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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT

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

For the Quarter Ended ~~June 30,~~December 31, 2018

001-08931

Commission File Number

CUBIC CORPORATION

Exact Name of Registrant as Specified in its Charter


Delaware		95-1678055
State of Incorporation		IRS Employer Identification No.

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer ☒		Accelerated filer ☐

Non-accelerated filer ☐		Small Reporting Company ☐

Emerging Growth Company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

As of ~~July 25, 2018,~~January 23, 2019, registrant had only one class of common stock of which there were ~~27,252,411~~31,150,232 shares outstanding (after deducting 8,945,300 shares held as treasury stock).

Table of Contents

CUBIC CORPORATION

QUARTERLY REPORT ON FORM 10-Q

For the Quarter Ended ~~June 30,~~December 31, 2018

TABLE OF CONTENTS

Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

CUBIC CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) (UNAUDITED)

(amounts in thousands, except per share data)


	Nine Months Ended				Three Months Ended				Three Months Ended
	June 30,				June 30,				December 31,
	2018		2017		2018		2017		2018		2017
Net sales:
Products	$	468,949	$	466,071	$	179,761	$	167,143	$	182,253	$	131,743
Services		354,240		292,523		116,451		99,041		123,006		116,648
		823,189		758,594		296,212		266,184		305,259		248,391
Costs and expenses:
Products		334,202		334,590		125,536		120,575		125,485		91,573
Services		245,075		208,510		80,401		71,075		92,785		86,217
Selling, general and administrative expenses		183,720		170,730		58,267		56,898		62,986		61,680
Research and development		40,113		38,779		13,934		16,901		12,012		11,977
Amortization of purchased intangibles		19,988		22,948		6,153		7,257		10,565		7,351
Restructuring costs		3,382		1,616		1,631		326		1,992		1,495
		826,480		777,173		285,922		273,032		305,825		260,293

Operating income (loss)		(3,291)		(18,579)		10,290		(6,848)
Operating loss										(566)		(11,902)

Other income (expenses):
Interest and dividend income		1,872		682		765		235		1,234		482
Interest expense		(8,152)		(12,202)		(2,567)		(4,357)		(4,032)		(2,674)
Other income (expense), net		(1,881)		717		(3,831)		1,648		(4,753)		(78)

Income (loss) from continuing operations before income taxes		(11,452)		(29,382)		4,657		(9,322)
Loss from continuing operations before income taxes										(8,117)		(14,172)

Income tax provision		4,299		5,967		5,627		68,914
Income tax (benefit) provision										2,497		(2,737)

Net loss from continuing operations		(15,751)		(35,349)		(970)		(78,236)
Loss from continuing operations										(10,614)		(11,435)
Net income from discontinued operations		8,364		10,985		5,380		56,279		—		1,649
Net income (loss)		(7,387)		(24,364)		4,410		(21,957)
Net loss										(10,614)		(9,786)

Less noncontrolling interest in loss of VIE		(1,881)		—		(1,881)		—		(4,027)		—

Net income (loss) attributable to Cubic	$	(5,506)	$	(24,364)	$	6,291	$	(21,957)
Net loss attributable to Cubic									$	(6,587)	$	(9,786)

Amounts attributable to Cubic:
Net income (loss) from continuing operations		(13,870)		(35,349)		911		(78,236)
Net loss from continuing operations									$	(6,587)	$	(11,435)
Net income from discontinued operations		8,364		10,985		5,380		56,279		—		1,649
Net income (loss) attributable to Cubic	$	(5,506)	$	(24,364)	$	6,291	$	(21,957)
Net loss attributable to Cubic									$	(6,587)	$	(9,786)

Net income (loss) per share:
Basic
Continuing operations attributable to Cubic	$	(0.51)	$	(1.30)	$	0.03	$	(2.89)	$	(0.23)	$	(0.42)
Discontinued operations	$	0.31	$	0.41	$	0.20	$	2.08	$	—	$	0.06
Basic earnings per share attributable to Cubic	$	(0.20)	$	(0.90)	$	0.23	$	(0.81)	$	(0.23)	$	(0.36)

Diluted
Continuing operations attributable to Cubic	$	(0.51)	$	(1.30)	$	0.03	$	(2.89)	$	(0.23)	$	(0.42)
Discontinued operations	$	0.31	$	0.41	$	0.20	$	2.08	$	—	$	0.06
Diluted earnings per share attributable to Cubic	$	(0.20)	$	(0.90)	$	0.23	$	(0.81)	$	(0.23)	$	(0.36)

Dividends per common share	$	0.14	$	0.14	$	—	$	—

Weighted average shares used in per share calculations:
Basic		27,221		27,100		27,232		27,110		28,492		27,207
Diluted		27,221		27,100		27,374		27,110		28,492		27,207

See accompanying notes.

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CUBIC CORPORATION

CONDENSED CONSOLIDATED

STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(in thousands)


	Nine Months Ended				Three Months Ended				Three Months Ended
	June 30,				June 30,				December 31,
	2018		2017		2018		2017		2018		2017
Net income (loss)	$	(7,387)	$	(24,364)	$	4,410	$	(21,957)
Net loss									$	(10,614)	$	(9,786)
Other comprehensive income (loss):
Foreign currency translation		(7,276)		(2,111)		(10,628)		11,193		(3,318)		(192)
Change in unrealized gains/losses from cash flow hedges:
Change in fair value of cash flow hedges, net of tax		(123)		(39)		640		930		1,343		28
Adjustment for net gains/losses realized and included in net income, net of tax		1,101		(1,204)		502		(1,204)		(24)		503
Total change in unrealized gains/losses realized from cash flow hedges, net of tax		978		(1,243)		1,142		(274)		1,319		531
Total other comprehensive income (loss)		(6,298)		(3,354)		(9,486)		10,919		(1,999)		339
Total comprehensive loss		(13,685)		(27,718)		(5,076)		(11,038)		(12,613)		(9,447)
Noncontrolling interest in comprehensive loss of consolidated VIE, net of tax		(1,881)		—		(1,881)		—		(4,027)		—
Comprehensive loss attributable to Cubic, net of tax	$	(11,804)	$	(27,718)	$	(3,195)	$	(11,038)	$	(8,586)	$	(9,447)

See accompanying notes.

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CUBIC CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands)


	June 30,		September 30,			December 31,		September 30,
	2018		2017			2018		2018
ASSETS

Current assets:
Cash and cash equivalents	$	93,274	$	60,143	��	$	75,174	$	111,834
Cash in consolidated VIE		414		—			421		374
Restricted cash		16,695		8,434			17,889		17,400
Restricted cash in consolidated VIE		10,000		—			10,000		10,000
Accounts receivable:
Long-term contracts		313,747		354,476			119,943		393,691
Allowance for doubtful accounts		(1,334)		(436)			(1,652)		(1,324)
		312,413		354,040			118,291		392,367

Contract assets							320,277		—
Recoverable income taxes		1,103		5,360			1,321		91
Inventories		126,405		87,715			92,201		84,199
Assets held for sale		8,177		—			8,177		8,177
Other current assets		45,423		29,951			40,924		43,705
Current assets of discontinued operations		—		75,900
Total current assets		613,904		621,543			684,675		668,147

Long-term contract receivables		14,791		17,457
Long-term contracts receivables							—		6,134
Long-term contracts financing receivables							44,936		—
Long-term contracts financing receivables in consolidated VIE							52,996		—
Long-term capitalized contract costs		71,530		56,471			—		84,924
Long-term capitalized contract costs in consolidated VIE		1,159		—			—		1,258
Property, plant and equipment, net		111,775		113,220			125,298		117,546
Deferred income taxes		4,937		7,385			4,687		4,713
Goodwill		327,964		321,562			484,329		333,626
Purchased intangibles, net		74,808		89,858			137,201		73,533
Other assets		13,229		10,515			13,871		14,192
Noncurrent assets of discontinued operations		—		98,274
Other assets in consolidated VIE							962		810
Total assets	$	1,234,097	$	1,336,285		$	1,548,955	$	1,304,883

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Short-term borrowings	$	—	$	55,000		$	64,500	$	—
Trade accounts payable		110,970		88,521			109,094		125,414
Trade accounts payable in consolidated VIE		268		—			205		165
Contract liability							69,713		—
Customer advances		56,769		56,132			—		75,941
Accrued compensation and other current liabilities		102,142		130,126			82,323		118,233
Income taxes payable		6,677		9,838			6,771		8,586
Current liabilities of discontinued operations		—		36,862
Total current liabilities		276,826		376,479			332,606		328,339

Long-term debt		199,785		199,761			199,801		199,793
Long-term debt in consolidated VIE		26,562		—			15,357		9,056
Other long-term liabilities		52,949		70,414			43,838		43,486
Other long-term liabilities in consolidated VIE		2,090		—			6,146		13

Shareholders’ equity:
Common stock		41,465		37,850			260,141		45,008
Retained earnings		785,303		794,485			815,083		801,834
Accumulated other comprehensive loss		(112,924)		(106,626)			(112,642)		(110,643)
Treasury stock at cost		(36,078)		(36,078)			(36,078)		(36,078)
Shareholders’ equity related to Cubic		677,766		689,631			926,504		700,121
Noncontrolling interest in VIE		(1,881)		—
Noncontrolling interest in consolidated VIE							24,703		24,075
Total shareholders’ equity		675,885		689,631			951,207		724,196
Total liabilities and shareholders’ equity	$	1,234,097	$	1,336,285		$	1,548,955	$	1,304,883

See accompanying notes.

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CUBIC CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)


	Nine Months Ended				Three Months Ended				Three Months Ended
	June 30,				June 30,				December 31,
	2018		2017		2018		2017		2018		2017
Operating Activities:
Net income (loss)	$	(7,387)	$	(24,364)	$	4,410	$	(21,957)
Net loss									$	(10,614)	$	(9,786)
Net income from discontinued operations		(8,364)		(10,985)		(5,380)		(56,279)		—		(1,649)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		34,133		35,774		10,642		11,750		16,011		12,433
Share-based compensation expense		5,100		3,586		2,603		395		2,720		1,627
Change in fair value of contingent consideration		446		(4,713)		(6)		(2,519)		429		298
(Gain) loss on disposal of assets		(1,474)		405		—		—
Deferred income taxes		(10,198)		(10,813)		(10,013)		17,660
Changes in operating assets and liabilities, net of effects from acquisitions:		(44,047)		(34,180)		(35,026)		5,928		(69,713)		(14,437)
NET CASH USED IN CONTINUING OPERATING ACTIVITIES		(31,791)		(45,290)		(32,770)		(45,022)		(61,167)		(11,514)
NET CASH PROVIDED BY OPERATING ACTIVITIES FROM DISCONTINUED OPERATIONS		14,497		28,776		8,364		16,702
NET CASH USED IN OPERATING ACTIVITIES FROM DISCONTINUED OPERATIONS										—		(15,424)
NET CASH USED IN OPERATING ACTIVITIES		(17,294)		(16,514)		(24,406)		(28,320)		(61,167)		(26,938)

Investing Activities:
Acquisition of businesses, net of cash acquired		(9,534)		(12,924)		—		—		(247,150)		(4,650)
Purchases of property, plant and equipment		(21,120)		(25,474)		(9,334)		(10,305)		(12,045)		(6,318)
Purchases of marketable securities		—		(18,944)		—		(189)
Proceeds from sales or maturities of marketable securities		—		18,944		—		6,441
Purchase of non-marketable debt and equity securities		(1,472)		(2,200)		(222)		—		—		(671)
Proceeds from the sale of fixed assets		2,400		—		—		—
NET CASH USED IN INVESTING ACTIVITIES FROM CONTINUING OPERATIONS		(29,726)		(40,598)		(9,556)		(4,053)
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES FROM DISCONTINUED OPERATIONS		133,795		1,217		133,795		(16)
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES		104,069		(39,381)		124,239		(4,069)
NET CASH USED IN INVESTING ACTIVITIES										(259,195)		(11,639)

Financing Activities:
Proceeds from short-term borrowings		198,820		93,080		79,700		23,800		372,000		82,000
Principal payments on short-term borrowings		(253,820)		(229,080)		(156,700)		(169,800)		(307,500)		(49,000)
Principal payments on long-term debt		—		(320)		—		(104)
Proceeds from long-term borrowings in consolidated VIE		28,378		—		28,378		—		5,798		—
Deferred financing fees in consolidated VIE		(2,180)		—		(2,180)		—
Stock issued under employee stock purchase plan		710		1,712		(88)		279
Purchase of common stock		(2,355)		(2,449)		(31)		(94)		(3,419)		(2,256)
Dividends paid		(3,676)		(3,679)		—		—
Contingent consideration payments related to acquisitions of businesses		(656)		(1,988)		—		—		(435)		(656)
Net change in restricted cash		(18,626)		71,084		(12,885)		72,597
NET CASH USED IN FINANCING ACTIVITIES		(53,405)		(71,640)		(63,806)		(73,322)
Proceeds from equity offering, net										215,832		—
NET CASH PROVIDED BY FINANCING ACTIVITIES										282,276		30,088

Effect of exchange rates on cash		175		(2,528)		1,242		4,958		1,962		677

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		33,545		(130,063)		37,269		(100,753)
NET DECREASE IN CASH AND CASH EQUIVALENTS										(36,124)		(7,812)

Cash and cash equivalents at the beginning of the period		60,143		197,127		56,419		167,817		139,608		68,577

CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD	$	93,688	$	67,064	$	93,688	$	67,064	$	103,484	$	60,765

Supplemental disclosure of non-cash investing and financing activities:
Liability incurred to acquire Vocality, net	$	—	$	1,035	$	—	$	—
Receivable recognized in connection with the acquisition of Trafficware, net									$	1,588	$	—

See accompanying notes.

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CUBIC CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

~~June 30,~~December 31, 2018

Note 1 — Basis for Presentation

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

In our opinion, the accompanying financial statements reflect all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the results for the interim periods presented. Operating results for the ~~three- and nine-month periods~~three-month period ended ~~June 30,~~December 31, 2018 are not necessarily indicative of the results that may be expected for the year ending September 30, ~~2018.~~2019. For further information, refer to the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended September 30, ~~2017.~~2018.

The preparation of the financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

~~As described in Note 13, we concluded that Cubic Mission Solutions (CMS)~~ ~~became a separate operating segment beginning on October 1, 2017. Applicable prior period amounts have been adjusted retrospectively to reflect the reportable segment change.~~

Through September 30, 2017 our principal lines of business were transportation fare collection systems and services, defense systems, and defense services. On April 18, 2018, we entered into a ~~definitive~~stock purchase agreement with Nova Global Supply & Services, LLC (Purchaser), an entity affiliated with GC Valiant, LP, under which we agreed to sell ~~the~~our Cubic Global Defense Services (CGD Services) ~~business.~~ ~~This transaction~~business to the Purchaser. The sale closed ~~and the sale was completed~~ on May 31, 2018. ~~In March 2018, all~~As a result of the ~~criteria were met for the classification of CGD Services as a discontinued operation. As a result,~~sale, the operating results and cash flows of CGD Services have been classified as discontinued operations in the ~~Condensed~~ Consolidated Statements of ~~Income (Loss)~~Operations and ~~Condensed~~ Consolidated Statements of Cash Flows for all periods ~~presented and the assets and liabilities of CGD Services have been classified as assets and liabilities of discontinued operations in the Condensed Consolidated Balance Sheet at September 30, 2017.~~presented. Refer to “Note 23 – Acquisitions and Divestitures” for additional information about the sale of CGD Services and the related discontinued operation classification.

~~Significant Accounting Policies~~

~~There have been no material changes to our significant accounting policies as compared with the policies described in our Annual Report on Form 10-K for the year ended September 30, 2017.~~

Recently Adopted Accounting Pronouncements – Revenue Recognition

OnRevenue Recognition: Effective October 1, 2018, we adopted Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers, as amended (commonly referred to as ASC 606) using the modified retrospective transition method. The adoption of ASC 606 resulted in a change in our significant accounting policy regarding revenue recognition, 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. Our Condensed Consolidated Statements of Income (Loss) for the quarter ended December ~~22,~~31, 2018 and our Condensed Consolidated Balance Sheet as of December 31, 2018 are presented under ASC 606, while our Condensed Consolidated Statements of Income (Loss) for the quarter ended December 31, 2017 and our Condensed Consolidated Balance Sheet as of September 30, 2018 are presented under the legacy revenue recognition guidance under ASC 605, Revenue Recognition. See Note 2 for disclosure of the impact of the adoption of ASC 606 on our Condensed Consolidated Statements of Income (Loss) and Condensed Consolidated Balance Sheet for the quarter ended December 31, 2018, and the effect of changes made to our Condensed Consolidated Balance Sheet as of October 1, 2018.

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 command, control, communication, computers, intelligence, surveillance and reconnaissance (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, ~~enacted tax legislation commonly referred to as the Tax Cuts~~state and Jobs Act of 2017 (Tax Act). Also in December 2017, the Securities and Exchange Commission (SEC) staff issued Staff Accounting Bulletin 118, which was codified in March 2018 under ASU 2018-05, which provides guidance on accounting for the tax effects of the Tax Act for which the accounting under Accounting Standards Codification (ASC) 740 is incomplete. To the extent that a company's accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. As described in Note 11 below, at June 30, 2018, we have not completed our accounting for the tax effects of enactment of the Tax Act; however, in certain cases, we have made a reasonable estimate of the effects on our existing deferred tax balances and the one-time transition tax.

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municipalities, and other international government customers and international local municipal transit agencies. We classify sales as products or services in our Condensed Consolidated Statements of Income (Loss) based on the attributes of the underlying contracts.

~~Recent~~

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

To determine the proper revenue recognition method, we evaluate each contractual arrangement to identify all performance obligations. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. The majority of our contracts have a single performance obligation because the promise to transfer the individual good or service is not separately identifiable from other promises within the contract and is, therefore, not distinct. These contractual arrangements either require the use of a highly specialized engineering, development and manufacturing process to provide goods according to customer specifications or represent a bundle of contracted goods and services that are integrated and together represent a combined output, which may include the delivery of multiple units. Some of our contracts have multiple performance obligations, primarily (i) related to the provision of multiple goods or services or (ii) due to the contract covering multiple phases of the product lifecycle (for instance: development and engineering, production, maintenance and support). For contracts with more than one performance obligation, we 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. Our contracts with the U.S. government, including contracts under the U.S. Department of Defense’s Foreign Military Sales program (FMS Contracts), are subject to the Federal Acquisition Regulations (FAR) and the price is typically based on estimated or actual costs plus a reasonable profit margin. As a result of these regulations, the standalone selling price of products or services in our contracts with the U.S. government and FMS Contracts are typically equal to the selling price stated in the contract. Therefore, we typically do not need to allocate (or reallocate) the transaction price to multiple performance obligations in our contracts with the U.S. government.

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

For those contracts for which control transfers over time, revenue is recognized based on the extent of progress towards completion of the performance obligation. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. For our design and build type contracts, 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.

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 we will be reimbursed in establishing the contract price.

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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.

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.

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 contracts with the U.S. government 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 international contracts to deliver complex systems, we typically receive milestone payments that are paid in accordance with the terms of our contract as we perform. 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 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 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.

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).


	Three Months Ended
	December 31,
	2018		2017
Operating income (loss)	$	1,814	$	(929)
Net income (loss) from continuing operations		1,271		(736)
Diluted earnings per share		0.04		(0.03)

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 comprises both funded backlog (firm orders for which funding is authorized and appropriated) and unfunded backlog. Unexercised contract options and indefinite delivery indefinite quantity (IDIQ) contracts are not included in backlog until the time the option or IDIQ task order is exercised or awarded. For our cost-reimbursable and fixed-priced-incentive contracts, the estimated consideration we expect to receive pursuant to the terms of the contract may exceed the contractual award amount. The estimated consideration is determined at the outset of the contract and is continuously reviewed throughout the contract period. In determining the estimated consideration, we consider the risks related to the technical, schedule and cost impacts to complete the contract and an estimate of any variable consideration. Periodically, we review these risks and may increase or decrease backlog accordingly As of December 31, 2018, our ending backlog was $3.814 billion. We expect to recognize approximately 25% of our December 31, 2018 backlog over the next 12 months and approximately 40% over the next 24 months as revenue, with the remainder recognized thereafter.

