10-Q 1 cub-20170331x10q.htm 10-Q cub_Current folio_10Q

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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 March 31, 2017

 

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 April 25, 2017, registrant had only one class of common stock of which there were 27,110,669 shares outstanding (after deducting 8,945,300 shares held as treasury stock).

 

 

 

 


 

CUBIC CORPORATION

QUARTERLY REPORT ON FORM 10-Q

For the Quarter Ended March 31, 2017

 

TABLE OF CONTENTS

 

 

 

 

 

 

 

    

    

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

 

30

 

Item 3. 

Quantitative and Qualitative Disclosures about Market Risk

 

41

 

Item 4. 

Controls and Procedures

 

41

 

 

 

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

 

 

 

 

Item 1. 

Legal Proceedings

 

44

 

Item 1A. 

Risk Factors

 

44

 

Item 6. 

Exhibits

 

44

 

 

 

 

2


 

PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

 

CUBIC CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) (UNAUDITED)

(amounts in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

Three Months Ended

 

 

March 31,

 

March 31,

 

 

2017

    

2016

    

2017

    

2016

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

$

298,928

 

$

280,763

 

$

154,168

 

$

155,794

Services

 

 

379,458

 

 

399,074

 

 

189,541

 

 

210,230

 

 

 

678,386

 

 

679,837

 

 

343,709

 

 

366,024

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

 

214,015

 

 

219,637

 

 

109,403

 

 

120,445

Services

 

 

306,724

 

 

314,594

 

 

155,582

 

 

159,938

Selling, general and administrative expenses

 

 

123,114

 

 

138,265

 

 

59,356

 

 

79,774

Research and development

 

 

21,878

 

 

9,625

 

 

12,858

 

 

6,143

Amortization of purchased intangibles

 

 

17,228

 

 

14,954

 

 

7,873

 

 

8,499

Restructuring costs

 

 

1,600

 

 

(75)

 

 

709

 

 

311

 

 

 

684,559

 

 

697,000

 

 

345,781

 

 

375,110

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating loss

 

 

(6,173)

 

 

(17,163)

 

 

(2,072)

 

 

(9,086)

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expenses):

 

 

 

 

 

 

 

 

 

 

 

 

Interest and dividend income

 

 

470

 

 

737

 

 

223

 

 

339

Interest expense

 

 

(7,845)

 

 

(3,917)

 

 

(4,305)

 

 

(2,579)

Other income (expense), net

 

 

(945)

 

 

398

 

 

(398)

 

 

223

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss before income taxes

 

 

(14,493)

 

 

(19,945)

 

 

(6,552)

 

 

(11,103)

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax benefit

 

 

(12,086)

 

 

(24,675)

 

 

(7,013)

 

 

(21,247)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(2,407)

 

$

4,730

 

$

461

 

$

10,144

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.09)

 

$

0.18

 

$

0.02

 

$

0.38

Diluted

 

$

(0.09)

 

$

0.18

 

$

0.02

 

$

0.38

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends per common share

 

$

0.14

 

$

0.14

 

$

0.14

 

$

0.14

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares used in per share calculations:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

27,095

 

 

26,968

 

 

27,103

 

 

26,973

Diluted

 

 

27,095

 

 

26,986

 

 

27,159

 

 

26,995

 

See accompanying notes.

3


 

CUBIC CORPORATION

CONDENSED CONSOLIDATED

STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

Three Months Ended

 

 

 

March 31,

 

March 31,

 

 

    

2017

    

2016

 

2017

    

2016

 

Net income (loss)

 

$

(2,407)

 

$

4,730

 

$

461

 

$

10,144

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

 

(13,304)

 

 

(17,621)

 

 

7,214

 

 

(9,118)

 

Change in unrealized gains/losses from cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

222

 

 

(347)

 

 

(244)

 

 

(375)

 

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

 

 

(1,191)

 

 

(574)

 

 

(326)

 

 

395

 

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

 

 

(969)

 

 

(921)

 

 

(570)

 

 

20

 

Total other comprehensive income (loss)

 

 

(14,273)

 

 

(18,542)

 

 

6,644

 

 

(9,098)

 

Total comprehensive income (loss)

 

$

(16,680)

 

$

(13,812)

 

$

7,105

 

$

1,046

 

 

See accompanying notes.

