				2.6
Fixed assets				2.7
Accounts payable and accrued expenses				(1.8)
Deferred taxes				(3.2)
Other net assets acquired (liabilities assumed)		(0.3)		(0.6)
Net identifiable assets acquired		1.8		26.4
Goodwill		3.5		40.4
Net assets acquired	$	5.3	$	66.8

The estimated fair values of assets acquired and liabilities assumed, including purchased intangibles, ~~as well as the estimated fair value of contingent consideration~~ are preliminary estimates pending the finalization of our valuation ~~analyses.~~analyses and the receipt of further information from the seller regarding its assets and liabilities. The estimated fair values of purchased intangibles were determined using the valuation methodology deemed to be the most appropriate for each type of asset being valued. The ~~customer relationships used the excess earnings approach and the technology asset valuations~~ trade name valuation

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used the relief from royalty ~~approach.~~method, the customer relationships valuation used the with-and-without valuation method, and the technology and backlog valuations used the excess earnings method.

The intangible assets are being amortized using straight-line methods based on the expected period of undiscounted cash flows ~~from~~that will be generated by the assets, over ~~a weighted~~an average useful life of ~~eight~~nine years from the date of acquisition.

The goodwill resulting from the acquisition consists primarily of the synergies expected from combining the operations of ~~Deltenna~~Nuvotronics with our existing ~~CGD Systems~~CMS business, and strengthening our capability of developing and integrating products in our ~~CGD Systems~~CMS portfolio. The goodwill also includes the value of the assembled workforce that became our employees following the close of the acquisition. The amount recorded as goodwill is allocated to our ~~CGD Systems~~CMS segment and is not expected to be deductible for tax purposes.

The estimated amortization expense related to the intangible assets recorded in connection with our acquisition of ~~Deltenna for fiscal years 2018 through 2022 and thereafter~~Nuvotronics is as follows (in millions):



Year Ended
September 30,
2018	$	0.3
2019		0.3
2020		0.3	$	4.0
2021		0.3		3.0
2022		0.3		3.0
2023				2.9
2024				2.7
Thereafter		0.6		10.1

GRIDSMART Technologies, Inc.

~~Vocality~~

~~On November 30, 2016,~~In January 2019, we acquired all of the outstanding capital stock of ~~Vocality International (Vocality), based in Shackleford, U.K.~~GRIDSMART Technologies, Inc. (GRIDSMART), a provider of ~~embedded technology which unifies communications platforms, enhances voice quality, increases~~differentiated video ~~performance~~tracking solutions to the Intelligent Traffic Systems market. Based in Knoxville, Tennessee, GRIDSMART specializes in video detection at the intersection utilizing advanced image processing, computer vision modeling and ~~optimizes~~machine learning along with a single camera solution providing best-in-class data ~~throughput. Vocality contributes~~for optimizing the flow of people and traffic through intersections. GRIDSMART is expected to provide synergies from combining its capabilities with our ~~C4ISR portfolio of products for our CGD Systems segment and expands our defense customer base. Vocality also sells its technology in the broadcast, oil and gas, mining, and maritime markets.~~existing CTS business.

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~~Vocality’s~~GRIDSMART’s sales and results of operations included in our operating results ~~for the years ended September 30, 2017, 2016 and 2015~~ were as follows ~~(in~~(in millions):

September 30,

2017

2016

2015
Sales

$
1.5

$
—

$
—
Operating loss

(2.9)

—

—
Net loss after taxes

(2.6)

—

—


	Years Ended September 30,
	2019		2018		2017
Sales	$	20.6	$	—	$	—
Operating income		0.9		—		—
Net income after taxes		0.9		—		—

~~Vocality’s~~GRIDSMART’s operating results above included the following amounts (in millions):


	Years Ended September 30,
	2019		2018		2017
Amortization	$	4.0	$	—	$	—
Acquisition-related expenses		2.9		—		—

The acquisition-date fair value of consideration is $86.8 million. The acquisition was financed primarily with proceeds from draws on our line of credit.

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



Technology	$	25.7
Customer relationships		3.6
Trade name		2.4
Inventory		4.3
Accounts receivable		1.7
Accounts payable and accrued expenses		(1.9)
Deferred taxes		(3.3)
Other net assets acquired		0.6
Net identifiable assets acquired		33.1
Goodwill		53.7
Net assets acquired	$	86.8

The estimated fair values of assets acquired and liabilities assumed, including purchased intangibles, are preliminary estimates pending the finalization of our valuation analyses, including the filing of pre-acquisition income tax returns. The estimated fair values of purchased intangibles were determined using the valuation methodology deemed to be the most appropriate for each type of asset being valued. The trade name valuation used the relief from royalty method, the customer relationships valuation used the with-and-without valuation method, and the technology and backlog valuations used the excess earnings method.

The intangible assets are being amortized using straight-line methods based on the expected period of undiscounted cash flows that will be generated by the assets, over an average useful life of approximately eight years ~~ended September 30, 2017, 2016~~from the date of acquisition.

The goodwill resulting from the acquisition consists primarily of the synergies expected from combining the operations of GRIDSMART with our existing CTS business, and ~~2015~~ (strengthening our capability of developing and integrating products in ~~millions):~~

September 30,

2017

2016

2015
Amortization

$
0.6

$
—

$
—
Acquisition-related expenses

1.6

—

—

P~~rior~~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 ~~acquisition of Vocality, Vocality had a number of share-based payment awards in place~~CTS segment and is not expected to ~~its employees. Due~~be deductible for tax purposes.

The estimated amortization expense related to the ~~structure of some of these share-based payment awards and the acceleration of vesting of certain of these awards~~intangible assets recorded in connection with our acquisition of ~~Vocality,~~ GRIDSMART is as follows (in millions):


Year Ended
September 30,
2020	$	5.3
2021		3.9
2022		3.5
2023		3.5
2024		3.5
Thereafter		8.1

Advanced Traffic Solutions Inc.

In October 2018, we ~~were required to recognize compensation expense, rather than purchase consideration,~~acquired all of the outstanding capital stock of Advanced Traffic Solutions Inc. (Trafficware), a provider of intelligent traffic solutions for the ~~portion~~transportation industry based in Sugar Land, Texas. Trafficware provides a fully integrated suite of software, Internet of Things devices, and hardware solutions that optimize the flow of motorist and pedestrian traffic. Trafficware is expected to provide synergies from combining its capabilities with our ~~purchase price that we paid to the seller that was distributed to the recipients~~existing CTS business.

Table of these awards. Consequently, we recognized $0.4 million of compensation expense within general and administrative expenses during the year ended September 30, 2017 related to this matter. This compensation is reflected in Vocality’s acquisition-related expensesContents

Trafficware’s sales and results of operations included in our operating results were as follows (in millions):


	Years Ended September 30,
	2019		2018		2017
Sales	$	53.8	$	—	$	—
Operating loss		(11.0)		—		—
Net loss after taxes		(11.0)		—		—

Trafficware’s operating results above ~~for fiscal year 2017.~~included the following amounts (in millions):


	Years Ended September 30,
	2019		2018		2017
Amortization	$	15.3	$	—	$	—
Acquisition-related expenses		5.2		—		—

The ~~acquisition date~~acquisition-date fair value of consideration is ~~$9.6~~$237.2 million. The acquisition was financed primarily with proceeds from draws on our line of credit.

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



Technology	$	43.3
Customer relationships		21.9
Backlog		4.8
Trade name		4.6
Accounts receivable		10.4
Inventory		9.9
Accounts payable and accrued expenses		(8.9)
Other net assets acquired (liabilities assumed)		(2.0)
Net identifiable assets acquired		84.0
Goodwill		153.2
Net assets acquired	$	237.2

The fair values of purchased intangibles were determined using the valuation methodology deemed to be the most appropriate for each type of asset being valued. The trade name valuation used the relief from royalty method, the customer relationships valuation used the with-and-without valuation method, and the technology and backlog valuations used the excess earnings method.

The goodwill resulting from the acquisition consists primarily of the synergies expected from combining the operations of Trafficware with our existing CTS business, and strengthening our capability of developing and integrating products in our CTS portfolio. The goodwill also includes the value of the assembled workforce that became our employees following the close of the acquisition. The amount recorded as goodwill is allocated to our CTS segment and is not expected to be deductible for tax purposes.

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


Year Ended
September 30,
2020	$	11.4
2021		11.4
2022		11.4
2023		6.4
2024		5.9
Thereafter		12.9

Shield Aviation, Inc.

In July 2018, we acquired the assets of Shield Aviation (Shield), based in San Diego, California, a provider of autonomous aircraft systems (AAS) for intelligence, surveillance and reconnaissance services. The addition of Shield expands our C4ISR portfolio for our CMS segment and will provide our customers with a rapidly deployable, medium AAS that offers unique mission enabling capabilities. We already provide the data link as well as the command and control link for the Shield AAS.

Shield’s sales and results of operations included in our operating results were as follows (in millions):


	Years Ended September 30,
	2019		2018		2017
Sales	$	—	$	—	$	—
Operating loss		(5.3)		(0.8)		—
Net loss after taxes		(5.3)		(0.6)		—

Shield’s operating results above included the following amounts (in millions):


	Years Ended September 30,
	2019		2018		2017
Amortization	$	0.8	$	0.1	$	—
Loss (gain) for changes in fair values of contingent consideration		(1.8)		0.2		—

The acquisition-date fair value of consideration is $12.8 million, which is comprised of the fair value of contingent consideration of $5.6 million, extinguishment of secured loans and warrants due from Shield of $5.2 million, cash paid of ~~$9.7~~$1.3 million, plus additional ~~held back~~ consideration to be paid in the future ~~estimated at $0.3 million,~~ ~~less~~of $0.7 million. Under the ~~$0.4~~purchase agreement, we will pay the sellers up to $10.0 million of ~~cash paid~~contingent consideration if Shield meets certain sales goals from the date of acquisition through July 31, 2025. The contingent consideration liability will be re-measured to fair value at each reporting date until the ~~seller recorded as compensation expense described above~~.contingencies are resolved and any subsequent changes in fair value are recognized in earnings.

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The acquisition of ~~Vocality~~Shield was paid for with funds from existing cash resources. The following table summarizes the fair values of the assets acquired and liabilities assumed at the acquisition date (in millions):

Customer relationships

$
2.1

Technology

2.4

Trade name

0.4

Inventory

1.7

Accounts payable and accrued expenses

(0.4)

Other net assets acquired (liabilities assumed)

(0.5)

Net identifiable assets acquired

5.7

Goodwill

3.9

Net assets acquired

$
9.6



Technology	$	6.0
Other net assets acquired		0.3
Net identifiable assets acquired		6.3
Goodwill		6.5
Net assets acquired	$	12.8

The ~~fair values of purchased intangibles were determined using the valuation methodology deemed to be the most appropriate for each type of~~technology asset ~~being valued. The customer relationships~~ valuation used the excess earnings ~~approach,~~method and ~~the technology and trade name asset valuations used the relief from royalty approach.~~

~~The intangible assets are~~is being amortized using ~~a combination of~~the straight-line ~~and accelerated methods~~method over eight years, which is based on the expected period of cash flows ~~from~~that will be generated by the ~~assets, over a weighted average useful life of nine years from the date of acquisition.~~asset.

The goodwill resulting from the acquisition consists primarily of the synergies expected from combining the operations of ~~Vocality~~Shield with our existing ~~CGD Systems~~CMS business, ~~including the synergies expected from combining its communication unification technologies with~~and strengthening our ~~C4ISR~~capability of developing and integrating products and ~~other products~~services in our ~~CGD Systems~~CMS portfolio. ~~The goodwill also includes the value of the assembled workforce that became our employees following the close of the~~

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~~acquisition. The amount recorded as goodwill is allocated to our CGD Systems segment and is generally not expected to be deductible for tax purposes.~~

The estimated amortization expense related to the intangible assets recorded in connection with our acquisition of Vocality for fiscal years 2018 through 2022 and thereafter is as follows (in millions):

Year Ended

September 30,

2018

$
0.8

2019

0.7

2020

0.6

2021

0.6

2022

0.5

Thereafter

1.3

~~GATR~~

On February 2, 2016, we acquired all of the outstanding capital stock of GATR Technologies, LLC (GATR), a defense systems business based in Huntsville, Alabama which manufactures expeditionary satellite communication terminal solutions. GATR expands our satellite communications and networking applications technologies for our CGD Systems segment and expands our customer base.

~~GATR’s sales and results of operations included in our operating results for the years ended September 30, 2017, 2016 and 2015 were as follows (in millions):~~

September 30,

2017

2016

2015
Sales

$
84.3

$
43.1

$
—
Operating income (loss)

1.9

(26.4)

—
Net income (loss) after taxes

1.4

(23.0)

—

~~GATR’s operating results above included the following amounts for the years ended September 30, 2017, 2016 and 2015 (in millions):~~

September 30,

2017

2016

2015
Amortization

$
12.7

$
9.7

$
—
Gains (losses) for changes in fair value of contingent consideration

3.2

(0.7)

—
Acquisition-related expenses

0.6

22.0

—

GATR’s operating results for the year ended September 30, 2016 were significantly impacted by the GAAP accounting requirements regarding business combinations. Prior to our acquisition of GATR, GATR had a number of share-based payment awards in place to its employees. Due to the structure of certain of these share-based payment awards and the acceleration of vesting of certain of these awards in connection with our acquisition of GATR, we were required to recognize compensation expense, rather than purchase consideration, for the portion of our purchase price that we paid to the seller that was distributed to the recipients of these awards. Consequently, we recognized $18.5 million of compensation expense within general and administrative expenses during the year ended September 30, 2016 related to this matter. Of this $18.5 million amount, $15.4 million is not deductible for tax purposes.

The acquisition-date fair value of consideration is $220.5 million, which is comprised of cash paid of $236.1 million plus the fair value of contingent consideration of $2.5 million, less $18.1 million of cash paid to the seller that was recognized as expense in fiscal 2016. Under the purchase agreement, we will pay the sellers up to $7.5 million of contingent consideration if GATR meets certain gross profit goals for the 12 month periods ended February 28, 2017 and 2018. The

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~~contingent consideration liability will be re-measured to fair value at each reporting date until the contingencies are resolved and any changes in fair value are recognized in earnings.~~

The acquisition of GATR was paid for predominantly with the proceeds of borrowings on our revolving credit agreement in 2016. The following table summarizes the fair values of the assets acquired and liabilities assumed at the acquisition date (in millions):

Customer relationships

$
51.7

Backlog

3.4

Technology

10.7

Non-compete agreements

1.2

Trade name

4.7

Accounts receivable

10.6

Inventory

3.4

Income tax receivable

5.1

Accounts payable and accrued expenses

(2.4)

Deferred tax liabilities

(23.8)

Net identifiable assets acquired

64.6

Goodwill

155.9

Net assets acquired

$
220.5

The fair values of purchased intangibles were determined using the valuation methodology deemed to be the most appropriate for each type of asset being valued. The customer relationships and backlog valuation used the excess earnings approach, the non-compete agreements used the with-and-without approach, and the technology and trade name asset valuations used the relief from royalty approach.

The intangible assets are being amortized using a combination of straight-line and accelerated methods based on the expected cash flows from the assets, over a weighted average useful life of nine years from the date of acquisition.

The goodwill resulting from the acquisition consists primarily of the synergies expected from combining the operations of GATR with our existing CGD Systems business, including the synergies expected from combining its satellite communications and networking applications technologies with our C4ISR products and other products in our CGD Systems 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 ~~CGD Systems~~CMS segment and is ~~generally not~~ expected to be deductible for tax purposes.

The ~~estimated~~ amortization expense related to the intangible assets recorded in connection with our acquisition of ~~GATR for fiscal years 2018 through 2022 and thereafter~~Shield is as follows (in millions):



Year Ended
September 30,
2018	$	11.1
2019		9.8
2020		8.3	$	0.8
2021		6.9		0.8
2022		5.6		0.8
2023				0.8
2024				0.8
Thereafter		7.6		1.4

MotionDSP

~~Table~~In October 2017 we paid cash of ~~Contents~~

~~TeraLogics~~

~~On December 21, 2015, we acquired all~~$4.7 million to purchase 49% of the ~~assets~~outstanding capital stock of ~~TeraLogics, LLC, an Ashburn, Virginia-based provider~~MotionDSP, a private artificial intelligence software company based in Burlingame, California, which specializes in real-time video enhancement and computer vision analytics. On February 21, 2018, we paid net cash of $4.8 million to purchase the remaining outstanding capital stock of MotionDSP. The addition of MotionDSP enhances the capabilities in real-time ~~full motion~~ video processing exploitation and dissemination for the Department of Defense, the intelligence community and commercial customers. TeraLogics’ ability to develop real-time video analysis and delivery software for full motion video complements the existing tactical communications portfolio of our ~~CGD Systems segment~~CMS business and expands our customer ~~base.~~base in the public safety and other adjacent markets.

~~TeraLogic’s~~MotionDSP’s sales and results of operations included in our operating results ~~for the years ended September 30, 2017, 2016 and 2015~~since its consolidation in our financial statements were as follows (in millions):


	Years Ended September 30,
	2019		2018		2017
Sales	$	1.5	$	0.6	$	—
Operating loss		(0.6)		(2.7)		—
Net loss after taxes		(0.6)		(1.9)		—

September 30,

2017

2016

2015
Sales

$
19.7

$
14.2

$
—
Operating loss

(1.8)

(2.9)

—
Net loss after taxes

(1.2)

(1.6)

—

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~~TeraLogic’s~~MotionDSP’s operating results above included the following amounts ~~for the years ended September 30, 2017, 2016 and 2015~~ (in millions):

September 30,

2017

2016

2015
Amortization

$
3.5

$
3.0

$
—
Losses for changes in fair value of contingent consideration

(1.3)

(1.5)

—
Acquisition-related expenses

0.2

2.3

—


	Years Ended September 30,
	2019		2018		2017
Amortization	$	0.7	$	0.4	$	—
Acquisition-related expenses		0.4		0.8		0.2

During the year ended September 30, 2016 we incurred a $1.3 million charge for compensation expense incurred related to amounts paid to TeraLogics employees upon the close of the acquisition. This compensation expense is reflected in TeraLogic’s acquisition-related expenses and the results of TeraLogic’s operations above.

The acquisition-date fair value of consideration is $33.9 million, which is comprised of cash paid of $28.9 million plus the acquisition-date fair value of contingent consideration of $5.0 million. Under the purchase agreement, we will pay the sellers up to $9.0 million of contingent consideration. Of this amount, up to $6.0 million will be paid if TeraLogics meets certain revenue thresholds in fiscal years 2016, 2017 and 2018; and up to $3.0 million will be paid if specific contract extensions are exercised by TeraLogics customers through fiscal 2018. The contingent consideration liability will be re-measured to fair value at each reporting date until the contingencies are resolved and any changes in fair value are recognized in earnings.

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



Customer relationships	$	6.7	$	0.2
Backlog		5.6
Software		2.5
Non-compete agreements		0.1
Accounts receivable		1.4
Technology				4.5
Trade name				0.1
Accounts payable and accrued expenses		(0.5)		(0.3)
Other net assets acquired (liabilities assumed)		(0.1)
Other noncurrent liabilities				(0.8)
Other net liabilities assumed				(0.9)
Net identifiable assets acquired		15.7		2.8
Goodwill		18.2		6.7
Net assets acquired	$	33.9	$	9.5

The fair values of purchased intangibles were determined using the valuation methodology deemed to be the most appropriate for each type of asset being valued. The ~~customer relationships and backlog~~trade name valuation used the ~~excess~~

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~~earnings approach,~~relief from royalty method, the ~~non-compete agreements~~customer relationships valuation used the with-and-without ~~approach,~~valuation method, and the ~~software~~technology valuation used the ~~replacement cost new less cost decrements for obsolescence approach.~~excess earnings method.

The intangible assets are being amortized using ~~a combination of~~ straight-line ~~and accelerated~~ methods based on the expected cash flows from the assets, over a ~~weighted average~~ useful life of seven years from the date of acquisition.

The goodwill resulting from the acquisition ~~consists~~was deemed to consist primarily of the synergies expected from combining the operations of ~~TeraLogics~~MotionDSP with our ~~existing CGD Systems business, including the synergies expected from combining TeraLogics~~CMS operating segment, enhancing our capabilities in real-time video capabilities with our existing tactical communications product portfolio. The goodwill also includes the value of the assembled workforce who became our employees following the close of the acquisition. The amount recorded as goodwill is allocated to our CGD Systems segmentprocessing and ~~is expected to be deductible for tax purposes.~~

The estimated amortization expense amounts related to the intangible assets recorded in connection with our acquisition of TeraLogics for fiscal years 2018 through 2022 and thereafter is as follows (in millions):

Year Ended

September 30,

2018

$
2.8

2019

2.1

2020

1.4

2021

0.8

2022

0.5

Thereafter

0.9

H4 ~~Global~~

~~On November 4, 2015, we acquired all of the assets of H4 Global, a U.K.-based provider of simulation-based training solutions which complements our CGD Systems segment training portfolio.~~

~~H4 Global’s sales and results of operations included in our operating results for the years ended September 30, 2017, 2016 and 2015 were as follows (in millions):~~

September 30,

2017

2016

2015
Sales

$
3.3

$
2.2

$
—
Operating loss

(1.1)

(0.6)

—
Net loss after taxes

(0.9)

(0.4)

—

~~H4 Global’s operating results above included the following amounts for the years ended September 30, 2017, 2016 and 2015 (in millions):~~

September 30,

2017

2016

2015
Amortization

$
0.1

$
0.1

$
—
Gains for changes in fair value of contingent consideration

—

0.4

—
Acquisition-related expenses

—

0.1

—

The acquisition-date fair value of consideration is $1.9 million, which is comprised of cash paid of $0.9 million plus the fair value of contingent consideration of $1.0 million. Under the purchase agreement, we will pay the sellers up to $4.1 million of contingent consideration, based upon the value of contracts entered over the five-year period beginning on the acquisition date. The contingent consideration liability will be re-measured to fair value at each reporting date until the contingencies are resolved and any changes in fair value will be recognized in earnings.