Disaggregation of Revenue: See Note 14 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.

Accounts Receivable: Receivables consist of billed amounts due from our customers. Due to the nature of our customers, we generally do not require collateral. We have limited exposure to credit risk as we have historically collected substantially all of our receivables. We generally require minimal allowance for doubtful accounts for our customers, which amounted to $1.7 million and $1.3 million as of December 31, 2018 and September 30, 2018, respectively.

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

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engineering costs incurred to date, including applicable overhead. Any inventoried costs in excess of estimated realizable value are immediately charged to cost of sales.

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. The amounts may not exceed their estimated net realizable value. 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.

Long-term Capitalized Contract Costs: Through September 30, 2018, long-term capitalized contract costs included costs incurred on contracts to develop and manufacture transportation systems for customers for which revenue recognition did not begin until the customers begin operating the systems prior to the adoption of ASC 606. Upon adoption of ASC 606, revenue recognition and cost recognition are no longer deferred in these situations and therefore we no longer have long-term capitalized contract costs.

Contract Liabilities: 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 liabilities are classified as current liabilities based on our contract operating cycle and calculated on a contract-by-contract basis, net of revenue recognized, at the end of each reporting period.

Recently Adopted Accounting Pronouncements – ~~Not Yet~~Income Taxes

On December 22, 2017 the U.S. government enacted the “Tax Cuts and Jobs Act of 2017” (Tax Act). Due to the complexity of the Tax Act, the SEC 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. During the first quarter of fiscal year 2019, we did not adjust provisional amounts recorded in the prior fiscal year and the SAB 118 measurement period subsequently ended on December 22, 2018. Although we no longer considers 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.

Recently Adopted Accounting Pronouncements – Other

In ~~May 2014,~~October 2016, the Financial Accounting Standards Board (FASB) issued ~~Accounting Standards Update (ASU) 2014-09,~~ASU 2016-16, ~~Revenue from Contracts with Customers.~~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. 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 customers in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods or services. Adoption of the new rules could affect the timing of revenue recognition for certain transactions. We will adopt ASU 2014-09 using the “modified retrospective” method of adoption, meaning the cumulative effect of applying ASU 2014-09 will be recognized as an adjustment to the opening retained earnings balance in the year of adoption. We expect that we will record an increase to our opening retained earnings in the year of adoption, however we cannot reasonably estimate the amount of the adjustment due to the remaining progress to be completed on our open contracts and any new contracts that commence prior to our adoption date. Adoption of ASU 2014-09 will be required2016-16 was effective for us beginning ~~in the first quarter of fiscal 2019~~October 1, 2018 and wedid not have ~~determined that we will not adopt ASU 2014-09 earlier than required.~~

~~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 detailed~~any significant impact ~~of the adoption of the new standard~~ on our ~~active contracts across all our business segments, developing processes and tools to dual report~~consolidated financial results under both current GAAP and ASU 2014-09, and assessing the impact to our internal control structure. 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 cases the accounting for those contracts will change under ASU 2014-09 such that we will recognize revenue as costs are incurred. This change will generally result in an acceleration of revenue as compared with our current revenue recognition method for those contracts. Approximately 22% of our net sales used the units-of-delivery method to recognize revenue in fiscal 2017. For a number of our multiple-element transportation contracts we are currently required to defer the recognition of all revenue and related costs during the design and build phase, as the collection of all customer payments occurs during the subsequent operate and maintain phase. Under ASU 2014-09, deferral of such revenue and costs is not required. As a result, net revenue related to prior periods will be recognized as an increase to retained earnings upon adoption of ASU 2014-09. Additionally, the deferred customer-payment feature of these contracts will require identification of an embedded financing component under ASU 2014-09 which will result in the recognition of financing income for amounts which would have otherwise been recognized as revenue under the legacy standard.

As the new standard will supersede substantially all existing revenue guidance affecting us under GAAP, 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 effect of the new standard will continue through the end of fiscal year 2018.statements.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10), which ~~updates certain~~requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income, requires entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset, and eliminates the requirement for entities to disclose the methods and significant assumptions used to estimate the fair value that is currently required to be disclosed for financial instruments measured at amortized cost. ASU 2016-01 was adopted by us beginning October 1, 2018 and did not have any significant impact 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 cash receipts and cash payments from specific types of transactions 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 ~~recognition, measurement, presentation and disclosure~~more than one class of ~~financial instruments.~~ cash flows. ASU ~~2016-01 will be~~ 2016-15 was

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effective for us beginning October 1, 2018 and did not have any significant impact on our consolidated financial statements.

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. ASU 2016-18 was adopted by us beginning October 1, 2018. The application of this accounting standard update did not impact financial results, but resulted in a retrospective change in the presentation of restricted cash, including the inclusion of $27.4 million and $11.8 million of restricted cash on hand at September 30, 2018 and December 31, 2017, respectively, within the beginning and ending amounts of cash and cash equivalents in our Statements of Cash Flows. In addition, changes in the total of cash, cash equivalents and restricted cash are now reflected in our Statements of Cash Flows for all periods presented.

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 ~~exception~~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 ~~specific portion~~business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The guidance requires an entity to evaluate if substantially all of the ~~amendment, early adoption~~fair value of the gross assets transferred is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities is not ~~permitted. We~~a business. ASU 2017-01 was adopted by us on October 1, 2018 and did not have any immediate impact on our consolidated financial statements. However, adoption of ASU 2017-01 could impact the accounting for future acquisitions or disposals of assets and activities because the accounting for a business combination differs significantly from that of an asset acquisition.

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 ~~currently evaluating the impact this guidance~~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. We adopted ASU 2017-07 beginning October 1, 2018 and it did not have any significant impacton our consolidated financial statements. The components of net periodic benefit cost, other than the service cost component, are included in other income (expense) in our condensed consolidated statements ~~and related disclosures.~~of income (loss).

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, 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 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 are currently evaluating the impact of the application of this accounting standard update on our consolidated financial statements ~~as well as whether to~~and we have determined we will not adopt the new guidance early.

~~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~~

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~~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.~~ ~~Adoption of ASU 2016-15 will be required for us beginning on October 1, 2018, and we have determined that we will not adopt ASU 2016-15 earlier than required.~~ ~~We are currently evaluating the impact of the application of this accounting standard update on our consolidated financial statements.~~

~~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. Adoption of ASU 2016-16 will be required for us in our fiscal year beginning October 1, 2018, and we have determined that we will not adopt ASU 2016-16 earlier than required.~~ ~~We are currently evaluating the impact of the application of this accounting standard update on our consolidated financial statements.~~

~~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. ~~Adoption of ASU 2016-18 will be required for us in our fiscal year beginning October 1, 2018, and we have determined that we will not adopt ASU 2016-18 earlier than required.~~ Beginning October 1, 2018 application of this accounting standard update will not impact financial results, but will result in a retrospective change in the presentation of restricted cash, including the inclusion of $8.4 million and $75.6 million of restricted cash on hand at September 30, 2017 and September 30, 2016, respectively, within the beginning and ending amounts of cash and cash equivalents in our Statements of Cash Flows.

~~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. Adoption of ASU 2017-01 will be required for us in our fiscal year beginning October 1, 2018, and we have determined that we will not adopt ASU 2017-01 earlier than required. ~~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~~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.

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In ~~March~~August 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. ~~Adoption of ASU 2017-07 will be required for us in our fiscal year beginning October 1, 2018, and we have determined that we will not adopt ASU 2017-07 earlier than required.~~ ~~We are currently evaluating the impact of the application of this accounting standard update on our consolidated financial statements.~~

~~The FASB has~~ issued ASU 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 economic results of an entity’s risk management activities in its financial statements. The amendments in this ASU are intended to better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the 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 effects of the hedging instrument and the hedged item in the financial statements. Additionally, the 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

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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 are effective for us in our annual period beginning October 1, 2019 and interim periods within that year, 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 ~~February~~August 2018, the FASB issued ASU ~~2018-02,~~ ~~Income Statement—Reporting Comprehensive Income~~2018-13, Fair Value Measurement - Disclosure Framework (Topic ~~220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which helps organizations reclassify certain stranded income tax effects in accumulated other comprehensive income resulting from~~820). The updated guidance modifies the ~~Tax Act enacted~~disclosure requirements on December 22, 2017. ASU No. 2018-02 allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from tax reform. Additionally, ASU No. 2018-02 requires financial statement preparers to disclose (1) a description of their accounting policy for releasing income tax effects from accumulated other comprehensive income, (2) whether they elect to reclassify the stranded income tax effects from the tax reform, and (3) information about other income tax effects related to the application of the tax reform that are reclassified from accumulated other comprehensive income to retained earnings, if any.fair value measurements. The amendments in this ~~ASU~~accounting standard update are effective for us in our annual period beginning October 1, ~~2019~~2020 and interim periods within that annual period. Early adoption is permitted for any removed or modified disclosures. 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 August 2018, the FASB issued ASU 2018-14, Defined Benefit Plan - Disclosure Framework (Topic 715), which modifies the 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 disclosures and adds disclosure requirements identified as relevant. The amendments in this accounting standard update are effective for us in our annual period beginning October 1, 2020. 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.

Note 2 — New Accounting Standards Implemented

In May 2014, the 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 disclosure requirements for revenue arrangements. The new standard, as 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. The adoption of ASC 606 primarily impacted certain (i) multiple-element transportation contracts that previously deferred the recognition of all revenue and related costs during the design and build phase, as the collection of payment occurred during the subsequent operate and maintain phase, and (ii) contracts previously covered by contract accounting standards that recognized revenue using the units-of-delivery method. Under ASC 606, we now recognize sales on these contracts over time by using the cost-to-cost method.

Based on contracts in process at September 30, 2018, upon adoption of ASC 606 we recorded a net increase to retained earnings of $24.5 million, which includes the acceleration of net sales of approximately $114.9 million and the related cost of sales. The adjustment to retained earnings 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 required. In addition, the adjustment to retained earnings 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

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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 Condensed Consolidated Statements of Income (Loss) 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 as reported under ASC 605, which included unbilled contract receivables, 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 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 Condensed Consolidated Balance Sheet as of October 1, 2018 due to the adoption of ASC 606 (in thousands):


			Adjustments		October 1, 2018
	September 30,		Due to		As Adjusted
	2018		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 noncurrent 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 liability		—		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
Other long-term liabilities		43,486		—		43,486
Other long-term 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 certain line items on our Condensed Consolidated Statements of Income (Loss) for the three months ended December 31, 2018 (in thousands):


	Three months ended December 31, 2018
					As Reported
	Under		Effect of		Under
	ASC 605		ASC 606		ASC 606
Net sales:
Products	$	152,562	$	29,691	$	182,253
Services		124,262		(1,256)		123,006
		276,824		28,435		305,259
Costs and expenses:
Products		100,544		24,941		125,485
Services		92,785		—		92,785
Selling, general and administrative expenses		62,823		163		62,986
Research and development		12,012		—		12,012
Amortization of purchased intangibles		10,565		—		10,565
Restructuring costs		1,992		—		1,992
		280,721		25,104		305,825

Operating loss		(3,897)		3,331		(566)

Other income (expenses):
Interest and dividend income		56		1,178		1,234
Interest expense		(4,032)		—		(4,032)
Other income (expense), net		(4,753)		—		(4,753)

Loss from continuing operations before income taxes		(12,626)		4,509		(8,117)

Income tax provision		2,473		24		2,497

Net loss		(15,099)		4,485		(10,614)

Less noncontrolling interest in loss of VIE		(5,981)		1,954		(4,027)

Net loss attributable to Cubic	$	(9,118)	$	2,531	$	(6,587)

Net income (loss) per share:
Basic earnings per share attributable to Cubic	$	(0.32)	$	0.09	$	(0.23)
Diluted earnings per share attributable to Cubic	$	(0.32)	$	0.09	$	(0.23)

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The table below quantifies the impact of adopting ASC 606 on segment net sales and operating income (loss) for the three months ended December 31, 2018 (in thousands):


	Three months ended December 31, 2018
					As Reported
	Under		Effect of		Under
	ASC 605		ASC 606		ASC 606
Sales:	(in thousands)
Cubic Transportation Systems	$	172,728	$	9,079	$	181,807
Cubic Mission Solutions		45,363		1,030		46,393
Cubic Global Defense		58,733		18,326		77,059
Total sales	$	276,824	$	28,435	$	305,259

Operating income (loss):
Cubic Transportation Systems	$	9,186	$	1,790	$	10,976
Cubic Mission Solutions		(5,191)		251		(4,940)
Cubic Global Defense		1,607		1,290		2,897
Unallocated corporate expenses		(9,499)		—		(9,499)
Total operating income (loss)	$	(3,897)	$	3,331	$	(566)

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The table below presents how the impact of the adoption of ASC 606 affected certain line items on our Condensed Consolidated Balance Sheet at December 31, 2018 (in thousands):


					As Reported
	Under		Effect of		Under
	ASC 605		ASC 606		ASC 606
ASSETS
Current assets:
Cash and cash equivalents	$	75,174	$	—	$	75,174
Cash in consolidated VIE		421		—		421
Restricted cash		17,889		—		17,889
Restricted cash in consolidated VIE		10,000		—		10,000
Accounts receivable, net		390,855		(272,564)		118,291
Contract assets		—		320,277		320,277
Recoverable income taxes		1,086		235		1,321
Inventories		121,223		(29,022)		92,201
Assets held for sale		8,177		—		8,177
Other current assets		40,924		—		40,924
Total current assets		665,749		18,926		684,675

Long-term contracts receivables		4,064		(4,064)		—
Long-term contracts financing receivables		—		44,936		44,936
Long-term contracts financing receivables in consolidated VIE		—		52,996		52,996
Long-term capitalized contract costs		95,894		(95,894)		—
Long-term capitalized contract costs in consolidated VIE		1,551		(1,551)		—
Property, plant and equipment, net		125,298		—		125,298
Deferred income taxes		4,298		389		4,687
Goodwill		484,329		—		484,329
Purchased intangibles, net		137,201		—		137,201
Other assets		13,871		—		13,871
Other noncurrent assets in consolidated VIE		962		—		962
Total assets	$	1,533,217	$	15,738	$	1,548,955

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Short-term borrowings	$	64,500	$	—	$	64,500
Trade accounts payable		111,310		(2,216)		109,094
Trade accounts payable in consolidated VIE		205		—		205
Contract liability		—		69,713		69,713
Customer advances		80,993		(80,993)		—
Accrued compensation and other current liabilities		82,323		—		82,323
Income taxes payable		6,512		259		6,771
Total current liabilities		345,843		(13,237)		332,606

Long-term debt		199,801		—		199,801
Long-term debt in consolidated VIE		15,357		—		15,357
Other long-term liabilities		43,838		—		43,838
Other long-term liabilities in consolidated VIE		6,146		—		6,146

Shareholders’ equity:
Common stock		260,141		—		260,141
Retained earnings		792,717		22,366		815,083
Accumulated other comprehensive loss		(112,642)		—		(112,642)
Treasury stock at cost		(36,078)		—		(36,078)
Shareholders’ equity related to Cubic		904,138		22,366		926,504
Noncontrolling interest in VIE		18,094		6,609		24,703
Total shareholders’ equity		922,232		28,975		951,207
Total liabilities and shareholders’ equity	$	1,533,217	$	15,738	$	1,548,955

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Note 23 — 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),~~the Purchaser, an entity affiliated with GC Valiant, LP, under which we agreed to sell our CGD Services business to the Purchaser. 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 at December 31, 2018, we have recorded a receivable from the Purchaser of $3.7 million for the estimated amount due related to the working capital settlement. The working capital settlement has not yet been settled with the Purchaser.

In addition to the ~~upfront cash payment,~~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. In the third quarter of fiscal 2018, we received $133.8 million in connection with the sale and at June 30, 2018 we have recorded a receivable from the Purchaser of $3.7 million for the estimated amount due related to the working capital settlement. No amount has been recorded as a receivable related to the potential achievement of earn-out conditions based upon our ~~probability~~ assessment of the probability of achievement of the required conditions.

We ~~have~~ 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. As such, the CGD Services business financial results are reported within discontinued operations in our condensed consolidated financial statements. The operating results and cash flows of CGD Services have been classified as discontinued operations in the Condensed Consolidated Statements of Income (Loss) and Condensed Consolidated Statements of Cash Flows for all periods ~~presented and the assets and liabilities of CGD Services have been classified as assets and liabilities of discontinued operations in the Condensed Consolidated Balance Sheet at September 30, 2017.~~presented.

~~In the second quarter of fiscal 2018, we concluded that at March 31, 2018~~ ~~all of the required factors for the then-expected sale of CGD Services were met for the business to be considered held for sale.~~ The assets and liabilities of a business held for sale are measured at lower of carrying value or fair value less cost to sell. In March 2018, we recognized a $6.9 million loss within discontinued operations upon classification of the CGD Services operations as held for sale, which was calculated as the excess of the carrying value of the net assets of CGD Services less the sales price in the stock purchase agreement of $135.0 million less estimated selling costs of $4.2 million. In the third quarter of fiscal 2018, this loss was adjusted by a reduction of $0.8 million to a total loss of $6.1 million based upon the estimated carrying value of the net assets at the date that the sale closed.

~~Table of Contents~~

The operations and cash flows of CGD Services are reflected in our consolidated Statements of Income and Consolidated Statements of Cash Flows as discontinued operations through May 31, 2018, the date of the sale. ~~Income~~The following table presents the composition of net income from discontinued operations, net of taxes, ~~is comprised of the following~~ for the quarter ~~and nine~~ended December 31, 2017 (in thousands). No amounts were recognized as income or loss from discontinued operations for the three months ended ~~June 30, 2018 and 2017 (in thousands):~~December 31, 2018:

Nine Months Ended

Three Months Ended

June 30,

June 30,

2018

2017

2018

2017

Net sales

$
262,228

$
281,661

$
71,867

$
95,685

Costs and expenses:

Cost of sales

235,279

255,995

64,597

86,706

Selling, general and administrative expenses

10,676

12,478

3,133

3,196

Amortization of purchased intangibles

1,373

2,145

276

608

Restructuring costs

7

334

—

—

Other income

(15)

(42)

(2)

(9)

  Earnings from discontinued operations before income taxes

14,908

10,751

3,863

5,184

Net (gain) loss on sale

6,081

—

(819)

—

Income tax provision (benefit)

463

(234)

(698)

(51,095)

Net income from discontinued operations

$
8,364

$
10,985

$
5,380

$
56,279

~~The carrying amounts of CGD Services segment assets and liabilities that were classified as assets and liabilities of discontinued operations as of September 30, 2017 are as follows (in thousands):~~

September 30,


2017

Accounts receivable, net

$
74,710

Other current assets

1,190

Property and equipment, net

466

Goodwill

94,350

Purchased intangibles, net

8,637

Other noncurrent assets

(5,179)

      Total assets

174,174

Accounts payable and other liabilities

36,862

   Net assets

$
137,312


		Three Months Ended
	December 31, 2017

Net sales	$	92,293
Costs and expenses:
Cost of sales		83,120
Selling, general and administrative expenses		3,667
Amortization of purchased intangibles		608
Other income		(5)
Earnings from discontinued operations before income taxes		4,903
Income tax provision		3,254
Net income from discontinued operations	$	1,649

Under a transition services agreement, we are providing the Purchaser with certain post-closing support primarily consisting of IT and payroll services. We are charging the Purchaser for the post-closing support in amounts that approximate their expected costs, and these support services will be phased out over an approximate ~~seven month~~ten-month period from the date that the sale closed.

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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Advanced Traffic Solutions Inc.

