10-Q 1 cub-20180630x10q.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 June 30, 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, registrant had only one class of common stock of which there were 27,252,411 shares outstanding (after deducting 8,945,300 shares held as treasury stock).

 

 

 

 


 

CUBIC CORPORATION

QUARTERLY REPORT ON FORM 10-Q

For the Quarter Ended June 30, 2018

 

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

 

32

 

Item 3. 

Quantitative and Qualitative Disclosures about Market Risk

 

44

 

Item 4. 

Controls and Procedures

 

44

 

 

 

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

 

 

 

 

Item 1. 

Legal Proceedings

 

46

 

Item 1A. 

Risk Factors

 

46

 

Item 6. 

Exhibits

 

47

 

 

 

 

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)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

Three Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2018

    

2017

    

2018

    

2017

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

$

468,949

 

$

466,071

 

$

179,761

 

$

167,143

 

Services

 

 

354,240

 

 

292,523

 

 

116,451

 

 

99,041

 

 

 

 

823,189

 

 

758,594

 

 

296,212

 

 

266,184

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

 

334,202

 

 

334,590

 

 

125,536

 

 

120,575

 

Services

 

 

245,075

 

 

208,510

 

 

80,401

 

 

71,075

 

Selling, general and administrative expenses

 

 

183,720

 

 

170,730

 

 

58,267

 

 

56,898

 

Research and development

 

 

40,113

 

 

38,779

 

 

13,934

 

 

16,901

 

Amortization of purchased intangibles

 

 

19,988

 

 

22,948

 

 

6,153

 

 

7,257

 

Restructuring costs

 

 

3,382

 

 

1,616

 

 

1,631

 

 

326

 

 

 

 

826,480

 

 

777,173

 

 

285,922

 

 

273,032

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

 

(3,291)

 

 

(18,579)

 

 

10,290

 

 

(6,848)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expenses):

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and dividend income

 

 

1,872

 

 

682

 

 

765

 

 

235

 

Interest expense

 

 

(8,152)

 

 

(12,202)

 

 

(2,567)

 

 

(4,357)

 

Other income (expense), net

 

 

(1,881)

 

 

717

 

 

(3,831)

 

 

1,648

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations before income taxes

 

 

(11,452)

 

 

(29,382)

 

 

4,657

 

 

(9,322)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax provision

 

 

4,299

 

 

5,967

 

 

5,627

 

 

68,914

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss from continuing operations

 

 

(15,751)

 

 

(35,349)

 

 

(970)

 

 

(78,236)

 

Net income from discontinued operations

 

 

8,364

 

 

10,985

 

 

5,380

 

 

56,279

 

Net income (loss)

 

 

(7,387)

 

 

(24,364)

 

 

4,410

 

 

(21,957)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less noncontrolling interest in loss of VIE

 

 

(1,881)

 

 

 —

 

 

(1,881)

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to Cubic

 

$

(5,506)

 

$

(24,364)

 

$

6,291

 

$

(21,957)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts attributable to Cubic:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) from continuing operations

 

 

(13,870)

 

 

(35,349)

 

 

911

 

 

(78,236)

 

Net income from discontinued operations

 

 

8,364

 

 

10,985

 

 

5,380

 

 

56,279

 

Net income (loss) attributable to Cubic

 

$

(5,506)

 

$

(24,364)

 

$

6,291

 

$

(21,957)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

 

 

 

 

 

 

 

       Continuing operations attributable to Cubic

 

$

(0.51)

 

$

(1.30)

 

$

0.03

 

$

(2.89)

 

       Discontinued operations

 

$

0.31

 

$

0.41

 

$

0.20

 

$

2.08

 

Basic earnings per share attributable to Cubic

 

$

(0.20)

 

$

(0.90)

 

$

0.23

 

$

(0.81)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

       Continuing operations attributable to Cubic

 

$

(0.51)

 

$

(1.30)

 

$

0.03

 

$

(2.89)

 

       Discontinued operations

 

$

0.31

 

$

0.41

 

$

0.20

 

$

2.08

 

Diluted earnings per share attributable to Cubic

 

$

(0.20)

 

$

(0.90)

 

$

0.23

 

$

(0.81)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

Diluted

 

 

27,221

 

 

27,100

 

 

27,374

 

 

27,110

 

 

See accompanying notes.