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The fair value of the net assets acquired and liabilities assumed was not material. Consequently, virtually the entire purchase price of $1.9 million was recorded as goodwill, which is comprised of expected synergies and assembled workforce. The amount recorded as goodwill is allocated to our CGD Systems segment and is not expected to be deductible for tax purposes.

~~DTECH~~

On December 16, 2014 we acquired all of the outstanding capital stock of DTECH Labs, Inc. (DTECH). Based in Ashburn, Virginia, DTECH is a provider of modular networking and baseband communications equipment that adds networking capability to our secure communications business. This acquisition expands the portfolio of product offerings and the customer basecomputer vision analytics of our ~~CGD Systems segment.~~

~~DTECH’s sales and results of operations included in our operating results for the years ended September 30, 2017, 2016 and 2015 were as follows (in millions):~~

September 30,

2017

2016

2015
Sales

$
39.0

$
34.5

$
45.8
Operating income (loss)

2.4

(3.0)

0.9
Net income (loss) after taxes

1.3

(2.1)

0.5

~~DTECH’s operating results above included $23.0 million and $14.2 million in intercompany sales for the years ended September 30, 2017 and 2016, respectively,~~CMS portfolio, as well as ~~the following amounts for the years ended September 30, 2017, 2016 and 2015 (in millions):~~

September 30,

2017

2016

2015
Amortization

$
6.8

$
8.0

$
9.2
Gains (losses) for changes in fair value of contingent consideration

2.0

0.5

(3.6)
Acquisition-related expenses

0.3

0.9

2.1

The cost of the acquisition was $99.5 million, adjusted by the difference between the net working capital acquired and the targeted working capital amounts and adjusted for other acquisition-related payments made upon closing, plus a contingent amount of up to $15.0 million based upon DTECH’s achievement of revenue and gross profit targets through fiscal year 2017. The acquisition-date fair value of the consideration was $99.4 million. The contingent consideration liability has been re-measured to fair value at each reporting date until the contingencies were resolved and changes in fair value have been recognized in earnings.

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

Customer relationships

$
35.1

Non-compete agreements

0.7

Backlog

2.1

Cash

0.9

Accounts receivable

5.4

Inventory

4.2

Warranty obligation

(0.4)

Tax liabilities

(3.3)

Accounts payable and accrued expenses

(3.4)

Other net assets acquired

0.2

Net identifiable assets acquired

41.5

Goodwill

57.9

Net assets acquired

$
99.4

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

The goodwill resulting from the acquisition consists primarily of the synergies expected from combining the operations of DTECH with our existing CGD Systems business, including the synergies expected from combining the networking and secure communications technologies of DTECH, and complementary products that will enhance our overall product and service portfolio. The goodwill also consists of the value of the assembled workforce that became our employees following the close of the acquisition. The amount recorded as goodwill in connection with the acquisition of MotionDSP is ~~allocated to our CGD Systems segment and is~~not expected to be deductible for tax ~~purposes.~~purposes.

The estimated amortization expense ~~amounts~~ related to the intangible assets recorded in connection with our acquisition of ~~DTECH for fiscal years 2018 through 2021~~MotionDSP is as follows (in millions):

Year Ended September 30,

2018

5.5

2019

4.1

2020

2.8

2021

1.5


Year Ended
September 30,
2020	$	0.7
2021		0.7
2022		0.7
2023		0.7
2024		0.6
Thereafter		0.2

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Pro forma information

The following unaudited pro forma information presents our consolidated results of operations as if ~~Deltenna, Vocality, GATR, TeraLogics, H4 Global~~Nuvotronics, GRIDSMART, Trafficware, Shield, and ~~DTECH~~MotionDSP had been included in our consolidated results since October 1, ~~2015~~2017 (in millions):


	Year Ended
	September 30,
	2017		2016

					Years Ended September 30,
					2019		2018
Net sales	$	1,487.5	$	1,488.6	$	1,510.8	$	1,297.6

Net income (loss)	$	(11.6)	$	0.1	$	45.1	$	(5.0)

The pro forma information includes adjustments to give effect to pro forma events that are directly attributable to the acquisitions and have a continuing impact on operations including the amortization of purchased intangibles and the elimination of interest expense for the repayment of debt. NoNaN adjustments were made for transaction expenses, other ~~adjustments~~items that do not reflect ongoing operations or for operating efficiencies or synergies. The pro forma financial information is not necessarily indicative of what the consolidated financial results of our operations would have been had the acquisitions been completed on October 1, ~~2015,~~2017, and it does not purport to project our future operating results.

NOTE 3—4—VARIABLE INTEREST ENTITIES

In accordance with ASC 810, Consolidation, we assess our partnerships and joint ventures at inception, and when there are changes in relevant factors to determine if any meet the qualifications of a variable interest entity (VIE). We consider a partnership or joint venture a VIE if it has any of the following characteristics: (a) the total equity investment is not sufficient to permit the entity to finance its activities without additional subordinated financial support, (b) characteristics of a controlling financial interest are missing (either the ability to make decisions through voting or other rights, the obligation to absorb the expected losses of the entity or the right to receive the expected residual returns of the entity), or (c) the voting rights of the equity holders are not proportional to their obligations to absorb the expected losses of the entity and/or their rights to receive the expected residual returns of the entity, and substantially all of the entity's activities either involve or are conducted on behalf of an investor that has disproportionately few voting rights.

We perform a qualitative assessment of each VIE to determine if we are its primary beneficiary. We conclude that we are the primary beneficiary and consolidate the VIE if we have both (a) the power to direct the activities that most significantly impact the VIE’s economic performance and (b) the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. We consider the VIE design, the contractual agreements that define the ownership structure, distribution of profits and losses, risks, responsibilities, indebtedness, voting rights and board representation of the respective parties in determining if we are the primary beneficiary. We also consider all parties that have direct or implicit variable interests when determining whether we are the primary beneficiary. As required by ASC 810, our primary beneficiary assessment is continuously performed.

In March 2018, Cubic and John Laing, an unrelated company that specializes in contracting under public-private partnerships (P3), jointly formed Boston AFC 2.0 HoldCo LLC (HoldCo). Also in March 2018, HoldCo created a wholly owned entity, Boston AFC 2.0 OpCo. LLC (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 MBTA Contract). HoldCo is 90% owned by John Laing and 10% owned by Cubic. Collectively, HoldCo and OpCo are referred to as the P3 Venture. Based on our assessment under ASC 810, we have concluded that OpCo and HoldCo are VIE’s and that we are the primary beneficiary of OpCo. Consequently, we have consolidated the financial statements of OpCo within Cubic’s consolidated financial statements. We have concluded that we are not the primary beneficiary of HoldCo, and thus we have not consolidated the financial statements of HoldCo within Cubic’s consolidated financial statements.

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and development and the operation and maintenance of the fare system have been subcontracted to Cubic by OpCo. Cubic will receive fixed payments of $427.6 million, adjusted for incremental transaction-based fees, inflation, and performance penalties under its subcontract with OpCo.

Upon creation of the P3 Venture, John Laing made a loan to HoldCo of $24.3 million in the form of a bridge loan that is intended to be converted to equity in the future in accordance with its equity funding responsibilities. Concurrently, HoldCo made a corresponding equity contribution to OpCo in the same amount which is included within equity of Noncontrolling interest in VIE in Cubic’s consolidated financial statements. Also, upon creation of the P3 Venture, Cubic issued a letter of credit for $2.7 million to HoldCo in accordance with Cubic’s equity funding responsibilities. HoldCo is able to draw on the Cubic letter of credit in certain liquidity instances, but 0 amounts have been drawn on this letter of credit through September 30, 2019.

Upon creation of the P3 Venture, OpCo entered into a credit agreement with a group of financial institutions (the OpCo Credit Agreement) which includes a long-term debt facility and a revolving credit facility. The long-term debt facility allows for draws up to a maximum amount of $212.4 million; draws may only be made during the design and build phase of the MBTA Contract. The long-term debt facility, including interest and fees incurred during the design and build phase, is required to be repaid on a fixed monthly schedule over the operate and maintain phase of the MBTA Contract. The long-term debt facility bears interest at variable rates of LIBOR plus 1.3% and LIBOR plus 1.55% over the design and build and operate and maintain phases of the MBTA Contract, respectively. At September 30, 2019, the outstanding balance on the long-term debt facility was $62.0 million, which is presented net of unamortized deferred financing costs of $8.8 million. The revolving credit facility allows for draws up to a maximum amount of $13.9 million and is only available to be drawn on during the operate and maintain phase of the MBTA Contract. OpCo’s debt is nonrecourse with respect to Cubic and its subsidiaries. The fair value of the long-term debt facility approximates its carrying amount.

The OpCo Credit Agreement contains a number of covenants which require that OpCo and Cubic maintain progress on the delivery of the MBTA Contract within a specified timeline and budget and provide regular reporting on such progress. The OpCo Credit Agreement also contains a number of customary events of default including, but not limited to, the delivery of a customized fare collection system to MBTA by a pre-determined date. Failure to meet such delivery date will result in OpCo, and Cubic via its subcontract with OpCo, to incur penalties due to the lenders.

OpCo has entered into pay-fixed/receive-variable interest rate swaps with a group of financial institutions to mitigate variable interest rate risk associated with its long-term debt. The interest rate swaps contain forward starting notional principal amounts which align with OpCo’s expected draws on its long-term debt facility. At September 30, 2019 and 2018, the outstanding notional principal amounts on open interest rate swaps were $137.4 million and $38.6 million, respectively. The fair value of OpCo’s interest rate swaps was $21.6 million at September 30, 2019, and is recorded as a liability in other long-term liabilities in our consolidated balance sheets. The interest rate swaps had 0 significant fair value at September 30, 2018. OpCo’s interest rate swaps have not been designated as effective hedges, and as such unrealized gains/losses are included in other income (expense), net. Unrealized losses as a result of changes in the fair value of OpCo’s interest rate swaps totaled $21.6 million in fiscal 2019. There was 0 significant unrealized gain or loss in fiscal 2018 related to the change in fair value of the interest rate swaps. See Note 5 for a description of the measurement of fair value of derivative financial instruments, including OpCo’s interest rate swaps.

OpCo holds a restricted cash balance which is required by the MBTA Contract to allow for the delivery of future change orders and unplanned expansions as directed by MBTA.

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The assets and liabilities of OpCo that are included in our Consolidated Balance Sheets at September 30, 2019 and 2018 are as follows:


	September 30,
	2019		2018
	(in thousands)
Cash	$	347	$	374
Restricted cash		9,967		10,000
Other current assets		33		—
Long-term capitalized contract costs		—		33,818
Long-term contracts financing receivable		115,508		—
Other noncurrent assets		1,419		810
Total assets	$	127,274	$	45,002

Trade accounts payable	$	25	$	165
Accrued compensation and other current liabilities		191		—
Due to Cubic		25,143		11,724
Other long-term liabilities		21,605		13
Long-term debt		61,994		9,056
Total liabilities	$	108,958	$	20,958
Total Cubic equity		(603)		(304)
Noncontrolling interests		18,919		24,348
Total liabilities and owners' equity	$	127,274	$	45,002

The assets of OpCo are restricted for OpCo’s use and are not available for the general operations of Cubic. OpCo’s debt is non-recourse to Cubic. Cubic’s maximum exposure to loss as a result of its equity interest in the P3 Venture is limited to the $2.7 million outstanding letter of credit, which will be converted to a cash contribution upon completion of the design and build phase of the MBTA Contract.

Prior to the adoption of ASC 606, Cubic and OpCo were precluded from recognizing revenue on the MBTA Contract because MBTA was not required to make payments to OpCo until the operate and maintain phase of the contract began. During this time period Cubic and OpCo were capitalizing costs associated with designing and building the system for MBTA. Upon the adoption of ASC 606, Cubic and OpCo are now permitted to recognize revenue related to the MBTA contract and therefore costs are now recognized as incurred and are no longer capitalized.

The revenue, operating income, and other income (expense), net of OpCo that are included in our Consolidated Statements of Operations are as follows (in thousands):


	Years Ended September 30,
	2019		2018		2017
Revenue	$	11,211	$	—	$	—
Operating income		9,923		—		—
Other income (expense), net		(21,592)		—		—
Interest income		3,704		—		—
Interest expense		(2,946)		—		—

NOTE 5—FAIR VALUE OF FINANCIAL INSTRUMENTS

The valuation techniques required to determine fair value are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect internal market assumptions. The two types of inputs create the following fair value hierarchy:

●

Level 1 - Quoted prices for identical instruments in active markets.

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●

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.

~~Table of Contents~~

The ~~fair value of certain of our cash equivalents are based upon quoted prices for identical instruments in active markets. The fair value of our other cash equivalents~~following table presents assets and ~~our available for sale marketable securities is based upon a discounted cash flow model~~liabilities measured and ~~approximate cost. The marketable securities in the rabbi trust are carried~~recorded at fair value ~~which is based upon quoted market prices for identical securities.~~ on our balance sheets on a recurring basis (in thousands):


	September 30, 2019								September 30, 2018
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets
Cash equivalents	$	—	$	—	$	—	$	—	$	9,000	$	—	$	—	$	9,000
Current derivative assets		—		2,635		—		2,635		—		1,803		—		1,803
Noncurrent derivative assets		—		859		—		859		—		314		—		314
Total assets measured at fair value	$	—	$	3,494	$	—	$	3,494	$	9,000	$	2,117	$	—	$	11,117
Liabilities
Current derivative liabilities		—		529		—		529		—		1,657		—		1,657
Noncurrent derivative liabilities		—		228		—		228		—		75		—		75
Contingent consideration to seller of H4 Global		—		—		1,073		1,073		—		—		665		665
Contingent consideration to seller of Deltenna		—		—		1,787		1,787		—		—		1,081		1,081
Contingent consideration to seller of Shield		—		—		3,814		3,814		—		—		5,618		5,618
Contingent consideration to seller of Nuvotronics		—		—		4,200		4,200		—		—		—		—
Contingent consideration to seller of TeraLogics - revenue targets		—		—		—		—		—		—		1,750		1,750
Total liabilities measured at fair value	$	—	$	757	$	10,874	$	11,631	$	—	$	1,732	$	9,114	$	10,846

Derivative financial instruments are measured at fair value, the material portions of which are based on active or inactive markets for identical or similar instruments or model-derived valuations whose inputs are observable. Where model-derived valuations are appropriate, we use the applicable credit spread as the discount rate. Credit risk related to derivative financial instruments is considered minimal and is managed by requiring high credit standards for counterparties and through periodic settlements of positions.

The fair value of contingent consideration liabilities to the sellers of businesses that we have acquired are revalued to their fair value each period and any increase or decrease is recorded into selling, general and administrative expense. Any changes in the assumed timing and amount of the probability of payment scenarios could impact the fair value.

At September 30, 2019, we have the following remaining contingent consideration arrangements with the sellers of companies which we acquired:

●

H4 Global: Payments of up to $2.7 million of contingent consideration based upon the value of contracts entered into over the five-year period ending September 30, 2020.

●

Deltenna: Payments of up to $6.6 million of contingent consideration if Deltenna meets certain sales goals from the date of acquisition through the fiscal year ending September 30, 2022.

●

Shield: Payments of up to $10.0 million of contingent consideration if Shield meets certain sales goals from the date of acquisition through July 31, 2025.

●

Nuvotronics: Payments of up to $8.0 million of contingent consideration if Nuvotronics meets certain gross profit goals for the 12-month periods ended December 31, 2020 and December 31, 2021.

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In addition, we have a contingent consideration arrangement with the Purchaser of our CGD Services business under which we are eligible to receive a cash payment of $3.0 million if the Purchaser is awarded certain government contracts in the future.

The ~~fair~~maximum remaining payout to the sellers of H4 Global is $2.7 million at September 30, 2019, and is based upon the value of contingent consideration liabilities that are based upon revenue targets or gross margin targets are based upon a real option approach. The contingent consideration liabilities that are valued using this real option approach includecontracts entered into over the Deltenna contingent consideration, a portion of the TeraLogics contingent consideration, the DTECH contingent consideration, and the GATR contingent consideration. Under this real option approach, each payment was modeled using long digital options written on the underlying revenue or gross margin metric. The strike price for each option is the respective revenue or gross margin as specified in the related agreement, and the spot price is calibrated to the revenue or gross margin forecast by calculating the present value of the corresponding projected revenues or gross margins using a risk-adjusted discount rate. The volatility for the underlying revenue metrics was based upon analysis of comparable guideline public companies and the volatility factor used in thefive-year period ending September 30, 2017 valuations was 40% for Deltenna, 15% for TeraLogics and 15% for GATR. The volatility factor used in the September 30, 2016 valuations was 17% for TeraLogics, 18% for DTECH and 17% for GATR. The risk-free rate was selected based on the quoted yields for U.S. Treasury securities with terms matching the earn-out payment period.

The fair value of the portion of the TeraLogics contingent consideration that is based on customer execution of contract extensions was estimated using a probability weighted approach. Subject to the terms and conditions of the TeraLogics Purchase Agreement, contingent consideration will be paid over a period commencing on the closing date and ending on December 21, 2018. The fair value of the contingent consideration was determined by applying probabilities of achieving the periodic payment to each period’s potential payment, and summing the present value of any future payments.

2020. The fair value of the H4 Global contingent consideration was estimated using a probability weighted approach. Subject to the terms and conditions of the H4 Global ~~Purchase Agreement,~~purchase agreement, contingent consideration will be paid over a ~~five year~~five-year term that commenced on October 1, 2015 and ends on September 30, 2020. The payments will be calculated based on the award of certain contracts during the specified period. The fair value of the contingent consideration was determined by applying probabilities to different scenarios and summing the present value of any future payments.

The fair value of Deltenna contingent consideration was primarily valued using the real option approach. Under this approach, each payment was modeled using long digital options written on the underlying revenue metric. The strike price for each option is the respective revenue as specified in the related agreement, and the spot price is calibrated to the revenue forecast by calculating the present value of the corresponding projected revenues using a risk-adjusted discount rate. The volatility for the underlying revenue metrics was based upon analysis of comparable guideline public companies and was 36% as of September 30, 2019 and 53% as of September 30, 2018. The selected discount rate was 11% as of September 30, 2019 and 11.5% as of September 30, 2018.

The fair value of the Shield contingent consideration was estimated based on Monte Carlo simulations. Under the purchase agreement, we will pay the sellers up to $10.0 million if Shield meets certain sales goals from the date of acquisition through July 31, 2025. The fair value of the contingent consideration was determined based upon a probability distribution of values based on 1,000,000 simulation trials. Key inputs for the simulation include projected revenues, assumed discount rates for projected revenues and cash flows, and volatility. The volatility and revenue risk adjustment factors were determined based on analysis of publicly traded comparable companies and as of September 30, 2019 were 18.0% and 13.1%, respectively, and as of September 30, 2018 were 20.0% and 14.5%, respectively. The discount rate used was based on our expected borrowing rate under our financing arrangements, which was determined to be 3.6% at September 30, 2019 and 3.9% at September 30, 2018.

The fair value of the Nuvotronics contingent consideration was estimated based on Monte Carlo simulations. Under the purchase agreement, we will pay the sellers up to $8.0 million if Nuvotronics meets certain gross profit goals for the 12-month periods ended December 31, 2020 and December 31, 2021. The fair value of the contingent consideration was determined based upon a probability distribution of values based on 1,000,000 simulation trials. Key inputs for the simulation include projected gross profits, assumed discount rates for projected gross profits, and gross profit volatility. The volatility factor used as of September 30, 2019 was 12.4% and was determined based on analysis of publicly traded comparable companies. The discount rate used as of September 30, 2019 was 7.4%, which was based on our risk-free rate of return adjusted for our gross profit required risk premium.

The inputs to each of the contingent consideration fair value models include significant unobservable inputs and therefore represent Level 3 measurements within the fair value hierarchy. Significant judgment is employed in determining the appropriateness of these assumptions as of the acquisition dates and each subsequent period.

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Accordingly, changes in the assumptions described above can materially impact the amount of contingent consideration expense we record in any period.