In October 2018, we acquired all of the outstanding capital stock of Advanced Traffic Solutions Inc. (Trafficware), a provider of intelligent traffic solutions for the transportation industry based in Sugar Land, Texas. Trafficware provides a fully integrated suite of software, Internet of Things devices, and hardware solutions that optimize the flow of motorist and pedestrian traffic. Trafficware is expected to provide synergies from combining its capabilities with our existing Cubic Transportation System (CTS) business.

Trafficware’s sales and results of operations included in our operating results for the quarter ended December 31, 2018 and 2017 were as follows (in millions):


	Three Months Ended
	December 31,
	2018		2017
Sales	$	10.5	$	—
Operating loss		(3.3)		—
Net loss after taxes		(3.3)		—

Trafficware’s operating results above included the following amounts for the quarter (in millions):


	Three Months Ended
	December 31,
	2018		2017
Amortization	$	4.3	$	—
Acquisition-related expenses		1.4		—

The acquisition-date fair value of consideration is $237.6 million, which is comprised of net cash paid of $239.2 million less a $1.6 million receivable due from 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.

The following table summarizes the estimated 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		9.4
Accounts payable and accrued expenses		(6.5)
Other net assets acquired (liabilities assumed)		(2.0)
Net identifiable assets acquired		85.9
Goodwill		151.7
Net assets acquired	$	237.6

The estimated fair values of assets acquired and liabilities assumed, including purchased intangibles, are preliminary estimates pending the finalization of our valuation analyses. 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 seven years from the date of acquisition.

The goodwill resulting from the acquisition consists primarily of the synergies expected from combining the operations of Trafficware with our existing CTS business, and strengthening our capability of developing and integrating products in our CTS portfolio. The goodwill also includes the value of the assembled workforce that became our employees

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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.

The estimated amortization expense related to the intangible assets recorded in connection with our acquisition of Trafficware for fiscal years 2019 through 2023 and thereafter is as follows (in millions):


Year Ended
September 30,
2019	$	15.3
2020		11.4
2021		11.4
2022		11.4
2023		6.4
Thereafter		18.8

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 (ISR) 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 for the three months ended December 31, 2018 and 2017 were as follows (in millions):


	December 31,
	2018		2017
Sales	$	—	$	—
Operating loss		(0.9)		—
Net loss after taxes		(0.9)		—

Shield’s operating results above included the following amounts for the three months ended December 31, 2018 and 2017 (in millions):


	December 31,
	2018		2017
Amortization	$	0.2	$	—
Acquisition-related expenses		—		—

The acquisition-date fair value of consideration is $12.8 million, which is comprised of estimated 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 $1.3 million, plus additional consideration to be paid in the future of $0.7 million. Under the purchase agreement, we will pay the sellers up to $10.0 million of 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 contingencies are resolved and any subsequent changes in fair value are recognized in earnings.

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The acquisition of Shield 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	$	6.0
Other net assets acquired		0.3
Net identifiable assets acquired		6.3
Goodwill		6.5
Net assets acquired	$	12.8

The technology asset valuation used the excess earnings approach and is being amortized using the straight-line method over eight years, which is based on the expected period of cash flows that will be generated by the asset.

The goodwill resulting from the acquisition consists primarily of the synergies expected from combining the operations of Shield with our existing Cubic Mission Solutions (CMS) business, and strengthening our capability of developing and integrating products and services in our CMS portfolio. The goodwill also includes the value of the assembled workforce that became our employees following the close of the acquisition. The amount recorded as goodwill is allocated to our CMS segment and is expected to be deductible for tax purposes.

The estimated amortization expense related to the intangible assets recorded in connection with our acquisition of Shield for fiscal years 2019 through 2023 and thereafter is as follows (in millions):


Year Ended
September 30,
2019	$	0.8
2020		0.8
2021		0.8
2022		0.8
2023		0.8
Thereafter		2.1

MotionDSP

OnIn October ~~31,~~ 2017 we paid cash of $4.7 million to purchase 49% of the outstanding capital stock of 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 video processing of our CMS business and expands our customer base in the public safety and other adjacent markets.

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From October 31, 2017 through February 21, 2018, we accounted for our 49% ownership of MotionDSP using the equity method of accounting. During this time period we recorded 49% of the net loss of MotionDSP, totaling $0.2 million, in our Condensed Consolidated Statements of Income within non-operating income (expense). As of February 21, 2018 we began consolidating the results of the operations of MotionDSP in our financial statements.

MotionDSP’s sales and results of operations included in our operating results since its consolidation in our financial statements for the ~~quarter and nine-months~~quarters ended ~~June 30,~~December 31, 2018 and 2017 were as follows (in millions):


	Nine Months Ended				Three Months Ended
	June 30,				June 30,				December 31,
	2018		2017		2018		2017		2018		2017
Sales	$	0.4	$	—	$	0.3	$	—	$	0.2	$	—
Operating loss		(1.0)		—		(0.2)		—		(0.4)		—
Net loss after taxes		(1.0)		—		(0.2)		—		(0.4)		—

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MotionDSP’s operating results above included the following amounts for the ~~quarter~~quarters ended December 31, 2018 and ~~nine-month periods~~2017 (in millions):


	Nine Months Ended				Three Months Ended
	June 30,				June 30,				December 31,
	2018		2017		2018		2017		2018		2017
Amortization	$	0.2	$	—	$	0.2	$	—	$	0.2	$	—
Acquisition-related expenses		0.7		—		0.1		—		0.1		—

The acquisition of MotionDSP 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):


Customer relationships	$	0.2
Technology		4.5
Trade name		0.1
Accounts payable and accrued expenses		(0.3)
Other noncurrent liabilities		(0.8)
Other net liabilities assumed		(0.9)
Net identifiable assets acquired		2.8
Goodwill		6.7
Net assets acquired	$	9.5

The preliminary estimated fair values of assets acquired and liabilities assumed, including purchased intangibles, deferred revenue are preliminary estimates pending the finalization of our valuation analyses. The preliminary 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 valuation used the excess earnings method.

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

~~At the time of the acquisition, the~~The goodwill resulting from the acquisition was deemed to consist primarily of the synergies expected from combining the operations of MotionDSP with our CMS operating segment, enhancing our capabilities in real-time video processing and computer vision analytics of our CMS portfolio, as well as 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 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 MotionDSP for fiscal years ~~2018~~2019 through ~~2022 and thereafter is as follows (in millions):~~

Year Ended

September 30,

2018

$
0.4

2019

0.7

2020

0.7

2021

0.7

2022

0.7

Thereafter

1.6

~~Deltenna Ltd.~~

In July 2017, we acquired all of the outstanding capital stock of Deltenna Ltd (Deltenna), a wireless infrastructure company specializing in the design and delivery of radio and antenna communication solutions. Deltenna designs and manufactures cutting-edge integrated wireless products including compact LTE base stations, broadband range extenders for areas of poor coverage and rugged antennas. The addition of Deltenna, headquartered in Chippenham, U.K., will enhance tactical communication and training capabilities of our Cubic Global Defense Systems (CGD Systems) businesses by effectively delivering high-capacity data networks within challenging and rigorous environments.

~~Deltenna’s sales and results of operations included in our operating results for the quarter and nine months ended June 30, 2018 and 2017 were as follows (in millions):~~

Nine Months Ended

Three Months Ended

June 30,

June 30,

2018

2017

2018

2017

Sales

$
0.3

$
—

$
0.3

$
—

Operating income

0.1

—

0.1

—

Net income after taxes

0.1

—

0.1

—

~~Deltenna’s operating results above included the following amounts for the quarter and nine-month periods (in millions):~~

Nine Months Ended

Three Months Ended

June 30,

June 30,

2018

2017

2018

2017

Amortization

$
0.2

$
—

$
0.1

$
—

Acquisition-related expenses

(0.3)

—

(0.1)

—

~~The acquisition-date fair value of consideration is $5.3 million, which is comprised of cash paid of $4.0 million~~ ~~plus~~ the fair value of contingent consideration of $1.3 million. Under the purchase agreement, we will pay the sellers up to $7.6 million of contingent consideration if Deltenna meets certain sales goals from the date of acquisition through the year ending September 30, 2022. 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 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):

Customer relationships

$
1.0

Technology

1.1

Other net assets acquired (liabilities assumed)

(0.3)

Net identifiable assets acquired

1.8

Goodwill

3.5

Net assets acquired

$
5.3

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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 valuation used the excess earnings approach and the technology asset valuations used the relief from royalty approach.

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

At the time of the acquisition, the goodwill resulting from the acquisition was deemed to consist primarily of the synergies expected from combining the operations of Deltenna with our legacy CGD Systems operating segment and strengthening our capability of developing and integrating products in our defense portfolio, as well as the value of the assembled workforce that became our employees following the close of the acquisition. The amount recorded as goodwill was assigned to our legacy CGD Systems segment. ~~As described in Note 13, we concluded that CMS~~ became a separate operating segment beginning on October 1, 2017 distinct from our legacy CGD Systems operating segment. In conjunction with the changes to reporting units, on October 1, 2017 we reassigned goodwill between CGD Systems and CMS based on their relative fair values. The amount recorded as goodwill in connection with the acquisition of Deltenna 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~~2023 and thereafter is as follows (in millions):

Year Ended

September 30,

2018

$
0.3

2019

0.3

2020

0.3

2021

0.3

2022

0.3

Thereafter

0.7

~~Vocality~~

On November 30, 2016, we acquired all of the outstanding capital stock of Vocality International (Vocality), based in Shackleford, U.K., a provider of embedded technology which unifies communications platforms, enhances voice quality, increases video performance and optimizes data throughput. Vocality contributes to our Command, Control, Communications, Computers, Intelligence, Surveillance and Reconnaissance (C4ISR) portfolio of products for our CMS segment and expands our customer base. Vocality also sells its technology in the broadcast, oil and gas, mining, and maritime markets.

~~Vocality’s sales and results of operations included in our operating results for the quarter and nine-months ended June 30, 2018 and 2017 were as follows (in millions):~~

Nine Months Ended

Three Months Ended

June 30,

June 30,

2018

2017

2018

2017

Sales

$
4.6

$
1.2

$
1.7

$
0.4

Operating income (loss)

(1.0)

(2.3)

0.3

(0.7)

Net income (loss) after taxes

(1.0)

(2.1)

0.3

(0.6)

~~Vocality’s operating results above included the following amounts for the quarter and nine month periods (in millions):~~

Nine Months Ended

Three Months Ended

June 30,

June 30,

2018

2017

2018

2017

Amortization

$
0.6

$
0.4

$
0.2

$
0.2

Acquisition-related expenses

0.6

1.5

—

0.3


Year Ended
September 30,
2019	$	0.7
2020		0.7
2021		0.7
2022		0.7
2023		0.7
Thereafter		0.8

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Prior to our acquisition of Vocality, Vocality had a number of share-based payment awards in place to its employees. Due to the structure of some of these share-based payment awards and the acceleration of vesting of certain of these awards in connection with our acquisition of Vocality, 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 $0.4 million of compensation expense within general and administrative expenses during the quarter ended December 31, 2016 related to this matter. This compensation is reflected in Vocality’s acquisition-related expenses in the first quarter of fiscal 2017 included in the results of operations above for the nine months ended June 30, 2017.

The acquisition date fair value of consideration is $9.6 million, which is comprised of cash paid of $9.7 million plus additional held back consideration to be paid in the future estimated at $0.3 million, ~~less the $0.4 million of cash paid to the seller recorded as compensation expense described above~~.

The acquisition of Vocality 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):

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

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 valuation used the excess earnings 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.

At the time of the acquisition, the goodwill resulting from the acquisition was deemed to consist primarily of the synergies expected from combining the operations of Vocality with our legacy CGD Systems operating segment, and strengthening our capability of developing and integrating products in our defense portfolio, as well as the value of the assembled workforce that became our employees following the close of the acquisition. The amount recorded as goodwill was assigned to our legacy CGD Systems segment. ~~As described in Note 13, we concluded that CMS~~ became a separate operating segment beginning on October 1, 2017 distinct from our legacy CGD Systems operating segment. In conjunction with the changes to reporting units, on October 1, 2017 we reassigned goodwill between CGD Systems and CMS based on their relative fair values. The amount recorded as goodwill in connection with the acquisition of Vocality 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 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

1523

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Pro forma information

The following unaudited pro forma information presents our consolidated results of operations as if ~~MotionDSP, Deltenna~~Trafficware, Shield, and ~~Vocality~~MotionDSP had been included in our consolidated results since October 1, ~~2016~~2017 (in millions):


	Nine Months Ended				Three Months Ended				Three Months Ended
	June 30,				June 30,				December 31,
	2018		2017		2018		2017		2018		2017
Net sales	$	823.7	$	761.2	$	296.2	$	267.0	$	307.1	$	261.8

Net income (loss)	$	(8.4)	$	(36.9)	$	7.3	$	(78.6)
Net loss									$	(6.3)	$	(13.4)

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. No adjustments were made for transaction expenses, other adjustments that do not reflect ongoing operations or for operating efficiencies or synergies. The pro forma financial information is not necessarily indicative of what the consolidated financial results of our operations would have been had the acquisitions been completed on October 1, ~~2016,~~2017, and it does not purport to project our future operating results.

Acquisition of GRIDSMART Subsequent to December 31, 2018

In January 2019, we acquired all of the outstanding capital stock of GRIDSMART Technologies, Inc. (GRIDSMART), a provider of differentiated video tracking to the Intelligent Traffic Systems (ITS) market. Based in Knoxville, Tennessee, GRIDSMART specializes in video detection at the intersection utilizing advanced image processing, computer vision modeling and machine learning along with a single camera solution providing best-in-class data for optimizing the flow of people and traffic through intersections. GRIDSMART is expected to provide synergies from combining its capabilities with our existing CTS business. The purchase price was $87.0 million adjusted for the difference between net working capital acquired and a targeted working capital amount, and was financed primarily with proceeds from draws on our line of credit. Due to the limited time between the acquisition date and the filing of this report and due to the difference in fiscal year dates between GRIDSMART and Cubic, it is not practicable for us to disclose: (i) the allocation of purchase price to assets acquired and liabilities assumed as of the date of close, (ii) the methods of amortization and amortization periods of acquired intangible assets, and (iii) pro forma revenues and earnings of the combined company for the quarter ended December 31, 2018.

Goodwill

Changes in goodwill for the ~~nine~~three months ended ~~June 30,~~December 31, 2018 were as follows for each of our reporting units (in thousands):

Cubic Global

Cubic


Transportation

Defense

Mission

Systems

Systems

Solutions

Total

Net balances at September 30, 2017

$
50,870

$
270,692

$
—

$
321,562

Reassignment on October 1, 2017

—

(125,321)

125,321

—

Acquisitions

—

665

6,676

7,341

Foreign currency exchange rate changes

(556)

(870)

487

(939)

Net balances at June 30, 2018

$
50,314

$
145,166

$
132,484

$
327,964



	Transportation		Cubic Mission		Cubic Global
	Systems		Solutions		Defense		Total

Net balances at September 30, 2018	$	49,786	$	138,127	$	145,713	$	333,626
Acquisitions		151,670		—		—		151,670
Foreign currency exchange rate changes		(798)		(73)		(96)		(967)
Net balances at December 31, 2018	$	200,658	$	138,054	$	145,617	$	484,329

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. 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 13, 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 Systems and CMS based on their relative fair values.

We estimated the fair value of CGD Systems and CMS based upon market multiples from publicly traded comparable companies in addition to discounted cash flows models for CMS and for a combination of CGD Systems and CMS based on discrete 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 discrete financial forecasts. The 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 Systems and CMS reporting units.

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.

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The test for goodwill impairment is a two-step process. The first step of the test is performed by comparing the fair value of each reporting unit to its carrying value, including recorded goodwill. If the carrying value of a reporting unit exceeds its fair value, the second step is performed to measure the amount of the impairment, if any, by comparing the implied fair value of goodwill to its carrying value. Any resulting impairment determined would be recorded in the current period.

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In connection with our reassignment of goodwill between CGD Systems and our new CMS reporting unit, we performed a goodwill impairment test on the legacy CGD Systems reporting unit immediately before the reassignment of goodwill. This test indicated that there was no impairment of the legacy CGD Systems reporting unit. We also performed a separate goodwill impairment test on the new CGD Systems and CMS reporting units as of October 1, 2017 after goodwill was reassigned in the amounts identified in the table above. The results of this October 1, 2017 impairment test indicated that the estimated fair values for our CGD Systems reporting unit exceeded its carrying value by over 10%, while the estimated fair value of our CMS reporting unit exceeded its carrying values by over 25%.

Our most recent annual goodwill impairment test ~~for our Cubic Transportation Systems (CTS) reporting unit~~ was our ~~2017~~2018 annual impairment test completed as of July 1, ~~2017.~~2018. The results of our ~~2017~~2018 annual impairment test indicated that the estimated fair value for our CTS reporting unit exceeded its carrying value by over 100%while the estimated fair values of our Cubic Global Defense (CGD) and CMS reporting units each exceeded their carrying values by over 40%. Subsequent to the effective dates of the tests for each of our reporting units, we do not believe that circumstances have occurred that indicate that an impairment for any of our reporting units is more-likely-than-not. As such, no subsequent interim impairment tests have been performed.

Unforeseen negative changes in future business or other market conditions for any of our reporting units including margin compression or loss of business, could cause recorded goodwill to be impaired in the future. Also, changes in estimates and assumptions we make in conducting our goodwill assessment could affect the estimated fair value of our reporting units and could result in a goodwill impairment charge in a future period.

Note 34 – 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, CTS, a wholly owned subsidiary of 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 CTS. 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 ~~both VIE’s.~~OpCo. Consequently, we have consolidated the financial statements of OpCo. within Cubic’s consolidated financial statements. We have concluded that we are not the ~~P3 Venture~~primary beneficiary of HoldCo., and thus we have not consolidated the financial statements of HoldCo. within Cubic’s consolidated 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 ~~estimated~~fixed payments of ~~$664.0~~$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 CTS by OpCo. CTS will receive ~~estimated~~fixed payments of ~~$510.0~~$427.6 million, adjusted for incremental transaction-based fees, inflation, and performance penalties, under its subcontract with OpCo.

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Upon creation of the P3 Venture, John Laing made a loan to HoldCo. of $24.3 million in the form of ana bridge loan that is intended to be converted to equity ~~bridge loan. The loan carries~~in the future in accordance with its equity funding responsibilities. Concurrently, HoldCo. made a ~~2.5%~~corresponding equity contribution to OpCo. in the same amount which is included within equity of

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Noncontrolling interest ~~rate and matures at the end~~in VIE within Cubic’s consolidated financial statements. Also, upon creation of the ~~design and build phase of the MBTA Contract.~~P3 Venture, CTS issued a letter of credit for $2.7 million to HoldCo. in accordance with CTS’s equity funding responsibilities. HoldCo. is able to draw on the CTS letter of credit in certain liquidity instances, but no amounts have been drawn on this letter of credit as of ~~June 30,~~December 31, 2018.

Upon creation of the P3 Venture, OpCo. entered into a credit agreement with a group of financial institutions (the P3OpCo. 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. ~~Through June 30,~~At December 31, 2018, ~~OpCo. has received proceeds from debt issuances under~~the outstanding balance on the long-term debt facility ~~of $11.4~~was $15.4 million, which is presented net of unamortized deferred financing costs ~~totaling $9.1~~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 value.

The P3OpCo. 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 P3OpCo. Credit Agreement also contains a number of customary events of default including, but not limited to, the ~~successful~~ 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 ~~June 30,~~December 31, 2018, the outstanding notional principal amounts on open interest rate swaps ~~was $21.1~~were $61.9 million. The fair value of OpCo.’s interest rate swaps at ~~June 30,~~December 31, 2018 was ~~$2.1~~$6.1 million and is recorded as a liability in Other long-term liabilities in our Consolidated Balance Sheets. OpCo.’s interest rate swaps were not designated as effective hedges at ~~June 30,~~December 31, 2018 and as such any unrealized gains/losses ~~of $2.1 million at June 30, 2018~~ are included in other income (expense), net. Unrealized losses as a result of changes in the fair value of OpCo.’s interest rate swaps were $6.1 million for the three months ended December 31, 2018. See Note 13 for a description of the measurement of fair value of derivative financial instruments, including OpCo.’s interest rate swaps.