3


 

CUBIC CORPORATION

CONDENSED CONSOLIDATED

STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

Three Months Ended

 

 

 

June 30,

 

June 30,

 

 

    

2018

    

2017

 

2018

    

2017

 

Net income (loss)

 

$

(7,387)

 

$

(24,364)

 

$

4,410

 

$

(21,957)

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

 

(7,276)

 

 

(2,111)

 

 

(10,628)

 

 

11,193

 

Change in unrealized gains/losses from cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

(123)

 

 

(39)

 

 

640

 

 

930

 

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

 

 

1,101

 

 

(1,204)

 

 

502

 

 

(1,204)

 

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

 

 

978

 

 

(1,243)

 

 

1,142

 

 

(274)

 

Total other comprehensive income (loss)

 

 

(6,298)

 

 

(3,354)

 

 

(9,486)

 

 

10,919

 

Total comprehensive loss

 

 

(13,685)

 

 

(27,718)

 

 

(5,076)

 

 

(11,038)

 

Noncontrolling interest in comprehensive loss of consolidated VIE, net of tax

 

 

(1,881)

 

 

 —

 

 

(1,881)

 

 

 —

 

Comprehensive loss attributable to Cubic, net of tax

 

$

(11,804)

 

$

(27,718)

 

$

(3,195)

 

$

(11,038)

 

 

See accompanying notes.

 

 

 

4


 

 

CUBIC CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

September 30,

 

 

    

2018

    

2017

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

93,274

 

$

60,143

 

Cash in consolidated VIE

 

 

414

 

 

 —

 

Restricted cash

 

 

16,695

 

 

8,434

 

Restricted cash in consolidated VIE

 

 

10,000

 

 

 —

 

Accounts receivable:

 

 

 

 

 

 

 

Long-term contracts

 

 

313,747

 

 

354,476

 

Allowance for doubtful accounts

 

 

(1,334)

 

 

(436)

 

 

 

 

312,413

 

 

354,040

 

 

 

 

 

 

 

 

 

Recoverable income taxes

 

 

1,103

 

 

5,360

 

Inventories

 

 

126,405

 

 

87,715

 

Assets held for sale

 

 

8,177

 

 

 —

 

Other current assets

 

 

45,423

 

 

29,951

 

Current assets of discontinued operations

 

 

 —

 

 

75,900

 

Total current assets

 

 

613,904

 

 

621,543

 

 

 

 

 

 

 

 

 

Long-term contract receivables

 

 

14,791

 

 

17,457

 

Long-term capitalized contract costs

 

 

71,530

 

 

56,471

 

Long-term capitalized contract costs in consolidated VIE

 

 

1,159

 

 

 —

 

Property, plant and equipment, net

 

 

111,775

 

 

113,220

 

Deferred income taxes

 

 

4,937

 

 

7,385

 

Goodwill

 

 

327,964

 

 

321,562

 

Purchased intangibles, net

 

 

74,808

 

 

89,858

 

Other assets

 

 

13,229

 

 

10,515

 

Noncurrent assets of discontinued operations

 

 

 —

 

 

98,274

 

Total assets

 

$

1,234,097

 

$

1,336,285

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Short-term borrowings

 

$

 —

 

$

55,000

 

Trade accounts payable

 

 

110,970

 

 

88,521

 

Trade accounts payable in consolidated VIE

 

 

268

 

 

 —

 

Customer advances

 

 

56,769

 

 

56,132

 

Accrued compensation and other current liabilities

 

 

102,142

 

 

130,126

 

Income taxes payable

 

 

6,677

 

 

9,838

 

Current liabilities of discontinued operations

 

 

 —

 

 

36,862

 

Total current liabilities

 

 

276,826

 

 

376,479

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

199,785

 

 

199,761

 

Long-term debt in consolidated VIE

 

 

26,562

 

 

 —

 

Other long-term liabilities

 

 

52,949

 

 

70,414

 

Other long-term liabilities in consolidated VIE

 

 

2,090

 

 

 —

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

Common stock

 

 

41,465

 

 

37,850

 

Retained earnings

 

 

785,303

 

 

794,485

 

Accumulated other comprehensive loss

 

 

(112,924)

 

 

(106,626)

 

Treasury stock at cost

 

 

(36,078)

 

 

(36,078)

 

Shareholders’ equity related to Cubic

 

 

677,766

 

 

689,631

 

Noncontrolling interest in VIE

 

 

(1,881)

 

 

 —

 

Total shareholders’ equity

 

 

675,885

 

 

689,631

 

Total liabilities and shareholders’ equity

 

$

1,234,097

 

$

1,336,285

 

 

See accompanying notes.