As of September 30, ~~2017,~~2019, the following table summarizes the change in fair value of our Level 3 contingent consideration ~~liability~~liabilities (in thousands):


	H4 Global		Deltenna		Shield		Nuvotronics			TeraLogics (Contract Extensions)	TeraLogics (Revenue Targets)		Total
Balance as of September 30, 2017	$	591	$	1,376	$	—	$	—	$	800	$	2,450	$	5,217
Initial measurement recognized at acquisition		—		—		5,618		—		—		—		5,618
Cash paid to seller		—		—		—		—		(1,000)		(1,750)		(2,750)
Total remeasurement (gain) loss recognized in earnings		74		(295)		—		—		200		1,050		1,029
Balance as of September 30, 2018	$	665	$	1,081	$	5,618	$	—	$	—	$	1,750	$	9,114
Initial measurement recognized at acquisition		—		—		—		4,900		—		—		4,900
Cash paid to seller		(385)		—		—		—		—		(1,750)		(2,135)
Total remeasurement (gain) loss recognized in earnings		793		706		(1,804)		(700)		—		—		(1,005)
Balance as of September 30, 2019	$	1,073	$	1,787	$	3,814	$	4,200	$	—	$	—	$	10,874

DTECH

H4

TeraLogics (Contract Extensions)

TeraLogics (Revenue Targets)

GATR

Deltenna

Total

Balance as of October 1, 2015

$
7,507
$
—
$
—
$
—
$
—
$
—
$
7,507

Initial measurement recognized at acquisition

—

1,602

2,000

3,100

2,500

—

9,202

Cash paid to seller

(5,000)

—

(1,000)

—

—

—

(6,000)

Adjustment to the provisional acquisition date valuation

—

(616)

(100)

—

—

—

(716)

Total remeasurement (gain) loss recognized in earnings

(507)

(419)

500

1,000

700

—

1,274

Balance as of September 30, 2016

$
2,000
$
567
$
1,400
$
4,100
$
3,200
$
—
$
11,267

Initial measurement recognized at acquisition

—

—

—

—

—

1,328

1,328

Cash paid to seller

—

—

(1,000)

(2,500)

—

—

(3,500)

Adjustment to the provisional acquisition date valuation

—

—

—

—

—

—

—

Total remeasurement (gain) loss recognized in earnings

(2,000)

24

400

850

(3,200)

48

(3,878)

Balance as of September 30, 2017

$
—
$
591
$
800
$
2,450
$
—
$
1,376
$
5,217

~~Table of Contents~~

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

September 30, 2017

September 30, 2016


Level 1

Level 2

Level 3

Total

Level 1

Level 2

Level 3

Total

Assets

Cash equivalents

$
8,501

$
—

$
—

$
8,501

$
57,455

$
—

$
—

$
57,455

Marketable securities

—

—

—

—

—

12,996

—

12,996

Current derivative assets

—

2,591

—

2,591

—

14,770

—

14,770

Noncurrent derivative assets

—

1,128

—

1,128

—

1,201

—

1,201

Total assets measured at fair value

$
8,501

$
3,719

$
—

$
12,220

$
57,455

$
28,967

$
—

$
86,422

Liabilities

Current derivative liabilities

—

3,456

—

3,456

—

13,752

—

13,752

Noncurrent derivative liabilities

—

1,128

—

1,128

—

1,334

—

1,334

Contingent consideration to seller of Deltenna

—

—

1,376

1,376

—

—

—

—

Contingent consideration to seller of GATR

—

—

—

—

—

—

3,200

3,200

Contingent consideration to seller of TeraLogics - contract extensions

—

—

800

800

—

—

1,400

1,400

Contingent consideration to seller of TeraLogics - revenue targets

—

—

2,450

2,450

—

—

4,100

4,100

Contingent consideration to seller of H4 Global

—

—

591

591

—

—

567

567

Contingent consideration to seller of DTECH

—

—

—

—

—

—

2,000

2,000

Total liabilities measured at fair value

$
—

$
4,584

$
5,217

$
9,801

$
—

$
15,086

$
11,267

$
26,353

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.

In fiscal 2019, we invested $5.0 million in Franklin Blackhorse, L.P., a limited partnership investment fund that invests in early stage, privately owned companies in the military, commercial, and disruptive technology sectors. We account for our investment using the equity method of accounting. For the year ended September 30, 2019, we recognized earnings of $0.3 million representing our share of the fund’s operating results, which is included in other income (expense) in our Consolidated Statements of Operations. We recorded a $5.3 million investment within other assets in our Consolidated Balance Sheet at September 30, 2019.

The fair value of long-term debt is calculated by discounting the value of the note based on market interest rates for similar debt instruments, which is a Level 2 technique. The following table presents the estimated fair value and carrying value of our long-term debt (in millions):


	September 30,		September 30,
	2017		2016

					September 30,
					2019		2018
Fair value	$	202.1	$	210.0	$	203.3	$	193.7
Carrying value	$	200.0	$	201.0	$	200.0	$	200.0

We did not have any significant non-financial assets or liabilities measured at fair value on a non-recurring basis in ~~2017, 2016,~~2019, 2018, or ~~2015~~2017 other than assets and liabilities acquired in business ~~acquisitions.~~acquisitions described in Note 3 and the restricted stock units that were granted in the first quarter of fiscal 2019 that contain performance and market-based vesting criteria described in Note 16.

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NOTE 4—6—CONTRACT ASSETS AND LIABILITIES

Contract assets include unbilled amounts typically resulting from sales under contracts when the percentage-of-completion cost-to-cost method of revenue recognition is utilized and revenue recognized exceeds the amount billed to the customer. Contract liabilities (formerly referred to as customer advances prior to the adoption of ASC 606) include advance payments and billings in excess of revenue recognized. Contract assets and contract liabilities were as follows (in thousands):



	September 30,		October 1,
	2019		2018

Contract assets	$	349,559	$	272,210
Contract liabilities	$	46,170	$	70,127

Contract assets increased $77.3 million during the twelve months ended September 30, 2019, due to the recognition of revenue related to the satisfaction or partial satisfaction of performance obligations during the twelve months ended September 30, 2019 for which we have not yet billed. There were 0 significant impairment losses related to our contract assets during the twelve months ended September 30, 2019.

Contract liabilities decreased $24.0 million during the twelve months ended September 30, 2019, due to revenue recognition in excess of payments received on these performance obligations. During the twelve-month period ended September 30, 2019, we recognized $62.4 million of our contract liabilities at October 1, 2018 as revenue. We expect our contract liabilities to be recognized as revenue over the next twelve months.

NOTE 7—ACCOUNTS RECEIVABLE

The components of accounts receivable ~~under long-term contracts~~ are as follows (in thousands):

September 30,

2017

2016

U.S. Government Contracts:

Amounts billed

$
76,451

$
66,668

Recoverable costs and accrued profits on progress completed--not billed

88,105

81,624

164,556

148,292

Commercial Customers:

Amounts billed

119,041

79,955

Recoverable costs and accrued profits on progress completed--not billed

150,668

160,098

269,709

240,053

434,265

388,345

Less unbilled amounts not currently due--commercial customers

(17,457)

(20,926)

$
416,808

$
367,419


	September 30,
	2019		2018

Accounts receivable
Billed	$	127,406	$	156,948
Unbilled		—		242,877
Allowance for doubtful accounts		(1,392)		(1,324)
Total accounts receivable		126,014		398,501
Less estimated amounts not currently due		—		(6,134)
Current accounts receivable	$	126,014	$	392,367

~~A portion~~Amounts billed include $60.3 million and $80.5 million due on U.S. federal government contracts at September 30, 2019 and 2018, respectively. As further described in Note 2, effective October 1, 2018, the component of recoverable costs and accrued profits on progress completed is billable under progress or milestone payment provisions of the related contracts. The remainder of these amounts is billable upon delivery of products or furnishing of services, with an immaterial amount subject to retainage provisions of the contracts. It is anticipated that we will bill and collect substantially the entire unbilled portion of receivables identified as current assets under progress billing provisions of the contracts or upon completion of milestones and/or acceptance by the customers during fiscal 2018. ~~The amount classified as not currently due is an estimate of the amount of long-term contract~~ accounts receivable that ~~will~~consisted of unbilled contract receivables as reported under ASC 605 has been reclassified as contract assets under ASC 606.

In our normal course of business, we may sell trade receivables to financial institutions as a cash management technique. We do not ~~be collected within one year from~~retain financial or legal obligations for these receivables that would result in material losses. Our ongoing involvement is limited to the remittance of customer payments to the financial institutions with respect to the sold trade receivables; therefore, our sold trade receivables are not included in our Consolidated Balance Sheet in any period presented. As of September 30, ~~2017 under transportation systems contracts in~~2019, we sold $31.1 million of outstanding trade receivables to financial institutions.

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NOTE 8—INVENTORIES

Inventories consist of the ~~U.S. and Australia, and under a CGD Systems contract in Italy based upon the payment terms in the contracts.~~

~~NOTE 5—INVENTORIES~~

~~Significant components of inventories are as follows~~following (in thousands):


	September 30,		September 30,
	2017		2016


					September 30,
					2019		2018

Finished products	$	4,369	$	10,018	$	10,905	$	7,099
Work in process and inventoried costs under long-term contracts		84,131		62,570		46,951		63,169
Materials and purchased parts		10,163		12,102		48,938		23,710
Customer advances		(10,948)		(18,328)		—		(9,779)
Net inventories	$	87,715	$	66,362	$	106,794	$	84,199

At September 30, ~~2017,~~2019, work in process and inventoried costs under long-term contracts includes approximately ~~$4.3~~$5.8 million in costs incurred outside the scope of work or in advance of a contract award compared to ~~$0.7~~$0.9 million ~~as of~~at September 30, ~~2016.~~2018. We believe it is probable that we will recover the costs inventoried at September 30, ~~2017,~~2019, plus a profit margin, under contract change orders or awards within the next year.

Costs we incur for certain U.S. federal government contracts include general and administrative costs as allowed by government cost accounting standards. The amounts remaining in inventory at September 30, ~~2017~~2019 and ~~2016~~2018 were ~~$2.5~~$0.5 million and ~~$2.3~~$2.0 million, respectively.

~~Table of Contents~~

NOTE 6—9—PROPERTY, PLANT AND EQUIPMENT

Significant components of property, plant and equipment are as follows (in thousands):


September 30,	2017		2016


					September 30,
					2019		2018
Land and land improvements	$	16,139	$	16,711	$	7,348	$	13,132
Buildings and improvements		52,625		51,113		48,191		57,959
Machinery and other equipment		75,540		70,547		107,297		81,727
Software		62,297		51,191		108,526		84,631
Leasehold improvements		17,007		13,266		17,064		11,991
Construction and internal-use software development in progress		23,156		8,150		16,814		12,888
Accumulated depreciation and amortization		(133,078)		(114,662)		(160,271)		(144,782)
	$	113,686	$	96,316
					$	144,969	$	117,546

In fiscal 2019, we entered into agreements related to the construction and leasing of two buildings on our existing corporate campus in San Diego, California. Under these agreements, a financial institution will own the buildings, and we will lease the property for a term of five years upon their completion.

In the third quarter of fiscal 2019 we sold the land and buildings comprising our separate CTS campus in San Diego. We have entered into a lease with the buyer of this campus and CTS employees will continue to occupy this separate campus until the new buildings on our corporate campus are ready for occupancy in fiscal 2021. In the third quarter of fiscal 2019 we also sold land and buildings in Orlando, Florida and we are entering a lease for new space in Orlando to accommodate our employees and operations in Orlando. In connection with the sale of these real estate campuses we received total net proceeds of $44.9 million and recognized net gains on the sales totaling $32.5 million.

As a part of our efforts to upgrade our current information systems, early in fiscal 2015 we purchased new enterprise resource planning (ERP) software and began the process of designing and configuring this software and other software applications to manage our operations.

Costs incurred in the development of internal-use software and software applications, including external direct costs of materials and services and applicable compensation costs of employees devoted to specific software development, are

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capitalized as computer software costs. Costs incurred outside of the application development stage, or that are types of costs that do not meet the capitalization requirements, are expensed as incurred. Amounts capitalized are included in property, plant and equipment and are amortized on a straight-line basis over the estimated useful life of the software, which ranges from three to seven years. No amortization expense is recorded until the software is ready for its intended use.

Through September 30, ~~2017~~2019 we have incurred costs of ~~$113.3~~$138.9 million related to the purchase and development of our ERP system, including ~~$40.6~~$3.1 million, ~~$45.2~~$22.5 million, and ~~$27.5~~$40.6 million of costs incurred during fiscal years ~~2017, 2016~~2019, 2018 and ~~2015,~~2017, respectively. We have capitalized ~~$16.7~~$1.6 million, ~~$20.3~~$7.5 million, and ~~$16.0~~$16.7 million of qualifying software development costs as internal-use software development in progress during fiscal years ~~2017, 2016,~~2019, 2018, and ~~2015,~~2017, respectively. We have recognized expense for ~~$23.9~~$1.5 million, ~~$24.9~~$15.0 million, and ~~$11.5~~$23.9 million of these costs in fiscal years ~~2017, 2016,~~2019, 2018, and ~~2015,~~2017, respectively, for costs that did not qualify for capitalization. Amounts that were expensed in connection with the development of these systems are classified within selling, general and administrative expenses in the Consolidated Statements of Operations.

~~Certain~~Various components of our ERP system became ready for their intended use and were placed into service ~~on April 1,~~at various times from fiscal 2016 ~~and on October 1, 2016 at which time~~through fiscal 2019. As each component became ready for its intended use, the ~~capitalized~~component’s costs ~~of developing those components~~ were transferred into completed software and we began amortizing these costs over ~~the seven year~~their seven-year estimated useful life ~~of these software components.~~using the straight-line method. We continue to capitalize costs associated with the development of other ERP components that are not yet ready for their intended use.

Our provisions for depreciation of plant and equipment and amortization of leasehold improvements and software amounted to ~~$18.1~~$22.6 million, ~~$11.4~~$19.5 million and ~~$10.1~~$17.8 million in ~~2017, 2016~~2019, 2018 and ~~2015,~~2017, respectively. Generally, we use straight-line methods for depreciable real property over estimated useful lives ranging from 15 to 39 years or for leasehold improvements, the term of the underlying lease if shorter than the estimated useful lives. We typically use accelerated methods (declining ~~balance and sum-of-the-years-digits)~~balance) for machinery and equipment and software other than our ERP system over estimated useful lives ranging from 5 to 10 years.

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NOTE 7—10—GOODWILL AND PURCHASED INTANGIBLE ASSETS

~~The changes~~Changes in ~~the carrying amount of~~ goodwill for the two years ended September 30, ~~2017~~2019 are as follows (in thousands):



	Cubic Transportation		Cubic Mission		Cubic Global
	Systems		Solutions		Defense		Total

Net balances at September 30, 2017	$	50,870	$	—	$	270,692	$	321,562
Reassignment on October 1, 2017		—		125,321		(125,321)		—
Acquisitions (see Note 2)		—		13,085		665		13,750
Foreign currency exchange rate changes		(1,084)		(279)		(323)		(1,686)
Net balances at September 30, 2018		49,786		138,127		145,713		333,626
Reassignment on April 1, 2019		—		3,428		(3,428)		—
Acquisitions		206,988		40,392		—		247,380
Foreign currency exchange rate changes		(2,182)		(523)		(204)		(2,909)
Net balances at September 30, 2019	$	254,592	$	181,424	$	142,081	$	578,097

Cubic Global

Cubic Global


Transportation

Defense

Defense

Systems

Systems

Services

Total

Net balances at October 1, 2015

$
55,974

$
87,575

$
94,350

$
237,899

Acquisitions (see Note 2)

—

175,150

—

175,150

Foreign currency exchange rate changes

(6,344)

241

—

(6,103)

Net balances at September 30, 2016

49,630

262,966

94,350

406,946

Acquisitions

—

5,885

—

5,885

Foreign currency exchange rate changes

1,240

1,841

—

3,081

Net balances at September 30, 2017

$
50,870

$
270,692

$
94,350

$
415,912

~~The components~~As described in Note 18, we concluded that CMS became a separate operating segment beginning on October 1, 2017. In conjunction with the changes to reporting units, we reassigned goodwill between CGD and CMS based on their relative fair values on October 1, 2017.

In July 2017, we acquired Deltenna, a wireless infrastructure company specializing in the design and delivery of radio and antenna communication solutions. Deltenna’s operations were included in our CGD reporting unit upon its acquisition. On April 1, 2019, we reorganized our reporting structure to include Deltenna in our CMS reporting unit and reassigned $3.4 million of goodwill from CGD to CMS based upon its relative fair value. Since its acquisition, Deltenna’s sales, operating results, and cash flows have not been significant to our consolidated results. As such, reportable segment information has not been restated for this change in the ~~net goodwill balances at September 30, 2017 are as follows (in thousands):~~composition of our reportable segments.

Cubic Global

Cubic Global


Transportation

Defense

Defense

Systems

Systems

Services

Total

Goodwill

$
50,870

$
270,692

$
145,215

$
466,777

Accumulated impairment charges

—

—

(50,865)

(50,865)

Net balances

$
50,870

$
270,692

$
94,350

$
415,912

We complete our annual goodwill impairment test each year as of July 1.1 separately for our CTS, CGD and CMS reporting units.

The test for goodwill impairment is a two-step process. The first step of the ~~goodwill impairment~~ test ~~compares~~is performed by comparing the fair value of ~~our~~each reporting ~~units~~unit to ~~their~~its carrying ~~values. We estimate~~amount, including recorded goodwill. If the carrying amount of a reporting unit exceeds its fair value, the second step is performed to measure the amount of the impairment, if any, by comparing the implied fair value of ~~our reporting units primarily based on~~goodwill to its carrying amount. Any resulting impairment determined would be recorded in the ~~discounted projected cash flows of the underlying operations and based upon market multiples from publicly traded comparable companies.~~ current period.

For our ~~2017~~2019 impairment test, the estimated fair value of all ~~three~~3 of our reporting units exceeded their respective carrying ~~values.~~amounts. As such, there was no0 impairment of goodwill in 2017. The estimated fair value for our Transportation Systems reporting unit exceeded its carrying value by over 100%, while the estimated fair values of our CGD Systems and CGD Services reporting units each exceeded their carrying values by over 10%.2019.

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Purchased Intangible Assets: The table below summarizes our purchased intangible assets (in thousands):


	September 30, 2017						September 30, 2016
							Gross
	Gross Carrying		Accumulated		Net Carrying		Carrying		Accumulated		Net Carrying
	Amount		Amortization		Amount		Amount		Amortization		Amount


													September 30, 2019						September 30, 2018
																			Gross
													Gross Carrying		Accumulated		Net Carrying		Carrying		Accumulated		Net Carrying
													Amount		Amortization		Amount		Amount		Amortization		Amount

Contract and program intangibles	$	214,215	$	(151,422)	$	62,793	$	209,511	$	(123,645)	$	85,866	$	181,903	$	(138,497)	$	43,406	$	151,965	$	(112,399)	$	39,566
Other purchased intangibles		61,580		(25,878)		35,702		57,463		(19,926)		37,537		155,608		(33,401)		122,207		52,851		(18,884)		33,967
Total	$	275,795	$	(177,300)	$	98,495	$	266,974	$	(143,571)	$	123,403	$	337,511	$	(171,898)	$	165,613	$	204,816	$	(131,283)	$	73,533

Total amortization expense for 2019, 2018 and 2017 ~~2016 and 2015~~ was ~~$33.0~~$42.1 million, ~~$34.1~~$27.1 million and ~~$27.6~~$30.2 million, respectively.

The table below shows our expected amortization of purchased intangibles as of September 30, ~~2017,~~2019, for each of the next five years and thereafter (in thousands):



	Transportation		Cubic Mission
	Systems		Solutions		Total
2020	$	17,553	$	18,884	$	36,437
2021		16,025		14,429		30,454
2022		15,470		11,304		26,774
2023		10,353		9,151		19,504
2024		9,797		7,179		16,976
Thereafter		21,531		13,937		35,468
	$	90,729	$	74,884	$	165,613

Cubic Global

Cubic Global


Transportation

Defense

Defense

Systems

Systems

Services

Total

2018

$
4,944

$
21,009

$
2,075

$
28,028

2019

2,886

17,291

1,434

21,611

2020

947

13,529

790

15,266

2021

698

10,075

707

11,480

2022

598

6,912

707

8,217

Thereafter

297

10,673

2,923

13,893

$
10,370

$
79,489

$
8,636

$
98,495

NOTE 8—11—FINANCING ARRANGEMENTS

Long-term debt consists of the following (in thousands):



September 30,	2017		2016		2019		2018


Series A senior unsecured notes payable to a group of insurance companies, interest fixed at 3.35%	$	50,000	$	50,000	$	50,000	$	50,000
Series B senior unsecured notes payable to a group of insurance companies, interest fixed at 3.35%		50,000		50,000		50,000		50,000
Series C senior unsecured notes payable to a group of insurance companies, interest fixed at 3.70%		25,000		25,000		25,000		25,000
Series D senior unsecured notes payable to a group of insurance companies, interest fixed at 3.93%		75,000		75,000		75,000		75,000
Mortgage note from a U.K. financial institution, with quarterly installments of principal and interest at 6.48%		—		1,012
		200,000		201,012
						200,000		200,000
Less unamortized debt issuance costs		(239)		(271)		(175)		(207)
Less current portion		—		(450)		(10,714)		—
	$	199,761	$	200,291
					$	189,111	$	199,793

Maturities of long-term debt for each of the five years in the period ending September 30, ~~2022,~~2024, are as follows: ~~2018 — $0.0 million; 2019 — $0.0 million;~~ 2020 — $10.7 million; 2021 — $35.7 million; 2022 — $35.7 ~~million~~million; 2023 — $35.7 million; 2024 — $35.7 million.

~~Interest paid amounted to $14.8 million, $11.0 million and $4.8 million in 2017, 2016 and 2015, respectively.~~

~~Table of Contents~~

In March 2013, we entered into a note purchase and private shelf agreement pursuant to which we issued $100.0 million of senior unsecured notes, bearing interest at a rate of 3.35% and maturing on March 12, 2025. ~~In addition, pursuant~~Pursuant to the agreement, on July 17, 2015, we issued an additional $25.0 million of senior unsecured notes, bearing interest at a rate of 3.70% and maturing on March 12, 2025. Interest payments on the notes issued in 2013 and 2015 are due semi-annually and principal payments are due from 2021 through 2025. ~~The agreement pertaining to the aforementioned notes also contained a provision that the coupon rate would increase by a further 0.50% should the company’s leverage ratio exceed a certain level.~~ On February 2, 2016 we revised the note purchase agreement and we issued an additional $75.0 million of senior unsecured notes bearing interest at 3.93% and maturing on March 12, 2026. Interest payments on these notes are due semi-annually and principal payments are due from 2020 through 2026. At

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The agreement pertaining to the ~~time of~~aforementioned notes also contained a provision that the ~~issuance of this last series of notes,~~coupon rate would increase by a further 0.50% should the company’s leverage ratio exceed a certain terms and conditions of the note purchase and private shelf agreement were revised in coordination with the revision and expansion of the revolving credit agreement as discussed below in order to increase our leverage capacity.level.

