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CUB > SEC Filings for CUB > Form 10-Q on 2-May-2013All Recent SEC Filings

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Form 10-Q for CUBIC CORP /DE/


2-May-2013

Quarterly Report


ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

March 31, 2013

We are a leading international provider of cost-effective systems and solutions that address the mass transit and global defense markets' most pressing and demanding requirements. We are engaged in the design, development, manufacture, integration, and sustainment of advanced technology systems and products. We also provide a broad range of engineering, training, technical, logistic, and information technology services. We serve the needs of various federal and regional government agencies in the U.S. and other allied nations around the world with products and services that have both defense and civil applications. Our main areas of focus are in mass transit fare collection, defense, intelligence, homeland security, and information technology, including cyber security.

We operate in three reportable business segments: Cubic Transportation Systems (CTS), Mission Support Services (MSS) and Cubic Defense Systems (CDS). We organize our business segments based on the nature of the products and services offered.

CTS is a systems integrator that develops and provides fare collection infrastructure, services and technology and real-time passenger information systems and services for public transit authorities and operators worldwide. We offer fare collection devices, software systems and multiagency, multimodal transportation integration technologies, as well as a full suite of operational services that help agencies efficiently collect fares, manage operations, reduce revenue leakage and make public transit more convenient. We provide a wide range of services for transit authorities in major transit markets worldwide, including computer hosting services, call center and web services, payment media issuance and distribution services, retail point of sale network management, payment processing, financial clearing and settlement, software application support and outsourced asset operations and maintenance.

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

CDS is focused on two primary lines of business: Training Systems and Secure Communications. CDS is a diversified supplier of live and virtual military training systems, and secure communication systems and products to the U.S. Department of Defense, other U.S. government agencies and allied nations. We design and manufacture instrumented range systems for fighter aircraft, armored vehicles and infantry force-on-force live training weapons effects simulations, laser-based tactical and communication systems, and precision gunnery solutions. Our secure communications products are aimed at intelligence, surveillance, asset tracking and search and rescue markets.

Consolidated Overview

Sales for the quarter ended March 31, 2013 increased 7% to $364.3 million from $339.6 million last year. CDS sales and CTS sales increased 28% and 5%, respectively, compared to the second quarter of last year, while MSS sales decreased 4%. For the first six months of the fiscal year, sales increased to $677.7 million compared to $656.4 million last year, an increase of 3%. CDS sales increased 12% compared to the first six months of last year, while CTS and MSS sales remained relatively consistent for such periods. The sales generated by businesses we acquired during 2013 totaled $10.6 million and $11.1 million for the three- and six-month periods ended March 31, 2013, respectively. See the segment discussions following for further analysis of segment sales.

Operating income was $34.6 million in the second quarter compared to $32.5 million in the second quarter of last year, an increase of 6%. CTS operating income increased 38%, while MSS operating income decreased 22% and CDS operating income decreased 95% compared to the second quarter of last year. CDS operating income for the second quarter included $6.1 million of restructuring costs related to severance pay and benefits. Businesses we acquired in 2013 generated operating losses of $0.6 million for the quarter, including $0.2 of transaction-related costs. Unallocated corporate and other costs for the second quarter of 2013 were $1.5 million compared to $1.6 million in 2012.


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Operating income for the six-month period decreased 12% to $52.9 million from $60.3 million last year. CDS and MSS operating income decreased 88% and 14%, respectively, compared to the first six months of last year, while CTS operating income increased 10%. CDS operating results for the six-month period included the restructuring charge mentioned above. Businesses we acquired in 2013 generated operating losses of $0.8 million for the six months ended March 31, 2013, including $0.6 million of transaction-related costs. Unallocated corporate and other expenses for the first six months of the fiscal year were $1.8 million for 2013 and $2.2 million for 2012.

Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (Adjusted EBITDA) increased to $41.5 million in the quarter from $38.0 million in the second quarter of last year. For the first six months of the fiscal year, Adjusted EBITDA decreased to $64.5 million compared to $71.6 million last year. The changes in Adjusted EBITDA for the quarter and six-month period ended March 31, 2013 are primarily related to the changes in operating income for the corresponding periods. See below for a reconciliation of this non-GAAP metric to net income and an explanation of why we believe it to be an important measure of performance.

