Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
CUB > SEC Filings for CUB > Form 10-Q on 4-Aug-2014All Recent SEC Filings

Show all filings for CUBIC CORP /DE/

Form 10-Q for CUBIC CORP /DE/


4-Aug-2014

Quarterly Report


ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

June 30, 2014

We are a leading international provider of cost-effective systems and solutions that address the transportation 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 transportation payment and information systems, 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, traffic management and road enforcement systems and services, and real-time passenger information systems and services for transportation 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 transportation more convenient. We provide a wide range of services for transportation authorities in major 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 and enforcement, 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, 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 June 30, 2014 increased 1% to $340.4 million from $337.2 million last year. Sales from CTS and CDS increased 14% and 22%, respectively, while MSS sales decreased 26% compared to the third quarter of last year. For the first nine months of the fiscal year, sales decreased to $1.002 billion compared to $1.021 billion last year, a decrease of 2%. MSS sales decreased 19% compared to the first nine months of last year, while CTS and CDS sales increased 8% and 7%, respectively. The sales generated by businesses we acquired during 2014 and 2013 totaled $36.0 million and $82.7 million for the three- and nine-month periods ended June 30, 2014 compared to $14.6 million and $25.7 million for the three- and nine-month periods ended June 30, 2013, respectively. See the segment discussions following for further analysis of segment sales.

Operating income was $19.2 million in the third quarter compared to $26.9 million in the third quarter of last year, a decrease of 29%. CTS, MSS and CDS operating income decreased 19%, 50% and 46%, respectively. Businesses we acquired during 2014 and 2013 contributed operating losses of $3.0 million for the three months ended June 30, 2014 compared to operating losses of $0.9 million for the three months ended June 30, 2013. Unallocated corporate and other costs for the third quarter of 2014 were $1.2 million compared to $1.8 million in 2013.


Table of Contents

Operating income for the nine-month period decreased 37% to $53.2 million from $84.8 million last year. CTS and MSS operating income decreased 49% and 47%, respectively, compared to the first nine months of last year, while CDS operating income increased 112%. CDS operating results for the nine-month period ended June 30, 2013 included restructuring costs of $6.2 million. Businesses we acquired in 2014 and 2013 generated operating losses of $8.9 million for the nine months ended June 30, 2014 and $1.7 million for the nine months ended June 30, 2013. Unallocated corporate and other expenses for the first nine months of the fiscal year were $4.1 million for 2014 and $3.7 million for 2013.

Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (Adjusted EBITDA) decreased to $26.7 million in the quarter from $33.3 million in the third quarter of last year. For the first nine months of the fiscal year, Adjusted EBITDA decreased to $76.0 million compared to $102.8 million last year. The changes in Adjusted EBITDA for the quarter and nine-month period ended June 30, 2014 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 third quarter of fiscal 2014 decreased to $12.2 million, or 45 cents per share, compared to $18.4 million, or 69 cents per share last year. Net income decreased for the quarter primarily due to the decrease in operating income described above partially offset by a decrease in income tax expense. In addition, interest expense increased due to the higher average outstanding debt balance over the quarter ended June 30, 2014 compared to the corresponding quarter of 2013. We recorded a loss of $0.7 million during the quarter ended June 30, 2014 related to changes in the fair value of our forward starting swap. No gains or losses related to our forward starting swap were recognized in fiscal year 2013.

For the first nine months of the year, net income attributable to Cubic decreased to $36.7 million, or $1.36 per share, from $62.3 million, or $2.33 per share last year. The decrease in net income for the nine-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 nine-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 $1.6 million in the first nine months this year compared to a loss of $1.2 million last year, before applicable income taxes. Net gains recognized in other income related to our forward starting swap totaled $0.2 million for the nine-month period ended June 30, 2014.

Our gross margin percentage on product sales decreased to 21% in the third quarter of 2014 from 29% last year, and decreased to 25% for the nine months ended June 30, 2014 from 28% last year. The decrease in the gross margin percentages in the third quarter of 2014 and for the nine months ended June 30, 2014 are primarily due to increased cost estimates on a contract to design and build a fare collection system in Vancouver which is further described in the CTS segment discussion below.