At ~~June 30,~~December 31, 2018, OpCo. holds a $10.0 million 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 ~~the P3 Venture~~OpCo. that are included in our ~~Consolidated Balance Sheets, excluding $15.3 million of assets that are eliminated in consolidation,~~condensed consolidated balance sheets at December 31, 2018 and September 30, 2018 are as follows:


	June 30,		September 30,		December 31,		September 30,
	2018		2017		2018		2018
	(in thousands)				(in thousands)
Cash	$	414	$	—	$	421	$	374
Restricted cash		10,000		—		10,000		10,000
Long-term capitalized contract costs		1,159		—		—		1,258
Long-term contracts financing receivable						52,996		—
Other noncurrent assets						962		810
Total assets	$	11,573	$	—	$	64,379	$	12,442

Trade accounts payable	$	268	$	—	$	205	$	165
Other long-term liabilities						6,146		13
Long-term debt		26,562		—		15,357		9,056
Other long-term liabilities		2,090		—
Total liabilities	$	28,920	$	—	$	21,708	$	9,234
Total Cubic equity						39		(304)
Noncontrolling interests						24,703		24,348
Total liabilities and owners' equity					$	46,450	$	33,278

The balance sheets of OpCo. at December 31, 2018 and September 30, 2018 exclude $17.9 million of liabilities and $20.8 million of assets, respectively, that are eliminated in consolidation.

The assets of ~~the P3 Venture~~OpCo. are restricted for its use only and are not available for the general operations of Cubic. ~~The P3 Venture’s~~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.~~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. The total amount of such costs capitalized through September 30, 2018 was $27.8 million, which was classified within long-term capitalized contract costs. 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.

~~Table~~The revenue, operating income, and other income (expense), net of ~~Contents~~OpCo. that are included in our condensed consolidated statement of income (loss) for the three months ended December 31, 2018 and 2017 are as follows:


	Three Months Ended
	December 31,
	2018		2017
Revenue	$	1,961	$	—
Operating income		1,668		—
Other income (expense), net		(6,133)		—
Interest income		503		—
Interest expense		(512)		—

Note 45 — Net Income (Loss) Per Share

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

In periods with a net income from continuing operations attributable to Cubic, diluted EPS is computed by dividing the net income for the period by the weighted average number of common and common equivalent shares outstanding

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

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


	Nine Months Ended				Three Months Ended
	June 30,				June 30,				December 31,
	2018		2017		2018		2017		2018		2017

Weighted average shares - basic		27,221		27,100		27,232		27,110		28,492		27,207
Effect of dilutive securities		—		—		142		—		—		—
Weighted average shares - diluted		27,221		27,100		27,374		27,110		28,492		27,207

Number of anti-dilutive securities		1,023		1,004		—		1,121		990		1,040

Note 56 — 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):



	December 31,		October 1,
	2018		2018

Contract assets	$	320,277	$	272,210
Contract liabilities	$	69,713	$	70,128

Contract assets increased $48.1 million during the three months ended December 31, 2018, primarily due to the recognition of revenue related to the satisfaction or partial satisfaction of performance obligations during the three months ended December 31, 2018 for which we have not yet billed. There were no significant impairment losses related to our contract assets during the three months ended December 31, 2018 and 2017.

Contract liabilities decreased $0.4 million during the three months ended December 31, 2018, primarily due to payments received in excess of revenue recognized on these performance obligations. During the three months ended December 31, 2018, we recognized $20.7 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.

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Note 7 — Balance Sheet Details

Accounts Receivable

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


	June 30,		September 30,		December 31,		September 30,
	2018		2017		2018		2018

Accounts receivable
Billed	$	123,661	$	184,983	$	119,943	$	156,948
Unbilled		204,877		186,950		—		242,877
Allowance for doubtful accounts		(1,334)		(436)		(1,652)		(1,324)
Total accounts receivable		327,204		371,497		118,291		398,501
Less estimated amounts not currently due		(14,791)		(17,457)		—		(6,134)
Current accounts receivable	$	312,413	$	354,040	$	118,291	$	392,367

The amount classified as not currently due is an estimate of the amount of long-term contract accounts receivable that will not be collected within one year from June 30, 2018 under transportation systems contracts in the U.S. and Australia, and under a CGD Systems contract in Italy based upon the payment terms in the contracts. The noncurrent balance at September 30, 2017 represented noncurrent amounts due from these same customers.

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Inventories

Inventories consist of the following (in thousands):


	June 30,		September 30,		December 31,		September 30,
	2018		2017		2018		2018

Finished products	$	2,391	$	4,369	$	7,716	$	7,099
Work in process and inventoried costs under long-term contracts		110,588		84,131		49,295		63,169
Materials and purchased parts		20,948		10,163		35,190		23,710
Customer advances		(7,522)		(10,948)		—		(9,779)
Net inventories	$	126,405	$	87,715	$	92,201	$	84,199

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

At ~~June~~both December 31, 2018 and September 30, 2018, work in process and inventoried costs under long-term contracts includes approximately ~~$2.8~~$0.9 million in costs incurred outside the scope of work or in advance of a contract ~~award compared to $4.3 million at September 30, 2017.~~award. We believe it is probable that we will recover the costs inventoried at ~~June 30,~~December 31, 2018, plus a profit margin, under contract change orders or awards within the next year.

~~Long-term Capitalized Costs~~

Long-term capitalized contract costs include costs incurred on certain transportation customer contracts to develop and manufacture systems for customers for which revenue recognition does not begin until the customers begin operating the systems. These capitalized costs are being 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. Long-term capitalized costs that were recognized as cost of sales totaled $2.3 million and $6.6 million for the quarter and nine-month periods ended June 30, 2018, respectively, and $2.2 million and $7.0 million for the quarter and nine-month periods ended June 30, 2017, respectively.

Capitalized Software

We capitalize certain costs associated with the development or purchase of internal-use software. The amounts capitalized are included in property, plant and equipment in our Condensed Consolidated Balance Sheets and are amortized on a straight-line basis over the estimated useful life of the software, which ranges from three to seven years. No amortization expense is recorded until the software is ready for its intended use.

As a part of our 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. Various components of our ERP system became ready for their intended use and were placed into service ~~on April 1,~~in phases from fiscal 2016 ~~October 1, 2016, October 1, 2017, and April 1,~~through fiscal 2018. As each component became ready for its intended use, the component’s costs were transferred into completed software and we began amortizing these costs over their seven-year estimated useful life.

Excluding businesses that we acquired in fiscal 2019, we completed the planned implementation of our ERP system in the fourth quarter of fiscal 2018. We continue to capitalize costs associated with the development of ~~other~~certain ERP ~~components~~features and upgrades that are not yet ready for their intended use. We capitalized costs related to ERP components in development totaling ~~$1.9~~$0.5 million and ~~$6.5~~$2.5 million for the ~~quarter~~quarters ended December 31, 2018 and ~~nine-month periods ended June 30, 2018, respectively, and $5.2 million and $11.7 million for the quarter and nine-month periods ended June 30,~~ 2017, respectively.

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In addition to software costs that were capitalized, during the ~~quarter~~quarters ended December 31, 2018 and ~~nine-month periods ended June 30, 2018~~December 31, 2017, we recognized expenses related to the development and implementation of our ERP system of ~~$2.8~~$0.8 million and ~~$13.1~~$6.3 million, ~~respectively, compared to $5.6 million and $15.6 million during the quarter and nine-month periods ended June 30, 2017,~~ respectively, for costs that did not meet the requirements for capitalization. Amounts that were expensed in

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connection with the development and implementation of these systems are classified within selling, general and administrative expenses in the Condensed Consolidated Statements of Income (Loss).

Deferred Compensation Plan

We have a non-qualified deferred compensation plan offered to a select group of highly compensated employees. The plan provides participants with the opportunity to defer a portion of their compensation in a given plan year. The liabilities associated with the non-qualified deferred compensation plan are included in other long-term liabilities in our Condensed Consolidated Balance Sheets and totaled ~~$11.3~~$12.0 million and $11.5 million at ~~both June 30,~~December 31, 2018 and September 30, ~~2017.~~2018, respectively.

We ~~make~~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 values of assets set aside to fund deferred compensation liabilities as of ~~June 30,~~December 31, 2018 and September 30, ~~2017~~2018 were ~~$6.2~~$5.8 million and ~~$5.3~~$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 Condensed Consolidated Statements of Income (Loss).

Note 68 — Fair Value of Financial Instruments

The valuation techniques required to determine fair value are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect internal market assumptions. The two types of inputs create the following fair value hierarchy:

Level 1 - Quoted prices for identical instruments in active markets.

Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3 - Significant inputs to the valuation model are unobservable.

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


	December 31, 2018								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		—		5,036		—		5,036		—		1,803		—		1,803
Noncurrent derivative assets		—		581		—		581		—		314		—		314
Total assets measured at fair value	$	—	$	5,617	$	—	$	5,617	$	9,000	$	2,117	$	—	$	11,117
Liabilities
Current derivative liabilities		—		3,367		—		3,367		—		1,657		—		1,657
Noncurrent derivative liabilities		—		—		—		—		—		75		—		75
Contingent consideration to seller of Deltenna		—		—		1,343		1,343		—		—		1,081		1,081
Contingent consideration to seller of Shield		—		—		5,618		5,618		—		—		5,618		5,618
Contingent consideration to seller of TeraLogics - revenue targets		—		—		—		—		—		—		1,750		1,750
Contingent consideration to seller of H4 Global		—		—		832		832		—		—		665		665
Total liabilities measured at fair value	$	—	$	3,367	$	7,793	$	11,160	$	—	$	1,732	$	9,114	$	10,846

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 is based upon a discounted cash flow model and approximate cost. 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~~model-

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derived valuations are appropriate, we use the applicable credit spread as the discount rate. Credit risk related to derivative financial instruments is considered minimal and is managed by requiring high credit standards for counterparties and through periodic settlements of positions.

The fair value of ~~our~~ contingent consideration liabilities to the sellers of businesses that we have acquired ~~and the fair value of the contingent consideration receivable from the Purchaser of our CGD Services business~~ are revalued to their fair value each ~~period. Any~~period and any increase or decrease ~~in the fair value of the contingent consideration amounts~~ is recorded into selling, general and administrative expense. ~~Changes~~Any changes in the assumed timing and amount of the probability of payment scenarios could impact the fair value.

At ~~June 30,~~December 31, 2018, we have the following remaining contingent consideration arrangements with the sellers of companies which we acquired:

Deltenna: Payment of up to ~~$7.1~~$6.9 million of contingent consideration if Deltenna meets certain sales goals from the date of acquisition through the year ending September 30, 2022.

~~TeraLogics:~~ Payment of up to $1.8 million if TeraLogics meets certain sales goals in fiscal year 2018; and up to $1.0 million will be paid if specific contract extensions are exercised by TeraLogics customers through fiscal 2018.

H4 Global: Payment of up to ~~$3.3~~$3.2 million of contingent consideration based upon the value of contracts entered into over the five-year period ~~ended~~ending September 30, 2020.

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.

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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 value of Deltenna contingent consideration ~~liabilities that are based upon revenue targets or gross margin targets are based upon a~~was valued using the real option approach. ~~The contingent consideration liabilities that are valued using this real option approach include the Deltenna contingent consideration and a portion of the TeraLogics 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 ~~factors~~factor used in the ~~June 30,~~December 31, 2018 valuations ~~were 45%~~was 40% for ~~Deltenna and 20% for TeraLogics.~~Deltenna. The volatility factor used in the September 30, ~~2017 valuations were 40%~~2018 valuation was 53% for ~~Deltenna and 15% for TeraLogics.~~Deltenna. 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~~maximum remaining payout to the sellers of H4 Global is $3.2 million at December 31, 2018, and is based upon the value of contracts entered into over the portion of the TeraLogics contingent consideration that is based on customer execution of contract extensions and the fair value of the contingent consideration receivable from the Purchaser of the CGD Services business were estimated using a probability weighted approach. 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 estimated future payments. At both the date of the sale of our CGD Services business and at Junefive-year period ending September 30, ~~2018, the estimated fair value of the contingent consideration receivable related to our sale of the CGD Services business is immaterial.~~

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 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 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 100,000 iterations. Key inputs for the simulation include projected revenues, assumed discount rates for projected revenue and cash flows, and volatility. The volatility and revenue risk adjustment factors used as of December 31, 2018 were 20% and 14%, respectively, and were determined based on analysis of publicly traded comparable companies. The discount rate used as of December 31, 2018 and September 30, 2018 was based on our expected borrowing rate under our financing arrangements, which was determined to be 5.0% at December 31, 2018 and September 30, 2018.

The inputs to each of the contingent consideration fair value models include significant unobservable inputs and therefore represent Level 3 measurements within the fair value hierarchy. Significant judgment is employed in determining the appropriateness of these assumptions as of the acquisition dates and each subsequent period. Accordingly, changes in the assumptions described above can materially impact the amount of contingent consideration expense we record in any period.

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As of ~~June 30,~~December 31, 2018, the following table summarizes the change in fair value of our Level 3 contingent consideration liabilities (in thousands):


		H4		TeraLogics (Contract Extensions)		TeraLogics (Revenue Targets)		Deltenna		Total		H4 Global		TeraLogics (Revenue Targets)		Deltenna		Shield		Total
Balance as of September 30, 2017	$	591	$	800	$	2,450	$	1,376	$	5,217
Net balances at September 30, 2018											$	665	$	1,750	$	1,081	$	5,618	$	9,114
Cash paid to seller		—		—		(1,750)		—		(1,750)		—		(1,750)		—		—		(1,750)
Total remeasurement (gain) loss recognized in earnings		176		150		400		(280)		446		167		—		262		—		429
Balance as of June 30, 2018	$	767	$	950	$	1,100	$	1,096	$	3,913
Balance as of December 31, 2018											$	832	$	—	$	1,343	$	5,618	$	7,793

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

June 30, 2018

September 30, 2017


Level 1

Level 2

Level 3

Total

Level 1

Level 2

Level 3

Total

Assets

Cash equivalents

$
15,000

$
—

$
—

$
15,000

$
8,501

$
—

$
—

$
8,501

Current derivative assets

—

2,515

—

2,515

—

2,591

—

2,591

Noncurrent derivative assets

—

159

—

159

—

1,128

—

1,128

Total assets measured at fair value

$
15,000

$
2,674

$
—

$
17,674

$
8,501

$
3,719

$
—

$
12,220

Liabilities

Current derivative liabilities

—

2,103

—

2,103

—

3,456

—

3,456

Noncurrent derivative liabilities

—

159

—

159

—

1,128

—

1,128

Contingent consideration to seller of Deltenna

—

—

1,096

1,096

—

—

1,376

1,376

Contingent consideration to seller of TeraLogics - contract extensions

—

—

950

950

—

—

800

800

Contingent consideration to seller of TeraLogics - revenue targets

—

—

1,100

1,100

—

—

2,450

2,450

Contingent consideration to seller of H4 Global

—

—

767

767

—

—

591

591

Total liabilities measured at fair value

$
—

$
2,262

$
3,913

$
6,175

$
—

$
4,584

$
5,217

$
9,801

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

The fair value of 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):


	June 30,		September 30,		December 31,		September 30,
	2018		2017		2018		2018
Fair value	$	194.8	$	202.1	$	195.4	$	193.7
Carrying value	$	200.0	$	200.0	$	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 the ~~third~~first quarter ~~and first nine months~~ of fiscal ~~2018~~2019 or ~~2017~~2018 other than assets and liabilities acquired in business acquisitions ~~and the fair value of our new CMS and CGD Systems reporting units~~ described in Note ~~2 above.~~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 11.

Note 79 — Financing Arrangements

In December 2018, we completed an underwritten public offering of 3,300,000 shares of our common stock. We granted the underwriters a 30-day option to purchase up to an additional 495,000 shares of common stock. In December 2018, the underwriters exercised their option to purchase the additional 495,000 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 our revolving credit agreement which was used to finance the acquisition of Trafficware and general corporate purposes.

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 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 ~~our~~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

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the revision and expansion of the revolving credit agreement as discussed below in order to increase our leverage capacity. The interest rates on all of the term notes described above may be adjusted upwards by up to 0.75% should our leverage ratio exceed certain levels.

We have a committed revolving credit agreement with a group of financial institutions in the amount of $400.0 million which expires in August 2021 (Revolving Credit Agreement). At ~~June 30,~~December 31, 2018, the weighted average interest rate on outstanding borrowings under the Revolving Credit Agreement was ~~3.61%~~3.75%. Debt issuance and modification costs of $2.3 million and $1.3 million were incurred in connection with February 2, 2016 and August 11, 2016 amendments to the Revolving Credit Agreement, respectively. Costs incurred in connection with establishment of and amendments to ~~the Revolving Credit Agreement~~

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this credit agreement are recorded in other assets on our Condensed 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 ~~June 30,~~December 31, 2018, our total debt issuance costs have an unamortized balance of ~~$2.1~~$1.7 million. The available line of credit is reduced by any letters of credit issued under the Revolving Credit Agreement. As of ~~June 30,~~December 31, 2018, there were no$64.5 million of borrowings under this agreement and there were letters of credit outstanding totaling ~~$46.3~~$38.4 million, which reduce the available line of credit to ~~$353.7~~$297.1 million. The ~~$46.3~~$38.4 million of letters of credit includes both financial letters of credit and performance guarantees.

We maintain a cash account with a bank in the ~~U.K.~~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 ~~U.K.~~United Kingdom. The balance in the account as of ~~June 30,~~December 31, 2018 was ~~$16.7~~$17.9 million and is classified as restricted cash in our Condensed Consolidated Balance Sheets.

As of ~~June 30,~~December 31, 2018, we had letters of credit and bank guarantees outstanding totaling ~~$58.9~~$50.1 million, which includes the ~~$46.3~~$38.4 million of letters of credit on the Revolving Credit Agreement above and ~~$12.6~~$11.7 million of letters of credit issued under other facilities. The total of ~~$58.9~~$50.1 million of letters of credit and bank guarantees includes ~~$50.3~~$42.9 million that guarantees either our performance or customer advances under certain contracts and financial letters of credit of ~~$8.6~~$7.2 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 have entered into a short-term borrowing arrangement in the ~~U.K.~~United Kingdom in the amount of £20.0 million British pounds (equivalent to approximately ~~$26.4~~$25.5 million) to help meet the short-term working capital requirements of our subsidiary. At ~~June 30,~~December 31, 2018, no amounts were outstanding under this borrowing arrangement.

We maintain a short-term borrowing arrangement in New Zealand totaling $0.5 million New Zealand dollars (equivalent to approximately $0.3 million) to help meet the short-term working capital requirementsThe terms of certain of our ~~subsidiary. At June 30,~~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 December 31, 2018, these agreements have no ~~amounts were outstanding under this borrowing arrangement.~~restrictions on distributions to shareholders, subject to certain tests in these agreements.

Our self-insurance arrangements are limited to certain workers’ compensation plans, automobile liability and product liability claims. Under these arrangements, we self-insure only up to the amount of a specified deductible for each claim. Self-insurance liabilities included in other current liabilities on the balance sheet amounted to ~~$3.0~~$8.7 million at ~~June 30,~~December 31, 2018 and ~~$2.9~~$8.6 million at September 30, ~~2017.~~2018.