We have a committed revolving credit agreement with a group of financial institutions in the amount of ~~$400.0~~$800.0 million which ~~expires~~is scheduled to expire in ~~August 2021~~April 2024 (Revolving Credit Agreement). Under the terms of the Revolving Credit Agreement, the company may elect that the debts comprising each borrowing bear interest generally at a rate equal to (i) London Interbank Offer Rate (“LIBOR”) based upon tenor plus a margin that fluctuates between 1.00% and 2.00%, as determined by the company’s Leverage Ratio (as defined in the Revolving Credit Agreement) as set forth in the company’s most recently delivered compliance certificate or (ii) the Alternate Base Rate (defined as a rate equal to the highest of (a) the Prime Rate (b) the NYFRB rate plus 0.50% (c) the Adjusted LIBOR Rate plus 1.00%), plus a margin that fluctuates between 0.00% and 1.00%, as determined by the company’s Leverage Ratio as set forth in its most recently delivered compliance certificate. At September 30, ~~2017,~~2019, the weighted average interest rate on outstanding borrowings under the Revolving Credit Agreement was ~~3.24%~~3.90%. Debt issuance and modification costs of ~~$2.3 million and $1.3~~$1.9 million were incurred in connection with ~~February 2, 2016 and August 11, 2016 amendments~~an April 2019 amendment to the Revolving Credit Agreement ~~respectively.~~which increased permitted borrowings from $400.0 million to $800.0 million. Costs incurred in connection with establishment of and amendments to this credit agreement are recorded in other assets on our Consolidated Balance Sheets, and are being amortized as interest expense using the effective interest method over the stated term of the Revolving Credit Agreement. At September 30, ~~2017, the Company’s~~2019, our total debt issuance costs have an unamortized deferred financing balance of ~~$2.8~~$1.2 million. The available line of credit is reduced by any letters of credit issued under the Revolving Credit Agreement. As of September 30, ~~2017,~~2019, there were $195.5 million of borrowings ~~totaling $55.0 million~~ under this agreement and there were letters of credit outstanding totaling ~~$81.3~~$31.5 million, which reduce the available line of credit to ~~$263.7~~$573.0 million. The ~~$81.3~~$31.5 million of letters of credit includes both financial letters of credit and performance guarantees.

~~Until June~~Interest paid amounted to $16.8 million, $10.0 million and $14.8 million in fiscal 2019, 2018 and 2017, respectively.

As of September 30, 2019, we had ~~a secured letter of credit facility agreement with a bank in the U.K. At September 30, 2016, there were~~ letters of credit and bank guarantees outstanding ~~under this agreement~~totaling $39.9 million, which includes the $31.5 million of $62.7 million. Restricted cash at September 30, 2016 of $69.4 million was held on deposit in the U.K. as collateral in support of this facility. In June 2017, this agreement was terminated and the associated letters of credit ~~were transferred to~~on the Revolving Credit Agreement described ~~above.~~above and $8.4 million of letters of credit issued under other facilities. The ~~cash~~total of $39.9 million of letters of credit and bank guarantees includes $34.4 million that ~~formerly collateralized~~guarantees either our performance or customer advances under certain contracts and financial letters of credit of $5.5 million which primarily guarantee our payment of certain self-insured liabilities. We have never had a drawing on a letter of credit instrument, nor are any anticipated; therefore, we estimate the ~~secured credit facility was used~~fair value of these instruments to ~~make principal payments~~be 0.

We have entered into a short-term borrowing arrangement in the U.K. in the amount of £20.0 million British pounds (equivalent to ~~reduce our outstanding~~approximately $24.6 million) to help meet the short-term ~~borrowings.~~

~~Our revolving credit agreement and note purchase and private shelf agreement each contain a number of customary covenants, including~~working capital requirements ~~for us to maintain certain interest coverage and leverage ratios and restrictions on our and certain~~ of our subsidiaries’ abilities to, among other things, incur additional debt, create liens, consolidate or merge with any other entity, or transfer or sell substantially all of their assets, in each case subject to certain exceptions and limitations. The occurrence of any event of defaultsubsidiary. At September 30, 2019, 0 amounts were outstanding under ~~these agreements may result in all of the indebtedness then outstanding becoming immediately due and payable. At March 31, 2017 we did not maintain the required leverage ratio.~~ Therefore in May 2017 certain terms and conditions of the revolving credit agreement and note purchase and private shelf agreement were further revised to allow us to maintain a higher level of leverage as of March 31, 2017 and for the remainder of the 2017 fiscal year. The revisions to the agreements do not impact the required leverage ratios in fiscal 2018 and subsequent years. This revision also contains a provision that the coupon rate may increase on all of the term notes discussed above by up to 0.75% should our leverage ratio exceed certain levels. In connection with this revision, we incurred $0.4 million of costs, primarily for amounts charged by our lenders in connection with these modifications. These costs were recorded in May 2017 as a reduction in the carrying value of the related debt liability and which will be amortized into additional interest expense over the life of the related debt.borrowing arrangement.

We maintain a cash account with a bank in the United Kingdom for which the funds are restricted as to use. The account is required to secure the customer’s interest in cash deposited in the account to fund our activities related to our performance under a fare collection services contract in the United Kingdom. The balance in the account as of September 30, ~~2017~~2019 was ~~$8.4~~$19.5 million and is classified as restricted cash in our Consolidated Balance Sheets.

~~Table of Contents~~

As of September 30, 2017, we had letters of credit and bank guarantees outstanding totaling $94.5 million, which includes the $81.3 million of letters of credit on the Revolving Credit Agreement above and $13.2 million of letters of credit issued under other facilities. The total of $94.5 million of letters of credit and bank guarantees includes $77.4 million that guarantees either our performance or customer advances under certain contracts, and financial letters of credit of $17.1 million which primarily guarantee our payment of certain self-insured liabilities. We have never had a drawing on a letter of credit instrument, nor are any anticipated; therefore, we estimate the fair value of these instruments to be zero.

We maintain a short-term borrowing arrangement in New Zealand totaling $0.5 million New Zealand dollars (equivalent to approximately $0.4 million) to help meet the short-term working capital requirements of our subsidiary. At September 30, 2017, no amounts were outstanding under this borrowing arrangement.

The terms of certain of our lending and credit agreements include provisions that require and/or limit, among other financial ratios and measurements, the permitted levels of debt, coverage of cash interest expense, and under certain circumstances, payments of dividends or other distributions to shareholders. As of September 30, ~~2017,~~2019, these agreements have no restrictions on distributions to ~~shareholders.~~shareholders, subject to certain tests in these agreements.

In December 2018, we completed an underwritten public offering of 3,795,000 shares of our common stock, including the exercise of the underwriters’ option to purchase additional shares. All shares were offered by us at a price to the public of $60.00 per share. Net proceeds were $215.8 million, after deducting underwriting discounts and commissions and offering expenses of $11.9 million. We used the net proceeds to repay a portion of our outstanding borrowings under the Revolving Credit Agreement which was used to finance the acquisition of Trafficware and for general corporate purposes.

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Table of Contents

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 other current liabilities on the balance sheet amounted to ~~$7.6~~$7.4 million and ~~$8.2~~$8.6 million as of September 30, ~~2017~~2019 and ~~2016,~~2018, respectively.

NOTE 9—12—COMMITMENTS

We lease certain office, manufacturing and warehouse space, vehicles, and other office equipment under non-cancelable operating leases expiring in various years through 2030. These leases, some of which may be renewed for periods up to 10 years, generally require us to pay all maintenance, insurance and property taxes. Several leases are subject to periodic adjustment based on price indices or cost increases. Rental expense (net of sublease income of $0.2 million in ~~2017, $0.3~~2019, $0.2 million in ~~2016~~2018 and ~~$0.3~~$0.2 million in ~~2015)~~2017) for all operating leases amounted to ~~$13.6~~$13.3 million, ~~$12.7~~$11.6 million and ~~$11.9~~$10.5 million in ~~2017, 2016~~2019, 2018 and ~~2015,~~2017, respectively. Future minimum payments, net of minimum sublease income, under non-cancelable operating leases with initial terms of one year or more consist of the following for the next five years and thereafter, as of September 30, ~~2017~~2019 (in thousands):


2018	$	12,806
2019		10,211

2020		7,998	$	18,121
2021		7,396		17,218
2022		4,781		15,097
2023				13,250
2024				12,311
Thereafter		11,273		37,926
	$	54,465
			$	113,923

NOTE ~~10—~~13—INCOME TAXES

On December 22, 2017, the U.S. government enacted the Tax Act, which includes provisions for Global Intangible Low-Tax Income (GILTI) under which taxes on foreign income are imposed on the excess of a deemed return on tangible assets of foreign subsidiaries. Consistent with accounting guidance, we have elected to account for the tax on GILTI as a period cost and thus have not adjusted any net deferred tax assets of our foreign subsidiaries in connection with the Tax Act.

Due to the complexity of the Tax Act, the Securities and Exchange Commission issued guidance in SAB 118 which clarified the accounting for income taxes under ASC 740 if certain information was not yet available, prepared or analyzed in reasonable detail to complete the accounting for income tax effects of the Tax Act. SAB 118 provided for a measurement period of up to one year after the enactment of the Tax Act, during which time the required analyses and accounting must be completed. During fiscal year 2018, we recorded provisional amounts for the income tax effects of the changes in tax law and tax rates, as reasonable estimates were determined by management during this period. These amounts did not change in fiscal year 2019.

The SAB 118 measurement period ended on December 22, 2018. Although we no longer consider these amounts to be provisional, the determination of the Tax Act’s income tax effects may change following future legislation or further interpretation of the Tax Act based on the publication of recently proposed U.S. Treasury regulations and guidance from the Internal Revenue Service and state tax authorities.

Income (loss) from continuing operations before income taxes includes the following components (in thousands):


Years ended September 30,	2017		2016		2015
	(in thousands)

							Years Ended September 30,
							2019		2018		2017
							(in thousands)
United States	$	(55,634)	$	(57,176)	$	(18,712)	$	(535)	$	(51,049)	$	(70,566)
Foreign		59,484		49,699		90,623		52,881		65,935		59,484
Total	$	3,850	$	(7,477)	$	71,911	$	52,346	$	14,886	$	(11,082)

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Table of Contents

Significant components of the provision (benefit) for income taxes from continuing operations are as follows:


Years ended September 30,	2017		2016		2015
	(in thousands)

							Years Ended September 30,
							2019		2018		2017
							(in thousands)
Current:
Federal	$	(4,330)	$	2,469	$	(2,433)	$	(710)	$	(4,775)	$	(4,070)
State		816		(231)		723		2,898		976		878
Foreign		13,869		8,249		20,266		10,523		19,882		13,869
Total current		10,355		10,487		18,556		12,711		16,083		10,677


Deferred:
Federal		2,839		(15,614)		24,112		(4,553)		(7,874)		2,257
State		710		(4,365)		5,710		(135)		482		569
Foreign		1,155		280		619		3,017		(1,598)		1,155
Total deferred		4,704		(19,699)		30,441		(1,671)		(8,990)		3,981
Provision for income taxes	$	15,059	$	(9,212)	$	48,997	$	11,040	$	7,093	$	14,658

The reconciliation of income tax computed at the U.S. federal statutory tax rate to income tax expense is as follows:


Years ended September 30,	2017		2016		2015
	(in thousands)


							Years Ended September 30,
							2019		2018		2017
							(in thousands)

Tax expense at U.S. statutory rate	$	1,349	$	(2,616)	$	25,169	$	10,992	$	3,124	$	(3,877)
State income taxes, net of federal tax effect		(489)		(1,199)		(34)		1,416		(237)		(923)
Nondeductible expenses (1)		54		7,828		1,555
Nondeductible expenses								1,720		1,186		(185)
Change in reserve for tax contingencies		(4,588)		1,320		(1,192)		(1,468)		(1,047)		(4,435)
Change in deferred tax asset valuation allowance (2)		12,647		(9,228)		37,589
Foreign income taxed at less than statutory rate (3)		9,122		(2,999)		(11,924)
Research and development credits (4)		(3,461)		(2,542)		(2,248)
Change in deferred tax asset valuation allowance								(10,007)		8,784		17,374
Foreign rate differential (1)								2,149		5,684		9,912
Tax credits								(4,767)		(2,656)		(3,459)
Impact of U.S. Tax Reform								—		(7,053)		—
Global Intangible Low-Tax Income								8,182		—		—
Stock Based Compensation								(448)		59		16
Non-controlling interest in equity arrangements								1,802		99		—
Other		425		224		82		1,469		(850)		235
Provision for income taxes	$	15,059	$	(9,212)	$	48,997	$	11,040	$	7,093	$	14,658

⁽¹⁾ In ~~2016,~~2018, we recorded ~~$6.3~~$3.5 million of tax expense related to ~~nondeductible acquisition-related compensation expenses.~~

~~(2)~~ ~~In 2017, we recorded $13.1~~foreign earnings which were not permanently reinvested prior to the enactment of the U.S. Tax Act. After enactment, certain foreign earnings are taxed at higher statutory rates than the U.S. which results in $2.1 million of incremental tax expense ~~related to an increase~~ in the valuation allowance related to tax credit carryforwards generated in the current year. In 2016, we recorded a net tax benefit primarily related to a business combination in which we acquired significant U.S. deferred tax liabilities as well as a utilization and subsequent release of the deferred tax valuation allowance in Australia. In 2015, we recorded a full valuation allowance on U.S. net deferred tax assets with a charge to expense of $35.8 million.

~~(3)~~2019. In 2017, we provided for deferred taxes on all cumulative unremitted foreign earnings, as the earnings ~~are~~were no longer considered permanently reinvested resulting in a charge of $9.5 million.

~~(4)~~ ~~In both 2016 and 2015, we recorded tax benefits of $1.0 million and $1.2 million, respectively, related to the reinstatement of the research and development tax credit.~~

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Significant components of our deferred tax assets and liabilities are as follows:


September 30,	2017		2016
	(in thousands)


					September 30,
					2019		2018
					(in thousands)

Deferred tax assets:
Accrued employee benefits	$	18,747	$	15,133	$	11,409	$	8,285
Long-term contracts and inventory valuation reductions		14,490		12,697
Allowances for loss contingencies		6,038		5,754		3,561		3,518
Deferred compensation		4,830		4,369		3,071		3,272
Intangible assets						—		1,361
Inventory valuation						8,036		1,154
Long-term contracts						6,995		7,751
Prepaid and accrued expenses						1,816		1,229
Retirement benefits		6,214		12,282		4,967		1,398
Tax credit carryforwards		31,161		16,512		33,118		35,137
Net operating losses carryforwards		3,968		12,713
Loss carryforwards						36,248		29,097
Other		2,652		2,796		818		264
Total gross deferred tax assets		88,100		82,256		110,039		92,466
Valuation allowance		(58,837)		(47,887)		(69,098)		(81,838)
Total deferred tax assets		29,263		34,369		40,941		10,628


Deferred tax liabilities:
Debt obligation basis difference						(4,582)		—
Deferred revenue		(15,085)		(19,952)		(12,135)		(2,351)
Unremitted foreign earnings		(11,910)		(2,347)
Intangible assets						(18,592)		—
Property, plant and equipment		(2,081)		(33)		(4,524)		(5,079)
Intangible assets		(8,176)		(12,894)
Foreign currency mark-to-market		—		(191)
Unremitted earnings						(977)		(823)
Other		(212)		(740)		(587)		(351)
Total deferred tax liabilities		(37,464)		(36,157)		(41,397)		(8,604)
Net deferred tax liability	$	(8,201)	$	(1,788)
Net deferred tax asset (liability)					$	(456)	$	2,024

The deferred tax assets and liabilities for fiscal ~~2017~~2019 and ~~2016~~2018 include amounts related to various acquisitions. The total change in deferred tax assets and liabilities in fiscal ~~2017~~2019 includes changes that are recorded to other comprehensive income (loss), retained earnings and ~~Goodwill.~~goodwill.

We calculate deferred tax assets and liabilities based on differences between financial reporting and tax bases of assets and liabilities and measure them using the enacted tax rates and laws that we expect will be in effect when the differences reverse.

At September 30, ~~2017,~~2019, we have federal and state income tax credit carryforwards ~~of $21.9 million and $20.5 million, respectively,~~(in thousands) which ~~will expire at various dates beginning in 2027. Such credit carryforwards (in thousands)~~begin to expire as follows:


U.S. foreign tax credits	$	14,535	2027
U.S. research and development tax credits		14,439	2035
State research and development tax credits		25,748	Do not expire

U.S. foreign tax credits

$
15,567

2027

U.S. research and development tax credits

6,303

2035-2037

State research and development tax credits

20,486

Do not expire

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We have federal, state and foreign capital and net operating losses (in thousands) which begin to expire as follows:


~~U.S. net operating loss carryforwards~~	$	—	—
~~State net operating loss carryforwards~~		~~42,885~~	~~2020-2037~~
~~Foreign net operating loss carryforwards~~		~~10,903~~	~~Do not expire~~


U.S. net operating loss carryforwards	$	127,013	2033
U.S. capital loss carryforwards		5,451	2023
State loss carryforwards		55,619	2021
State capital loss carryforwards		23,038	2023
Foreign net operating loss carryforwards		13,548	Do not expire

During 2015, we evaluated our net U.S. deferred income taxes, which included an assessment of the cumulative income or loss over the ~~prior-three year~~prior three-year period and future periods and concluded that a valuation allowance was required. After consideration of our recent history of U.S. losses, we continue to maintain a valuation allowance on net U.S. deferred tax assets as of September 30, ~~2017.~~2019.

~~Table of Contents~~

As of September 30, ~~2017,~~2019, a total valuation allowance of ~~$58.8~~$69.1 million has been established against U.S. deferred tax assets, certain foreign operating losses and other foreign assets. For fiscal ~~2017,~~2019, the valuation allowance ~~was increased~~decreased by ~~$11.0~~$12.7 million, of which ~~$12.7~~$10.0 million was recorded as a net tax ~~expense~~benefit in our Consolidated Statement of Operations, offset by amounts recorded through acquisition accounting and to other ~~comprehensive income (loss) related to retirement benefits.~~components of income.

The non-cash charge to increase or decrease a valuation allowance does not have any impact on our cash flows, nor does such an allowance preclude us from using loss carryforwards or other deferred tax assets in the future. Until we re-establish a pattern of continuing profitability, in accordance with the applicable accounting guidance, U.S. income tax expense or benefit related to the recognition of deferred tax assets in the Consolidated Statement of Operations for future periods will be offset by decreases or increases in the valuation allowance with no net effect on the Consolidated Statement of Operations. If sufficient positive evidence arises in the future, any existing valuation allowance could be reversed as appropriate, decreasing income tax expense in the period that such conclusion is reached.

~~We provide for U.S. income~~Prior to the Tax Act, we provided deferred taxes on all undistributed foreign earnings, as we did not consider these amounts permanently reinvested. Under the transition to a modified territorial tax system, all previously untaxed undistributed foreign earnings are subject to a transition tax charge at reduced rates and future repatriations of foreign ~~subsidiaries which are not considered indefinitely reinvested outside~~earnings will generally be exempt from U.S. tax. We will continue to provide applicable deferred taxes based on the ~~U.S. Deferred income~~tax liability or withholding taxes ~~net~~that would be due upon repatriation of the undistributed foreign ~~tax credits, are provided for foreign earnings available for distribution.~~earnings. As of September 30, ~~2017,~~2019, we have recorded a deferred tax liability of ~~$11.9~~$1.0 million related to future taxes on our unremitted foreign earnings.

Accounting for Uncertainty in Income Taxes

During fiscal ~~2017~~2019 and ~~2016,~~2018, the aggregate changes in our total gross amount of unrecognized tax benefits are summarized as follows:


Years ended September 30,	2017		2016
	(in thousands)


					September 30,
					2019		2018
					(in thousands)

Balance at beginning of year	$	16,932	$	12,619	$	9,942	$	13,248
Additions (reductions) for tax positions taken in prior years:		399		3,641
Additions (reductions) for tax positions taken in prior years						8,458		(80)
Recognition of benefits from expiration of statutes		(26)		(359)		(776)		(1,770)
Recognition of benefits from open years effectively settled		(5,359)		—
Additions for tax positions related to the current year		1,302		986		951		713
Additions for tax positions related to current year acquisitions		—		45
Reductions for tax positions related to acquisitions						—		(2,169)
Balance at end of year	$	13,248	$	16,932	$	18,575	$	9,942

At September 30, ~~2017~~2019 and ~~2016,~~2018, the amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was ~~$3.7~~$0.7 million and ~~$7.5~~$1.8 million, respectively. During fiscal year ~~2018,~~2020, it is reasonably possible that resolution of reviews by taxing authorities, both domestic and foreign, could be reached with respect to ~~approximately $2.9 million~~an immaterial amount of ~~the~~net unrecognized tax benefits depending on the timing of examinations or expiration of ~~statute~~statutes of limitations, either because our tax positions are sustained or because we agree to the disallowance and pay the related income tax. We

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recognize interest and/or penalties related to income tax matters in income tax expense. The amount of net interest and penalties recognized as a component of income tax expense during ~~2017, 2016~~fiscal 2019 and ~~2015 was~~2018 were not material. Interest and penalties accrued at September 30, 2017 and 2016 amounted to $0.9 million and $1.6 million, respectively, bringing the total net liability for uncertain tax issues to $12.0 million and $15.5 million, respectively, as of September 30, 2017 and 2016.

We are subject to ongoing audits from various taxing authorities in the jurisdictions in which we do business. As of September 30, ~~2017,~~2019, the fiscal years open under the statute of limitations in significant jurisdictions include ~~2013~~2016 through ~~2017~~2019 in the U.S. We believe we have adequately provided for uncertain tax issues we have not yet resolved with federal, state and foreign tax authorities. Although not more likely than not, the most adverse resolution of these issues could result in additional charges to earnings in future periods. Based upon a consideration of all relevant facts and circumstances, we do not believe the ultimate resolution of uncertain tax issues for all open tax periods will have a material adverse effect upon our financial condition or results of operations.