Our gross margin percentage on service sales decreased to 19% in the first nine months of 2014 from 22% last year. The decrease in the gross margin percentages on services sales for the nine-month period was primarily the result of increased costs of providing services on a transportation contract in Chicago. The provision of services under this contract began just prior to the end of fiscal 2013. Revenue recognized on this contract is limited to billable amounts, which were significantly less than costs incurred to provide these services until the billable amounts increased upon system acceptance, which occurred effective January 1, 2014.

For the three-month period ended June 30, 2014, our gross margin percentage on service sales increased to 23% compared to 22% last year, primarily because of revenue recognized on this transportation contract in Chicago. For this contract, although the customer system acceptance occurred effective January 1, 2014, we did not receive notice of this acceptance until our third fiscal quarter of 2014. Therefore, service revenue recognized in the quarter ended June 30, 2014 includes $7.5 million related to amounts that were billable for the months ended January 2014 through March 2014.

Selling, general and administrative (SG&A) expenses increased in the third quarter of 2014 to $46.5 million compared to $44.1 million in 2013. For the nine-month period, SG&A increased to $131.5 million compared to $126.4 million last year. As a percentage of sales, SG&A expenses were 14% for the third quarter and 13% for the nine-month period of fiscal 2014 compared to 13% and 12%, respectively, in 2013. The increase in SG&A expenses in the third quarter was primarily due to SG&A expenses associated with companies acquired in 2013 and 2014. In addition, share based compensation expense added $1.6 million and $4.0 million to SG&A expenses for the third quarter and first nine months of the year, respectively, compared to $1.5 million for each of the corresponding periods last year.

Company funded research and development expenditures, which relate to new defense and transportation technologies under development, decreased to $3.9 million for the third quarter compared to $6.4 million last year, and decreased to $13.8 million for the nine-month period this year compared to $19.3 million last year. Amortization of purchased intangibles increased for the third quarter of 2014 to $5.7 million compared to $4.4 million last year due to the increase in intangible assets related to businesses acquired during 2013 and 2014. Amortization of purchased intangibles for the first nine months of 2014 increased to $17.1 million from $12.2 million in 2013.


Table of Contents

We estimate our annual effective income tax rate for fiscal 2014 will be approximately 23%. The effective rate for fiscal 2014 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)



                                          Nine Months Ended                 Three Months Ended
                                               June 30,                          June 30,
                                       2014             2013             2014             2013
                                                             (in millions)
                                                    (As Restated)                     (As Restated)
Transportation Systems Segment
Sales                               $     429.1    $         398.4    $     153.0    $         134.8

Transportation Systems Segment
Operating Income                    $      35.2    $          69.5    $      15.3    $          19.0

CTS sales increased 14% in the third quarter to $153.0 million compared to $134.8 million last year, and increased 8% for the nine- month period to $429.1 million from $398.4 million last year. Businesses acquired by CTS in fiscal years 2013 and 2014 contributed sales of $14.9 million and $36.9 million during the quarter and nine months ended June 30, 2014, respectively, compared to $3.1 million and $4.6 million for the quarter and nine months ended June 30, 2013.

During the quarter and nine months ended June 30, 2014 we increased cost estimates on a contract to design and build a system in Vancouver. Since we use the cost-to-cost percentage of completion method of accounting for the development and build of this system, increases in estimated total costs have an impact of reducing revenue and operating margin. Increases in cost estimates in the quarter ended June 30, 2014 reduced sales and operating income by $13.5 million for the quarter, and increases in cost estimates in the nine months ended June 30, 2014 reduced sales and operating income by $18.3 million for the nine-month period.

During the quarter ended June 30, 2014 our customer for a system development and services contract in Chicago determined that we had met the final criteria for system delivery effective January 1, 2014. According to our contract with this customer, monthly payments for this contract increase at the time that delivery of the system is completed and accepted. As such, in the quarter ended June 30, 2014 we billed and collected these increased contractual amounts for the months of January 2014 through June 2014. Revenue is being recognized for this contract based upon when amounts are billable to the customer. Therefore, revenue recognized in the quarter ended June 30, 2014 includes $7.5 million related to amounts that were billable for the months ended January 2014 through March 2014.