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Note 810 — Pension Plans

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


	Nine Months Ended				Three Months Ended				Three Months Ended
	June 30,				June 30,				December 31,
	2018		2017		2018		2017		2018		2017
Service cost	$	459	$	457	$	153	$	155	$	149	$	151
Interest cost		5,672		5,293		1,891		1,775		1,910		1,880
Expected return on plan assets		(10,644)		(9,634)		(3,549)		(3,234)		(3,009)		(3,525)
Amortization of actuarial loss		2,098		2,748		700		926		528		692
Administrative expenses		328		142		108		48		97		110
Net pension cost (benefit)	$	(2,087)	$	(994)	$	(697)	$	(330)	$	(325)	$	(692)

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Note 911 - Stockholders’ Equity

Long-Term Equity Incentive Plan

In 2013, the Executive Compensation Committee of ~~our~~the Board of Directors (Compensation Committee) approved a long-term equity incentive award program. To date, the Compensation Committee has approved three general categories of grant awards: RSUs with time-based vesting, RSUs with performance-based vesting, and RSUs with performance and market-based vesting. Through ~~June 30,~~December 31, 2018, the Compensation Committee has granted ~~1,086,380~~1,285,560 RSUs with time-based vesting, ~~and 1,172,464~~1,173,766 RSUs with performance-based vesting, and 219,890 RSUs with performance and market-based vesting under this program.

Each RSU with time-based vesting or performance-based vesting represents a contingent right to receive one 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 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, and return on equity targets. The level at which Cubic performs against scalable targets over the performance periods will determine the percentage of the RSUs that will ultimately vest.

~~Through June 30, 2018,~~In fiscal 2019, the Compensation Committee granted RSUs with 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 2,258,844~~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 644,663 have vested.~~ RSUs that will vest. If the our 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 could result in a reduction of up to 25% of these RSUs vesting at the end of the performance period.

The grant date fair value of each RSU with time-based vesting or performance-based vesting is the fair market value of one share of our common stock at the grant date.

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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 in the first quarter of fiscal 2019:



		RSU's granted during the three
		months ended December 31, 2018

Date of grant		November 21, 2018
Closing average share value (mean)	$	68.56
Performance period begins		October 1, 2018
Performance period ends		September 30, 2021
Risk-free interest rate		2.8%
Expected volatility		34%

As a result of the valuation analysis, the fair value of the RSUs with performance and market-based vesting granted in the first quarter of fiscal 2019 was calculated at $67.40 per RSU.

At ~~June 30,~~December 31, 2018, 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 ~~431,675.~~331,181 RSUs with time-based vesting, 129,907 RSUs with performance-based vesting, and 152,570 RSUs with performance and market-based vesting.

The following table summarizes our RSU activity:


	Unvested Restricted Stock Units			Unvested Restricted Stock Units
		Weighted-Average			Weighted-Average
	Number of Shares	Grant-Date Fair Value		Number of Shares	Grant-Date Fair Value
Unvested at September 30, 2017	1,045,187	$	45.86
Unvested at September 30, 2018				366,460	$	52.31
Granted	340,937		61.19	195,033		64.33
Vested	(146,506)		46.88	(128,949)		50.61
Forfeited	(238,603)		48.42	(15,391)		50.04
Unvested at June 30, 2018	1,001,015	$	50.32
Unvested at December 31, 2018				417,153	$	58.54


	Unvested Restricted Stock Units with Performance Based Vesting
		Weighted-Average
	Number of Shares	Grant-Date Fair Value
Unvested at September 30, 2018	635,628	$	50.11
Granted	—		—
Vested	—		—
Forfeited	(295,759)		43.86
Unvested at December 31, 2018	339,869	$	55.54


	Unvested Restricted Stock Units with Performance and Market Based Vesting
		Weighted-Average
	Number of Shares	Grant-Date Fair Value
Unvested at September 30, 2018	—	$	—
Granted	219,890		67.40
Vested	—		—
Forfeited	—		—
Unvested at December 31, 2018	219,890	$	67.40

2535

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~~Note 10 - Stock-Based Compensation~~

We recorded non-cash compensation expense related to stock-based awards ~~for the three- and nine-month periods ended June 30, 2018 and 2017~~ as follows (in thousands):


	Nine Months Ended				Three Months Ended				Three Months Ended
	June 30,				June 30,				December 31,
	2018		2017		2018		2017		2018		2017
Cost of sales	$	729	$	412	$	357	$	129	$	313	$	156
Selling, general and administrative		4,371		3,174		2,246		266		2,407		1,471
	$	5,100	$	3,586	$	2,603	$	395	$	2,720	$	1,627

As of ~~June 30,~~December 31, 2018, there was ~~$43.5~~$52.0 million of unrecognized compensation cost related to unvested RSUs. Based upon the expected forfeitures and the expected vesting of performance based RSUs, the aggregate fair value of RSUs expected to ultimately vest is ~~$23.5~~$37.5. million. This amount is expected to be recognized over a weighted-average period of ~~1.7~~1.6 years.

We ~~are required to~~ estimate forfeitures at the time of grant and revise those estimates in subsequent periods on a cumulative basis in the period the estimated forfeiture rate changes for all stock-based awards when significant events occur. We consider our historical experience with employee turnover as the basis to arrive at our estimated forfeiture rate. The forfeiture rate was estimated to be 12.5% per year as of ~~June 30,~~December 31, 2018. To the extent the actual forfeiture rate is different from what we have estimated, stock-based compensation related to these awards will be different from our expectations.

Note 1112 – Income Taxes

U.S. Tax Cuts and Jobs Act

On December 22, 2017, the U.S. government enacted the Tax Act. The legislation is broad and complex and significantly revises the U.S. corporate income tax system by, among other things, reducing the current corporate federal income tax rate to 21% from 35%, adopting a modified territorial regime and imposing a one-time transitional tax on deemed repatriated earnings of foreign subsidiaries. The rate reduction is effective January 1, 2018 resulting in a U.S. statutory rate for fiscal year 2018 of 24.5% and 21% for subsequent fiscal years. At June 30, 2018, we have not completed our accounting relatedDue to the initial tax effects of enactment of the Tax Act; however, in certain cases, as described below, we have made a reasonable estimate of the effects on our existing deferred tax balances and the one-time transition tax.

~~The final transition impact~~complexity of the Tax Act, ~~may differ, possibly materially, from~~ the ~~estimates provided, due~~SEC 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 ~~among other things, changes in interpretations~~complete the accounting for income tax effects of the Tax Act, regulatory guidance that may be issued, any legislative action to address questions that arise because of the Tax Act, any changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or any updates or changes to estimates we have utilized to calculate the impact~~. The SEC has issued Staff Accounting Bulletin No.~~Act. SAB 118 ~~which was codified in March 2018 under ASU 2018-05,~~ ~~that would allow~~provided for a measurement period of up to one year after the enactment ~~date~~ of the Tax Act, ~~to finalize~~during which time the ~~recording~~required analyses and accounting must be completed. During fiscal year 2018, we recorded provisional amounts for the income tax effects of the ~~related~~changes in tax ~~impacts. We currently anticipate finalizing~~law and ~~recording any resulting adjustments within the one year time period provided.~~

~~Based on an initial assessment, a provisional discrete~~ tax benefit of $4.3 million and $3.0 million has been recorded in the three months ended December 31, 2017 and March 31, 2018, respectively, related to the re-measurement of U.S. net deferred tax liabilities at the lower enacted corporate tax rate and other effects of enactment of the Tax Act. While other deferred tax assets and liabilities will also be reduced, such reduction is expected to be offsetrates, as reasonable estimates were determined by changes to our U.S. valuation allowance. The one-time transition tax is based on post-1986 earnings and profits (E&P) that we previously deferred from U.S. income taxes. At present, we do not anticipate a material impact on the income statement from the one-time transition tax and therefore have recorded a provisional amount of $0 as of June 30, 2018. We have not yet completed our calculation of the total post-1986 E&P of our foreign entities, and as such the calculation is subject to further refinement. management during this period.

During the ~~three months~~first quarter of fiscal year 2019, we did not adjust provisional amounts recorded in the prior fiscal year and the SAB 118 measurement period subsequently ended ~~March~~on December 22, 2018. Although we no longer considers 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.

The Tax Act 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.

Effective Tax Rate

During interim periods, the Company generally utilizes the estimated annual effective tax rate method which involves the use of forecasted information. Under this method, the provision is calculated by applying an estimate of the annual effective tax rate for the full fiscal year to “ordinary” income or loss (pretax income or loss excluding unusual or infrequently occurring discrete items) for the reporting period. For the three-month period ended December 31, 2018, ~~we classified~~ the ~~CGD Services business as discontinued operations~~Company believes it is more appropriate to use a blend of the discrete effective tax rate method and ~~subsequently completed~~ the ~~sale during the three months ended June 30, 2018. ASC 740-20 requires total~~estimated annual effective tax rate method to calculate income tax expense ~~or benefit~~for the period. The Company determined that since small changes in estimated “ordinary” income for U.S. operations would result in significant changes in the worldwide estimated annual effective tax rate, the discrete tax rate method should be utilized to ~~be allocated among continuing operations, discontinued operations, extraordinary items, other comprehensive~~determine a more reliable estimate of U.S. income ~~and items charged directly to shareholders’ equity. For the nine months ended June 30, 2018, we~~

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~~recognized a combined U.S. gain from discontinued operations and other comprehensive income and a loss from U.S. continuing operations and therefore recorded~~ tax expense ~~of $0.5 million to discontinued operations with an offsetting $0.5 million benefit to continuing operations.~~for the period.

Income tax expense recognized on pre-tax losses from continuing operations for the ~~nine~~three months ended ~~June 30,~~December 31, 2018 resulted in an effective tax rate of negative ~~37.5%~~31% which differs from the effective tax rate of negative 132.3% for the year ended September 30, 2017 primarily due to the difference in jurisdictional mix, the overall level of pre-tax income (loss) and discrete tax benefits resulting from enactment of the Tax Act. The effective tax rate for the nine months ended June 30, 2018 differs from the U.S. statutory tax rate of ~~24.5%~~21% primarily due to the jurisdictional mix of pre-tax income (loss), and U.S. losses for which no tax benefit can be realized due to a

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valuation ~~allowance, offset by discrete~~allowance. The effective tax ~~benefits resulting from the impact of the Tax Act. Income tax expense recognized on pre-tax income from continuing operations~~rate for the three months ended ~~June 30,~~December 31, 2018 ~~resulted in an~~differs from the effective tax rate of ~~120.8% as compared to~~ negative ~~737.0%~~6% and positive 48% for the three months ended ~~June~~December 31, 2017 and the year ended September 30, ~~2017. The year-over-year comparison of effective tax rates is not meaningful~~2018, respectively, primarily due to differences in the ~~impact~~jurisdictional mix of ~~applying~~pre-tax income (loss), partially offset by discrete benefits resulting from the ~~accounting guidance provided by ASC 740-270-45-8 in order to determine tax expense from discontinued operations.~~enactment of the Tax Act.

The amount of net unrecognized tax benefits was $5.6 million as of June 30, 2018 and $6.5 million as of September 30, 2017, exclusive of interest and penalties. At June 30, 2018, the amount of net unrecognized tax benefits from permanent tax adjustments that, if recognized, would favorably impact the effective rate was $2.8 million. During the next 12 months, it is possible that resolution of reviews by taxing authorities, both domestic and international, could be reached with respect to approximately $2.8 million of the net unrecognized tax benefits depending on the timing of examinations and expiration of statute of limitations, either because our tax positions are sustained or because we agree to their disallowance and pay the related income tax.

We are subject to ongoing audits from various taxing authorities in the jurisdictions in which we do business. As of June 30, 2018, the years open under the statute of limitations in significant jurisdictions include fiscal years 2015-2017 in the U.S. We believe we have adequately provided for uncertain tax issues that have not yet been resolved with federal, state and foreign tax authorities.Deferred Tax Balances

As of ~~June 30,~~December 31, 2018, we maintained a valuation allowance against U.S. deferred tax assets as realization of such assets does not meet the more-likely-than-not threshold required under accounting guidelines. We will continue to assess the need for a valuation allowance on deferred tax assets by evaluating positive and negative evidence that may exist. Through ~~June 30,~~December 31, 2018, a total valuation allowance of ~~$72.7~~$79.3 million has been established for U.S. net deferred tax assets, certain foreign operating losses and other foreign assets.

Note 1213 — Derivative Instruments and Hedging Activities

In order to manage our exposure to fluctuations in interest and foreign currency exchange ~~and interest~~ rates we utilize derivative financial instruments such as forward starting swaps and foreign currency forwards ~~and forward starting swaps~~ for periods typically up to three 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 noncurrent assets or liabilities, depending on the realized and unrealized gain or loss position of the hedged contract at the balance sheet date, and the timing of future cash flows. The cash flows from derivatives treated as hedges are classified in the Condensed Consolidated Statements of Cash Flows in the same category as the item being hedged.

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The following table shows the notional principal amounts of our outstanding derivative instruments as of ~~June 30,~~December 31, 2018 and September 30, ~~2017~~2018 (in thousands):


	Notional Principal				Notional Principal
	June 30, 2018		September 30, 2017		December 31, 2018		September 30, 2018
Instruments designated as accounting hedges:
Foreign currency forwards	$	112,937	$	125,486	$	169,095	$	169,406

Instruments not designated as accounting hedges:
Foreign currency forwards	$	26,777	$	35,117	$	24,824	$	27,909

Included in the amounts not designated as accounting hedges at ~~June 30,~~December 31, 2018 and September 30, ~~2017~~2018 were foreign currency forwards with notional principal amounts of ~~$16.8~~$12.7 million and ~~$18.5~~$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~~losses of $0.3 ~~million and $10.2~~ million were recognized in other income (expense), net for the three months ended ~~June 30,~~December 31, 2018 and 2017 ~~respectively,~~ related to these ~~forwards. Unrealized losses of $0.1 million and $8.2 million were recognized in other income (expense), net for the nine months ended June 30, 2018 and 2017, respectively, related to~~ foreign currency ~~forwards~~forward contracts not designated as accounting hedges.

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

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periods ended ~~June 30,~~December 31, 2018 and September 30, ~~2017.~~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 values. We did not have any derivative instruments with credit-risk related contingent features that would require us to post collateral as of ~~June 30,~~December 31, 2018 or September 30, ~~2017.~~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 Condensed Consolidated Balance Sheets as of ~~June 30,~~December 31, 2018 and September 30, ~~2017~~2018 (in thousands):


		Fair Value					Fair Value
	Balance Sheet Location	June 30, 2018		September 30, 2017		Balance Sheet Location	December 31, 2018		September 30, 2018
Asset derivatives:
Foreign currency forwards	Other current assets	$	2,515	$	2,591	Other current assets	$	5,036	$	1,803
Foreign currency forwards	Other noncurrent assets		159		1,128	Other noncurrent assets		582		314
		$	2,674	$	3,719		$	5,618	$	2,117
Liability derivatives:
Foreign currency forwards	Other current liabilities	$	2,103	$	3,456	Other current liabilities	$	3,367	$	1,657
Foreign currency forwards	Other noncurrent liabilities		159		1,128	Other noncurrent liabilities		—		75
Total		$	2,262	$	4,584		$	3,367	$	1,732

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The tables below present gains and losses recognized in other comprehensive ~~loss~~income (loss) for the three ~~and nine~~ months ended ~~June 30,~~December 31, 2018 and 2017 related to derivative financial instruments designated as cash flow hedges, as well as the amount of gains and losses reclassified into earnings during those periods (in thousands):

Nine Months Ended

Three Months Ended

June 30, 2018

June 30, 2017

December 31, 2018

December 31, 2017

Gains (losses)

reclassified into

Gains (losses)

reclassified into

recognized in

earnings -

Gains (losses)

earnings -

recognized in

earnings -

Gains (losses)

earnings -

Derivative Type

OCI

Effective Portion

recognized in OCI

Effective Portion

OCI

Effective Portion

recognized in OCI

Effective Portion

Foreign currency forwards

163

(1,468)

(1,912)

1,853

1,779

(33)

656

(774)

Three Months Ended

June 30, 2018

June 30, 2017

Gains (losses)

reclassified into

recognized in

earnings -

Gains (losses)

earnings -

Derivative Type

OCI

Effective Portion

recognized in OCI

Effective Portion

Foreign currency forwards

(848)

(670)

(281)

(355)

The amount of unrealized gains and losses from derivative instruments and hedging activities classified as not highly effective did not have a material impact on the results of operations for the ~~three- and nine-month~~three-month periods ended ~~June 30,~~December 31, 2018 and 2017. 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 ~~$0.3~~$1.7 million, net of income taxes.

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Note 1314 — Segment Information

We define our operating segments and reportable segments based on the way our chief executive officer, who we have concluded is our chief operating decision maker, manages our operations for purposes of allocating resources and assessing performance and we continually reassess our operating segment and reportable segment designation based upon these criteria. ~~Through~~ ~~September 30, 2017, our company was aligned in our CGD Systems~~We evaluate performance and ~~CTS~~allocate resources based on total segment operating ~~segments, which were also our~~income or loss. The accounting policies of the reportable segments.~~In 2016, we formalized~~ are the ~~structure~~same as those described in the summary of ~~our CMS~~significant accounting policies. Intersegment sales and transfers are immaterial and are eliminated in consolidation.

Our reportable segments are business ~~unit within our CGD Systems operating segment. CMS combines~~units that offer different products and ~~integrates our C4ISR~~services. Operating results for each segment are reported separately to senior corporate management to make decisions as to the allocation of corporate resources and ~~secure communications operations. Through September 30, 2017, we concluded that CMS was not a separate operating segment based upon factors including the nature of information presented~~ to our chief executive officer and Board of Directors and the consequential level at which certain resource allocations and performance assessments were made. In the first quarter of fiscal 2018, we began providing additional financial information to our chief executive officer and Board of Directors at the CMS level, which allowed greater resource allocation decisions and performance assessments to be made at that level. As such, we concluded that CMS became a separate operating segment beginning on October 1, 2017. Applicable prior period amounts have been adjusted retrospectively to reflect the reportable segment change.assess performance.

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


	Nine Months Ended				Three Months Ended				Three Months Ended
	June 30,				June 30,				December 31,
	2018		2017		2018		2017		2018		2017
Sales:
Cubic Transportation Systems	$	478.1	$	407.9	$	164.6	$	136.4	$	181.8	$	146.5
Cubic Global Defense Systems		233.2		247.4		88.9		89.1
Cubic Mission Solutions		111.9		103.3		42.7		40.7		46.4		33.1
Cubic Global Defense										77.1		68.8
Total sales	$	823.2	$	758.6	$	296.2	$	266.2	$	305.3	$	248.4

Operating income (loss):
Cubic Transportation Systems	$	42.7	$	16.5	$	18.6	$	(0.9)	$	11.0	$	9.9
Cubic Global Defense Systems		13.6		18.4		6.9		10.4
Cubic Mission Solutions		(17.2)		(14.5)		(0.5)		(1.5)		(4.9)		(8.9)
Cubic Global Defense										2.9		1.4
Unallocated corporate expenses		(42.4)		(39.0)		(14.7)		(14.8)		(9.6)		(14.3)
Total operating income (loss)	$	(3.3)	$	(18.6)	$	10.3	$	(6.8)	$	(0.6)	$	(11.9)

Depreciation and amortization:
Cubic Transportation Systems	$	9.1	$	6.9	$	2.8	$	2.4	$	7.7	$	3.3
Cubic Global Defense Systems		6.1		7.3		2.0		3.5
Cubic Mission Solutions		15.8		18.1		4.7		5.4		5.4		5.9
Cubic Global Defense										2.2		2.1
Corporate		3.1		3.5		1.1		0.5		0.7		1.1
Total depreciation and amortization	$	34.1	$	35.8	$	10.6	$	11.8	$	16.0	$	12.4

Unallocated corporate costs in the ~~third~~first quarter of ~~2018~~2019 include costs of strategic and IT system resource planning as part of our One Cubic Initiatives, which totaled ~~$5.0~~$1.6 million compared to $8.9 million in the third quarter of last year. Unallocated corporate costs included $18.8 million of costs incurred in the first nine months of 2018 for strategic and IT system resource planning compared to $23.6$8.0 million in the first ~~nine months~~quarter of last year. As described in Note 2,3, the operating results of CGD Services have been classified as discontinued operations in the Condensed Consolidated Statements of Income (Loss) for all periods presented. In the application of the accounting requirements for discontinued operations, corporate overhead is not allocated to discontinued operations. Therefore, certain corporate overhead costs that had previously been allocated to the CGD Services segment have been included in the unallocated corporate expenses amounts above. Such amounts totaled $1.3 million and $1.9 million in the third quarter of fiscal 2018 and fiscal 2017, respectively, and totaled $5.3 million and $5.9 million for the first nine months of fiscal 2018 and fiscal 2017, respectively.

