Note 2 — Implementation of the New Revenue Recognition Standard

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.

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 of $90.4 million. 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 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 Operations for any historical or future period.

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

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 liabilities		—		70,127		70,127
Customer advances		75,941		(75,941)		—
Accrued compensation and other current liabilities		118,233		583		118,816
Income taxes payable		8,586		—		8,586
Total current liabilities		328,339		(8,242)		320,097

Long-term debt		199,793		—		199,793
Long-term debt in consolidated VIE		9,056		—		9,056
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

The table below presents how the adoption of ASC 606 affected certain line items on our Condensed Consolidated Statements of Operations for the three and six months ended March 31, 2019 (in thousands):


	Three months ended March 31, 2019						Six months ended March 31, 2019
					As Reported						As Reported
	Under		Effect of		Under		Under		Effect of		Under
	ASC 605		ASC 606		ASC 606		ASC 605		ASC 606		ASC 606
Net sales:
Products	$	195,588	$	27,156	$	222,744	$	348,150	$	56,847	$	404,997
Services		114,047		548		114,595		238,309		(708)		237,601
		309,635		27,704		337,339		586,459		56,139		642,598
Costs and expenses:
Products		145,156		22,411		167,567		245,700		47,352		293,052
Services		82,212		—		82,212		174,997		—		174,997
Selling, general and administrative expenses		66,295		(100)		66,195		129,118		63		129,181
Research and development		13,754		—		13,754		25,766		—		25,766
Amortization of purchased intangibles		12,395		—		12,395		22,960		—		22,960
Restructuring costs		1,757		—		1,757		3,749		—		3,749
		321,569		22,311		343,880		602,290		47,415		649,705

Operating loss		(11,934)		5,393		(6,541)		(15,831)		8,724		(7,107)

Other income (expenses):
Interest and dividend income		74		1,339		1,413		130		2,517		2,647
Interest expense		(4,531)		—		(4,531)		(8,563)		—		(8,563)
Other income (expense), net		(3,602)		—		(3,602)		(8,355)		—		(8,355)

Loss from continuing operations before income taxes		(19,993)		6,732		(13,261)		(32,619)		11,241		(21,378)

Income tax benefit		(4,053)		222		(3,831)		(1,580)		246		(1,334)

Loss from continuing operations		(15,940)		6,510		(9,430)		(31,039)		10,995		(20,044)
Net loss from discontinued operations		(1,339)		—		(1,339)		(1,339)		—		(1,339)
Net loss		(17,279)		6,510		(10,769)		(32,378)		10,995		(21,383)

Less noncontrolling interest in loss of VIE		(3,885)		2,508		(1,377)		(9,866)		4,462		(5,404)

Net loss attributable to Cubic	$	(13,394)	$	4,002	$	(9,392)	$	(22,512)	$	6,533	$	(15,979)

Amounts attributable to Cubic:
Net loss from continuing operations		(12,055)		4,002		(8,053)		(21,173)		6,533		(14,640)
Net loss from discontinued operations		(1,339)		—		(1,339)		(1,339)		—		(1,339)
Net loss attributable to Cubic	$	(13,394)	$	4,002	$	(9,392)	$	(22,512)	$	6,533	$	(15,979)

Net income (loss) per share:
Basic earnings per share attributable to Cubic	$	(0.43)	$	0.13	$	(0.30)	$	(0.75)	$	0.22	$	(0.54)
Diluted earnings per share attributable to Cubic	$	(0.43)	$	0.13	$	(0.30)	$	(0.75)	$	0.22	$	(0.54)

The table below quantifies the impact of adopting ASC 606 on segment net sales and operating income (loss) for the three and six months ended March 31, 2019 (in thousands):