 

 

5


 

CUBIC CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

Three Months Ended

 

 

 

June 30,

 

June 30,

 

 

    

2018

    

2017

 

2018

    

2017

 

Operating Activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(7,387)

 

$

(24,364)

 

$

4,410

 

$

(21,957)

 

Net income from discontinued operations

 

 

(8,364)

 

 

(10,985)

 

 

(5,380)

 

 

(56,279)

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

34,133

 

 

35,774

 

 

10,642

 

 

11,750

 

Share-based compensation expense

 

 

5,100

 

 

3,586

 

 

2,603

 

 

395

 

Change in fair value of contingent consideration

 

 

446

 

 

(4,713)

 

 

(6)

 

 

(2,519)

 

(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

 

NET CASH USED IN CONTINUING OPERATING ACTIVITIES

 

 

(31,791)

 

 

(45,290)

 

 

(32,770)

 

 

(45,022)

 

NET CASH PROVIDED BY OPERATING ACTIVITIES FROM DISCONTINUED OPERATIONS

 

 

14,497

 

 

28,776

 

 

8,364

 

 

16,702

 

NET CASH USED IN OPERATING ACTIVITIES

 

 

(17,294)

 

 

(16,514)

 

 

(24,406)

 

 

(28,320)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investing Activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition of businesses, net of cash acquired

 

 

(9,534)

 

 

(12,924)

 

 

 —

 

 

 —

 

Purchases of property, plant and equipment

 

 

(21,120)

 

 

(25,474)

 

 

(9,334)

 

 

(10,305)

 

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)

 

 

 —

 

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)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financing Activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from short-term borrowings

 

 

198,820

 

 

93,080

 

 

79,700

 

 

23,800

 

Principal payments on short-term borrowings

 

 

(253,820)

 

 

(229,080)

 

 

(156,700)

 

 

(169,800)

 

Principal payments on long-term debt

 

 

 —

 

 

(320)

 

 

 —

 

 

(104)

 

Proceeds from long-term borrowings in consolidated VIE

 

 

28,378

 

 

 —

 

 

28,378

 

 

 —

 

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)

 

Dividends paid

 

 

(3,676)

 

 

(3,679)

 

 

 —

 

 

 —

 

Contingent consideration payments related to acquisitions of businesses

 

 

(656)

 

 

(1,988)

 

 

 —

 

 

 —

 

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)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of exchange rates on cash

 

 

175

 

 

(2,528)

 

 

1,242

 

 

4,958

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

 

33,545

 

 

(130,063)

 

 

37,269

 

 

(100,753)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at the beginning of the period

 

 

60,143

 

 

197,127

 

 

56,419

 

 

167,817

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD

 

$

93,688

 

$

67,064

 

$

93,688

 

$

67,064

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Liability incurred to acquire Vocality, net

 

$

 —

 

$

1,035

 

$

 —

 

$

 —

 

 

See accompanying notes.

6


 

 

CUBIC CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

June 30, 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 ended June 30, 2018 are not necessarily indicative of the results that may be expected for the year ending September 30, 2018. 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.

 

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.

 

On April 18, 2018, we entered into a definitive agreement to sell the Cubic Global Defense Services (CGD Services) business. This transaction closed and the sale was completed on May 31, 2018. 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 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. Refer to “Note 2 – 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

 

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 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.

 

7


 

Recent Accounting Pronouncements – Not Yet Adopted

 

In May 2014, the 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.

 

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.

 

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 application 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, which provides clarifying guidance on how entities should classify certain cash receipts and cash payments on the statement of

8


 

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 impact of the application of this accounting standard update on our consolidated financial statements as well as whether to adopt the new guidance early.

In March 2017, the FASB issued ASU 2017-07, Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The update requires employers to present the service cost component of the net periodic benefit cost in the same income statement line item as other employee compensation costs arising from services rendered during the period. The other components of net benefit cost, including interest cost, expected return on plan assets, amortization of prior service cost/credit and actuarial gain/loss, and settlement and curtailment effects, are to be presented outside of any subtotal of operating income. Employers will have to disclose the line(s) used to present the other components of net periodic benefit cost, if the components are not presented separately in the income statement. 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

9


 

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.

 

 

Note 2 — Acquisitions and Divestitures

 

Sale of CGD Services

 

On April 18, 2018, we entered into a stock purchase agreement with Nova Global Supply & Services, LLC (Purchaser), an entity affiliated with GC Valiant, LP, under which we agreed to sell our CGD Services business to the Purchaser. 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 addition to the upfront cash payment, 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 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.

 

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.

 

10


 

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 from discontinued operations, net of taxes, is comprised of the following for the quarter and nine months ended June 30, 2018 and 2017 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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