 

 

 

4


 

 

CUBIC CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

September 30,

 

 

    

2017

    

2016

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

167,817

 

$

197,127

 

Restricted cash

 

 

77,161

 

 

75,648

 

Marketable securities

 

 

18,844

 

 

12,996

 

Accounts receivable - net

 

 

344,706

 

 

382,581

 

Recoverable income taxes

 

 

6,268

 

 

9,706

 

Inventories - net

 

 

113,864

 

 

66,362

 

Other current assets

 

 

31,841

 

 

38,231

 

Total current assets

 

 

760,501

 

 

782,651

 

 

 

 

 

 

 

 

 

Long-term contract receivables

 

 

19,562

 

 

20,926

 

Long-term capitalized contract costs

 

 

60,872

 

 

65,382

 

Property, plant and equipment, net

 

 

101,230

 

 

96,316

 

Deferred income taxes

 

 

17,794

 

 

2,194

 

Goodwill

 

 

409,091

 

 

406,946

 

Purchased intangibles, net

 

 

110,648

 

 

123,403

 

Other assets

 

 

8,204

 

 

6,590

 

Total assets

 

$

1,487,902

 

$

1,504,408

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Short-term borrowings

 

$

250,000

 

$

240,000

 

Trade accounts payable

 

 

68,669

 

 

81,172

 

Customer advances

 

 

63,404

 

 

49,481

 

Accrued compensation and other current liabilities

 

 

134,618

 

 

147,690

 

Income taxes payable

 

 

1,889

 

 

1,450

 

Current portion of long-term debt

 

 

435

 

 

450

 

Total current liabilities

 

 

519,015

 

 

520,243

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

200,071

 

 

200,291

 

Other long-term liabilities

 

 

96,844

 

 

93,978

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

Common stock

 

 

35,191

 

 

32,756

 

Retained earnings

 

 

806,949

 

 

813,035

 

Accumulated other comprehensive loss

 

 

(134,090)

 

 

(119,817)

 

Treasury stock at cost

 

 

(36,078)

 

 

(36,078)

 

Total shareholders’ equity

 

 

671,972

 

 

689,896

 

Total liabilities and shareholders’ equity

 

$

1,487,902

 

$

1,504,408

 

 

See accompanying notes.

 

 

5


 

CUBIC CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

Three Months Ended

 

 

 

March 31,

 

March 31,

 

 

    

2017

    

2016

 

2017

    

2016

 

Operating Activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(2,407)

 

$

4,730

 

$

461

 

$

10,144

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

25,736

 

 

18,977

 

 

12,292

 

 

10,029

 

Share-based compensation expense

 

 

3,357

 

 

4,088

 

 

1,043

 

 

1,970

 

Change in fair value of contingent consideration

 

 

(2,194)

 

 

(1,706)

 

 

(880)

 

 

(897)

 

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

 

 

(13,494)

 

 

(63,784)

 

 

(9,016)

 

 

(9,354)

 

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

 

 

10,998

 

 

(37,695)

 

 

3,900

 

 

11,892

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investing Activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition of businesses, net of cash acquired

 

 

(12,924)

 

 

(243,483)

 

 

 —

 

 

(213,765)

 

Purchases of property, plant and equipment

 

 

(15,169)

 

 

(21,375)

 

 

(8,495)

 

 

(11,015)

 

Purchases of marketable securities

 

 

(18,755)

 

 

(14,686)

 

 

(12,509)

 

 

(7,145)

 

Proceeds from sales or maturities of marketable securities

 

 

12,503

 

 

29,870

 

 

6,257

 

 

15,694

 

Proceeds from sale of fixed assets

 

 

1,233

 

 

 —

 

 