Net income attributable to Cubic for the second quarter of fiscal 2013 increased to $27.2 million, or $1.02 per share, compared to $23.4 million, or 88 cents per share, last year. Net income increased for the quarter due to an increase in operating income, and a decrease in income tax expense, which was impacted by the decrease in the effective income tax rate, as described below. The impact of these items was partially offset by a decrease in interest and dividend income and an increase in interest expense.

For the first six months of the year, net income attributable to Cubic decreased to $39.6 million, or $1.48 per share, from $44.1 million, or $1.65 per share last year. The decrease in net income for the six-month period was primarily due to a decrease in operating income, partially offset by a decrease in income tax expense. In the first quarter of fiscal 2013, we recorded $0.6 million of interest expense related to a judgment against us, which required us to pay such amount of interest to the court on behalf of a party that had filed claims against us. Also, interest and dividend income decreased for the six-month period based upon the decrease in our average cash balances over the periods. Included in other income was a net foreign currency exchange loss of $0.2 million in the first six months this year compared to a gain of $1.5 million last year, before applicable income taxes.

Our gross margin percentages on products sales decreased to 29% in the second quarter of 2013 from 32% last year, and decreased to 27% for the six months ended March 31, 2013 from 29% last year. The decrease in gross margin percentages were primarily due to decreases in CDS sales of air and ground combat training systems to customers in the Far East.

Our gross margin percentages on service sales increased to 23% in the second quarter of 2013 from 21% last year, and increased to 21% in the first six months of 2013 from 20% last year. The increase in the gross margin percentages on services sales for the three- and six-month periods ended March 31, 2013 is the result of the increase in CTS service sales as a percentage of our total service sales. CTS service sales have a higher gross margin percentage than service sales from our other segments.

Product and service sales for the second quarter of this year increased by $9.2, million or 6% and $15.5 million, or 8%, respectively, compared to the second quarter of last year. For the first six months of the year, product sales decreased $8.4 million, or 3%, while services sales increased by $29.7 million, or 9%.

Selling, general and administrative (SG&A) expenses decreased in the second quarter of 2013 to $41.3 million compared to $43.0 million in 2012. For the six-month period, SG&A increased to $82.3 million compared to 78.3 million last year. As a percentage of sales, SG&A expenses were 11% for the second quarter and 12% for the six-month period of fiscal 2013 compared to 13% and 12% in 2012, respectively. The decrease in SG&A expenses in the second quarter was primarily due to a $2.9 million provision for a legal claim that was accrued for in the second quarter of 2012. Selling and marketing costs in the second quarter of this year were slightly lower than last year; however, selling and marketing costs for the six-month period ended March 31, 2013 were higher than last year. In the second quarter of 2013 we incurred expenses of $0.7 million in preparation for a secondary offering of currently outstanding shares for certain of our shareholders. During the first quarter of 2013 we incurred $1.1 million of professional services costs in connection with the restatement of our consolidated financial statements for the year ended September 30, 2012 and previous periods. Also, in the first quarter of 2013 SG&A expenses were reduced by $1.4 million related to proceeds from an insurance claim for losses that we incurred over the period from fiscal 2010 to fiscal 2012. SG&A expenses in businesses that we acquired in 2013 were $1.1 million for the second quarter and $1.6 million for the first six months of 2013.

Company funded research and development expenditures, which mainly relate to new defense technologies we are developing, decreased to $7.1 million for the second quarter compared to $8.1 million last year, and decreased slightly to $12.9 million for the six-month period this year compared to $13.0 million last year. Amortization of purchased intangibles increased for the second quarter of 2013 to $4.3 million compared to $3.7 million last year due to the amortization of intangible assets related to businesses purchased during 2013. Amortization of purchased intangibles for the first six months of 2013 increased to $7.8 million from $7.7 million in 2012.