	Three months ended March 31, 2019						Six months ended March 31, 2019
					As Reported						As Reported
	Under		Effect of		Under		Under		Effect of		Under
	ASC 605		ASC 606		ASC 606		ASC 605		ASC 606		ASC 606
Sales:
Cubic Transportation Systems	$	182,571	$	18,122	$	200,693	$	355,299	$	27,201	$	382,500
Cubic Mission Solutions		62,677		(742)		61,935		108,040		288		108,328
Cubic Global Defense		64,387		10,324		74,711		123,120		28,650		151,770
Total sales	$	309,635	$	27,704	$	337,339	$	586,459	$	56,139	$	642,598

Operating income (loss):
Cubic Transportation Systems	$	5,673	$	3,122	$	8,795	$	14,859	$	4,912	$	19,771
Cubic Mission Solutions		(7,911)		(512)		(8,423)		(13,232)		(131)		(13,363)
Cubic Global Defense		2,390		2,783		5,173		4,127		3,943		8,070
Unallocated corporate expenses		(12,086)		—		(12,086)		(21,585)		—		(21,585)
Total operating income (loss)	$	(11,934)	$	5,393	$	(6,541)	$	(15,831)	$	8,724	$	(7,107)

The table below presents how the impact of the adoption of ASC 606 affected certain line items on our Condensed Consolidated Balance Sheet at March 31, 2019 (in thousands):


					As Reported
	Under		Effect of		Under
	ASC 605		ASC 606		ASC 606
ASSETS
Current assets:
Cash and cash equivalents	$	42,483	$	—	$	42,483
Cash in consolidated VIE		362		—		362
Restricted cash		19,064		—		19,064
Restricted cash in consolidated VIE		9,967		—		9,967
Accounts receivable, net		406,180		(248,648)		157,532
Contract assets		—		296,920		296,920
Recoverable income taxes		5,700		210		5,910
Inventories		153,035		(33,165)		119,870
Assets held for sale		12,620		—		12,620
Other current assets		44,471		—		44,471
Other current assets in consolidated VIE		43		—		43
Total current assets		693,925		15,317		709,242

Long-term contracts receivables		3,474		(3,474)		—
Long-term contracts financing receivables		—		41,758		41,758
Long-term contracts financing receivables in consolidated VIE		—		68,779		68,779
Long-term capitalized contract costs		109,318		(109,318)		—
Long-term capitalized contract costs in consolidated VIE		1,846		(1,846)		—
Property, plant and equipment, net		129,367		—		129,367
Deferred income taxes		4,563		235		4,798
Goodwill		579,648		—		579,648
Purchased intangibles, net		184,104		—		184,104
Other assets		14,290		—		14,290
Other noncurrent assets in consolidated VIE		1,114		—		1,114
Total assets	$	1,721,649	$	11,451	$	1,733,100

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Short-term borrowings	$	209,000	$	—	$	209,000
Trade accounts payable		132,040		(2,354)		129,686
Trade accounts payable in consolidated VIE		156		—		156
Contract liabilities		—		78,352		78,352
Customer advances		100,520		(100,520)		—
Accrued compensation and other current liabilities		93,256		—		93,256
Accrued compensation and other current liabilities in consolidated VIE		204		—		204
Income taxes payable		2,234		456		2,690
Current portion of long-term debt		10,714		—		10,714
Total current liabilities		548,124		(24,066)		524,058

Long-term debt		189,095		—		189,095
Long-term debt in consolidated VIE		25,602		—		25,602
Other long-term liabilities		41,290		—		41,290
Other long-term liabilities in consolidated VIE		9,866		—		9,866

Shareholders’ equity:
Common stock		264,612		—		264,612
Retained earnings		775,102		26,384		801,486
Accumulated other comprehensive loss		(110,156)		—		(110,156)
Treasury stock at cost		(36,078)		—		(36,078)
Shareholders’ equity related to Cubic		893,480		26,384		919,864
Noncontrolling interest in VIE		14,192		9,133		23,325
Total shareholders’ equity		907,672		35,517		943,189
Total liabilities and shareholders’ equity	$	1,721,649	$	11,451	$	1,733,100