 —

 

 

 —

 

NET CASH USED IN INVESTING ACTIVITIES

 

 

(33,112)

 

 

(249,674)

 

 

(14,747)

 

 

(216,231)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financing Activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from short-term borrowings

 

 

69,280

 

 

253,300

 

 

32,480

 

 

180,700

 

Principal payments on short-term borrowings

 

 

(59,280)

 

 

(73,300)

 

 

(24,280)

 

 

(50,700)

 

Proceeds from long-term borrowings

 

 

 —

 

 

75,000

 

 

 —

 

 

75,000

 

Principal payments on long-term debt

 

 

(216)

 

 

(254)

 

 

(109)

 

 

(123)

 

Purchase of common stock

 

 

(2,314)

 

 

(1,658)

 

 

 —

 

 

 —

 

Dividends paid

 

 

(3,679)

 

 

(3,641)

 

 

(3,659)

 

 

(3,641)

 

Contingent consideration payments related to acquisitions of businesses

 

 

(1,988)

 

 

(1,679)

 

 

 —

 

 

 —

 

Net change in restricted cash

 

 

(1,513)

 

 

(3,514)

 

 

2,713

 

 

(1,102)

 

NET CASH PROVIDED BY FINANCING ACTIVITIES

 

 

290

 

 

244,254

 

 

7,145

 

 

200,134

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of exchange rates on cash

 

 

(7,486)

 

 

(16,553)

 

 

5,180

 

 

(8,350)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

 

(29,310)

 

 

(59,668)

 

 

1,478

 

 

(12,555)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at the beginning of the period

 

 

197,127

 

 

218,476

 

 

166,339

 

 

171,363

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD

 

$

167,817

 

$

158,808

 

$

167,817

 

$

158,808

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Liability incurred to acquire Vocality, net

 

$

1,035

 

$

 —

 

$

 —

 

$

 —

 

Liability incurred to acquire GATR, net

 

$

 —

 

$

7,651

 

$

 —

 

$

7,651

 

Liability incurred to acquire TeraLogics, net

 

$

 —

 

$

4,998

 

$

 —

 

$

 —

 

Liability incurred to acquire H4 Global, net

 

$

 —

 

$

952

 

$

 —

 

$

 —

 

 

See accompanying notes.

 

 

6


 

CUBIC CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

March 31, 2017

 

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 six-month periods ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending September 30, 2017. 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, 2016.

 

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.

 

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, 2016.

 

Recent Accounting Pronouncements

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. ASU 2014-09 outlines a comprehensive revenue recognition model and supersedes most current revenue recognition guidance. The new guidance will require revenue to be recognized when promised goods or services are transferred to 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. 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. ASU 2014-09 allows for two methods of adoption: (a) “full retrospective” adoption, meaning the standard is applied to all periods presented, or (b) “modified retrospective” adoption, meaning the cumulative effect of applying ASU 2014-09 is recognized as an adjustment to the opening retained earnings balance in the year of adoption. We have not yet determined which method of adoption we will select. 

 

We have assigned a task force within management to lead our implementation efforts and we have engaged outside advisors to assist. We are currently in the process of analyzing the impact of the adoption of the new standard on our various revenue streams. Under ASU 2014-09, revenue is recognized as control transfers to the customer. As such, revenue for our fixed-price development and production contracts will generally be recognized over time as costs are incurred, which is consistent with the revenue recognition model we currently use for the majority of these contracts.  For certain of our fixed-price production contracts where we currently recognize revenue as units are delivered, in most 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 13% of our net sales used the units-of-delivery method to recognize revenue in fiscal 2016. We continue to analyze the impact of the new standard on our remaining revenue streams and, as the standard will supersede substantially all existing revenue guidance affecting us under GAAP, we expect that it will impact revenue and cost recognition on a significant number of our contracts across our business segments, in addition to our business processes and our information technology systems. As a result, our evaluation of the effect of the new standard will continue to extend over several future periods.