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The American Taxpayer Relief Act of 2012, which reinstated the U.S. federal research and development tax credit retroactively from January 1, 2012 through December 31, 2013, was enacted into law during the second quarter of fiscal 2013. Therefore, the tax benefit resulting from the reinstatement for fiscal 2013 was reflected in our estimated annual effective tax rate for fiscal 2013 in the second fiscal quarter. Additionally, we recorded a discrete tax benefit of approximately $1.9 million in the second quarter of fiscal 2013 related to the reinstatement of the federal research and development tax credit for fiscal 2012. After consideration of both of these items, we estimate our annual effective income tax rate for fiscal 2013 will be approximately 25%. The effective rate for fiscal 2013 could be affected by, among other factors, the mix of business between the U.S. and foreign jurisdictions, our ability to take advantage of available tax credits and audits of our records by taxing authorities.

Transportation Systems Segment (CTS)



                                        Six Months Ended             Three Months Ended
                                            March 31,                    March 31,
                                       2013           2012          2013           2012
                                                         (in millions)
Transportation Systems Segment
Sales                               $     257.4    $    257.5    $     138.8    $     131.7

Transportation Systems Segment
Operating Income                    $      45.4    $     41.3    $      32.2    $      23.4

CTS sales increased 5% in the second quarter to $138.8 million compared to $131.7 million last year, and decreased slightly for the six-month period to $257.4 million from $257.5 million last year. During the quarter and six months ended March 31, 2013, CTS generated higher sales from contracts in the U.K., including higher annual system usage incentives on a significant U.K. contract that were recognized in the second quarter, as well as higher sales on a contract for a suburban bus system near Chicago. NextBus, a business we acquired in January 2013 that provides real-time passenger information products and services to transit agencies contributed sales of $1.5 million for the quarter. For the quarter and six-month period CTS realized lower sales both from a contract to design and build a system in Sydney, Australia and due to reduced work on a contract to design and build a system in Vancouver. In the quarter and six months ended March 31, 2012 revenues were higher on the Vancouver and Sydney projects as we were producing a significant amount of the hardware for the systems, while this year we are in the latter stages of delivery for these systems. The average exchange rates between the prevailing currency in our foreign operations and the U.S. dollar resulted in a decrease in sales of $1.5 million for the second quarter and an increase of $1.1 million for the six-month period compared to the same periods last year.

CTS operating income increased 38% in the second quarter to $32.2 million compared to $23.4 million last year, and increased 10% for the six-month period to $45.4 million from $41.3 million last year. The increases in operating income for the quarter and six-month periods are primarily due to higher sales on our contracts the U.K., including higher annual system usage incentives on a U.K. contract described above. In addition, sales increased during the quarter and six-month period on certain higher-margin products and services that we provide in Australia. In recent quarters, including the first quarter of 2013 we were incurring costs related to our contract in Sydney, Australia to transition portions of the systems into operations, for which revenues were not sufficient to cover our costs of servicing the system. This situation has begun to improve in the second quarter of 2013 as portions of the systems are moving through the transition phase towards operations. The operating loss from NextBus was $0.3 million in the second quarter of 2013, including costs of the acquisition totaling $0.2 million. The average exchange rates between the prevailing currency in our foreign operations and the U.S. dollar resulted in a decrease in operating income of $0.2 million for the second quarter and an increase of $0.1 million for the six-month period compared to the same periods last year.


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Mission Support Services Segment (MSS)



                                        Six Months Ended             Three Months Ended
                                            March 31,                    March 31,
                                       2013           2012          2013           2012
                                                         (in millions)
Mission Support Services Segment
Sales                               $     235.6    $    234.4    $     122.2    $     126.9

Mission Support Services Segment
Operating Income                    $       7.8    $      9.1    $       3.6    $       4.6

MSS sales decreased 4% in the second quarter to $122.2 million compared to $126.9 million last year, and increased 1% for the six-month period to $235.6 million from $234.4 million last year. Sales in the quarter and six-month period were lower on certain contracts, including at the Joint Readiness Training Center (JRTC) in Fort Polk, Louisiana due to lower activity. The decrease in sales was also caused by the loss of contracts due to lower bids by competitors. These decreases in sales were partially offset for the quarter and were more than offset for the six-month period by increases in sales on certain Abraxas contracts, and by sales generated by NEK, a Special Operation Forces training business acquired in December 2012 that generated sales of $9.1 million and $9.6 million in the three- and six-month periods ended March 31, 2013, respectively.