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Cash amounts paid for income taxes, net of refunds received, were $28.7 million, $15.7 million and $1.6 million ~~$14.2 million~~in 2019, 2018 and ~~$15.2 million in~~ 2017, ~~2016 and 2015,~~ respectively.

NOTE ~~11—~~14—DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

In order to manage our exposure to fluctuations in interest and foreign currency exchange rates we utilize derivative financial instruments such as forward starting swaps and foreign currency ~~exchange~~ forwards for periods typically up to ~~three~~five years. We do not use any derivative financial instruments for trading or other speculative purposes.

All derivatives are recorded at fair value, however, the classification of gains and losses resulting from changes in the fair values of derivatives are dependent on the intended use of the derivative and its resulting designation. If a derivative is designated as a fair value hedge, then a change in the fair value of the derivative is offset against the change in the fair value of the underlying hedged item and only the ineffective portion of the hedge, if any, is recognized in earnings. If a derivative is designated as a cash flow hedge, then the effective portion of a change in the fair value of the derivative is recognized as a component of accumulated other comprehensive income (loss) until the underlying hedged item is recognized in earnings, or the forecasted transaction is no longer probable of occurring. If a derivative does not qualify as a highly effective hedge, any change in fair value is immediately recognized in earnings. We formally document all hedging relationships for all derivative hedges and the underlying hedged items, as well as the risk management objectives and strategies for undertaking the hedge transactions. We classify the fair value of all derivative contracts as current or ~~non-current~~noncurrent assets or liabilities, depending on the realized and unrealized gain or loss position of the hedged contract at the balance sheet date, and the timing of future cash flows. The cash flows from derivatives treated as hedges are classified in the Consolidated Statements of Cash Flows in the same category as the item being hedged.

The following table shows the notional principal amounts of our outstanding derivative instruments as of September 30, ~~2017~~2019 and ~~2016~~2018 (in thousands):


	Notional Principal
	September 30, 2017		September 30, 2016

					Notional Principal
					September 30, 2019		September 30, 2018
Instruments designated as accounting hedges:
Foreign currency forwards	$	125,486	$	158,664	$	143,164	$	169,406

Interest rate swaps						95,000		—

Instruments not designated as accounting hedges:
Foreign currency forwards	$	35,117	$	115,070	$	24,220	$	27,909

Included in the amounts not designated as accounting hedges at September 30, ~~2017~~2019 and ~~2016~~2018 were foreign currency forwards with notional principal amounts of ~~$18.5~~$14.0 million and ~~$78.4~~$14.7 million, respectively, that have been designed to manage exposure to foreign currency exchange risks, and for which the gains or losses of the changes in fair value of the forwards has approximately offset an equal and opposite amount of gains or losses related to the foreign currency exposure. Unrealized gains of ~~$0.1~~$0.0 million and ~~unrealized gains of $8.2~~$0.2 million were recognized in other income (expense), net for the fiscal years ended September 30, ~~2017~~2019 and ~~2016,~~2018, respectively, related to foreign currency forward contracts not designated as accounting hedges.

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During fiscal 2019, we entered into agreements related to the construction and leasing of 2 buildings on our existing corporate campus in San Diego. This will allow us to consolidate virtually all of our San Diego operations in a single location and accommodate the expected growth of our business. Under these agreements a financial institution will own the buildings, and we will lease the property for a term of five years upon their completion. In conjunction with these agreements, we entered into pay-variable/receive-fixed interest rate swaps with a group of financial institutions to mitigate variable interest rate risk associated with these future lease obligations. The interest rate swaps contain forward starting notional principal amounts which align with our expected lease payments. These interest rate swaps were designated as effective cash flow hedges at September 30, 2019, and as such, unrealized gains/losses are included in accumulated other comprehensive income (loss). Unrealized gains as a result of changes in the fair value of the interest rate swaps were $0.2 million for the year ended September 30, 2019.

The notional principal amounts for outstanding derivative instruments provide one measure of the transaction volume outstanding and do not represent the amount of our exposure to credit or market loss. Credit risk represents our gross exposure to potential accounting loss on derivative instruments that are outstanding or unsettled if all counterparties failed to perform according to the terms of the contract, based on then-current interest or currency exchange rates at each respective date. Our exposure to credit loss and market risk will vary over time as a function of interest and currency exchange rates. The amount of credit risk from derivative instruments and hedging activities was not material for the fiscal years ended September 30, ~~2017~~2019 and ~~2016.~~2018. Although the table above reflects the notional principal amounts of our foreign exchange instruments, it does not reflect the gains or losses associated with the exposures and transactions that the foreign exchange instruments are intended to hedge. The amounts ultimately realized upon settlement of these financial instruments, together with the gains and losses on the underlying exposures, will depend on actual market conditions during the remaining life of the instruments.

We generally enter into master netting arrangements, which reduce credit risk by permitting net settlement of transactions with the same counterparty. We present our derivative assets and derivative liabilities at their gross fair

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values. We did not have any derivative instruments with credit-risk related contingent features that would require us to post collateral as of September 30, ~~2017~~2019 or ~~2016.~~2018.

The table below presents the fair value of our derivative financial instruments that qualify for hedge accounting as well as their classification onin the ~~consolidated balance sheets as of September 30, 2017 and 2016~~Consolidated Balance Sheets (in thousands):


		Fair Value
	Balance Sheet Location	September 30, 2017		September 30, 2016

							Fair Value
						Balance Sheet Location	September 30, 2019		September 30, 2018
Asset derivatives:
Foreign currency forwards	Other current assets	$	2,591	$	14,769	Other current assets	$	2,635	$	1,803
Foreign currency forwards	Other noncurrent assets		1,128		1,201	Other assets		619		314
		$	3,719	$	15,970
Forward starting swap						Other assets		240		—
							$	3,494	$	2,117
Liability derivatives:
Foreign currency forwards	Other current liabilities	$	3,456	$	13,752	Other current liabilities	$	529	$	1,657
Foreign currency forwards	Other noncurrent liabilities		1,128		1,333	Other noncurrent liabilities		228		75
Total		$	4,584	$	15,085		$	757	$	1,732

The tables below present gains and losses recognized in other comprehensive income (loss) ~~for the years ended September 30, 2017 and 2016~~ related to derivative financial instruments designated as cash flow hedges, as well as the amount of gains and losses reclassified into earnings ~~during those periods~~ (in thousands):

September 30, 2019

September 30, 2018

Gains (losses)

reclassified into

recognized in

earnings -

Gains (losses)

earnings -

Derivative Type

OCI

Effective Portion

recognized in OCI

Effective Portion

Foreign currency forwards

4,344

1,945

(45)

(1,239)

Years ended September 30,

2017

2016




Gains (losses)



Gains (losses)

Gains (losses)

reclassified into

reclassified into

recognized in

earnings -

Gains (losses)

earnings -
Derivative Type

OCI

Effective Portion

recognized in OCI

Effective Portion
Foreign currency forwards

$
(2,200)

$
551

$
(806)

$
1,522

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~~Unrealized~~The amount of unrealized gains ~~of $0.1 million~~ and ~~unrealized~~ losses ~~of $0.1 million~~ from derivative instruments and hedging activities classified as not highly effective ~~were recognized in other income (expense), net~~did not have a material impact on the results of operations for the years ended September 30, ~~2017~~2019 or ~~2016, respectively.~~2018. The amount of estimated unrealized net ~~losses~~gains from cash flow hedges which are expected to be reclassified to earnings in the next twelve months is ~~$0.6~~$1.5 million, net of income taxes.

NOTE ~~12—~~15—PENSION, PROFIT SHARING AND OTHER BENEFIT PLANS

Deferred Compensation Plan

We have a non-qualified deferred compensation plan offered to a select group of highly compensated employees. The plan provides participants with the opportunity to defer a portion of their compensation in a given plan year. The liabilities associated with the non-qualified deferred compensation plan are included in other ~~long-term~~noncurrent liabilities in our Consolidated Balance Sheets and totaled ~~$11.4~~$11.0 million and ~~$10.6~~$11.5 million at September 30, ~~2017~~2019 and ~~2016,~~2018, respectively.

In the ~~first quarter of fiscal 2015,~~past we ~~began making~~have made contributions to a rabbi trust to provide a source of funds for satisfying a portion of these deferred compensation liabilities. The total carrying value of the assets set aside to fund deferred compensation liabilities as of September 30, ~~2017~~2019 and ~~2016~~2018 were ~~$5.3~~$6.6 million and ~~$3.6~~$6.4 million, respectively, which were comprised entirely of life insurance contracts. The carrying value of the life insurance contracts is based on the cash surrender value of the policies. Changes in the carrying value of the deferred compensation liability, and changes in the carrying value of the assets held in the rabbi trust are reflected in our Consolidated Statements of Operations.

Defined Contribution Plans

We have profit sharing and other defined contribution retirement plans that provide benefits for most U.S. employees. Certain of these plans require us to match a portion of eligible employee contributions up to specified limits. These plans also allow for additional company contributions at the discretion of the Board of Directors. We also have a defined contribution plan for European employees that were formerly eligible for the European defined benefit plan described

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below. Under this plan, we match a portion of the eligible employee contributions up to limits specified in the plan. Company contributions to defined contribution plans aggregated ~~$14.3~~$19.4 million, ~~$15.6~~$16.8 million and ~~$14.2~~$16.8 million in ~~2017, 2016~~2019, 2018 and ~~2015,~~2017, respectively.

Employee Stock Purchase Plan

We sponsor a noncompensatory Employee Stock Purchase Plan, ~~(“ESPP”),~~ which allows eligible employees to purchase common stock of the Company at a discount rate of 5% of the market price per share on the last trading day of the offering period. Annual employee contributions are limited to $25,000, are voluntary, and made through a bi-weekly payroll deduction.

Defined Benefit Pension Plans

Certain employees in the U.S. are covered by a noncontributory defined benefit pension plan for which benefits were frozen as of December 31, 2006 (curtailment). The effect of the U.S. plan curtailment is that no new benefits have been accrued after that date. Approximately one-half of our European employees are covered by a contributory defined benefit pension plan for which benefits were frozen as of September 30, 2010. Although the effect of the European plan curtailment is that no new benefits will accrue after September 30, 2010, the plan is a final pay plan, which means that benefits will be adjusted for increases in the salaries of participants until their retirement or departure from the company. The European plan was amended in 2014 to reduce the amount of participant compensation used in computing the pension liability for certain participants. U.S. and European employees hired subsequent to the dates of the curtailment of the respective plans are not eligible for participation in the defined benefit plans.

During fiscal year 2016, we partially settled our remaining obligations associated with the U.S. plan. The plan offered certain retired, vested participants the opportunity to voluntarily elect to receive their benefits as an immediate lump sum distribution. The lump sum distribution was paid out from plan assets in September 2016 and resulted in a settlement loss of $2.7 million, which is recorded in other non-operating expense for the year ended September 30, 2016.

Our funding policy for the defined benefit pension plans provides that contributions will be at least equal to the minimum amounts mandated by statutory requirements. Based on our known requirements for the U.S. and ~~U.K.~~ European

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plans, as of September 30, ~~2017,~~2019, we expect to make contributions of approximately ~~$5.1~~$6.1 million in ~~2018.~~2020. September 30 is used as the measurement date for these plans.

Changes in actuarial assumptions of our defined benefit pension plans are recorded in accumulated other comprehensive income (loss). The unrecognized amounts recorded in accumulated other comprehensive income (loss) will be subsequently recognized as net periodic pension cost, consistent with our historical accounting policy for amortizing those amounts. We will recognize actuarial gains and losses that arise in future periods and are not recognized as net periodic pension cost in those periods as increases or decreases in other comprehensive income (loss), net of tax, in the period they arise. We adjust actuarial gains and losses recognized in other comprehensive income (loss) as they are subsequently recognized as a component of net periodic pension cost. The unrecognized actuarial gain or loss included in accumulated other comprehensive income (loss) at September 30, ~~2017~~2019 and expected to be recognized in net pension cost during fiscal ~~2018~~2020 is a loss of ~~$2.7~~$4.0 million ($~~2.1~~3.2 million net of income tax). The unrecognized actuarial ~~gain was $10.1 million~~loss incurred in fiscal year ~~2017,~~2019 was $32.1 million, which was primarily driven by ~~an increase~~a decrease in discount rates used in the calculation of the net benefit ~~obligation, changes in mortality assumptions, and higher investment returns on plan assets. No~~obligation. NaN plan assets are expected to be returned to us in ~~2018.~~fiscal 2020.

The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the defined benefit pension plans were as follows (in thousands):


September 30,	2017		2016


					September 30,
					2019		2018

Projected benefit obligation	$	235,097	$	241,117	$	246,697	$	222,332
Accumulated benefit obligation		235,097		241,117		246,697		222,332
Fair value of plan assets		209,722		194,253		221,311		214,530

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The following table sets forth changes in the projected benefit obligation and fair value of plan assets and the funded status for these defined benefit plans (in thousands):


September 30,	2017		2016

					September 30,
					2019		2018
Change in benefit obligations:
Net benefit obligation at the beginning of the year	$	241,117	$	227,527	$	222,332	$	235,097
Service cost		617		595		590		606
Interest cost		7,091		8,972		7,617		7,529
Actuarial (gain) loss		(10,082)		41,583		32,067		(9,449)
Gross benefits paid		(7,549)		(8,365)		(8,141)		(8,034)
Settlements		—		(10,424)
Foreign currency exchange rate changes		3,903		(18,771)		(7,768)		(3,417)
Net benefit obligation at the end of the year		235,097		241,117		246,697		222,332


Change in plan assets:
Fair value of plan assets at the beginning of the year		194,253		201,502		214,530		209,722
Actual return on plan assets		14,915		23,775		17,794		11,998
Employer contributions		5,354		4,271		4,842		5,117
Gross benefits paid		(7,549)		(8,365)		(8,141)		(8,034)
Settlements		—		(10,424)
PBGC Premium paid		(348)		(362)		(177)		(286)
Administrative expenses		(547)		(925)		(541)		(698)
Foreign currency exchange rate changes		3,644		(15,219)		(6,996)		(3,289)
Fair value of plan assets at the end of the year		209,722		194,253		221,311		214,530


Unfunded status of the plans		(25,375)		(46,864)		(25,386)		(7,802)
Unrecognized net actuarial loss		58,572		72,909		70,095		48,081
Net amount recognized	$	33,197	$	26,045	$	44,709	$	40,279


Amounts recognized in Accumulated OCI
Liability adjustment to OCI	$	(58,572)	$	(72,909)	$	(70,095)	$	(48,081)
Deferred tax asset		15,033		19,236		11,667		7,365
Valuation allowance on deferred tax asset		(2,107)		(5,153)		(1,172)		610
Accumulated other comprehensive loss	$	(45,646)	$	(58,826)	$	(59,600)	$	(40,106)

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


	September 30,
	2017		2016		2015

							Years Ended September 30,
							2019		2018		2017
Service cost	$	617	$	595	$	670	$	590	$	606	$	617
Interest cost		7,091		8,972		9,073		7,617		7,529		7,091
Expected return on plan assets		(12,928)		(13,182)		(13,835)		(11,990)		(14,120)		(12,928)
Amortization of actuarial loss		3,700		1,869		705		2,098		2,777		3,700
Settlement loss		—		2,671		—
Administrative expenses		474		177		163		348		438		474
Net pension cost (benefit)	$	(1,046)	$	1,102	$	(3,224)
Net pension benefit							$	(1,337)	$	(2,770)	$	(1,046)

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Years ended September 30,

2017

2016

2015

Weighted-average assumptions used to determine benefit obligation at September 30:

Discount rate

3.3%

3.0%

4.1%

Rate of compensation increase

3.2%

3.1%

3.1%

Weighted-average assumptions used to determine net periodic benefit cost for the years ended September 30:

Discount rate

3.0%

4.1%

4.2%

Expected return on plan assets

6.8%

6.8%

6.9%

Rate of compensation increase

3.1%

3.1%

3.2%


	Years Ended September 30,
	2019	2018	2017

Weighted-average assumptions used to determine benefit obligation at September 30:
Discount rate	2.5%	3.6%	3.3%
Rate of compensation increase	3.1%	3.3%	3.2%
Weighted-average assumptions used to determine net periodic benefit cost for the years ended September 30:
Discount rate	3.6%	3.3%	3.0%
Expected return on plan assets	5.7%	6.8%	6.8%
Rate of compensation increase	3.3%	3.2%	3.1%

The long-term rate of return assumption represents the expected average rate of earnings on the funds invested or to be invested to provide for the benefits included in the benefit obligations. That assumption is determined based on a number of factors, including historical market index returns, the anticipated long-term asset allocation of the plans, historical plan return data, plan expenses, and the potential to outperform market index returns.

We have the responsibility to formulate the investment policies and strategies for the plans’ assets. Our overall policies and strategies include: maintain the highest possible return commensurate with the level of assumed risk, and preserve benefit security for the plans’ participants.

We do not direct the day-to-day operations and selection process of individual securities and investments and, accordingly, we have retained the professional services of investment management organizations to fulfill those tasks. The investment management organizations have investment discretion over the assets placed under their management. We provide each investment manager with specific investment guidelines by asset class.

The target ranges for each major category of the plans’ assets at September 30, ~~2017~~2019 are as follows:


		Allocation
Asset Category		Range
Equity securities		20% to 55%
Debt securities		25% to 75%
Cash		0% to 55%
Real estate		0% to 10%

Our defined benefit pension plans invest in cash and cash equivalents, equity securities, fixed income securities, pooled separate accounts and common collective trusts. Our plans also invest in diversified growth funds that hold underlying investments in equities, fixed-income securities, commodities, and real estate. The following table presents the fair value of the assets of our defined benefit pension plans by asset category and their level within the fair value hierarchy (in thousands). See Note 35 for a description of each level within the fair value hierarchy.

All assets measured at the net asset value (NAV) practical expedient in the table below are invested in pooled separate accounts or common collective trusts which do not have publicly quoted prices. The fair value of the pooled separate accounts and common collective trusts are determined based on the ~~net asset value~~NAV of the underlying investments. The fair value of the underlying investments held by the pooled separate accounts and common collective trusts, other than real estate investments, is generally based upon quoted prices in active markets. The fair value of the underlying investments comprised of real estate properties is determined through an appraisal process which uses valuation methodologies including comparisons to similar real estate and discounting of income streams.

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	September 30, 2019								September 30, 2018
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Plan assets held at fair value:
Cash equivalents	$	2,908	$	—	$	—	$	2,908	$	19,314	$	—	$	—	$	19,314

*Plan assets held at net asset value practical expedient:**
Equity Funds								100,302								107,424
Fixed Income Funds								105,651								73,533
Diversified Growth Funds								8,886								14,259
Real Estate Funds								3,564								—
Total assets held at net asset value practical expedient:							$	218,403							$	195,216

Total Plan Assets							$	221,311							$	214,530

September 30, 2017

September 30, 2016


Level 1

Level 2

Level 3

Total

Level 1

Level 2

Level 3

Total

Plan assets held at fair value:

Cash equivalents

$
2,665

$
—

$
—

$
2,665

$
3,071

$
—

$
—

$
3,071

Plan assets held at net asset value practical expedient*:

Equity Funds

101,433

83,877

Fixed Income Funds

84,188

72,219

Diversifies Growth Funds

16,646

27,525

Real Estate Funds

4,790

7,561

Total assets held at net asset value practical expedient:

$
207,057

$
191,182

Total Plan Assets

$
209,722

$
194,253

* Plan assets measured at fair value using NAV (or its equivalent) as a practical expedient have not been categorized in the fair value hierarchy.

The pension plans held no direct positions in Cubic Corporation common stock as of September 30, ~~2017~~2019 and ~~2016.~~2018.

We expect to pay the following pension benefit payments ~~which reflect expected future service, as appropriate,~~ (in thousands):


2018	$	8,330
2019		8,753

2020		9,148	$	9,067
2021		9,358		9,140
2022		9,543		9,306
2022-2026		50,890

2023				9,324
2024				9,693
2024-2028				52,750

NOTE ~~13—~~16—STOCKHOLDERS’ EQUITY

Long-Term Equity Incentive Plan

~~In 2013, the Executive Compensation Committee of the Board of Directors (Compensation Committee) approved a~~Under our long-term equity incentive ~~award program. Through September 30, 2017, the Compensation Committee has granted 924,605~~program we have provided participants with three general categories of grant awards: RSUs with time-based vesting, ~~and 993,298~~ RSUs with performance-based vesting, ~~under this program.~~and RSUs with performance and market-based vesting.

Each RSU with time-based vesting or performance-based vesting represents a contingent right to receive ~~one~~1 share of our common stock. Each RSU with performance and market-based vesting represents a contingent right to receive up to 1.25 shares of our common stock. Dividend equivalent rights accrue with respect to the RSUs ~~when and~~ as dividends are paid on our common stock and vest proportionately with the RSUs to which they relate. Vested shares are delivered to the recipient following each vesting date.

The RSUs granted with time-based vesting generally vest in ~~four~~4 equal installments on each of the four October 1 dates following the grant date, subject to the recipient’s continued service through such vesting date.

The performance-based RSUs granted to participants vest over three-year performance periods based on Cubic’s achievement of performance goals established by the Compensation Committee over the performance periods, subject to the recipient’s continued service through the end of the respective performance periods. For the performance-based RSUs granted prior to ~~date,~~September 30, 2018, the vesting ~~will be~~is contingent upon Cubic meeting ~~one of three types of~~ vesting criteria over the performance ~~period. These three categories of vesting criteria consist of~~period, including revenue growth targets, earnings growth targets,

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and return on equity targets. The level at

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which ~~Cubic’s~~Cubic performs against scalable targets over the performance periods will determine the percentage of the RSUs that will ultimately vest.