 

7


 

 

In January 2016, the FASB issued Accounting Standards Update ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10) which updates certain aspects of recognition, measurement, presentation 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, leasees 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 adopt the new guidance early.

 

In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation. The new guidance simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The amendments in this standard are effective for our annual year and first fiscal quarter beginning on October 1, 2017 with early adoption permitted. We are currently evaluating the impact of the application of this accounting standard update on our consolidated financial statements. We do not intend to 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 cash flows. The guidance also clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. The guidance will be effective for us in our fiscal year beginning October 1, 2018, and early adoption is permitted. We are currently evaluating the impact of the application of this accounting standard update on our consolidated financial statements as well as whether to adopt the new guidance early.

 

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

 

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

 

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

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. This standard removes the second step of the goodwill impairment test, where a determination of the fair value of individual assets and liabilities of a reporting unit was needed to measure the goodwill impairment. Under this updated standard, goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the

8


 

carrying amount of goodwill. The guidance will be effective for us in our fiscal year beginning October 1, 2020 with early adoption permitted. We are currently evaluating the impact of the application of this accounting standard update on our consolidated financial statements as well as whether to adopt the new guidance early.

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

 

Note 2 — Acquisitions

 

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

 

Vocality

 

On November 30, 2016, we acquired all of the outstanding capital stock of Vocality International (Vocality), based in Shackleford, United Kingdom, 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 Cubic Global Defense Systems (CGD Systems) segment and expands our defense 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 six-months ended March 31, 2017 and 2016 were as follows (in millions):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

Three Months Ended

 

 

 

March 31,

 

March 31,

 

 

 

2017

    

2016

 

2017

    

2016

 

Sales

 

$

0.8

 

$

 —

 

$

0.7

 

$

 —

 

Operating income (loss)

 

 

(1.6)

 

 

 —

 

 

(0.5)

 

 

 —

 

Net income (loss) after taxes

 

 

(1.5)

 

 

 —

 

 

(0.6)

 

 

 —

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

Three Months Ended

 

 

 

March 31,

 

March 31,

 

 

 

2017

    

2016

 

2017

    

2016

 

Amortization

 

$

0.2

 

$

 —

 

$

0.2

 

$

 —

 

Acquisition-related expenses

 

 

1.2

 

 

 —

 

 

0.4

 

 

 —

 

 

 

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

9


 

reflected in Vocality’s acquisition-related expenses and results of operations above for the six months ended March 31, 2017.

 

The estimated acquisition date fair value of consideration is $9.6 million, which was comprised of cash paid of $8.9 million plus additional held back consideration to be paid in the future estimated at $1.1 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)

 

 

(0.2)

 

Net identifiable assets acquired

 

 

6.0

 

Goodwill

 

 

3.6

 

Net assets acquired

 

$

9.6

 

 

 

The preliminary estimated fair values of assets acquired and liabilities assumed, including purchased intangibles, inventory and 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 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.

 

The goodwill resulting from the acquisition consists primarily of the synergies expected from combining the operations of Vocality with our existing CGD Systems business, including the synergies expected from combining its communication unification technologies with our C4ISR products and other products in our CGD Systems portfolio. The goodwill also includes the value of the assembled workforce that became our employees following the close of the acquisition. The amount recorded as goodwill is allocated to our CGD Systems segment and is generally not expected to be deductible for tax purposes.

 

The estimated amortization expense related to the intangible assets recorded in connection with our acquisition of Vocality for fiscal years 2017 through 2021 and thereafter is as follows (in millions):

 

 

 

 

 

 

Year Ended

 

 

 

 

September 30,

    

 

 

 

2017

 

$

0.6

 

2018

 

 

0.8

 

2019

 

 

0.7

 

2020

 

 

0.6

 

2021

 

 

0.5

 

Thereafter

 

 

1.7

 

 

 

 

GATR

 

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

10


 

 

GATR’s sales and results of operations included in our operating results for the quarter and six months ended March 31, 2017 and 2016 were as follows (in millions):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

Three Months Ended

 

 

 

March 31,

 