~~Changes in estimates on~~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 ~~which~~each of our segments, as we believe these factors affect the nature, amount, timing, and uncertainty of our revenue ~~is recognized using the cost-to-cost-percentage-of-completion method increased our operating income by $2.2 million~~ and decreased our operating loss by $0.1 million for the three and nine months ended June 30, 2018, respectively, and decreased our operating loss by $6.2 million and $2.4 million for the three and nine months ended June 30, 2017, respectively. These adjustments increased our net income fromcash flows.

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~~continuing operations attributable to Cubic~~

Sales by ~~$1.7 million ($0.06 per share) and decreased our net loss from continuing operations attributable to Cubic~~Geographic Region (in millions):


	Three months ended December 31, 2018
	CTS		CMS		CGD		Total

United States	$	91.3	$	45.5	$	35.7	$	172.5
United Kingdom		50.9		0.4		4.3		55.6
Australia		29.8		0.1		5.6		35.5
Far East/Middle East		4.4		0.4		18.4		23.2
Other		5.4		—		13.1		18.5
Total sales	$	181.8	$	46.4	$	77.1	$	305.3

Sales by ~~$0.1 million ($0.00 per share)~~End Customer. We are the prime customer for the ~~three~~vast majority of our sales. The table below presents total net sales disaggregated by end customer (in millions):


	Three months ended December 31, 2018
	CTS		CMS		CGD		Total

U.S. Federal Government and State and Local Municipalities	$	90.8	$	45.8	$	32.4	$	169.0
Other		91.0		0.6		44.7		136.3
Total sales	$	181.8	$	46.4	$	77.1	$	305.3

Sales by Contract Type. Substantially all of our contracts are fixed-price type contracts. Sales included in Other contract types represent cost plus and ~~nine months ended June 30, 2018, respectively,~~time and decreased our net loss from continuing operations attributable to Cubic by $3.2 million ($0.12 per share) and $1.2 million ($0.05 per share) for the three and nine months ended June 30, 2017, respectively.material type contracts.

~~CMS Investment in Shield Aviation~~On a fixed-price type contract, we agrees to perform the contractual statement of work for a predetermined sales price. On a cost-plus type contract, we are is paid our allowable incurred costs plus a profit which can be fixed or variable depending on 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):


	Three months ended December 31, 2018
	CTS		CMS		CGD		Total

Fixed Price	$	178.2	$	45.8	$	71.6	$	295.6
Other		3.6		0.6		5.5		9.7
Total sales	$	181.8	$	46.4	$	77.1	$	305.3

Sales by Deliverable Type: The table below presents total net sales disaggregated by the type of ~~June 30, 2018 our CMS segment had total secured loans outstanding of $4.5 million from Shield Aviation, a private start-up company in~~deliverable, which is determined by us at the U.S. that is developing autonomous aircraft systems for intelligence, surveillance and reconnaissance (ISR) services. CMS also obtained warrants in the investee in connection with this debt financing, with a carrying value of $0.7 million at June 30, 2018. The note receivable is classified within other current assets and the warrants are classified within non-current other assets on our Condensed Consolidated Balance Sheets. The note receivable is held at amortized cost and the warrants are held at their historical cost.performance obligation level (in millions):


	Three months ended December 31, 2018
	CTS		CMS		CGD		Total

Product	$	92.0	$	40.6	$	49.7	$	182.3
Service		89.8		5.8		27.4		123.0
Total sales	$	181.8	$	46.4	$	77.1	$	305.3

~~In July 2018, we purchased all~~

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Revenue Recognition Method: The table below presents total net sales disaggregated based on the assets of Shield Aviation in exchange for cancellation of the loans receivable and the warrants, plus cash consideration of $1.6 million. In addition, we have agreed to pay the sellers a percentage of the cumulative revenues earned for the sales of Shield Aviation products and services for seven years from the date of the purchase, up to a total possible payment to the sellers of $10.0 million.revenue recognition method applied (in millions):


	Three months ended December 31, 2018
	CTS		CMS		CGD		Total

Point in Time	$	16.7	$	34.4	$	0.5	$	51.6
Over Time		165.1		12.0		76.6		253.7
Total sales	$	181.8	$	46.4	$	77.1	$	305.3

Note 1415 — Legal Matters

A former reseller of our air combat training systems in the Far East has filed a demand for arbitration seeking monetary damages for claims including tortious interference. Based upon the arbitration hearings that were held during the third quarter of fiscal 2018, we believe that the possible loss related to the torturous interference claim ranges from $0 to $2.4 million. We do not currently believe that any amount of potential loss related to this claim is probable, and no significant amounts have been accrued as expense related to any of the claims under arbitration. The arbitration proceedings now are closed, and we expect the arbitrator’s decision by the end of August 2018.

We consider all ~~other~~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.

Note 16 — Subsequent Event

On February 5, 2019, we entered into agreements related to the construction and leasing of two 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 legal entity affiliated with the financial institutions involved with the project will own the buildings, and we will lease the buildings for a term of five years upon their completion. At the end of the lease term we will be required to elect to negotiate a new lease term, purchase the property, or arrange for a sale of the property to a third party. Alternatively the financial institutions may elect to keep the building and release us from these requirements.

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3.3 CUBIC CORPORATION

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

~~June 30,~~December 31, 2018

Cubic Corporation 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 through increased situational understanding. Cubic designs, integrates and ~~operational readiness. We design, integrate and operate~~operates systems, products and services ~~to serve the needs of various federal and regional government agencies~~focused in the ~~U.S.~~transportation, command, control, communication, computers, intelligence, surveillance and ~~allied nations around the world.~~reconnaissance (C4ISR), and training markets. We offer integrated payment and information systems, expeditionary communications, cloud-based computing and intelligence delivery, as well as state-of-the-art training and readiness solutions. We believe that we have significant transportation and defense industry expertise which, combined with our innovative technology capabilities, contributes to our leading market positions and allows us to deepen and further expand each of our business segments in key markets.

WeThrough September 30, 2017 our principal lines of business were transportation systems and services, defense systems, and defense services. On May 31, 2018, we sold the non-Original Equipment Manufacturer (OEM) 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 segment and reportable segment beginning on October 1, 2017. As a result, we now operate in three reportable business segments: Cubic Transportation Systems (CTS), Cubic Global Defense Systems ~~(CGD Systems)~~(CGD), and Cubic Mission Solutions (CMS). All of our business segments share a common mission of increasing situational awareness to create enhanced value for our customers worldwide through common technologies. Our defense customers benefit from increased readiness and effectiveness, while our transportation customers benefit from enhanced efficiency and reduced congestion. ~~We organize our business segments based on the nature of the products and services offered.~~

On April 18, 2018, we entered into a definitive agreement to sell the Cubic Global Defense Services (CGD Services) business and the sale closed on May 31, 2018. The product offerings of the Non-OEM CGD Services business and the markets where it competes no longer fit with our strategy. The scale required to compete profitably in the defense services industry has increased meaningfully, and technology is no longer a market differentiator. The sale of the CGD Services business enables us to better concentrate our resources on markets with stronger growth and higher margins, and further increases our financial flexibility to pursue profitable growth opportunities that enhance shareholder returns. In March 2018, all of the criteria were met for the classification of CGD Services as a discontinued operation. As a result, the assets, liabilities, operating results and cash flows of CGD Services have been classified as discontinued operations and have been excluded from amounts described below.

CTS isspecializes in the design, development, production, installation, maintenance and operation of automated fare payment, intelligent traffic management and enforcement solutions, real-time information systems, and revenue management infrastructure and technologies for transportation agencies. As part of our turnkey solutions, CTS also provides these customers with a comprehensive suite of business process outsourcing (BPO) services and expertise, such as card and payment media management, central systems and application support, retail network management, customer call centers and financial clearing and settlement support. As transportation authorities seek to optimize their operations by outsourcing bundled systems and services, CTS has transformed itself from a provider of automated fare collection (AFC) systems into 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~~company focused on 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 market. Advanced Traffic Solutions Inc. (Trafficware), which we acquired in October 2018, when combined with our existing transportation capabilities, is expected to enhance our ability to offer compelling solutions to reduce urban congestion using Trafficware’s intelligent, data-rich intersection management technology.

CMS provides networked command, control, communication, computers, intelligence, surveillance and ~~enforcement~~reconnaissance (C4ISR) capabilities for defense, intelligence, security and commercial missions. CMS’ core competencies include protected wide-band communications for command, control and intelligence, surveillance and reconnaissance (C2ISR) systems, expeditionary satellite communication solutions, real time processing, exploitation and ~~technology~~dissemination of full motion video, deployable secure tactical cloud computing, communication gateways, and ~~infrastructure maintenance services to U.K.~~intelligence, surveillance 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.reconnaissance (ISR) services.

CGD ~~Systems~~ is a leading diversified supplier of live, virtual, constructive and game-based training solutions to the U.S. Department of Defense, other U.S. government agencies and allied nations. We offer a full range of training solutions for military and security forces. Our customized systems and services accelerate combat readiness in the air, on the ground and at sea while meeting the demands of evolving operations globally. Our range design business offers complete range design solutions for military, law enforcement, special forces and security training centers, including laser-engagement training simulation systems, live-fire range design, exercise planning, expert support and detailed After Action Reviews.

CMS provides networked Command, Control, Communications, Computers, Intelligence, Surveillance and Reconnaissance (C4ISR) capabilities for defense, intelligence, security and commercial missions. CMS’ core competencies include communications and electronics solutions such as high-speed data links, search-and-rescue avionics and customized signal intelligence products, deployable and tactical communications products, wideband ultra-portable expeditionary satellite communication terminal solutions, secure video delivery, real time processing, exploitation and dissemination of full motion video in the cloud, deployable secure computing tactical cloud and networking solutions equipment, and communication gateways. Through September 30, 2017, CMS was considered a

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business within our CGD Systems operating segment. In the first quarter of fiscal 2018 we began considering CMS a separate operating segment. Applicable prior period amounts have been adjusted retrospectively to reflect the segment change.

Consolidated Overview

We adopted Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (commonly known as ASC 606), effective October 1, 2018 using the modified retrospective transition method. In accordance with the modified retrospective transition method, the quarter ended December 31, 2018 is presented under ASC 606, while the quarter ended December 31, 2017 is presented under ASC 605, Revenue Recognition, the accounting standard in effect for periods ending prior to October 1, 2018. The cumulative effect of the change in accounting for periods prior to October 1, 2018 was recognized through retained earnings at the date of adoption.

The table below quantifies the impact of adopting ASC 606 on net sales and operating income (loss) for the three months ended December 31, 2018:


	Three months ended December 31, 2018
					As Reported
	Under		Effect of		Under
	ASC 605		ASC 606		ASC 606
Sales:	(in thousands)
Cubic Transportation Systems	$	172,728	$	9,079	$	181,807
Cubic Mission Solutions		45,363		1,030		46,393
Cubic Global Defense		58,733		18,326		77,059
Total sales	$	276,824	$	28,435	$	305,259

Operating income (loss):
Cubic Transportation Systems	$	9,186	$	1,790	$	10,976
Cubic Mission Solutions		(5,191)		251		(4,940)
Cubic Global Defense		1,607		1,290		2,897
Unallocated corporate expenses		(9,499)		—		(9,499)
Total operating income (loss)	$	(3,897)	$	3,331	$	(566)

Sales for the quarter ended ~~June 30,~~December 31, 2018 increased ~~11%~~23% to ~~$296.2~~$305.3 million from ~~$266.2~~$248.4 million in the ~~third~~first fiscal quarter of last ~~year. For~~year, which includes the ~~first nine months~~impact of the ~~fiscal year, consolidated sales increased 9% to $823.2 million compared to $758.6 million last year. For~~adoption of the ~~quarter, sales~~new revenue recognition standard described and quantified above. Sales from CTS, CMS and ~~CMS~~CGD increased by ~~21%~~24%, 40%, and 5%12%, respectively, while sales from CGD Systems were flat. For the first nine months of the fiscal year, sales from CTS and CMS increased by 17% and 8%, respectively, while sales from CGD Systems decreased by 6%.respectively. The average exchange rates between the prevailing currency in our foreign operations and the U.S. dollar had ~~a positive~~an unfavorable impact on sales of ~~$2.7 million for the third quarter and $14.9~~$5.5 million for the first ~~nine months~~fiscal quarter of ~~the year~~2019 compared to the ~~same periods~~first fiscal quarter of last ~~year, and virtually all of this impact was at our CTS segment. Sales generated by businesses~~year. Businesses we acquired during 2019 and 2018 ~~and 2017 totaled $2.2 million and $5.3~~had sales of $10.7 million for the ~~three- and nine-month periods~~three-month period ended ~~June 30,~~December 31, 2018, compared to ~~$0.4 million and $1.2 million for~~no sales in the ~~three- and nine-month periods~~three-month period ended ~~June 30,~~December 31, 2017. See the segment discussions following for further analysis of segment sales.

Our consolidated operating ~~income~~loss was ~~$10.3~~$0.6 million in the ~~third~~first quarter of fiscal ~~2018~~2019 compared to aan operating loss of ~~$6.8~~$11.9 million in the ~~third~~first quarter of last year. CTS operating income increased to ~~$18.6~~$11.0 million for the ~~third~~first quarter compared to an$9.9 million last year while CGD had operating ~~loss~~income of ~~$0.9~~$2.9 million in the first quarter compared to $1.4 million last year. The CMS operating loss for the ~~third~~first quarter decreased to ~~$0.5~~$4.9 million this year compared to ~~$1.5~~$8.9 million last ~~year, while CGD Systems operating income decreased by 34% between those same quarters.~~year. Unallocated corporate and other costs for the ~~third~~first quarter of ~~2018~~2019 were ~~$14.7~~$9.6 million compared to ~~$14.8~~$14.3 million in ~~2017.~~2018. Unallocated corporate costs included unallocated IT costs which totaled ~~$5.0~~$1.6 million in the ~~third~~first quarter of fiscal ~~2018~~2019 compared to ~~$8.9~~$8.0 million for last year. The reduction in unallocated IT costs is the result of many of our IT projects reaching or approaching finalization in the first quarter of fiscal 2019. The average exchange rates between the prevailing currency in our foreign operations and the U.S. had ~~a positive~~an unfavorable impact on our quarterly operating results of ~~$0.4~~$0.6 million in the ~~third~~first quarter compared to the same ~~period~~quarter last year. Businesses we acquired during 2019 and 2018 had operating losses totaling $4.6 million for the first quarter of fiscal 2019 and had no operating losses in the first quarter of last year. See the segment discussions following for further analysis of segment operating income (loss).

Our consolidated operating loss for the first nine months of fiscal 2018 decreased to $3.3 million from $18.6 million in the first nine months of last year. The improvement in operating results was driven by a $26.2 million increase in the operating income of CTS. For the first nine months of fiscal 2018, CGD Systems operating income decreased by $4.8 million as compared to the same period in 2017, and the CMS operating loss increased by $2.7 million. Unallocated corporate and other costs for the first nine months of fiscal 2018 were $42.4 million compared to $39.0 million in the first nine months of 2017. Unallocated corporate costs included unallocated IT costs which totaled $18.8 million in the first nine months of fiscal 2018 compared to $23.6 million for the first nine months of last year. The average exchange rates between the prevailing currency in our foreign operations and the U.S. had a positive impact on our operating results of $2.1 million in the first nine months of fiscal 2018 compared to the same period last year.

As described above, the operating results for CGD Services have been classified as discontinued operations in the Condensed Consolidated Statements of Income (Loss) for all periods presented. In the application of the accounting requirements for discontinued operations, corporate overhead is not allocated to discontinued operations. Therefore, certain corporate overhead costs that had previously been allocated to the CGD Services segment have been included in the unallocated corporate expenses amounts above. Such amounts totaled $1.3 million and $1.9 million in the third quarter of fiscal 2018 and fiscal 2017, respectively, and totaled $5.3 million and $5.9 million for the first nine months of fiscal 2018 and fiscal 2017, respectively.

Our gross margin percentage on product sales increased to 31% in the first quarter of 2019 from 30% in the ~~third quarter of 2018 from 28% in the third~~first quarter last year ~~and increased to~~ ~~29% for the first nine months of fiscal 2018 from 28% in 2017.~~. The increase in product sales gross margins ~~particularly for~~in the first quarter was primarily due to ~~product mix driven by~~ increased shipments ~~of air combat training systems and improved profitability on certain CTS development contracts in the third quarter of fiscal 2018.~~by our CMS segment, which generally have higher gross margins than products sold by our other business segments. Our gross margin percentage on service sales was ~~31%~~25% in the ~~third~~first quarter of ~~2018~~2019 compared to ~~28%~~26% in the ~~third~~first quarter of last ~~year,~~ ~~and 31% for the first nine months of fiscal 2018 compared to 29% for the first nine months of last year~~.year. The ~~increase~~decrease in gross margins on service sales was primarily driven by ~~improved operational efficiencies and~~ a ~~favorable service mix in our service contracts.~~

~~Selling, general and administrative (SG&A) expenses increased~~slight decrease in the ~~third quarter~~proportion of ~~2018 to $58.3 million compared to $56.9 million in 2017. For the nine-month period, SG&A expenses increased to $183.7 million compared to $170.7~~service sales provided by our CTS business segment, which generally has higher gross margins than service sales for our other business segments.

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Selling, general and administrative (SG&A) expenses increased in the first quarter of 2019 to $63.0 million ~~last year.~~compared to $61.7 million in 2018. As a percentage of sales, SG&A expenses were ~~20%~~21% for the ~~third~~ quarter ~~and 22% for the nine-month period~~ ended ~~June 30,~~December 31, 2018, compared to ~~21%~~25% for the ~~third~~ quarter ~~and 23% for the nine-month period~~ ended ~~June 30,~~December 31, 2017. The ~~increases~~increase in SG&A expense for the ~~third~~first quarter ~~and first nine months of fiscal 2018 as compared to the same periods in fiscal 2017 were~~was primarily due to ~~increases~~the SG&A expenses incurred by Trafficware, which was acquired in bid and proposal costs on new business pursuits and an increase in expense related to contingent consideration for recent business acquisitions between these periods. Contingent consideration on business acquisitions is measured at its estimated fair value at each reporting period based upon a number of assumptions including projections regarding whether the acquired companies are expected to achieve goals that will trigger payment of the consideration. Changes in the fair value of contingent consideration are recognizedOctober 2018. These increases in SG&A ~~expense.~~were partially offset by the reduction in unallocated corporate costs, including the reduction of unallocated IT costs described above.

Company funded research and development (R&D) expenditures ~~decreased to $13.9~~totaled $12.0 million for ~~the third quarter compared to $16.9 million last year and increased to $40.1 million for the nine-month period this year compared to $38.8 million last year.~~ ~~The most significant trend related to R&D for the quarter and~~both the first ~~nine months~~quarter of fiscal year ~~2018 compared to fiscal 2017 is~~2019 and 2018. There was no significant shift in the ~~shift in~~mix of R&D expenditures between our business ~~segments. For the third quarter and first nine months of fiscal 2018, CTS R&D expenditures have decreased by over 50%~~segments from these periods in 2017, while the R&D expenditures for CMS and CGD Systems have increased significantly between these periods. In the third quarter and first nine months of fiscal 2017, CTS had incurred $3.0 million and $6.4 million of expenditures, respectively, related to the development of technologies for use on the New York Fare Payment System project. Such development costs were recognized as R&D expense in fiscal 2017 because we had not yet been awarded this contract. In October 2017, we were awarded the New York Fare Payment System contract and therefore, in the first quarter of fiscal 2018 to the first quarter of 2019. In the first quarter of fiscal 2019 CTS continued to make R&D investments in new transportation product development, ~~costs related to this contract began being classified as costs~~including fare collection technologies, real-time passenger information and development of ~~sales.~~tolling, intelligent transport systems, and analytic technologies. CGD’s R&D expenditures focused on next generation live, virtual, constructive training systems and CMS’ R&D expenditures were driven by the development of new antenna technologies for communications.