~~Through September 30, 2017,~~In fiscal 2019, the Compensation Committee granted RSUs which contained both performance and market-based vesting criteria. The performance and market-based RSUs granted to participants vest over three-year performance periods based on Cubic’s achievement of revenue growth targets and earnings growth targets subject to the recipient’s continued service through the end of the respective performance periods. The level at which Cubic ~~has granted 1,917,903~~performs against scalable targets over the performance periods impact the percentage of the RSUs that will ultimately vest. For these RSUs, Cubic’s relative total stock return (TSR) as compared to the Russell 2000 Index (Index) over the performance period will result in a multiplier for the number of ~~which 451,608~~RSUs that will vest. If the TSR performance exceeds the performance of the Index based on a scale established by the Compensation Committee, the multiplier will result in up to an additional 25% of RSUs vesting at the end of the performance period. If the TSR performance is below the performance of the Index based on a scale established by the Compensation Committee, the multiplier would result in a reduction of up to 25% of these RSUs vesting at the end of the performance period.

During fiscal 2019, the Compensation Committee amended the long-term equity incentive program to provide accelerated vesting for retirement age participants. Under this amendment, participants who are 60 years of age, and whose age plus years of service equals or exceeds 70 are eligible for accelerated vesting of their RSUs. Participants who have ~~vested.~~ reached the retirement age criteria must generally provide a one-year notice of retirement to the Company. For participants who have reached the retirement age criteria, expense is recognized over the adjusted service period.

The grant date fair value of each RSU with time-based vesting or performance-based vesting is the fair market value of ~~one~~1 share of our common stock at the grant date.

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 our common stock were simulated through the end of the performance period. The correlation matrix between our common stock and the index as well as our stock and the Index’s return volatilities were developed based upon an analysis of historical data. The following table includes the assumptions used for the valuation of the RSUs with performance and market-based vesting that were granted during fiscal 2019:




	RSUs granted during the year ended September 30, 2019

Date of grant	November 21, 2018	April 1, 2019
Grant date fair value	$67.40	$59.29
Performance period begins	November 21, 2018	April 1, 2019
Performance period ends	September 30, 2021	September 30, 2021
Risk-free interest rate	2.8%	2.8%
Expected volatility	34%	34%

At September 30, ~~2017,~~2019, 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 ~~417,882.~~366,913 RSUs with time-based vesting, 112,942 RSUs with performance-based vesting, and 174,105 RSUs with performance and market-based vesting.

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The following table summarizes our RSU activity:


	Unvested Restricted Stock Units
		Weighted-Average
	Number of Shares	Grant-Date Fair Value
Unvested at October 1, 2015	759,902	$	47.24

				Unvested Restricted Stock Units with Service-Based Vesting
					Weighted Average
				Number of Shares	Grant-Date Fair Value
Unvested at September 30, 2017				366,331	$	45.99
Granted	471,627		43.72	165,271		61.06
Vested	(130,678)		46.94	(147,832)		46.86
Forfeited	(211,722)		44.86	(17,310)		48.62
Unvested at September 30, 2016	889,129		45.98
Unvested at September 30, 2018				366,460	$	52.31
Granted	395,913		46.20	239,874		63.25
Vested	(158,243)		46.15	(145,409)		50.76
Forfeited	(81,612)		48.32	(38,831)		54.67
Unvested at September 30, 2017	1,045,187	$	45.86
Unvested at September 30, 2019				422,094	$	58.84


	Unvested Restricted Stock Units with Performance-Based Vesting
		Weighted Average
	Number of Shares	Grant-Date Fair Value
Unvested at September 30, 2017	678,856	$	46.59
Granted	179,162		61.40
Vested	—		—
Forfeited	(222,390)		48.46
Unvested at September 30, 2018	635,628	$	50.11
Granted	—		—
Vested	—		—
Forfeited	(320,366)		44.63
Unvested at September 30, 2019	315,262	$	55.67


	Unvested Restricted Stock Units with Performance and Market-Based Vesting
		Weighted Average
	Number of Shares	Grant-Date Fair Value
Unvested at September 30, 2017	—	$	—
Granted	—		—
Vested	—		—
Forfeited	—		—
Unvested at September 30, 2018	—	$	—
Granted	237,616		66.79
Vested	—		—
Forfeited	(10,214)		67.40
Unvested at September 30, 2019	227,402	$	66.77

As of September 30, ~~2017,~~2019, approximately ~~698,129~~1,637,274 shares remained available for future grants under our long-term equity incentive plan. On October 1, ~~2017, 123,237~~2019, 148,995 RSUs vested.

122

~~NOTE 14—STOCK-BASED COMPENSATION~~Table of Contents

We recorded non-cash compensation expense related to stock-based awards ~~of $5.3 million for the year ended September 30, 2017, which was comprised of the following~~as follows (in thousands):




			Years Ended September 30,
			2019		2018		2017
Cost of sales	$	500	$	1,766	$	1,096	$	338
Selling, general and administrative		4,769		13,722		6,419		4,674
	$	5,269
			$	15,488	$	7,515	$	5,012

As of September 30, ~~2017,~~2019, there was ~~$32.2~~$39.7 million of unrecognized compensation ~~cost~~expense related to unvested RSUs. Based upon the expected forfeitures and the expected vesting of performance-based RSUs, the aggregate fair value of RSUs expected to ultimately vest is ~~$19.1 million. This amount~~$40.0 million, which is expected to be recognized over a weighted-average period of ~~1.8 years.~~1.7 years and includes the RSUs that vested on October 1, 2019.

We ~~are required to~~ estimate forfeitures at the time of grant and revise those estimates in subsequent periods on a cumulative basis in the period the estimated forfeiture rate changes for all stock-based awards when significant events occur. We consider our historical experience with employee turnover as the basis to arrive at our estimated forfeiture rate. The forfeiture rate was estimated to be 12.5% per year as of September 30, ~~2017.~~2019. To the extent the actual forfeiture rate is different from what we have estimated, ~~stock-based~~ compensation expense related to these awards will be different from our expectations.

NOTE ~~15—~~17—LEGAL MATTERS

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~~defending the lawsuit. We are also undertaking defense of our customer in~~investigation into this matter, ~~pursuant to~~we believe this matter will not have a materially adverse effect on our ~~contractual obligations to that customer. The court made several rulings in our favor concerning the validity~~financial position, results of ~~the plaintiff’s patents at issue. The plaintiff appealed those rulings and the Federal Circuit Court~~operations, or cash flows. No liability for this claim has been recorded as of Appeals upheld the District Court’s rulings. While these are favorable ruling for us, the case has yet to be dismissed as the plaintiff evaluates its legal options. Accordingly, we cannot estimate the probability of loss or any range of estimate of possible loss at this time.September 30, 2019.

NOTE ~~16—~~18—BUSINESS SEGMENT INFORMATION

We define our operating segments and reportable segments based on the way our chief executive officer, who we have ~~three primary business segments: Cubic Transportation Systems (CTS), Cubic Global Defense Services (CGD Services)~~concluded is our chief operating decision maker, manages our operations for purposes of allocating resources and ~~Cubic Global Defense Systems (CGD Systems).~~assessing performance and we continually reassess our operating segment and reportable segment designation based upon these criteria. Through September 30, 2017, our company was aligned in our CGD and CTS designs, produces, installs and services electronic revenue collection systems for mass transit projects, including railways and buses. CGD Services provides training, operations, intelligence, maintenance, technical and other services to the U.S. government and allied nations. CGD Systems performs work under U.S. and foreign government contracts relating to electronic defense systems and equipment. CGD Systems products include customized military range instrumentation, laser based training systems, and virtual simulation systems. operating segments, which were also our reportable segments. In 2016, we formalized the structure of our ~~Cubic Mission Solutions (CMS)~~CMS business unit within our CGD ~~Systems~~ operating segment. CMS combines and integrates our ~~command, control, communications, computers, intelligence, surveillance and reconnaissance (C4ISR)~~C4ISR and secure communications operations. Following the formalization of the structure of our CMS business, our chief executive officer began receiving reports of our business activities in multiple different formats and began to use the results of the CMS business activities for certain aspects of resource allocation decisions and performance assessments. However, based upon ourThrough September 30, 2017, ~~assessment of our~~we concluded that CMS was not a separate operating ~~segments and reportable segments we have concluded~~segment based upon factors ~~such as the nature of the business activities and customers, and~~including the nature of information presented to our chief executive officer and Board of Directors ~~that CMS is not an operating segment.~~and the consequential level at which certain resource allocations and performance assessments were made. In the first quarter of fiscal 2018, we began providing additional ~~aspects~~financial information to our chief executive officer and Board of Directors at the CMS level, which allowed greater resource allocation decisions and performance ~~assessment are expected~~assessments to be made at ~~the CMS level and~~that level. As such, we ~~anticipate~~concluded that CMS ~~will become an~~became a separate operating segment inbeginning on October 1, 2017. Applicable prior period amounts have been adjusted retrospectively to reflect the ~~first quarter of fiscal 2018.~~reportable segment change.

We evaluate performance and allocate resources based on total segment operating ~~profit~~income or loss. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. Intersegment sales and transfers are immaterial and are eliminated in consolidation.

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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.

~~108~~

~~Table of Contents~~

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


	Years Ended September 30,
	2019		2018		2017
Sales:
Cubic Transportation Systems	$	849.8	$	670.7	$	578.6
Cubic Mission Solutions		328.8		207.0		168.9
Cubic Global Defense		317.9		325.2		360.2
Total sales	$	1,496.5	$	1,202.9	$	1,107.7

Operating income (loss):
Cubic Transportation Systems	$	77.2	$	60.4	$	39.8
Cubic Mission Solutions		7.8		(0.1)		(9.3)
Cubic Global Defense		23.0		16.6		28.1
Unallocated corporate expenses		(21.8)		(52.5)		(56.0)
Total operating income	$	86.2	$	24.4	$	2.6

Assets:
Cubic Transportation Systems	$	825.8	$	390.2	$	335.1
Cubic Mission Solutions		437.9		352.9		390.5
Cubic Global Defense		394.2		360.1		280.1
Corporate		189.3		201.7		156.4
Discontinued Operations		—		—		174.2
Total assets	$	1,847.2	$	1,304.9	$	1,336.3

Depreciation and amortization:
Cubic Transportation Systems	$	30.7	$	12.0	$	8.8
Cubic Mission Solutions		23.3		22.4		23.8
Cubic Global Defense		6.8		8.5		10.4
Corporate		3.9		3.7		5.0
Total depreciation and amortization	$	64.7	$	46.6	$	48.0

Capital expenditures:
Cubic Transportation Systems	$	6.6	$	3.2	$	6.9
Cubic Mission Solutions		11.1		2.1		1.7
Cubic Global Defense		4.5		9.4		5.9
Corporate		26.9		17.0		22.4
Total expenditures for long-lived assets	$	49.1	$	31.7	$	36.9

Year Ended

September 30,

2017

2016

2015
Sales:

Cubic Transportation Systems

$
578.6

$
586.4

$
566.8
Cubic Global Defense Systems

529.1

484.2

462.1
Cubic Global Defense Services

378.2

391.1

402.1
Total sales

$
1,485.9

$
1,461.7

$
1,431.0

Operating income (loss):

Cubic Transportation Systems

$
39.8

$
57.5

$
75.9
Cubic Global Defense Systems

18.8

(17.1)

18.4
Cubic Global Defense Services

6.7

11.2

6.6
Unallocated corporate expenses

(47.8)

(44.4)

(25.5)
Total operating income

$
17.5

$
7.2

$
75.4

Assets:

Cubic Transportation Systems

$
335.1

$
338.2

$
410.0
Cubic Global Defense Systems

670.6

616.2

341.2
Cubic Global Defense Services

179.4

191.2

200.7
Corporate

151.2

359.1

348.4
Total assets

$
1,336.3

$
1,504.7

$
1,300.3

Depreciation and amortization:

Cubic Transportation Systems

$
8.8

$
8.2

$
10.8
Cubic Global Defense Systems

32.9

28.7

17.1
Cubic Global Defense Services

3.1

5.2

8.5
Corporate

6.3

3.4

1.3
Total depreciation and amortization

$
51.1

$
45.5

$
37.7

Capital expenditures:

Cubic Transportation Systems

$
6.9

$
2.2

$
2.0
Cubic Global Defense Systems

7.6

8.9

0.6
Corporate

22.4

21.0

19.6
Total expenditures for long-lived assets

$
36.9

$
32.1

$
22.2


Years ended September 30,	2019		2018		2017
Long-lived assets, net:
United States	$	128.4	$	106.7	$	100.6
United Kingdom		5.9		5.7		11.7
Other foreign countries		10.7		12.0		7.3
Total long-lived assets, net	$	145.0	$	124.4	$	119.6

Years ended September 30,

2017

2016

2015

Geographic Information:

Sales (a):

United States

$
867.4

$
827.0

$
765.0

United Kingdom

219.4

243.0

282.4

Canada

31.5

44.6

17.6

Australia

175.6

154.0

164.6

Middle East

64.8

71.0

67.7

Far East

66.9

57.4

55.3

Other

60.3

64.7

78.4

Total sales

$
1,485.9

$
1,461.7

$
1,431.0

~~(a)~~

~~Sales are attributed to countries or regions based on the location of customers.~~

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Years ended September 30,

2017

2016

2015

Long-lived assets, net:










United States

$
101.0

$
86.3

$
65.8

United Kingdom

11.7

5.3

8.6

Other foreign countries

7.3

9.4

4.3

Total long-lived assets, net

$
120.0

$
101.0

$
78.7

CGD ~~Services~~ and ~~CGD Systems~~CMS segment sales include ~~$705.5~~$468.8 million, ~~$657.9~~$365.8 million and ~~$670.0~~$327.8 million in ~~2017, 2016~~2019, 2018 and ~~2015,~~2017, respectively, of sales to U.S. government agencies. CTS segment sales include $158.5 million and $147.3 million ~~$156.3 million~~in 2018 and ~~$183.2 million in~~ 2017, ~~2016 and 2015,~~ respectively, of sales under various contracts with our customer, Transport for London. No other customer accounts for 10% or more of our revenues for any periods presented.

~~Changes~~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 affect the nature, amount, timing, and uncertainty of our revenue and cash flows.

Sales by Geographic Region (in millions):


	Years Ended September 30,
	2019		2018		2017

United States	$	956.6	$	627.8	$	522.8
United Kingdom		218.2		240.7		219.4
Australia		163.5		166.7		175.6
Far East/Middle East		74.0		86.4		112.7
Other		84.2		81.3		77.2
Total sales	$	1,496.5	$	1,202.9	$	1,107.7

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):


	Years Ended September 30,
	2019		2018		2017

U.S. Federal Government and State and Local Municipalities	$	938.8	$	639.5	$	522.6
Other		557.7		563.4		585.1
Total sales	$	1,496.5	$	1,202.9	$	1,107.7

Sales by Contract Type: Substantially all of our contracts are fixed-price type contracts. Sales included in ~~estimates~~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. On a cost-plus type contract, we are paid our allowable incurred costs plus a profit which can be fixed or variable depending on ~~contracts for~~the contract’s fee arrangement up to predetermined funding levels determined 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):


	Years Ended September 30,
	2019		2018		2017

Fixed Price	$	1,452.4	$	1,146.2	$	1,036.9
Other		44.1		56.7		70.8
Total sales	$	1,496.5	$	1,202.9	$	1,107.7

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Sales by Deliverable Type: The table below presents total net sales disaggregated by the type of deliverable, which is determined by us at the performance obligation level (in millions):


	Years Ended September 30,
	2019		2018		2017

Product	$	1,011.1	$	704.9	$	681.6
Service		485.4		498.0		426.1
Total sales	$	1,496.5	$	1,202.9	$	1,107.7

Revenue Recognition Method: The table below presents total net sales disaggregated based on the revenue isrecognition method applied (in millions):


	September 30,
	2019

Point in Time	$	347.4
Over Time		1,149.1
Total sales	$	1,496.5

NOTE 19—RESTRUCTURING

In 2019, we initiated projects to restructure and modify our supply chain strategy, functional responsibilities, methods, capabilities, processes and rationalize suppliers with the goal of reducing ongoing costs and increasing the efficiencies of our worldwide procurement organization. The majority of the costs associated with these restructuring activities are related to consultants that we have engaged in connection with these efforts, and such costs have been recognized ~~using the cost-to-cost percentage-of-completion method decreased operating income~~ by ~~approximately $0.1 million, $2.8~~our corporate entity. The total costs of this restructuring project are expected to exceed amounts incurred to date by $0.9 million and ~~$14.5 million~~these efforts are expected to be completed early in ~~2017, 2016~~fiscal 2020. Also, in fiscal 2019 our CTS and 2015, respectively. These adjustments decreased net income by approximately $0.3 million ($0.01 per share), $1.6 million ($0.06 per share) and $8.0 million ($0.30 per share) in 2017, 2016 and 2015, respectively.

~~Certain~~CGD segments incurred restructuring charges, consisting primarily of our transportation systems service contracts contain service level or system usage incentives, for which we recognize revenues when the incentive award is fixed or determinable. These contract incentives are generally based upon monthly service levels or monthly performance and become fixed or determinable on a monthly basis. However, one of our legacy transportation systems service contracts that terminated in late fiscal 2015 contained annual system usage incentive which were based upon system usage compared to annual baseline amounts. For this contract the annual system usage incentives were not considered fixed or determinable until the end of the contract year for which the incentives are measured, which fell within the second quarter of our fiscal year. During the second quarter of fiscal year ended September 30, 2015, we recognized sales of $9.3 millionemployee severance costs related to ~~annual system usage incentives on this transportation systems contract. In August 2015 we completed this contract and recognized an additional $3.1 million related~~headcount reductions initiated to ~~the final amount~~optimize our cost positions. The total costs of ~~system usage incentives. The recognition~~each of these system usage incentives resulted in additional operating income of the same amounts in these respective periods. Upon completion of this contract we entered into a new service contract with this customer that is structured differentlyrestructuring plans initiated thus far are not expected to be significantly greater than the ~~contract that completed in August 2015; the new contract does not have any significant system usage incentives.~~charges incurred to date.

InOur fiscal ~~years 2017, 2016, and 2015 we conducted a number of~~2018 restructuring ~~initiatives.~~ ~~In 2017 we incurred $2.5 million of charges for restructuring efforts which included $1.0 million of unallocated corporate~~activities related primarily to expenses incurred by our corporate entity to establish a North American shared services center. Our fiscal 2017 restructuring activities included corporate efforts to increase the centralization and efficiency of our manufacturing processes, ~~and $0.9 million of~~as well as restructuring charges incurred by our CGD ~~Systems~~ businesses related to the elimination of a level of management in the CGD ~~Systems~~ simulator business.

In 2016, we incurred $1.9 million of charges related to restructuring. In fiscal 2016 our CGD-Systems and CGD-Services segments incurred restructuring costs in connection with the formalization of our CMS business division described above. CGD-Systems and CGD Services incurred cumulative restructuring charges of $0.9 million in connection with this initiative. In addition, during fiscal 2016, our CTS business implemented a restructuring plan to reduce headcount by approximately 20 in order to rebalance our resources with work levels. CTS incurred resulting restructuring charges of $1.0 million in connection with this initiative.

In 2015, we incurred $6.3 million of charges related to restructuring our defense services and defense systems businesses into a single organization to better align our defense business organizational structure with customer requirements, increase operational efficiencies and improve collaboration and innovation across the company. CGD Systems and CGD Services incurred restructuring charges of $4.6 million and $0.6 million, respectively, in connection with these restructuring activities. In addition, CTS incurred $0.6 million of restructuring costs and we incurred $0.5 million of unallocated corporate expenses related to various restructuring activities.

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~~Table of Contents~~

Restructuring charges incurred by our business ~~segment~~segments were as follows (in millions):


	Years Ended September 30,
	2019		2018		2017

Restructuring costs:
Cubic Transportation Systems	$	3.2	$	0.4	$	0.4
Cubic Mission Solutions		—		0.2		—
Cubic Global Defense		3.3		1.3		0.9
Unallocated corporate expenses		8.9		3.1		1.0
Total restructuring costs	$	15.4	$	5.0	$	2.3

Year Ended

September 30,

2017

2016

2015

Restructuring costs:

Cubic Transportation Systems
$
0.4

$
1.0

$
0.6
Cubic Global Defense Systems

0.9

0.3

4.6
Cubic Global Defense Services

0.2

0.6

0.6
Unallocated corporate expenses and other

1.0

—

0.5
Total restructuring costs
$
2.5

$
1.9

$
6.3

126

~~A summary~~Table of ~~the activity relating to the~~Contents

The following table presents a rollforward of our restructuring liability ~~and employee separation expenses,~~as of September 30, 2019, which is included within accrued compensation and other current liabilities within our Consolidated Balance Sheet, ~~is as follows~~ (in ~~thousands)~~millions):


	Employee Separation
Balance as of October 1, 2015	$	1,893

			Restructuring Liability		Restructuring Liability
			Employee Separation and other		Consulting Costs
Balance as of October 1, 2017			$	1.0	$	—
Accrued costs		1,852		4.2		0.8
Cash payments		(3,096)		(4.6)		(0.5)
Balance as of September 30, 2016		649
Balance as of September 30, 2018			$	0.6	$	0.3
Accrued costs		2,468		7.5		7.9
Cash payments		(2,142)		(6.1)		(7.4)
Balance as of September 30, 2017	$	975
Balance as of September 30, 2019			$	2.0	$	0.8

Certain restructuring costs are based upon estimates. Actual amounts paid may ultimately differ from these estimates. If additional costs are incurred or recognized amounts exceed costs, such changes in estimates will be recognized when incurred. ~~The total costs of each of the restructuring plans described above are not expected to be significantly greater than the charges incurred to date.~~

During fiscal year 2017 our CGD Systems segment made a $2.7 million loan to a private company in the U.S. that develops technologies for aircraft systems. CGD Systems also obtained warrants in the company in connection with the debt financing. Both the note receivable and warrants are classified as non-current assets on our Balance Sheet. The note receivable is held at amortized cost and the warrants are held at their historical cost. On a quarterly basis we consider whether any portion of the value of the warrants or note receivable may have been impaired. In fiscal 2017 we recognized an impairment loss of $0.2 million on the warrants based upon the estimated decrease in the fair value of this private company. If the private company that we financed does not successfully develop or commercialize its technologies, we could be required to recognize further impairments in the future.