March 31,

 

 

 

2017

    

2016

 

2017

    

2016

 

Sales

 

$

27.4

 

$

9.3

 

$

8.9

 

$

9.3

 

Operating income (loss)

 

 

(5.3)

 

 

(20.7)

 

 

(4.8)

 

 

(20.7)

 

Net loss after taxes

 

 

(3.2)

 

 

(18.3)

 

 

(2.9)

 

 

(18.3)

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

Three Months Ended

 

 

 

March 31,

 

March 31,

 

 

 

2017

    

2016

 

2017

    

2016

 

Amortization

 

$

6.6

 

$

2.4

 

$

3.0

 

$

2.4

 

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

 

 

1.7

 

 

(0.1)

 

 

1.3

 

 

(0.1)

 

Acquisition-related expenses

 

 

0.8

 

 

19.4

 

 

 —

 

 

18.8

 

 

 

GATR’s operating results for the quarter ended March 31, 2016 were significantly impacted by the GAAP accounting requirements regarding business combinations. Prior to our acquisition of GATR, GATR had a number of share-based payment awards in place to its employees. Due to the structure of certain of these share-based payment awards and the acceleration of vesting of certain of these awards in connection with our acquisition of GATR, we were required to recognize compensation expense, rather than purchase consideration, for the portion of our purchase price that we paid to the seller that was distributed to the recipients of these awards. Consequently, we recognized $18.5 million of compensation expense within general and administrative expenses during the quarter ended March 31, 2016 related to this matter. This compensation expense is reflected in GATR’s acquisition-related expenses and the results of GATR’s operations above. Of this $18.5 million amount, $15.4 million is not deductible for tax purposes.

 

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

 

11


 

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

 

 

 

 

 

 

Customer relationships

    

$

51.7

 

Backlog

 

 

3.4

 

Technology

 

 

10.7

 

Non-compete agreements

 

 

1.2

 

Trade name

 

 

4.7

 

Accounts receivable

 

 

10.6

 

Inventory

 

 

3.4

 

Income tax receivable

 

 

5.1

 

Accounts payable and accrued expenses

 

 

(2.4)

 

Deferred tax liabilities

 

 

(23.8)

 

Net identifiable assets acquired

 

 

64.6

 

Goodwill

 

 

155.9

 

Net assets acquired

 

$

220.5

 

 

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

 

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

 

The goodwill resulting from the acquisition consists primarily of the synergies expected from combining the operations of GATR with our existing CGD Systems business, including the synergies expected from combining its satellite communications and networking applications technologies with our C4ISR products and other products in our CGD Systems portfolio. The goodwill also includes the value of the assembled workforce that became our employees following the close of the acquisition. The amount recorded as goodwill is allocated to our CGD Systems 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 GATR for fiscal years 2017 through 2021 and thereafter is as follows (in millions):

 

 

 

 

 

 

Year Ended

 

 

 

 

September 30,

    

 

 

 

2017

 

$

12.7

 

2018

 

 

11.1

 

2019

 

 

9.8

 

2020

 

 

8.3

 

2021

 

 

6.9

 

Thereafter

 

 

13.2

 

 

TeraLogics

 

On December 21, 2015, we acquired all of the assets of TeraLogics, LLC, an Ashburn, Virginia-based provider of real-time full motion video processing, exploitation and dissemination for the Department of Defense, the intelligence community and commercial customers. TeraLogics’ ability to develop real-time video analysis and delivery software for full motion video complements the existing tactical communications portfolio of our CGD Systems segment and expands our customer base.  