Amortization of purchased intangibles for the ~~third~~first quarter of ~~2018 decreased~~2019 increased to ~~$6.2~~$10.6 million from ~~$7.3~~$7.4 million in ~~2017 and decreased to $20.0~~2018. The increase was driven by $4.3 million of amortization of Trafficware intangible assets in the first ~~nine months~~quarter of fiscal ~~2018 from $22.9 million for such period last year. These reductions relate to~~2019, partially offset by the reduction of amortization on previously acquired intangible assets that are amortized using accelerated methods for which amortization decreases over time.

~~Interest expense for the third quarter of fiscal 2018 decreased to $2.6 million, compared to $4.4 million in the third quarter of last year.~~ Interest expense for the first ~~nine months~~quarter of fiscal ~~2018 decreased to $8.2~~2019 was $4.0 million, compared to ~~$12.2~~$2.7 million in the first ~~nine months~~quarter of last year. The ~~decreased~~increase in interest expense was primarily caused by the ~~decrease~~increase in our average outstanding debt balances ~~during these quarters, including~~for the ~~recent impact of the use of proceeds from the sale of CGD Services to repay short-term borrowings in the third~~first quarter of fiscal ~~2018.~~

~~Our net income from continuing operations attributable~~2019 compared to ~~Cubic in~~ the ~~third~~first quarter of fiscal ~~2018 was $0.9 million compared to a net loss of $78.2 million~~2018. The average outstanding borrowings under our revolving credit agreement increased in the ~~third quarter last year. For the~~ first nine months of fiscal 2018, our net loss from continuing operations attributable to Cubic was $13.9 million compared to $35.3 million last year. The change in net income (loss) from continuing operations attributable to Cubic from the third quarter of fiscal ~~2017~~2019 primarily to finance the ~~third quarter~~acquisition of fiscal 2018 was most significantly impacted by the income tax provisions described below and the changes in operating income (loss) described above. For the first nine months of fiscal year 2018, the net loss from continuing operations attributable to Cubic was most significantly impacted by the change in operating loss described above and the decrease in interest expense described above.Trafficware.

The income tax expense recognized on pre-tax losses from continuing operations for the ~~nine~~three months ended ~~June 30,~~December 31, 2018 resulted in an effective tax rate of negative ~~37.6%~~31%, which differs from the effective tax ~~rate~~rates of ~~negative 132.3%~~48% for the year ended September 30, 2018 and negative 6% for the three months ended December 31, 2017, primarily due to the difference in jurisdictional mix ~~the overall level~~ of pre-tax income ~~(loss) and~~loss), partially offset by discrete ~~tax~~ benefits resulting from the enactment of the ~~U.S. government tax legislation commonly referred to as the~~ Tax ~~Cuts~~cuts and Jobs Act of 2017 ~~(Tax~~(the Tax Act). ~~Additionally, income~~Through December 31, 2018, a total valuation allowance of $79.3 million has been established for U.S. net deferred tax ~~expense recognized~~assets, certain foreign operating losses and other foreign assets. The change in the valuation allowance does not have any impact on ~~pre-tax income~~our consolidated operations or cash flows, nor does such an allowance preclude us from ~~continuing operations for~~using loss carryforwards or other deferred tax assets in the ~~three months ended June 30, 2018 resulted in an~~future.

Our effective tax rate could be affected by, among other factors, the mix of ~~120.3% as compared to negative 737.0%~~business between U.S. and foreign jurisdictions, fluctuations in the need for the three months ended June 30, 2017. The year-over-year comparison of effective tax rates is not meaningful due to the impact of applying the accounting guidance provided by ASC 740-270-45-8 in order to determine tax expense from discontinuing operations. As a ~~result of the Tax Act, tax expense for the nine months ended June 30, 2018 includes a one-time non-cash tax benefit of $7.3 million, primarily related to the re-measurement of certain U.S.~~valuation allowance against deferred tax ~~liabilities~~assets, our ability to take advantage of available tax credits and ~~the impact~~audits 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. This estimated net tax benefit is based on our ~~current analysis of the Tax Act and may be adjusted in future periods as we collect additional information and evaluate any regulatory guidance.~~records by taxing authorities. After considering the impact of the U.S. valuation allowance, we have determined that a reliable estimate of the annual effective tax rate for fiscal year ~~2018~~2019 cannot be made, since relatively small changes in our projected income produce a significant variation in our effective tax rate.

Our net loss from continuing operations attributable to Cubic in the first quarter of fiscal 2019 was $6.6 million compared to $11.4 million in the first quarter last year. The change in net loss from continuing operations attributable to Cubic from the first quarter of fiscal 2018 to the first quarter of fiscal 2019 was favorably impacted by the reduction in our operating loss described above, partially offset by an increase in income tax as described above. In addition, nonoperating expense in the first quarter of fiscal 2019 included a $6.1 million unrealized loss caused by the change in the fair value of an interest rate swap held by a variable interest entity (VIE) that is consolidated by Cubic. The 90 percent noncontrolling interest in the net loss of the consolidated VIE, which is comprised primarily of the VIE’s loss on its interest rate swap, is added back to our net loss to arrive at net loss attributable to Cubic.

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Our net income from discontinued operations in the third quarter of fiscal 2018 was $5.4 million compared to $56.3 million in the third quarter last year. For the first nine months of fiscal 2018, our net income from discontinued operations was $8.4 million compared to $11.0 million last year. The assets and liabilities of a discontinued operation held for sale are measured at lower of carrying value or fair value less cost to sell. As a result, in the second quarter of fiscal 2018 we recognized a loss of $6.9 million within discontinued operations for the excess of the carrying value of the net assets of CGD Services less the sales price in the definitive agreement less estimated selling costs. In the third quarter of fiscal 2018 we recorded an adjustment of $0.8 million to reduce the total loss to $6.1 million based upon the estimated carrying value of the net assets at the date that the sale closed. The income taxes on the pre-tax income of the discontinued operations also had a significant impact on the changes in the net income of discontinued operations, as described above.

Cubic Transportation Systems Segment (CTS)


	Nine Months Ended				Three Months Ended				Three Months Ended
	June 30,				June 30,				December 31,
	2018		2017		2018		2017		2018		2017
	(in millions)								(in millions)
Transportation Systems Segment Sales	$	478.1	$	407.9	$	164.6	$	136.4	$	181.8	$	146.5

Transportation Systems Segment Operating Income (Loss)	$	42.7	$	16.5	$	18.6	$	(0.9)
Transportation Systems Segment Operating Income									$	11.0	$	9.9

CTS sales increased ~~21%~~24% in the ~~third~~first quarter of fiscal year ~~2018~~2019 to ~~$164.6~~$181.8 million compared to ~~$136.4~~$146.5 million inlast year, including the ~~third~~impact of the adoption of the new revenue recognition standard described above. For the first quarter of ~~last year~~fiscal 2019, sales increased in North America, Australia, and ~~increased 17% for~~United Kingdom as compared to the first ~~nine months~~quarter of fiscal ~~2018 to $478.1 million from $407.9 million last year. For the third quarter and first nine months of the year, sales~~2018. Sales were higher in the U.S. primarily due to revenue from system development on the New York New Fare Payment System ~~contract,~~and MBTA contracts, and $10.5 million of sales from Trafficware, which ~~was awarded~~we acquired in October ~~2017.~~2018. Sales were higher in ~~the U.K. and~~ Australia for the ~~third~~first quarter ~~and first nine months~~ of ~~the year~~2019 largely due to ~~the positive impact of exchange rates. Increased~~an increase in development work on ~~both development and service contracts, including work on new change orders in London also increased CTS sales for the third quarter and first nine months~~a number of ~~the year.~~customer systems. The average exchange rates between the prevailing currency in our foreign operations and the U.S. dollar resulted in ~~an increase~~a decrease in sales of ~~$2.6~~$4.8 million for the ~~third~~first quarter of fiscal ~~2018 and $14.4 million for the nine-month period~~2019 compared to the same ~~periods~~period last year, primarily due to the strengthening of the U.S. dollar against the British pound ~~against the U.S.~~and Australian dollar.

CTS operating income increased to ~~$18.6~~$11.0 million compared to an operating ~~loss~~income of ~~$0.9~~$9.9 million in the ~~third~~first quarter ~~of last year, and increased to $42.7 million from $16.5 million for the first nine months~~ of last year. For the ~~third~~ quarter, ~~and for the first nine months,~~ operating income was higher from increased volumes of system development work, ~~and services,~~ including work on new change orders. Operating income was also higher supported by reductions of R&D spending of $6.4 million for the third quarter of fiscal 2018 compare to the third quarter last year and $11.7 million for the first nine months of fiscal 2018 compared to the first nine months of last year. R&D expenses in the third quarter and first nine months of fiscal 2017 included ~~$3.0 million and $6.4 million of~~ ~~expenditures, respectively, related to the development of technologies expected to be used for~~ the New York ~~New~~ Fare Payment System ~~project.~~

~~During the first quarter CTS implemented our new enterprise resource planning (ERP) system,~~ and as a result began amortizing the cost of certain capitalized software into its operating results. This resulted in a decrease in operating income of $1.1 million for the third quarter and $3.2 million for the first nine months compared to the same periods last year. The average exchange rates between the prevailing currency in our foreign operations and the U.S. dollar resulted in an increase in operating income of $0.6 million for the third quarter of fiscal 2018 and $2.5 million for the nine-month period compared to the same periods last year.

~~Table of Contents~~

~~Cubic Global Defense Systems Segment (CGD Systems)~~

Nine Months Ended

Three Months Ended

June 30,

June 30,


2018

2017

2018

2017

(in millions)

Cubic Global Defense Systems Segment Sales

$
233.2

$
247.4

$
88.9

$
89.1

Cubic Global Defense Systems Segment Operating Income

$
13.6

$
18.4

$
6.9

$
10.4

CGD Systems sales decreased in the third quarter of fiscal 2018 to $88.9 million compared to $89.1 million last year, and decreased 6% for the first nine months of fiscal 2018 to $233.2 million from $247.4 million last year.

Sales of air combat training systems in the third quarter of fiscal year 2018 were higher than in the third quarter of last year. For the first nine months of fiscal 2018, sales of air combat training systems were slightly below the sales for the same period last year. The comparative sales between the third quarter of fiscal 2018 and the third quarter of 2017 and the year-over-year comparative sales were significantly impacted by an $8.0 million gain recognized on an equitable contract adjustment in the third quarter of fiscal 2017 for our littoral combat ship virtual training contract with the U.S. Navy. In addition, sales for the nine month period ended June 30, 2018 increased on ground combat training systems as compared to the first nine months of fiscal 2017. The average exchange rates between the prevailing currency in our foreign operations and the U.S. dollar resulted in an increase in sales of $0.5 million for the first nine months of fiscal 2018 compared to the same period last year, but exchange rates had no significant impact on sales for the third quarter of fiscal 2018 compared to the third quarter of last year.

CGD Systems operating income was $6.9 million in the third quarter of fiscal 2018 compared to $10.4 million last year, and $13.6 million for the first nine months of 2018 compared to $18.4 million for the first nine months of last year. The decreases in operating income were caused by the gain of $8.0 million recognized in the third quarter of 2017 due to the approval of a contract adjustment with the U.S. Navy described above. The overall decrease in operating profits driven by the equitable contract adjustment for the third quarter and first nine months of fiscal 2018MBTA contracts. These increases were partially offset by ~~increased~~an operating profits in both air and ground combat training systems. The increase in air combat training systems operating profits for the third quarter was primarily driven by increased sales, while the improvement in the operating profitsloss of $3.3 million from Trafficware for the first ~~nine months was primarily driven by an improved mix of sales of higher margin systems. Operating income on ground combat training systems was higher in the third~~ quarter of fiscal ~~2018~~2019, which included the impact of $4.3 million of amortization of purchased intangibles and ~~first nine months~~$1.4 million of ~~fiscal 2018 compared to the similar periods last year primarily due to improvements in expected total costs of the development of two ground combat training system contracts in the Far East.~~ In addition, although R&D expenditures for CGD Systems were relatively flat between the third quarter of fiscal 2018 and the third quarter last year, R&D expenditures increased approximately $4.0 million for the first nine months of fiscal 2018 compared to the first nine months of fiscal 2017. The increase in R&D expenditures ~~is indicative of the acceleration of our development of next generation live, virtual, constructive training systems.~~acquisition-related costs. The average exchange rates between the prevailing currency in our foreign operations and the U.S. dollar resulted in a decrease in operating income of ~~$0.2 million for the third quarter of fiscal 2018~~ ~~and a decrease of $0.4~~$0.7 million for the first ~~nine months of fiscal 2018~~ quarter compared to the ~~same periods~~first quarter last year.

Cubic Mission Solutions Segment (CMS)


	Nine Months Ended				Three Months Ended				Three Months Ended
	June 30,				June 30,				December 31,
	2018		2017		2018		2017		2018		2017
	(in millions)								(in millions)
Cubic Mission Solutions Segment Sales	$	111.9	$	103.3	$	42.7	$	40.7	$	46.4	$	33.1

Cubic Mission Solutions Segment Operating Loss	$	(17.2)	$	(14.5)	$	(0.5)	$	(1.5)	$	(4.9)	$	(8.9)

CMS sales increased 40% in the first quarter of fiscal 2019 to $46.4 million compared to $33.1 million last year. The increase in sales for the first quarter was primarily due to increased orders and shipments of expeditionary satellite communications products and command and control, intelligence, surveillance and reconnaissance (C2ISR) products.

The CMS operating loss was $4.9 million in the first quarter of fiscal 2019 compared to $8.9 million last year. For the first quarter of fiscal 2019 compared to the first quarter last year, CMS had increased operating profits from expeditionary satellite communications products and C2ISR products and services due to increased sales. In addition, CMS had a decrease in the amortization expense on purchased intangible assets between the first quarter of fiscal 2018 and the first quarter of fiscal 2019.

Cubic Global Defense Segment (CGD)


	Three Months Ended
	December 31,
	2018		2017
	(in millions)
Cubic Global Defense Segment Sales	$	77.1	$	68.8

Cubic Global Defense Segment Operating Income	$	2.9	$	1.4

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~~CMS~~CGD sales increased 5% in the ~~third~~first quarter of fiscal ~~2018~~2019 to ~~$42.7~~$77.1 million compared to ~~$40.7~~$68.8 million last ~~year,~~year. Sales increased due to the impact of the adoption of the new revenue recognition standard described and ~~increased by 8%~~quantified above. Under the new revenue recognition standard, 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 ~~first nine months~~customer, are now accounted for on the percentage-of-completion cost-to-cost method of ~~fiscal 2018 to $111.9 million from $103.3~~revenue recognition. The average exchange rates between the prevailing currency in our foreign operations and the U.S. dollar resulted in a decrease in sales of $0.7 million for the first nine months of last year. The increases in sales for the third quarter and first nine months of the year were primarily due to increased orders and shipments of Command and Control, Intelligence, Surveillance and Reconnaissance (C2ISR) products and services. Sales of technical networking products were relatively flat between the third quarter of ~~fiscal 2018 and the third quarter last year, but increased for the first nine months of fiscal 2018~~2019 compared to the same period last year. ~~These increases~~

CGD operating income was $2.9 million in ~~sales for~~ the ~~third~~first quarter of fiscal 2019 compared to $1.4 million last year. Operating income increased primarily due to the recognition of revenue and ~~first nine months~~margin on the contracts that were impacted by the adoption of the ~~fiscal year were partially offset by decreased deliveries of~~ ~~expeditionary satellite communications products due to timing of sales. Businesses acquired during fiscal years 2018 and 2017 whose operations are included~~new revenue recognition standard described above. The average exchange rates between the prevailing currency in our ~~CMS~~foreign operations and the U.S. dollar did not have a significant impact on CGD’s operating ~~segment, had sales of $2.0 million and $0.4 million for the quarters ended June 30, 2018 and 2017, respectively, and had sales of $5.0 million and $1.2 million~~income for the first ~~nine months of fiscal years 2018 and 2017, respectively.~~

~~The CMS operating loss was $0.5 million in the third~~ quarter of fiscal ~~2018 compared to $1.5 million last year, and $17.2 million for the first nine months of 2018 compared to $14.5 million for the first nine months of last year. For both the third quarter and the first nine months of fiscal 2018 CMS had increased operating profits on~~ ~~C2ISR products and services~~ ~~due to increased shipments and sales of~~ ~~between these periods. In addition, for the third quarter and first nine months of fiscal 2018 compared to the same periods in 2017, CMS had~~ decreases in the amortization expense on purchased intangible assets which are amortized based upon accelerated methods. For both the third quarter and first nine months of fiscal 2018, the operating losses were impacted by increases in R&D expenditures as well as decreases in sales of higher-margin expeditionary satellite communications products declined for the third quarter and first nine months of fiscal 2018 as compared to the same periods in fiscal 2017 due to timing.

Businesses acquired during fiscal years 2018 and 2017 whose operations are included in our CMS operating segment, had operating income of $0.1 million and an operating loss of $0.7 million for the quarters ended June 30, 2018 and 2017, respectively, and had operating losses of $2.0 million and $2.3 million for the first nine months of fiscal years 2018 and 2017, respectively.2019.

Backlog


	June 30,		September 30,		December 31,		September 30,
	2018		2017		2018		2018
	(in millions)				(in millions)
Total backlog
Cubic Transportation Systems	$	3,208.7	$	2,043.9	$	3,346.6	$	3,544.9
Cubic Global Defense Systems		425.6		420.3
Cubic Mission Solutions		66.7		72.3		93.3		77.0
Cubic Global Defense						374.4		442.6
Total	$	3,701.0	$	2,536.5	$	3,814.3	$	4,064.5

Total backlog ~~increased~~decreased by ~~$1,164.5~~$250.2 million from September 30, ~~2017~~2018 to ~~June 30, 2018 primarily due~~December 31, 2018. We recorded a net decrease to ~~the award of contracts to CTS in New York, Boston and Brisbane. These contracts together added approximately $1.4 billion to the~~ backlog of ~~CTS when they were awarded.~~$104.5 million on October 1, 2018 upon 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 the quarter decreased backlog by ~~$50.4~~$32.7 million compared to September 30, ~~2017.~~2018.

Liquidity and Capital Resources

Operating activities used cash of ~~$31.8~~$61.2 million ~~for~~in the ~~nine-month period ended June 30, 2018~~first quarter of fiscal 2019 due to ~~significant~~timing of cash flows on CTS design and build contracts, inventory builds for upcoming scheduled deliveries ~~and reductions in customer advances.~~as well as payment of certain scheduled annual expenditures including annual employee bonuses.

AsInvesting activities for the first quarter of fiscal 2019 included $239.2 million of cash paid related to the acquisition of Trafficware in our CTS segment, and $8.0 million of payments of holdback amounts made to the former owners of DTECH. In addition, as a part of our efforts to upgrade our current information systems, early in fiscal 2015 we began the process of designing and implementing new ERP software and other software applications to manage our operations. 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, or that do not meet the capitalization requirements, are expensed as incurred. Cash used in connection with ERP design and development totaled ~~$19.6~~$1.3 million in the first ~~nine months~~quarter of fiscal ~~2018.~~2019. Of this amount, ~~$13.1~~$0.8 million was recognized as expense and is reflected in cash flows used in operations, while ~~$6.5~~$0.5 million was capitalized and is included in purchases of property, plant and equipment in investing cash flows. ~~Investing activities for the nine-month period also included $9.5~~

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million of cash paid related to the acquisition of a business in our CMS segment. Investing activities from discontinued operations included $133.8 million of cash received related to the sale of CGD Services.

Financing activities for the ~~nine-month~~three-month period ended December 31, 2018 included ~~principal repayments~~net short-term borrowings of ~~$55.0~~$64.5 million ~~on short-term borrowings.~~and $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. In addition, we also used ~~$2.4~~$3.4 million for the repurchase of common stock in connection with our stock-based compensation ~~plan and paid dividends to shareholders of $3.7 million. Restricted cash increased $18.6 million related to contractual requirements.~~plan.