MSS operating income decreased 22% in the second quarter to $3.6 million compared to $4.6 million last year, and decreased 14% for the six-month period to $7.8 million from $9.1 million last year. The decreased operating income primarily resulted from increased personnel costs on a flight simulator training contract and the loss of contracts described above. In addition, NEK had an operating loss of $0.3 million for the quarter and $0.5 million for the six-month period ended March 31, 2013, including acquisition-related costs of $0.4 million.

Defense Systems Segment (CDS)



                                             Six Months Ended       Three Months Ended
                                                March 31,               March 31,
                                              2013       2012        2013         2012
                                                           (in millions)
Defense Systems Segment Sales
Training systems                           $    153.2   $ 135.0   $      87.6    $  70.3
Secure communications                            31.2      29.0          15.6       10.4
                                           $    184.4   $ 164.0   $     103.2    $  80.7

Defense Systems Segment Operating Income
Training systems                           $      8.9   $  12.3   $       7.0    $   7.8
Secure communications                            (1.3 )    (0.2 )        (0.6 )     (1.7 )
Restructuring costs                              (6.1 )       -          (6.1 )        -
                                           $      1.5   $  12.1   $       0.3    $   6.1

Training Systems

Training systems sales increased 25% in the second quarter to $87.6 million compared to $70.3 million last year, and increased 13% for the six-month period to $153.2 million from $135.0 million last year. Sales increased in the second quarter and the first half of fiscal 2013 from air combat training systems and increased shipments of MILES (Multiple Integrated Laser Engagement Simulation) equipment to the U.S. government. These increases were partially offset by lower ground combat training system sales in the Far East in the second quarter and six months ended March 31, 2013. In addition, the increase in sales for the six-month period were partially offset by lower sales in the first quarter of 2013 from air combat training systems in the Far East, and a ground combat training system contract in the U.K.


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Operating income decreased 10% in the second quarter to $7.0 million compared to $7.8 million last year, and decreased 28% for the six-month period to $8.9 million from $12.3 million last year. Although the increased sales of air combat training systems in the U.S. increased operating income for the quarter and six-month period ended March 31, 2013, these increases were more than offset by decreases in operating income on decreased sales of ground combat training systems in the Far East. Also, for the six months ended March 31, 2013, although total sales of air combat training systems were higher, the operating margin for air combat training systems sales was lower than in 2012 because sales of higher margin air combat training systems to a customer in the Far East decreased in the first quarter of 2013. Operating margins on a ground combat training systems service contract in the U. K. improved for the quarter and six months ended March 31, 2013 due to decreasing costs as the contract matures.

Secure Communications

During the quarter ended March 31, 2013, certain CDS product lines that were previously classified in an "Other" category have been reclassified into the "Secure Communications" category. Prior year amounts have been reclassified to conform to the current year presentation.

Secure communications sales increased 50% in the second quarter to $15.6 million compared to $10.4 million last year, and increased 8% for the six-month period to $31.2 million from $29.0 million last year. Operating losses decreased to $0.6 million in the second quarter from $1.7 million last year, and increased from $0.2 million to $1.3 million for the six-month period.

Sales were higher from personnel locater systems for the quarter and six-month period but were lower from datalink and power amplifier products. Increased operating income for the quarter on higher personnel locater system sales was partially offset by the lower operating income on lower sales of datalinks. For the six-month period, the higher operating income on higher personnel locater system sales was more than offset by lower margins on datalink sales. These decreased datalink margins for the six months were caused by lower sales as well as cost growth, particularly from the impact of cost increases of $1.2 million in the first quarter of fiscal 2013 on a U.S. government contract.

Restructuring costs

In March 2013, our CDS business implemented a restructuring plan to reduce global employee headcount by approximately 150 in order to rebalance our resources with work levels that have declined due to recent delays in contract awards and contract funding. CDS incurred a resulting restructuring charge of $6.1 million in the second quarter of fiscal 2013. The total costs of the restructuring plan are not expected to be significantly greater than the charges incurred to date. The workforce realignment was reflective of the current mix of work and anticipated activity levels going forward. We anticipate that operating margins will improve for CDS over the course of the current fiscal year and next year with the leaner cost structure.