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~~Table of Contents~~

NOTE ~~17—~~20—SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following is a summary of our quarterly results of operations for the fiscal years ended September 30, ~~2017~~2019 and ~~2016:~~2018:


									Year
	Three Months Ended								Ended
Fiscal 2017	September 30		June 30		March 31		December 31		September 30
	(in thousands, except per share data)

																			Year
											Three Months Ended								Ended
Fiscal 2019											September 30		June 30		March 31		December 31		September 30
											(in thousands, except per share data)
Net sales	$	445,606	$	361,869	$	343,709	$	334,677	$	1,485,861	$	471,198	$	382,679	$	337,339	$	305,259	$	1,496,475
Operating income (loss)		25,384		(1,697)		(2,072)		(4,101)		17,514		58,619		34,725		(6,541)		(566)		86,237
Net income (loss)		13,155		(21,957)		461		(2,868)		(11,209)		41,763		23,910		(9,392)		(6,587)		49,694
Net income (loss) per share, basic		0.49		(0.81)		0.02		(0.11)		(0.41)		1.39		0.77		(0.30)		(0.23)		1.63
Net income (loss) per share, diluted		0.49		(0.81)		0.02		(0.11)		(0.41)		1.38		0.77		(0.30)		(0.23)		1.62


									Year
	Three Months Ended								Ended
Fiscal 2018	September 30		June 30		March 31		December 31		September 30
	(in thousands, except per share data)
Net sales	$	379,709	$	296,212	$	278,586	$	248,391	$	1,202,898
Operating income (loss)		27,673		10,290		(1,679)		(11,902)		24,382
Net income (loss)		17,816		6,291		(2,011)		(9,786)		12,310
Net income (loss) per share, basic		0.65		0.23		(0.07)		(0.36)		0.45
Net income (loss) per share, diluted		0.65		0.23		(0.07)		(0.36)		0.45

Year

Three Months Ended

Ended

Fiscal 2016

September 30

June 30

March 31

December 31

September 30

(in thousands, except per share data)

Net sales

$
406,588

$
375,240

$
366,024

$
313,813

$
1,461,665

Operating income (loss)

10,488

13,893

(9,086)

(8,077)

7,218

Net income (loss)

(7,493)

4,498

10,144

(5,414)

1,735

Net income (loss) per share, basic

(0.29)

0.17

0.38

(0.20)

0.06

Net income (loss) per share, diluted

(0.29)

0.17

0.38

(0.20)

0.06

The following table summarizes the aggregate impact of net changes in contract estimates (amounts in thousands, except per share data):

Changes in estimates on contracts for which revenue is recognized using the cost-to-cost-percentage-of-completion method decreased operating income by approximately $4.6 million in the three months ended September 30, 2017 and increased operating income by approximately $1.3 million in the three months ended September 30, 2016. These adjustments decreased net income by approximately $2.9 million ($0.11 per share) in the three months ended September 30, 2017 and increased net income by approximately $0.9 million ($0.03 per share) in the three months ended September 30, 2016.


	Three Months Ended
	September 30,
	2019		2018
Operating income (loss)	$	(1,420)	$	(4,162)
Net income (loss) from continuing operations		(1,615)		(3,149)
Diluted earnings per share		(0.05)		(0.12)

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of Cubic Corporation

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Cubic Corporation as of September 30, ~~2017~~2019 and ~~2016,~~2018, and the related consolidated statements of operations, comprehensive income (loss), cash flows and changes in shareholders’ equity for each of the three years in the period ended September 30, ~~2017. These~~2019, and the related notes (collectively referred to as the “consolidated financial ~~statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.~~

~~We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States)~~statements”). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements ~~referred to above~~ present fairly, in all material respects, the ~~consolidated~~ financial position of ~~Cubic Corporation at~~the Company as of September 30, ~~2017~~2019 and ~~2016,~~2018, and the ~~consolidated~~ results of its operations and its cash flows for each of the three years in the period ended September 30, ~~2017,~~2019, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), ~~Cubic Corporation’s~~the Company’s internal control over financial reporting as of September 30, ~~2017,~~2019, based on criteria established in Internal Control- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated November 20, ~~2017,~~2019, expressed an unqualified opinion thereon.

Adoption of New Accounting Standard

As discussed in Notes 1 and 2 to the consolidated financial statements, the Company changed its method of accounting for recognizing revenue from contracts with customers in the year ended September 30, 2019 due to the adoption of ASU No. 2014-09, Revenue from Contracts with Customers, as amended(commonly known as Accounting Standards Codification (ASC) 606). See below for discussion of our related critical audit matter related to the adoption of ASC 606.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

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	Revenue Recognition – Percentage-of-Completion Method
Description of the Matter	As more fully described in Note 1 of the financial statements, for those long-term fixed-price contracts for which control transfers over time, revenue is recognized based on the extent of progress towards completion of the performance obligation. The Company generally accounts for these contracts using the cost-to-cost measure of progress. Under the cost-to-cost measure of progress, the estimation of progress toward completion is subject to many variables and requires significant judgment. Auditing the Company’s estimate of total contract costs at completion is especially challenging due to the judgmental and subjective nature of the estimation of remaining costs to complete, including material, labor and subcontracting costs, among others, unique to each revenue arrangement. In particular, the significant estimation relates to management’s judgment in estimating contract costs and evaluating changes in the estimates of costs at completion as circumstances change and as new information is received. The revisions in contract estimates can materially affect the Company’s operating results.
How We Addressed the Matter in Our Audit	We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s revenue recognition review process including controls over management’s review of the significant assumptions described above. For example, we tested controls over the development of the estimated costs to complete and the review of the estimates by management. To test the estimate of contract costs to complete, our audit procedures included, among others, testing significant components of the estimate noted above, assessing the completeness of the cost estimates, reviewing changes in the estimates from previous periods and testing underlying data used by management. For example, our procedures included discussing program status with business segment personnel responsible for managing the contractual arrangements, observing project review meetings, inspecting evidence to support the assumptions made by management, performing analyses to compare estimates with historical actuals from similar completed projects,and evaluating the key assumptions utilized in development of the remaining contract costs to complete the arrangement. We also reviewed documentation of management’s estimates through the reporting date for evidence of changes that would impact estimates as of the balance sheet date.
	Business Combinations – Valuation of Acquired Intangible Assets
Description of the Matter	As more fully discussed in Note 3 to the consolidated financial statements, during the year ended September 30, 2019 the Company completed its acquisitions of Advanced Traffic Solutions Inc. (Trafficware), GRIDSMART Technologies, Inc. (GRIDSMART), and Nuvotronics, Inc. (Nuvotronics) (collectively ‘the acquired entities’) for consideration of $237.2 million, $86.8 million, and $66.8 million, respectively. The transactions were accounted for as business combinations. Auditing the Company’s accounting for its acquisitions of the acquired entities required significant auditor judgment due to the significant estimation uncertainty in determining the fair value of identified intangible assets, which primarily consisted of technology and customer relationships. The significant estimation uncertainty was primarily due to the complexity of the valuation models prepared by management to measure the fair value of the intangible assets and the sensitivity of the respective fair values to the significant underlying assumptions. The significant assumptions used to estimate the value of the intangible assets included discount rates, terminal growth rates, the weighted average cost of capital, and certain assumptions that form the basis of the internal rate of return (e.g., revenue growth rates, expenses, customer attrition rates, and technology replacement rates). These significant assumptions are especially challenging to audit as they are forward looking and could be affected by future economic and market conditions.

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How We Addressed the Matter in Our Audit	~~/s/ Ernst & Young LLP~~We obtained an understanding, evaluated the design and tested the operating effectiveness of the Company's internal controls over its valuation of acquired intangible assets. Our tests included controls over the estimation process supporting the recognition and measurement of technology and customer-related intangible assets. We also tested controls around management’s review of assumptions used in the valuation models. To test the estimated fair value of the technology and customer-related intangible assets, we performed audit procedures that included, among other things, evaluating the Company's selection of the valuation methodology, evaluating the methods and significant assumptions used by the Company, and evaluating the completeness and accuracy of the underlying data supporting the significant assumptions and estimates. We involved our valuation specialists to assist with our evaluation of the methodology used by the Company and significant assumptions included in the fair value estimates. For example, our valuation specialists performed independent comparative calculations to estimate the acquired entity’s weighted average cost of capital. Additionally, we compared the Company’s revenue growth rates to historical actuals, to selected guideline company growth rates in the industry, and to third party analyst expectations for the industry overall.
	ASC 606 Revenue from Contracts with Customers Adoption
Description of the Matter	As discussed above and in Notes 1 and 2 of the consolidated financial statements, the Company adopted ASC 606 using the modified retrospective method as of October 1, 2018. The adoption of ASC 606 resulted in a change in significant accounting policy regarding revenue recognition and resulted in changes in accounting policies regarding contract estimates, backlog, inventory, contract assets, long-term capitalized contract costs, and contract liabilities. Implementation required the Company to re-evaluate each of its contracts to determine if there was a change under the new standard. Auditing the Company’s adoption of ASC 606 was especially challenging due to the complex nature of the implementation. In particular, there was complexity resulting from the number of contracts reviewed by management as part of the process and the judgments required to be made during this review, and the materiality of the cumulative adjustment recorded.
How We Addressed the Matter in Our Audit	We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s adoption of ASC 606 process including controls over management’s identification of revenue streams, development of accounting policies for each revenue stream, and computation of the transition adjustment. To test the Company’s adoption of ASC 606, our audit procedures included, among others, testing that revenue contracts were appropriately assigned into revenue streams to evaluate the appropriate revenue recognition model for the transition adjustment by selecting a sample of contracts and agreeing key terms to management’s analysis. Additionally, we tested changes in the estimated transaction price, estimated costs, and revenue recognized due to implementing the new standard by selecting a sample of contracts and reperforming management’s assessment. Our procedures also included evaluating management’s identification and assessment of variable consideration and product or service performance obligations. Additionally, we recalculated the transition adjustment recorded by management.

/s/ Ernst & Young LLP

We have served as the Company's auditor since 1959.

San Diego, ~~California~~CA

November 20, ~~2017~~2019

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Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

Item 9A. CONTROLS AND PROCEDURES

Evaluation of Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act)) that are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and is accumulated and communicated to management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), as appropriate, to allow timely decisions regarding required disclosure.

Management, with participation by our CEO and CFO, has designed our disclosure controls and procedures to provide reasonable assurance of achieving desired objectives. As of September 30, ~~2017,~~2019, we carried out an evaluation, under the supervision of and with the participation of our management, including our CEO and CFO, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the evaluation, as of September 30, ~~2017,~~2019, our CEO and CFO have concluded that our disclosure controls and procedures were effective.

Management’s Report on Internal Control over Financial Reporting

Internal control over financial reporting refers to the process designed by, or under the supervision of, our CEO and CFO, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP, and includes those policies and procedures that: (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Management is responsible for establishing and maintaining adequate internal control over our financial reporting (as defined in Exchange Act Rule 13a-15(f)). In order to evaluate the effectiveness of internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, under the supervision of and with the participation of our management, including our CEO and CFO, we conducted an assessment based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Our system of internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

As permitted by SEC rules, management’s assessment of and conclusion on the effectiveness of internal controls over financial reporting excludes an evaluation of the design and operation of internal controls of Advanced Traffic Solutions, GRIDSMART, and Nuvotronics, which we acquired in 2019 and are included in the 2019 consolidated financial statements of the Company and constituted 5.1% and 2.8% of total and net assets, excluding the preliminary value of goodwill and purchased intangibles, respectively, as of September 30, 2019 and 5.8% and 13.5% of revenues and net income attributable to Cubic, respectively, for the year then ended.

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Based on our evaluation, management has concluded that our internal control over financial reporting was effective as of September 30, ~~2017.~~2019.

The effectiveness of our internal control over financial reporting as of September 30, ~~2017~~2019 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which follows.

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Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended September 30, ~~2017~~2019 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

~~We do, however, anticipate that there will be such changes in~~In the first quarter of fiscal ~~2018~~2020 we will adopt ASU 2016-02, Leases (commonly referred to as ASC 842), which was issued by the Financial Accounting Standards Board in February 2016. ASC 842 outlines a comprehensive lease accounting model and supersedes the current lease accounting guidance. Under the new guidance, lessees will be required to recognize a right-of-use asset which represents the lessee’s right to use, or control the use of, a specific asset and a lease liability which represents the obligation to make lease payments, for all leases for the lease term. Adoption of the new guidance will affect the balance sheet presentation and expense recognition related to ~~the transition of certain of~~ our ~~businesses~~leases. In fiscal 2019 we designed modifications to our enterprise resource planning (ERP) system. During the third quarter of fiscal 2016, we began the implementation of a new ERP system by transitioning our corporate operations, including corporate payroll, corporate general ledger, corporate procurement and payments, and corporate cash receipts functions. During the first quarter of fiscal 2017, this transition to our new ERP system continued with our North American manufacturing operations transitioning to a new material requirements planning (MRP) system and certain of our North American CGD Systems subsidiaries transitioning their payroll, general ledger, procurement, payment, billing and cash receipts functions to our new ERP system. We have accordingly in fiscal 2017 modified our existing internal controls infrastructure, as well as added other processes and internal controls, in order to ~~adapt~~monitor the transition to ~~our new ERP system as well as take advantage of the increased functionality of~~ the new ~~system. The transition of our remaining operations to our new ERP system will occur in phases in fiscal 2018, beginning~~lease accounting guidance and adherence with the ~~transition of our transportation businesses~~guidance on an ongoing basis. These process and control enhancements are being implemented in the first quarter of fiscal 2018. We believe that the new ERP system and related changes to processes and the design of our internal controls will enhance our internal control over financial reporting while providing us with the ability to scale our business. We believe we have taken the necessary steps to monitor and maintain appropriate internal control over financial reporting during fiscal 2017 and we will continue to evaluate the operating effectiveness of related key controls during subsequent periods.2020.

Item 9B. OTHER INFORMATION

None.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of Cubic Corporation

Opinion on Internal Control over Financial Reporting

We have audited Cubic Corporation’s internal control over financial reporting as of September 30, ~~2017,~~2019, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Cubic ~~Corporation’s~~Corporation (the Company) maintained in all material respects, effective internal control over financial reporting as of September 30, 2019, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of September 30, 2019 and 2018, and the related consolidated statements of operations, comprehensive income (loss), cash flows and changes in shareholders’ equity for each of the three years in the period ended September 30, 2019, and the related notes, and our report dated November 20, 2019 expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control ~~over~~Over Financial Reporting. Our responsibility is to express an opinion on the ~~company’s~~Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

As indicated in the accompanying Management’s Report on Internal Control over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Advanced Traffic Solutions, GRIDSMART or Nuvotronics, which are included in the 2019 consolidated financial statements of the Company and constituted 5.2% and 2.8% of total and net assets, respectively, excluding the preliminary value of goodwill and purchased intangibles, as of September 30, 2019 and 5.8% and 13.5% of revenues and net income attributable to Cubic, respectively, for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of Advanced Traffic Solutions, GRIDSMART or Nuvotronics.

We conducted our audit in accordance with the standards of the ~~Public Company Accounting Oversight Board (United States).~~PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely

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detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

~~In our opinion, Cubic Corporation maintained, in all material respects, effective internal control over financial reporting as of September 30, 2017, based on the COSO criteria.~~/s/ Ernst & Young LLP

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Cubic Corporation as of September 30, 2017 and 2016, and the related consolidated statements of operations, comprehensive income (loss), cash flows and changes in shareholders’ equity for each of the three years in the period ended September 30, 2017 and our report dated November 20, 2017 expressed an unqualified opinion thereon.

~~/s/ Ernst & Young LLP~~

San Diego, California

November 20, ~~2017~~2019

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PART III

Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

Information regarding directors and executive officers and corporate governance will be included in our definitive Proxy Statement to be filed with the SEC in connection with our ~~2017~~2019 Annual Meeting of Shareholders (the Proxy Statement), and is incorporated herein by reference.

We have adopted a code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer, controller and persons performing similar functions, which appears on our website at: http://www.cubic.com/corp1/invest/governance.html. We intend to disclose future amendments to certain provisions of our code of ethics, or waivers of such provisions granted to one of these specified officers, on our website within four business days following the date of such amendment or waiver.

Item 11. EXECUTIVE COMPENSATION.

Information regarding executive compensation will be included in the Proxy Statement, and is incorporated herein by reference.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

Information regarding security ownership of certain beneficial owners and management and related stockholder matters will be included in the Proxy Statement, and is incorporated herein by reference.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

Information regarding certain relationships and related transactions, and director independence will be included in the Proxy Statement, and is incorporated herein by reference.

Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.

Information regarding principal accounting fees and services will be included in the Proxy Statement, and is incorporated herein by reference.

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PART IV

Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a)	Documents filed as part of this Report:

~~(a)Documents filed as part of this Report:~~

(1)

The following consolidated financial statements of Cubic Corporation, as referenced in Item 8 of this Form 10-K:

~~(1)The following consolidated financial statements of Cubic Corporation, as referenced in Item 8 of this Form 10-K:~~


Consolidated Statements of Operations Years ended September 30, ~~2017, 2016~~2019, 2018 and ~~2015~~2017		~~65Error! Bookmark not defined.~~68

Consolidated Statements of Comprehensive Income Years ended September 30, ~~2017, 2016~~2019, 2018 and ~~2015~~2017		66 69

Consolidated Balance Sheets September 30, ~~2017~~2019 and ~~2016~~2018		67 70

Consolidated Statements of Cash Flows Years ended September 30, ~~2017, 2016~~2019, 2018 and ~~2015~~2017		69 72

Consolidated Statements of Changes in Shareholders’ Equity Years ended September 30, ~~2017, 2016~~2019, 2018 and ~~2015~~2017		71 74

Notes to Consolidated Financial Statements September 30, ~~2017~~2019		72 75

(2)

The following consolidated financial statement schedules of Cubic Corporation and subsidiaries:

~~(2)The following consolidated financial statement schedules of Cubic Corporation and subsidiaries:~~

None are required under the applicable accounting rules and regulations of the SEC.

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(b)	Exhibits:

2.1	Stock Purchase Agreement dated April 18, 2018, by and among Nova Global Supply & Services, LLC, Cubic Corporation and Cubic Global Defense, Inc. Incorporated by reference to Form 8-K filed April 19, 2018, file No. 001-08931, Exhibit 2.1.
3.1	Amended and Restated Certificate of Incorporation. Incorporated by reference to Form ~~10-Q for the quarter ended June 30, 2006,~~8-K filed February 19, 2019, file No. 001-08931, Exhibit 3.1.
3.2	~~Certificate of Amendment of Amended and Restated Certificate of Incorporation. Incorporated by reference to Form 10-Q for the quarter ended March 31, 2016, file No. 001-08931, Exhibit 3.2.~~
~~3.3~~	Amended and Restated Bylaws. Incorporated by reference to Form 8-K filed ~~April 22, 2014,~~November 14, 2018, file No. 001-08931, Exhibit 3.1.
4.1	Form of Common Stock Certificate. Incorporated by reference to Form 10-K for the fiscal year ended September 30, 2012, file No. 001-08931, Exhibit 4.1.
~~4.2~~	Registration Rights Agreement, dated as of February 25, 2013, by and among Cubic Corporation and certain of its shareholders. Incorporated by reference to Form 8-K filed February 25, 2013, file No. 001-08931, Exhibit 4.1.
10.1*	Amended and Restated Cubic Corporation 2015 Incentive Award Plan. Incorporated by reference to Appendix AB to the Definitive Proxy Statement on Schedule 14A filed on January ~~13, 2015,~~18, 2019, file No. 001-08931.
10.2*	Cubic Corporation Employee Stock Purchase Plan. Incorporated by reference to Appendix B to the Definitive Proxy Statement on Schedule 14A filed on January 13, 2015, file No. 001-08931.
10.3*	Form of Time-Based Vesting Restricted Stock Unit Award Grant Notice and Award Agreement under the Cubic Corporation 2015 Incentive Award ~~Plan.~~Plan (for awards granted prior to fiscal year 2020). Incorporated by reference to Form 10-Q for the quarter ended December 31, 2016, file No. 001-08931, Exhibit 10.1.
10.4*	Form of Performance-Based Vesting Restricted Stock Unit Award Grant Notice and Award Agreement under the Cubic Corporation 2015 Incentive Award ~~Plan.~~Plan (for awards granted during fiscal year 2019). Incorporated by reference to Form 10-Q for the quarter ended December 31, ~~2016,~~2018, file No. ~~001-08931,~~001 08931, Exhibit ~~10.2.~~10.1.
10.5*	Form of Non-Employee Director Restricted Stock Unit Award Grant Notice and Award Agreement under the Cubic Corporation 2015 Incentive Award ~~Plan.~~Plan (for awards granted prior to fiscal year 2020). Incorporated by reference to Form 10-K for the fiscal year ended September 30, 2015, file No. 001-08931, Exhibit 10.5.
10.6*	Form of Stock Payment Award under the Amended and Restated Cubic Corporation 2015 Incentive Award Plan. Incorporated by reference to Form 10-Q for the quarter ended March 31, 2019, file No. 001-08931, Exhibit 10.2.
10.7*	Amended Transition Protection Plan. Incorporated by reference to Form 10-K for the ~~fiscal~~ year ended September 30, 2015, file No. 001-08931, Exhibit 10.6.
10.710.8	Amendment to Transition Protection Plan, dated May 1, 2018. Incorporated by reference to Form 10-Q for the quarter ended March 31, 2018, file No. 001-08931, Exhibit 10.2.
10.9*	Management Incentive Bonus Plan. Incorporated by reference to Form 10-Q for the quarter ended ~~March~~December 31, ~~2016,~~2018, file No. 001-08931, Exhibit ~~10.1.~~10.2.
10.810.10	Severance Policy for Cubic Employees. Incorporated by reference to Form 10-Q for the quarter ended December 31, 2015, file No. 001-08931, Exhibit 10.2.
10.910.11	Employment ~~Transition Agreement,~~Offer Letter dated ~~September 11, 2015,~~June 7, 2017, by and between Cubic Corporation and ~~Stephen Shewmaker.~~Anshooman Aga. Incorporated by reference to Form 10-K for the ~~fiscal~~ year ended September 30, ~~2015,~~2017, file No. 001-08931, Exhibit ~~10.9.~~
10.10*	Letter Agreement regarding director compensation, dated September 1, 2015, by and between Cubic Corporation and Janice M. Hamby. Incorporated by reference to Form 10-K for the fiscal year ended September 30, 2015, file No. 001-08931, Exhibit 10.10.
~~10.11*†~~	Separation Agreement, dated June 13, 2016, by and between Cubic Corporation and William J. Toti. Incorporated by reference to Form 10-Q for the quarter ended June 30, 2016, file No. 001-08931, Exhibit 10.1.10.24.
10.12*	Employment Transition Agreement, dated July 11, 2017, by and between Cubic Corporation and John D. Thomas. Incorporated by reference to Form 10-Q for the quarter ended June 30, 2017, file No. 001-08931, Exhibit 10.1.
10.13*	Amended and Restated Deferred Compensation Plan dated January 1, 2013. Incorporated by reference to Form 10-Q for the quarter ended December 31, 2012, file No. 001-08931, Exhibit 10.1.
10.1410.13	Indemnity Agreement. Incorporated by reference to Form 8-K filed May 3,6, 2010, file No. 001-08931, Exhibit 10.1.
~~10.15~~10.14	~~Credit Agreement dated January 12, 2012. Incorporated by reference to Form 10-Q for the quarter ended March 31, 2012, file No. 001-08931, Exhibit 10.6.~~
~~10.16~~	Second Amended and Restated Credit Agreement, dated as of May 8, 2012, by and among Cubic Corporation, JPMorgan Chase Bank, N.A. (as administrative agent) and the other lenders party thereto. Incorporated by reference to Form 10-Q for the quarter ended June 30, 2012, file No. 001-08931, Exhibit 10.3.