In March 2018, CTS 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

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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 CTS. 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 we are the primary beneficiary of both VIE’s. Consequently, we have consolidated the financial statements of the P3 Venture within Cubic’s consolidated financial statements. As such, the cash flows of the P3 Venture are reflected in Cubic’s Condensed Consolidated Statements of Cash Flows including net proceeds of long-term borrowings of the P3 Venture totaling ~~$26.2~~$5.8 million described below, even though the P3 Venture’s long-term debt is non-recourse to Cubic Corporation.

The MBTA Contract consists of a design and build phase of approximately 3 years and an operate and maintain period of approximately 10 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 ~~estimated~~fixed payments of ~~$664.0~~$558.5 million, adjusted for incremental transaction-based fees, inflation, and performance penalties to OpCo. in connection with the MBTA ~~Contract~~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 CTS by OpCo. CTS will receive ~~estimated~~fixed payments of ~~$510.0~~$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 an equity bridge loan. The loan carries a 2.5% interest rate and matures at the end of the design and build phase of the MBTA contract. CTS issued a letter of credit for $2.7 million to HoldCo. in accordance with CTS’s equity funding responsibilities. HoldCo. is able to draw on the CTS letter of credit in certain liquidity instances, but no amounts have been drawn on this letter of credit as of ~~June 30,~~December 31, 2018.

Upon creation of the P3 Venture, OpCo. entered into a credit agreement with a group of financial institutions (the P3 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 through 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.

A change in exchange rates between foreign currencies, primarily between the Australian dollar and the U.S. dollar and between the British Pound and the U.S. dollar, resulted in ~~an increase~~a decrease of ~~$0.2~~$2.0 million to our cash balance as of ~~June 30,~~December 31, 2018 compared to September 30, ~~2017.~~2018.

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 in March 2025. In addition, pursuant to the agreement, in July 2015, we issued an additional $25.0 million of senior unsecured notes bearing interest at a rate of 3.70% and maturing in March 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 ~~our~~the company’s leverage ratio exceed a certain level. In February 2016, we revised the note purchase agreement and issued an additional $75.0 million of senior unsecured notes bearing interest at 3.93% and maturing in March 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. The interest rates on all of the term notes described above may be adjusted upwards by up to 0.75% should our leverage ratio exceed certain levels.

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We have a committed revolving credit agreement with a group of financial institutions in the amount of $400.0 million which expires in August 2021 (Revolving Credit Agreement). Debt issuance and modification costs of $2.3 million and $1.3 million were incurred in connection with February 2, 2016 and August 11, 2016 amendments to the Revolving Credit Agreement, respectively. Costs incurred in connection with establishment of and amendments to the Revolving Credit Agreement are recorded in other assets on our Condensed 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 ~~June 30,~~December 31, 2018, our total debt issuance costs have an unamortized balance of ~~$2.1~~$1.7 million. The available line of credit is reduced by any letters of credit issued under the Revolving Credit Agreement. As of ~~June 30,~~December 31, 2018, there were no$64.5 million of borrowings under this agreement and there were letters of credit outstanding totaling ~~$46.3~~$38.4 million, which reduce the

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available line of credit to ~~$353.7~~$297.1 million. The ~~$46.3~~$38.4 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. These agreements also contain customary events of default, including, without limitation: (a) failure by 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.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 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 interest expense over the life of the related debt. The terms of certain of our lending and credit agreements also include provisions that limit, under certain circumstances, payments of dividends or other distributions to shareholders. As of June 30, 2018, these agreements have no restrictions on such distributions to shareholders in fiscal year 2018.

We maintain a cash account with a bank in the ~~U.K.~~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 ~~U.K.~~United Kingdom The balance in the account as of ~~June 30,~~December 31, 2018 was ~~$16.7~~$17.9 million and is classified as restricted cash in our Condensed Consolidated Balance Sheets.

As of ~~June 30,~~December 31, 2018, ~~$88.8 million~~virtually all of the ~~$120.4~~of the $103.5 million of our cash and cash equivalents, including restricted cash, was held by our foreign subsidiaries, primarily in the ~~U.K.,~~United Kingdom, New Zealand and Australia.

~~Prior~~Subsequent to the enactment of 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 whereby all previously untaxed undistributed foreign earnings are subject to a transition tax charge at reduced rates and future repatriations of foreign earnings will generally be exempt from U.S. ~~tax, we wrote off the existing U.S. deferred tax liability on undistributed foreign earnings with a corresponding increase to the valuation allowance during the first quarter of 2018.~~tax. We will continue to monitor ~~available evidence and~~ our ~~plans for~~intentions to repatriate foreign earnings and ~~expect to continue to~~ provide applicable deferred taxes ~~based on the tax liability or~~and withholding taxes that would be due upon repatriation of the undistributed foreign earnings.

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Our financial condition remains strong with working capital of ~~$337.1~~$352.2 million and a current ratio of ~~2.2~~2.1 to 1 at ~~June 30,~~December 31, 2018. We expect that cash on hand, cash flows from operations, and our unused lines of credit will be adequate to meet our liquidity requirements for the foreseeable future.

Recent Accounting Pronouncements

~~Recently Adopted~~See “Recent Accounting ~~Pronouncements~~

~~On December 22, 2017, the U.S. government enacted tax legislation commonly referred to as the Tax Cuts and Jobs Act of 2017 (Tax Act). Also~~Pronouncements” in December 2017, the Securities and Exchange Commission (SEC) staff issued Staff Accounting Bulletin 118, which was codified in March 2018 under ASU 2018-05, which provides guidance on accounting for the tax effectsNote 1 of the Tax Act for which the accounting under Accounting Standards Codification (ASC) 740 is incomplete. To the extent that a company's accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. At June 30, 2018, we have not completed our accounting for the tax effects of enactment of the Tax Act; however, in certain cases, we have made a reasonable estimate of the effects on our existing deferred tax balances and the one-time transition tax.

~~Recent Accounting Pronouncements – Not Yet Adopted~~

~~In May 2014, the~~Condensed Consolidated Financial ~~Accounting Standards Board (FASB) issued Accounting Standards Update (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 customers in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods or services. Adoption of the new rules could affect the timing of revenue recognition for certain transactions. We will adopt ASU 2014-09 using the “modified retrospective” method of adoption, meaning the cumulative effect of applying ASU 2014-09 will be recognized as an adjustment to the opening retained earnings balance in the year of adoption. We expect that we will record an increase to our opening retained earnings in the year of adoption, however we cannot reasonably estimate the amount of the adjustment due to the remaining progress to be completed on our open contracts and any new contracts that commence prior to our adoption date. Adoption of ASU 2014-09 will be required for us beginning in the first quarter of fiscal 2019 and we have determined that we will not adopt ASU 2014-09 earlier than required.

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 detailed impact of the adoption of the new standard on our active contracts across all our business segments, developing processes and tools to dual report financial results under both current GAAP and ASU 2014-09, and assessing the impact to our internal control structure. 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 cases the accounting for those contracts will change under ASU 2014-09 such that we will recognize revenue as costs are incurred. This change will generally result in an acceleration of revenue as compared with our current revenue recognition method for those contracts. Approximately 22% of our net sales used the units-of-delivery method to recognize revenue in fiscal 2017. For a number of our multiple-element transportation contracts we are currently required to defer the recognition of all revenue and related costs during the design and build phase, as the collection of all customer payments occurs during the subsequent operate and maintain phase. Under ASU 2014-09, deferral of such revenue and costs is not required. As a result, net revenue related to prior periods will be recognized as an increase to retained earnings upon adoption of ASU 2014-09. Additionally, the deferred customer-payment feature of these contracts will require identification of an embedded financing component under ASU 2014-09 which will result in the recognition of financing income for amounts which would have otherwise been recognized as revenue under the legacy standard.

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~~In January 2016, the FASB issued ASU 2016-01,~~ ~~Financial Instruments – Overall (Subtopic 825-10)~~ which updates certain aspects of recognition, measurement, presentation and disclosure of financial instruments. ASU 2016-01 will be effective for us beginning October 1, 2018 and, with the exception of a specific 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.

~~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 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 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 are currently evaluating the impact of the applicationStatements of this ~~accounting standard update on our consolidated financial statements as well as whether to adopt the new guidance early.~~

~~In August 2016, the FASB issued ASU 2016-15,~~ ~~Classification of Certain Cash Receipts and Cash Payments~~,Form 10-Q, 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. ~~Adoption of ASU 2016-15 will be required for us beginning on October 1, 2018, and we have determined that we will not adopt ASU 2016-15 earlier than required.~~ 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 amounthereby incorporated 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~~

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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. Adoption of ASU 2017-07 will be required for us in our fiscal year beginning October 1, 2018, and we have determined that we will not adopt ASU 2017-07 earlier than required. We are currently evaluating the impact of the application of this accounting standard update on our consolidated financial statements.

The FASB has issued ASU 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 economic results of an entity’s risk management activities in its financial statements. The amendments in this ASU are intended to better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the 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 effects of the hedging instrument and the hedged item in the financial statements. Additionally, the 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 are effective for us in our annual period beginning October 1, 2019 and interim periods within that year, 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 February 2018, the FASB issued ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which helps organizations reclassify certain stranded income tax effects in accumulated other comprehensive income resulting from the Tax Act enacted on December 22, 2017. ASU No. 2018-02 allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from tax reform. Additionally, ASU No. 2018-02 requires financial statement preparers to disclose (1) a description of their accounting policy for releasing income tax effects from accumulated other comprehensive income, (2) whether they elect to reclassify the stranded income tax effects from the tax reform, and (3) information about other income tax effects related to the application of the tax reform that are reclassified from accumulated other comprehensive income to retained earnings, if any. The amendments in this ASU are effective for us in our annual period beginning October 1, 2019 and interim periods within that annual period. 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.reference.

Critical Accounting Policies, Estimates and Judgments

Our financial statements are prepared in accordance with accounting principles that are generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We continually evaluate our estimates and judgments, the most critical of which are those related to revenue recognition, income taxes, valuation of goodwill, purchased intangibles, accounting for business combinations, and pension costs. We base our estimates and judgments on historical experience and other factors that we believe to be reasonable under the circumstances. Materially different results can occur as circumstances change and additional information becomes known.

Besides the estimates identified above that are considered critical, we make many other accounting estimates in preparing our financial statements and related disclosures. All estimates, whether or not deemed critical, affect reported amounts of assets, liabilities, revenues and expenses, as well as disclosures of contingent assets and liabilities. These estimates and judgments are also based on historical experience and other factors that are believed to be reasonable

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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.

~~Table~~Effective October 1, 2018, we adopted Accounting Standards Update 2014-09, Revenue from Contracts with Customers, as amended (commonly referred to as ASC 606), which changed the way we recognize revenue for certain contracts. See “Recently Adopted Accounting Pronouncements – Revenue Recognition” within “Note 1 – Basis of ~~Contents~~

~~For further information, refer~~Presentation” included in our Notes to ~~“Item 7 — Management’s~~Consolidated Financial Statements for changes to our critical accounting policies as a result of adopting ASC 606. Other than changes to our revenue recognition policy as a result of adopting ASC 606 there have been no significant changes to the critical accounting policies disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of ~~Operations — Critical Accounting Policies, Estimates and Judgments” and the consolidated financial statements and notes thereto included~~Operations” in our Annual Report on Form 10-K for the year ended September 30, ~~2017.~~2018.

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 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 “Part I - Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended September 30, ~~2017,~~2018, and throughout this report that could cause actual results to differ materially from those expressed in these statements. Such risks, estimates, assumptions and uncertainties include, among others:

our ability to monitor and evaluate the effectiveness of new processes and procedures we have implemented to remediate the material weaknesses that previously existed in our internal control over financial reporting;

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 ~~effect~~effects of sequestration on our contracts;

our assumptions covering behavior by public transit authorities;

our ability to successfully integrate new companies into our business and to properly assess the effects of such integration on our financial condition;

the U.S. government’s increased emphasis on awarding contracts to small businesses, and our ability to retain existing contracts or win new contracts under competitive bidding processes;

negative audits by the U.S. government;

the effects of politics and economic conditions on negotiations and business dealings in the various countries in which we do business or intend to do business;

competition and technology changes in the defense and transportation industries;

the change in the way transit agencies pay for transit systems;

our ability to accurately estimate the time and resources necessary to satisfy obligations under our contracts;

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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;

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business disruptions due to cyber security threats, physical threats, terrorist acts, acts of nature and public health crises;

our involvement in litigation, including litigation related to patents, proprietary rights and employee misconduct;

our reliance on subcontractors and on a limited number of third parties to manufacture and supply our products;

our ability to comply with our development contracts and to successfully develop, introduce and sell new products, systems and services in current and future markets;

defects in, or a lack of adequate coverage by insurance or indemnity for, our products and systems;

changes in U.S. and foreign tax laws, exchange rates or our economic assumptions regarding our pension plans; and

other factors discussed elsewhere in this 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 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our market risks at ~~June 30,~~December 31, 2018 have not changed materially from those described under “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” in our Annual Report on Form 10-K for the year ended September 30, ~~2017.~~2018.

ITEM 4 - CONTROLS AND PROCEDURES

We performed an evaluation of the effectiveness of our disclosure controls and procedures as of ~~June 30,~~December 31, 2018. The evaluation was performed with the participation of senior management of each business segment and key corporate functions, and under the supervision of our Chief Executive Officer and our Chief Financial Officer. Based on our evaluation, we concluded that our disclosure controls and procedures were operating and effective as of that date.

Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act)) are designed to provide reasonable assurance that information required to be disclosed in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission ~~(SEC)~~ and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

During the third quarter of fiscal 2016, we began the implementation of a new enterprise resource planning (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 subsidiaries transitioning their payroll, general ledger, procurement, payment, billing and cash receipts functions to our new ERP system. During the first quarter of 2018, we transitioned the payroll, general ledger, procurement, payment, billing and cash receipts functions for significant portions of our Australian and U.K. operations to our new ERP system. During the third quarter of fiscal

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~~2018, we transitioned the general ledger, manufacturing, procurement, payment, billing, and cash receipts of our CMS subsidiaries~~

We have implemented changes to our ~~new ERP system. We~~processes, systems and controls with respect to the adoption of Accounting Standards Update 2014-09, Revenue from Contracts with Customers, as amended (commonly referred to as ASC 606). These changes included the development of policies and procedures, training, ongoing contract review requirements, internal management reports, controls related to information systems, and disclosures. There have ~~accordingly in fiscal 2017 and fiscal 2018 modified our existing internal controls infrastructure, as well as added~~not been any other processes and internal controls, to adapt 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. 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 the first nine months of fiscal 2018 and we will continue to evaluate the operating effectiveness of related key controls during subsequent periods.

~~There were no other~~significant changes in our internal control over financial reporting during the quarter ended ~~June 30,~~December 31, 2018, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

ITEM 1A - RISK FACTORS

There have been no material changes to the risk factors disclosed in “Part I - Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended September 30, ~~2017, other than~~2018, except as ~~previously disclosed in our Quarterly Reports on Form 10-Q for the quarters ended December 31, 2017 and March 31, 2018, and changes to the risk factors~~set forth below.

~~Recent U.S. tax legislation~~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 ~~materially~~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 ~~condition,~~position or operating results ~~of operations and cash flows.~~

~~Recently-enacted U.S. tax legislation has significantly changed~~in the U.S. federal income taxation of U.S. corporations, including by reducing the U.S. corporate income tax rate, limiting interest deductions, adopting elements of a territorial tax system, imposing a one-time transition tax (or “repatriation tax”) on all undistributed earnings and profits of certain U.S.-owned foreign corporations, revising the rules governing net operating losses and the rules governing foreign tax credits, and introducing new anti-base erosion provisions. Many of these changes are effective immediately, without any transition periodsfuture or grandfathering for existing transactions. The legislation is unclear in many respects and could be subject to potential amendments and technical corrections, as well as interpretations and implementing regulations by the Treasury and Internal Revenue Service (IRS), any ofmay retroactively adversely affect previously reported results, which could ~~lessen or increase certain adverse impacts~~cause our stock price to decline.

For a discussion of the legislation. In addition, it is unclear how these U.S. federal income tax changes will affect state and local taxation, which often uses federal taxable income as a starting point for computing state and local tax liabilities.

While our analysis and interpretation of this legislation is ongoing, based on an initial assessment, a provisional discrete tax benefit of $4.3 million and $3.0 million has been recorded in the three months ended December 31, 2017 and March 31, 2018, respectively, related to the re-measurement of U.S. net deferred tax liabilities at the lower enacted corporate tax rate and other effects of the enactment of the Tax Act. These amounts may be subject to further adjustment in subsequent periods throughout fiscal 2018 in accordance with subsequent interpretive guidance issued by the SEC or the IRS.

While some of the changes made by the tax legislation may be beneficial to us in one or more reporting periods and prospectively, other changes may adversely affect us on a going forward basis. We continue to work with our tax advisors to determine the full impact that the ~~recent tax legislation as a whole will~~adoption of ASC 606 has had and is expected to have on ~~us.~~our consolidated financial statements and related disclosures, see “Recently Adopted Accounting Pronouncements” in Note 1 of the Condensed Consolidated Financial Statements of this Form 10-Q.

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ITEM 6 - EXHIBITS

(a) The following exhibits are included herein:


Exhibit No.		Description
~~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 18, 2018, file No. 001-08931, Exhibit 2.1.
3.1		Amended and Restated Certificate of Incorporation. ~~Incorporation~~Incorporated by reference to Form 10-Q for the quarter ended June 30, 2006 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.
10.1*		~~Amendment to Separation~~Form of Performance-Based Vesting Restricted Stock Unit Award Grant Notice and Award Agreement ~~and General Release dated April 10, 2018, by and between~~under the Cubic Corporation ~~and John D. Thomas. Incorporated by reference to Form 10-Q for the quarter ended March 31, 2018, file No. 001-08931, Exhibit 10.1.~~2015 Incentive Award Plan.
10.2*		~~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.~~
10.3*		~~Amendment to Cubic Corporation 2015~~ Incentive ~~Award Plan, dated August 6, 2018.~~Bonus Plan.
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350
32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350
101		Financial statements from the Cubic Corporation Quarterly Report on Form 10-Q for the quarter ended ~~June 30,~~December 31, 2018, formatted in Extensible Business Reporting Language (XBRL): (i) Condensed Consolidated Statements of Income (Loss), (ii) Condensed Consolidated Statements of Comprehensive Income (Loss), (iii) Condensed Consolidated Balance Sheets, (iv) Condensed Consolidated Statements of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements.

*Indicates management contract or compensatory plan or arrangement.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		CUBIC CORPORATION

Date	~~August 8, 2018~~February 6, 2019	/s/ Anshooman Aga
		Anshooman Aga
		Executive Vice President and Chief Financial Officer
		(Principal Financial Officer)


Date	~~August 8, 2018~~February 6, 2019	/s/ Mark A. Harrison
		Mark A. Harrison
		Senior Vice President and Corporate Controller
		(Principal Accounting Officer)

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		Page

	PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)	3
	Condensed Consolidated Statements of Income (Loss)	3
	Condensed Consolidated Statements of Comprehensive Income (Loss)	4
	Condensed Consolidated Balance Sheets	5
	Condensed Consolidated Statements of Cash Flows	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3242
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	4450
Item 4.	Controls and Procedures	4450

	PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	4652
Item 1A.	Risk Factors	4652
Item 6.	Exhibits	4753


			Cubic Global		Cubic
	Transportation		Defense		Mission
	Systems		Systems		Solutions		Total

Net balances at September 30, 2017	$	50,870	$	270,692	$	—	$	321,562
Reassignment on October 1, 2017		—		(125,321)		125,321		—
Acquisitions		—		665		6,676		7,341
Foreign currency exchange rate changes		(556)		(870)		487		(939)
Net balances at June 30, 2018	$	50,314	$	145,166	$	132,484	$	327,964