The following table presents a rollforward of our restructuring liability as of March 31, 2013, which is included within accrued compensation and other current liabilities within our Condensed Consolidated Balance Sheets (in millions):

                                     Restructuring Liability
                                       Employee Separation

Liability as of December 31, 2012   $                       -
Accrued costs                                             6.1
Cash payments                                            (0.5 )
Liability as of March 31, 2013      $                     5.6

Certain restructuring costs are based upon estimates. Actual amounts paid may ultimately differ from these estimates. If additional costs are incurred or recognized amounts exceed costs, such changes in estimates will be recognized when incurred


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Backlog



                           March 31,     September 30,
                              2013           2012
                                  (in millions)
Total backlog
Transportation Systems     $  1,616.3   $       1,663.7
Mission Support Services        806.6             737.0
Defense Systems:
Training systems                316.8             362.0
Secure communications            64.3              68.9
Total Defense Systems           381.1             430.9
Total                      $  2,804.0   $       2,831.6

Funded backlog
Transportation Systems     $  1,616.3   $       1,663.7
Mission Support Services        197.8             248.1
Defense Systems:
Training systems                316.8             362.0
Secure communications            64.3              68.9
Total Defense Systems           381.1             430.9
Total                      $  2,195.2   $       2,342.7

Total backlog decreased $27.6 million from September 30, 2012 to March 31, 2013. Decreases in backlog for CTS and CDS were partially offset by increases in backlog at MSS. The increase in MSS backlog was partially due to the addition of $19.5 million of backlog from the acquisition of NEK, and the decrease in CTS backlog was partially offset by the addition of $7.1 million of backlog from the acquisition of NextBus. The CDS backlog has been negatively impacted by recent delays in contract awards and extensions, which are due in part to the budgetary uncertainties experienced by our U.S. governmental agency customers. Changes in exchange rates between the prevailing currency in our foreign operations and the U.S. dollar as of the end of the quarter reduced backlog by $22.8 million compared to September 30, 2012. Most of the decrease in backlog caused by the changes in exchange rates impacted CTS backlog.

The difference between total backlog and funded backlog represents options under multiyear MSS service contracts. Funding for these contracts comes from annual operating budgets of the U.S. government and the options are normally exercised annually. Funded backlog includes unfilled firm orders for our products and services for which funding has been both authorized and appropriated by the customer (Congress, in the case of U.S. government agencies). Options for the purchase of additional systems or equipment are not included in backlog until exercised. In addition to the amounts identified above, we have been selected as a participant in or, in some cases, the sole contractor for several substantial indefinite delivery/ indefinite quantity (IDIQ) contracts. IDIQ contracts are not included in backlog until an order is received. In the past, many of the contracts we were awarded in MSS were long-term in nature, spanning periods of five to ten years. The U.S. Department of Defense now awards shorter-term contracts for the services we provide and increasingly relies upon IDIQ contracts which can result in a lower backlog and/or lower funded backlog due to the shorter-term nature of Task Orders issued under these IDIQ awards. We also have several service contracts in our transportation business that include contingent revenue provisions tied to meeting certain performance criteria. These variable revenues are also not included in the amounts identified above.


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Adjusted EBITDA

Adjusted EBITDA represents net income attributable to Cubic before interest, taxes, non-operating income, depreciation and amortization. We believe that the presentation of Adjusted EBITDA included in this report provides useful information to investors with which to analyze our operating trends and performance and ability to service and incur debt. Also, Adjusted EBITDA is a factor we use in measuring our performance and compensating certain of our executives. Further, we believe Adjusted EBITDA facilitates company-to-company operating performance comparisons by backing out potential differences caused by variations in capital structures (affecting net interest expense), taxation and the age and book depreciation of property, plant and equipment (affecting relative depreciation expense), and non-operating expenses which may vary for different companies for reasons unrelated to operating performance. In addition, . . .

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