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~~Table of Contents~~

~~10.17~~	First Amendment to Second Amended and Restated Credit Agreement, dated as of December 12, 2014, by and among Cubic Corporation, JPMorgan Chase Bank, N.A. (as administrative agent) and the other lenders party thereto. Incorporated by reference to Form 10-Q for the quarter ended December 31, 2015, file No. 001-08931, Exhibit 10.3.
~~10.18~~	Second Amendment to Second Amended and Restated Credit Agreement, dated as of February 2, 2016, by and among Cubic Corporation, JPMorgan Chase Bank, N.A. (as administrative agent) and the other lenders party thereto. Incorporated by reference to Form 8-K filed February 3, 2016, file No. 001-08931, Exhibit 10.1.
~~10.19~~	Third Amended and Restated Credit Agreement, dated as of August 11, 2016, by and among Cubic Corporation, JPMorgan Chase Bank, N.A. (as administrative agent) and the other lenders party thereto. Incorporated by reference to Form 8-K filed August 11, 2016, file No. 001-08931, Exhibit 10.1.
~~10.20~~	Amended and Restated Note Purchase and Private Shelf Agreement (including the forms of the notes issued thereunder), dated as of February 2, 2016, by and among Cubic Corporation, the Guarantors (as defined therein), PGIM, Inc. and the other purchasers party thereto. Incorporated by reference to Form 8-K filed February 3, 2016, file No. 001-08931, Exhibit 10.2.
~~10.21~~10.15	Second Amended and Restated Note Purchase and Private Shelf Agreement (including the forms of the notes issued thereunder), dated as of August 11, 2016, by and among Cubic Corporation, the Guarantors (as defined therein), PGIM, Inc. and the other purchasers party thereto. Incorporated by reference to Form 8-K filed August 11, 2016, file No. 001-08931, Exhibit 10.2.
~~10.22~~10.16	First Amendment to Third Amended and Restated Credit Agreement, dated as of May 4, 2017, by and among Cubic Corporation, JP Morgan Chase Bank NA (as administrative agent) and the other lenders party thereto. Incorporated by reference to From 10-Q for the quarter ended March 31, 2017, file No. 001-08931, Exhibit 10.1.
~~10.23~~	First Amendment of Second Amended and Restated Note Purchase and Private Shelf Agreement, dated as of May 4, 2017, by and among Cubic Corporation, PGIM, Inc. and the other purchasers party thereto. Incorporated by reference to Form 10-Q for the quarter ended March 31, 2017, file No. 001-08931, Exhibit 10.2.

137

Table of Contents

10.2410.17	~~Employment Offer Letter,~~Construction and Development Agreement, dated ~~June 7, 2017, by and~~as of February 5, 2010, between Cubic Corporation and ~~Anshooman Aga.~~Bankers Commercial Corporation. Incorporated by reference to Form 10-Q for the quarter ended March 31 2019, file No. 001-08931, Exhibit 10.3.
10.18	Ground Lease, dated as of February 5, 2019, between Cubic Corporation and Bankers Commercial Corporation. Incorporated by reference to Form 10-Q for the quarter ended March 31, 2019, file No. 001-08931, Exhibit, 10.4.
10.19	Lease Agreement, dated as of February 5, 2019, between Cubic Corporation and Bankers Commercial Corporation. Incorporated by reference to Form 10-Q for the quarter ended March 31, 2019, file No. 001-08931, Exhibit, 10.5.
10.20	Participation Agreement, dated as of February 5, 2019, between Cubic Corporation and Bankers Commercial Corporation, MUFG Bank, LTD and MUFG Union Bank, N.A. Incorporated by reference to Form 10-Q for the quarter ended March 31, 2019, file No. 001-08931, Exhibit, 10.6.
10.21	Memorandum of Lease, Fee and Leasehold Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing, dated as of February 5, 2019, by and among Cubic Corporation, Bankers Commercial Corporation Chicago Title Company, as deed of trust trustee for the benefit of MUFG Union Bank, N.A. Incorporated by reference to Form 10-Q for the quarter ended March 31, 2019, file No. 001-08931, Exhibit, 10.7.
10.22	Fourth Amended and Restated Credit Agreement, dated as of April 30, 2019, by and among Cubic Corporation, JP Morgan Chase Bank, N.A (as administrative agent) and the other lenders party thereto. Incorporated by reference to Form 10-Q for the quarter ended March 31, 2019, file No. 001-08931, Exhibit, 10.8.
10.23	Receivables Purchase Agreement, dated as of September 16, 2018, between Cubic Corporation and Bank of the West.
10.24	Account Purchase Agreement, dated as of September 27, 2019 between GATR Technologies Inc. and Wells Fargo Bank, N.A.
21.1	List of Subsidiaries.
23.1	Consent of Independent Registered Public Accounting Firm.
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350.
101	Financial statements from the Cubic Corporation Annual Report on Form 10-K for the year ended September 30, ~~2017,~~2019, formatted in Inline Extensible Business Reporting Language ~~(XBRL)~~(iXBRL): (i) Consolidated Statements of Operations, (ii) Consolidated Statements of Comprehensive Income ~~(Loss)~~, (iii) Consolidated Balance Sheets, (iv) Consolidated Statements of Cash Flows, (v) Consolidated Statement of Changes in Shareholders’ Equity, and (vi) notes to Consolidated Financial Statements.
104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

* Indicates management contract or compensatory plan or arrangement

~~† Confidential treatment has been granted for portions of this exhibit. These portions have been omitted and filed separately with the Securities and Exchange Commission.~~

~~120~~138

Table of Contents

Item 16. FORM 10-K SUMMARY

None

SIGNATURES

~~SIGNATURES~~

Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized:


(Registrant)		CUBIC CORPORATION


11/20/1719		/s/ Bradley H. Feldmann
Date		BRADLEY H. FELDMANN,
		Chairman of the Board, President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:


11/20/1719	/s/ Bradley H. Feldmann	11/20/1719	/s/ ~~Walter C. Zable~~David F. Melcher
Date	BRADLEY H. FELDMANN,	Date	~~WALTER C. ZABLE,~~DAVID F. MELCHER,
	~~President and~~		Chairman of the Board, ofPresident and	Lead Independent Director
	Chief Executive Officer, Director		~~Directors~~
	(Principal Executive Officer)


11/20/1719	/s/ Anshooman Aga	11/20/1719	/s/ Mark A. Harrison
Date	ANSHOOMAN AGA,		MARK A. HARRISON,
	Executive Vice President and Chief		Senior Vice President and ~~Corporate~~Chief
	Financial Officer		~~Controller~~Accounting Officer
	(Principal Financial Officer)		(Principal Accounting Officer)


11/20/1719	/s/ Bruce G. Blakley	11/20/1719	/s/ Janice M. Hamby
Date	BRUCE G. BLAKLEY,	Date	JANICE M. HAMBY,
	Director		Director


11/20/1719	/s/ ~~Edwin A. Guiles~~Prithviraj Banerjee	11/20/1719	/s/ Steven J. Norris
Date	~~EDWIN A. GUILES,~~PRITHVIRAJ BANERJEE,	Date	STEVEN J. NORRIS,
	Director		Director


11/20/1719	/s/ Maureen Breakiron-Evans	11/20/1719	/s/ John H. Warner
Date	MAUREEN BREAKIRON-EVANS,	Date	JOHN H. WARNER,
	Director		Director

~~121~~139


Delaware		95-1678055
State of Incorporation		IRS Employer Identification No.


Common Stock	CUB	New York Stock Exchange, Inc.
Title of each class	Trading Symbol(s)	Name of exchange on which registered


Large accelerated filer ☒⌧		Accelerated filer ☐◻

Non-accelerated filer ☐◻		Smaller reporting company ☐
		Emerging growth company ☐


		Page No.
Part I

Item 1.	Business	3
~~Item 1A.~~	~~Risk Factors~~	16
~~Item 1B.~~	~~Unresolved Staff Comments~~	36
~~Item 2.~~	~~Properties~~	36
~~Item 3.~~	~~Legal Proceedings~~	38
~~Item 4.~~	~~Mine Safety Disclosures~~	38

~~Part II~~Item 1A.
	Risk Factors	16
Item 5.1B.	Unresolved Staff Comments	37
Item 2.	Properties	37
Item 3.	Legal Proceedings	38
Item 4.	Mine Safety Disclosures	38

Part II

Item 5.	Market for the Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities	39
Item 6.	Selected Financial Data	40
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	41 42
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	64 66
Item 8.	Financial Statements and Supplementary Data	65 68
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	~~114~~
~~Item 9A.~~	~~Controls and Procedures~~	~~114~~
~~Item 9B.~~	~~Other Information~~	~~115~~
		131
~~Part III~~Item 9A.
	Controls and Procedures	131
Item ~~10.~~9B.	Other Information	132

Part III

Item 10.	Directors, Executive Officers and Corporate Governance	~~117~~ 135
Item 11.	Executive Compensation	~~117~~ 135
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	~~117~~ 135
Item 13.	Certain Relationships and Related Transactions and Director Independence	~~117~~ 135
Item 14.	Principal Accounting Fees and Services	~~117~~ 135

Part IV

Item 15.	Exhibits, Financial Statement Schedules	~~118~~ 136
Item 16.	Form 10-K Summary	~~121~~ 139
	SIGNATURES	~~121~~ 139


Segment & Business Area		Customer Relationships
~~Business Area~~		~~Year~~
CTS - Automated Fare Collection		● Since 1972, provided ticket encoding and vending technology to the San Francisco Bay Area’s MTC, which includes Bay Area Rapid Transit (BART) ~~ticket encoding~~. We are in process of delivering next-generation fare payment technology and ~~vending technology.~~ operational services to the Clipper smart card system
		● Since 1985, provided the London Underground (the Tube) with new fare gates and standardized ticketing machines.
CGD - Air ~~Combat~~ Training		● In 1973, supplied first “Top Gun” Air Combat Maneuvering Instrumentation system for the Marine Corps Air Station at Yuma, AZ.
CGD - Ground ~~Combat~~ Training		● In 1990, pioneered the world’s first turnkey ground combat-instrumentation system at Hohenfels, Germany for the U.S. Army.
~~MILES~~CMS - Expeditionary Satellite Communication Terminals		~~1995, won a contract for our first laser engagement simulation system for~~ ● In 2008, GATR’s technology was made an evolutionary component of the U.S. ~~Army.~~
Special Operations Command Deployable Node family of SATCOM terminals. ~~Korea Battle Simulation Center (KBSC)~~		~~1991, won a contract to design, stand up and operate this large and complex training center to support all U.S. Forces in Korea. Have provided continuous support since 1991.~~
~~Joint Coalition Warfare Center (JCWC), now Joint Force Development (JFD)~~		~~1994, won a contract to design, stand up and operate this large and complex training center to support U.S. joint forces worldwide. Have provided continuous support since 1994.~~


	Year Ended September 30,
	2017		2016		2015		2014		2013
Results of Operations:
Sales	$	1,485,861	$	1,461,665	$	1,431,045	$	1,398,352	$	1,361,407
Cost of sales		1,122,142		1,116,906		1,091,326		1,082,535		1,055,313
Selling, general and administrative expenses		258,088		269,593		212,518		181,672		165,230
Research and development		52,652		31,976		17,992		17,959		24,445
Interest expense		15,027		11,199		4,400		4,084		3,427
Income taxes (1)		15,059		(9,212)		48,997		19,831		14,502
Net income (loss) attributable to Cubic (1) (2)		(11,209)		1,735		22,885		69,491		25,086

Per Share Data:
Net income (loss) per share, basic (1) (2)	$	(0.41)	$	0.06	$	0.85	$	2.59	$	0.94
Net income (loss) per share, diluted (1) (2)		(0.41)		0.06		0.85		2.59		0.94
Cash dividends		0.27		0.27		0.27		0.24		0.24

Shares used in calculating net income (loss) per share:
Basic		27,106		26,976		26,872		26,787		26,736
Diluted		27,106		27,040		26,938		26,845		26,760

Year-End Data:
Shareholders’ equity related to Cubic	$	689,631	$	689,896	$	756,288	$	782,278	$	716,946
Equity per share, basic		25.44		25.57		28.14		29.20		26.82
Total assets		1,336,285		1,504,408		1,300,276		1,194,606		1,109,618
Long-term debt, net of current portion		199,761		200,741		126,705		102,390		102,920


Supplemental disclosure of non-cash investing and financing activities:
Liability incurred to acquire Deltenna, net	$	1,327	$	—	$	—
Liability incurred to acquire Vocality, net	$	271	$	—	$	—
Liability incurred to acquire GATR, net	$	—	$	6,788	$	—
Liability incurred to acquire TeraLogics, net	$	—	$	4,998	$	—
Liability incurred to acquire H4 Global, net	$	—	$	952	$	—
Liability incurred to acquire DTECH, net	$	—	$	—	$	11,808


					Accumulated
					Other				Noncontrolling		Number
	Common		Retained		Comprehensive		Treasury		Interest in		of Shares
(in thousands except per share amounts)	Stock		Earnings		Loss		Stock		VIE		Outstanding

October 1, 2014	$	20,669	$	803,059	$	(5,372)	$	(36,078)	$	223	26,789

Net income		—		22,885		—		—		29	—
Other comprehensive loss, net of tax		—		—		(46,464)		—		—	—
Stock issued under equity incentive plans		—		(46)		—		—		—	160
Purchase of common stock		(2,652)		—		—		—		—	(66)
Stock-based compensation		8,325		—		—		—		—	—
Purchase of noncontrolling interest		(749)		—		—		—		(252)	—
Tax expense from equity incentive plans		(33)		—		—		—		—	—
Cash dividends paid -- $.24 per share of common stock		—		(7,256)		—		—		—	—

September 30, 2015		25,560		818,642		(51,836)		(36,078)		—	26,883

Net income		—		1,735		—		—		—	—
Other comprehensive loss, net of tax		—		—		(67,981)		—		—	—
Stock issued under equity incentive plans		—		(57)		—		—		—	152
Purchase of common stock		(1,563)		—		—		—		—	(43)
Stock-based compensation		8,762		—		—		—		—	—
Tax expense from equity incentive plans		(3)		—		—		—		—	—
Cash dividends paid -- $.27 per share of common stock		—		(7,285)		—		—		—	—

September 30, 2016		32,756		813,035		(119,817)		(36,078)		—	26,992

Net loss		—		(11,209)		—		—		—	—
Other comprehensive income, net of tax		—		—		13,191		—		—	—
Stock issued under equity incentive plans		—		—		—		—		—	158
Stock issued under employee stock purchase plan		2,234		—		—		—		—	32
Purchase of common stock		(2,444)		—		—		—		—	(55)
Stock-based compensation		5,269		—		—		—		—	—
Tax benefit from equity incentive plans		35		—		—		—		—	—
Cash dividends paid -- $.27 per share of common stock		—		(7,341)		—		—		—	—

September 30, 2017	$	37,850	$	794,485	$	(106,626)	$	(36,078)	$	—	27,127


Customer relationships	$	51.7
Backlog		3.4
Technology		10.7
Non-compete agreements		1.2
Trade name		4.7
Accounts receivable		10.6
Inventory		3.4
Income tax receivable		5.1
Accounts payable and accrued expenses		(2.4)
Deferred tax liabilities		(23.8)
Net identifiable assets acquired		64.6
Goodwill		155.9
Net assets acquired	$	220.5


Customer relationships	$	35.1
Non-compete agreements		0.7
Backlog		2.1
Cash		0.9
Accounts receivable		5.4
Inventory		4.2
Warranty obligation		(0.4)
Tax liabilities		(3.3)
Accounts payable and accrued expenses		(3.4)
Other net assets acquired		0.2
Net identifiable assets acquired		41.5
Goodwill		57.9
Net assets acquired	$	99.4


		DTECH		H4		TeraLogics (Contract Extensions)		TeraLogics (Revenue Targets)		GATR		Deltenna		Total
Balance as of October 1, 2015	$	7,507	$	—	$	—	$	—	$	—	$	—	$	7,507
Initial measurement recognized at acquisition		—		1,602		2,000		3,100		2,500		—		9,202
Cash paid to seller		(5,000)		—		(1,000)		—		—		—		(6,000)
Adjustment to the provisional acquisition date valuation		—		(616)		(100)		—		—		—		(716)
Total remeasurement (gain) loss recognized in earnings		(507)		(419)		500		1,000		700		—		1,274
Balance as of September 30, 2016	$	2,000	$	567	$	1,400	$	4,100	$	3,200	$	—	$	11,267
Initial measurement recognized at acquisition		—		—		—		—		—		1,328		1,328
Cash paid to seller		—		—		(1,000)		(2,500)		—		—		(3,500)
Adjustment to the provisional acquisition date valuation		—		—		—		—		—		—		—
Total remeasurement (gain) loss recognized in earnings		(2,000)		24		400		850		(3,200)		48		(3,878)
Balance as of September 30, 2017	$	—	$	591	$	800	$	2,450	$	—	$	1,376	$	5,217


	September 30, 2017								September 30, 2016
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets
Cash equivalents	$	8,501	$	—	$	—	$	8,501	$	57,455	$	—	$	—	$	57,455
Marketable securities		—		—		—		—		—		12,996		—		12,996
Current derivative assets		—		2,591		—		2,591		—		14,770		—		14,770
Noncurrent derivative assets		—		1,128		—		1,128		—		1,201		—		1,201
Total assets measured at fair value	$	8,501	$	3,719	$	—	$	12,220	$	57,455	$	28,967	$	—	$	86,422
Liabilities
Current derivative liabilities		—		3,456		—		3,456		—		13,752		—		13,752
Noncurrent derivative liabilities		—		1,128		—		1,128		—		1,334		—		1,334
Contingent consideration to seller of Deltenna		—		—		1,376		1,376		—		—		—		—
Contingent consideration to seller of GATR		—		—		—		—		—		—		3,200		3,200
Contingent consideration to seller of TeraLogics - contract extensions		—		—		800		800		—		—		1,400		1,400
Contingent consideration to seller of TeraLogics - revenue targets		—		—		2,450		2,450		—		—		4,100		4,100
Contingent consideration to seller of H4 Global		—		—		591		591		—		—		567		567
Contingent consideration to seller of DTECH		—		—		—		—		—		—		2,000		2,000
Total liabilities measured at fair value	$	—	$	4,584	$	5,217	$	9,801	$	—	$	15,086	$	11,267	$	26,353


			Cubic Global		Cubic Global
	Transportation		Defense		Defense
	Systems		Systems		Services		Total

Net balances at October 1, 2015	$	55,974	$	87,575	$	94,350	$	237,899
Acquisitions (see Note 2)		—		175,150		—		175,150
Foreign currency exchange rate changes		(6,344)		241		—		(6,103)
Net balances at September 30, 2016		49,630		262,966		94,350		406,946
Acquisitions		—		5,885		—		5,885
Foreign currency exchange rate changes		1,240		1,841		—		3,081
Net balances at September 30, 2017	$	50,870	$	270,692	$	94,350	$	415,912


U.S. foreign tax credits	$	15,567	2027
U.S. research and development tax credits		6,303	2035-2037
State research and development tax credits		20,486	Do not expire