 

12


 

Teralogic’s sales and results of operations included in our operating results for the quarter and six months ended March 31, 2017 and 2016 were as follows (in millions):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

Three Months Ended

 

 

 

March 31,

 

March 31,

 

 

 

2017

    

2016

 

2017

    

2016

 

Sales

 

$

11.0

 

$

3.8

 

$

4.8

 

$

3.8

 

Operating income (loss)

 

 

(0.2)

 

 

(2.0)

 

 

(0.2)

 

 

(0.3)

 

Net loss after taxes

 

 

(0.1)

 

 

(1.2)

 

 

(0.1)

 

 

(0.2)

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

Three Months Ended

 

 

 

March 31,

 

March 31,

 

 

 

2017

    

2016

 

2017

    

2016

 

Amortization

 

$

1.8

 

$

1.0

 

$

0.8

 

$

1.0

 

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

 

 

(0.2)

 

 

0.1

 

 

(0.3)

 

 

0.1

 

Acquisition-related expenses

 

 

0.1

 

 

2.2

 

 

 —

 

 

0.5

 

 

 

During the quarter ended December 31, 2015 we incurred a $1.3 million charge for compensation expense incurred related to amounts paid to TeraLogics employees upon the close of the acquisition. This compensation expense is reflected in Teralogic’s acquisition-related expenses and the results of Teralogic’s operations above.

 

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

 

Through March 31, 2017 we have paid $32.4 million to the seller. At March 31, 2017 we have recorded a liability of $3.2 million as an estimate of the additional cash consideration that will be due to the seller in the future.

 

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

 

 

 

 

 

 

Customer relationships

    

$

6.7

 

Backlog

 

 

5.6

 

Software

 

 

2.5

 

Non-compete agreements

 

 

0.1

 

Accounts receivable

 

 

1.4

 

Accounts payable and accrued expenses

 

 

(0.5)

 

Other net assets acquired (liabilities assumed)

 

 

(0.1)

 

Net identifiable assets acquired

 

 

15.7

 

Goodwill

 

 

18.2

 

Net assets acquired

 

$

33.9

 

 

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

13


 

earnings approach, the non-compete agreements used the with-and-without approach, and the software used the replacement cost new less cost decrements for obsolescence 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 seven years from the date of acquisition.

 

The goodwill resulting from the acquisition consists primarily of the synergies expected from combining the operations of TeraLogics with our existing CGD Systems business, including the synergies expected from combining TeraLogics real-time video capabilities with our existing tactical communications product portfolio. The goodwill also includes the value of the assembled workforce who became our employees following the close of the acquisition. The amount recorded as goodwill is allocated to our CGD Systems segment and is expected to be deductible for tax purposes.

 

The estimated amortization expense amounts related to the intangible assets recorded in connection with our acquisition of TeraLogics for fiscal years 2017 through 2021 and thereafter is as follows (in millions):

 

 

 

 

 

 

Year Ended

 

 

 

 

September 30,

    

 

 

 

2017

 

$

3.5

 

2018

 

 

2.8

 

2019

 

 

2.1

 

2020

 

 

1.4

 

2021

 

 

0.8

 

Thereafter

 

 

1.4

 

 

H4 Global

 

On November 4, 2015, we acquired all of the assets of H4 Global, a U.K.-based provider of simulation-based training solutions which complements our CGD Systems segment training portfolio.

 

H4 Global’s sales and results of operations included in our operating results for the quarter and six months ended March 31, 2017 and 2016 were as follows (in millions):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

Three Months Ended

 

 

 

March 31,

 

March 31,

 

 

 

2017

    

2016

 

2017

    

2016

 

Sales

 

$

1.6

 

$

0.6

 

$

0.9

 

$

0.6

 

Operating income (loss)

 

 

(0.3)

 

 

 —

 

 

(0.1)

 

 

0.1

 

Net income (loss) after taxes

 

 

(0.2)

 

 

 —

 

 

 —

 

 

 —

 

 

 

H4 Global’s operating results above included the following amounts for the quarter and six-month periods (in millions):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

Three Months Ended

 

 

 

March 31,

 

March 31,

 

 

 

2017

    

2016

 

2017

    

2016

 

Amortization

 

$

0.1

 

$

 —

 

$

0.1

 

$

 —

 

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

 

 

0.1

 

 

0.2

 

 

 —

 

 

0.2

 

Acquisition-related expenses

 

 

 —

 

 

0.1

 

 

 —

 

 

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