The average exchange rates between the prevailing currency in our foreign operations and the U.S. dollar resulted in an increase in sales of $5.3 million for the third quarter and an increase of $3.3 million for the nine-month period compared to the same periods last year.

CTS operating income decreased 19% in the third quarter to $15.3 million compared to $19.0 million last year, and decreased 49% for the nine-month period to $35.2 million from $69.5 million last year. CTS operating income for the quarter and nine months ended June 30, 2014 decreased due to the changes in cost estimates on the Vancouver contract described above. The decrease in CTS operating income for the nine-month period was also impacted by the increased costs of providing services on our transportation contract in Chicago. The provision of services under this contract began just prior to the end of fiscal 2013. Revenue recognized on this contract is limited to billable amounts, which were significantly less than costs incurred to provide these services until the billable amounts increased upon system acceptance, which occurred effective January 1, 2014. For the nine-month period ended June 30, 2014, the operating loss for this contract was $24.2 million. However, as discussed above, for the quarter ended June 30, 2014, the operating margin on our contract in Chicago improved compared to the first half of the year due to the increase in the billable amounts effective January 1, 2014. The operating margin on this contract was $0.9 million for the quarter. The operating margin for the quarter includes $5.5 million of operating margin related to amounts that were billable for the months ended January 2014 through March 2014, net of the recognition in cost of sales of long-term capitalized costs incurred for those billable amounts.

We are also in a phase of the Sydney contract where we are continuing to install the system while transitioning to full operations and the costs incurred to provide services are greater than the billable revenues for those services. Profit margins are expected to improve as the Sydney system moves into full operations in the first half of next year. An increase in estimated development costs of a supplier for new rail ticketing technology for a customer in the U.K. also impacted the nine months ended June 30, 2014 by $3.4 million and we have since diversified the supply of development work for this contract. The decrease in operating income for the nine-month period was partially offset by increased system usage bonuses on our contract in London.


Table of Contents

Businesses acquired by CTS in 2013 and 2014 had operating losses of $0.4 million and $2.1 million, respectively, for the three- and nine-month periods ended June 30, 2014 compared to operating losses of $0.2 million and $0.5 million, respectively for the quarter and nine-month periods ended June 30, 2013. The average exchange rates between the prevailing currency in our foreign operations and the U.S. dollar resulted in increases in operating income of $2.6 million for the third quarter and $4.5 million for the nine-month periods compared to the same periods last year.

Mission Support Services Segment (MSS)



                                          Nine Months Ended                 Three Months Ended
                                               June 30,                          June 30,
                                       2014             2013             2014             2013
                                                             (in millions)
                                                    (As Restated)                     (As Restated)
Mission Support Services Segment
Sales                               $     291.7    $         359.4    $      91.8    $         123.8

Mission Support Services Segment
Operating Income                    $       6.0    $          11.4    $       1.8    $           3.6

MSS sales decreased 26% in the third quarter to $91.8 million compared to $123.8 million last year, and decreased 19% for the nine-month period to $291.7 million from $359.4 million last year. Sales for the first nine months of the fiscal year were lower due in part to the U.S. government's shut down in October 2013. Sales for the quarter and nine months ended June 30, 2014 also decreased due to reductions in spending by the U.S. government. The decrease in sales was also caused by the loss of a contract early in fiscal year 2014 due to a lower bid by a competitor. These reductions were partially offset by growth in the Simulator Training business area due to the win of a new contract in early fiscal 2014. NEK Special Programs Group LLC (NEK), a Special Operation Forces training business acquired in December 2012 had sales of $14.4 million and $34.0 million for the three- and nine-month periods ended June 30, 2014 compared to sales of $11.4 million and $21.1 million for the three- and nine-month periods ended June 30, 2013.

MSS operating income decreased 50% in the third quarter to $1.8 million compared to $3.6 million last year, and decreased 47% for the nine-month period to $6.0 million from $11.4 million last year. The decreased operating income for the quarter and nine-month period resulted from the sales decreases described above and reduced profit margins on contracts due to competitive pressures driving down bid prices. Operating income also decreased as a result of a focused investment we are making to increase our footprint in the Special Operations Forces market, which totaled $0.6 million for the quarter and $1.3 million for the nine months. NEK had an operating loss of $0.2 million for the quarter and $0.8 million for the nine-month period ended June 30, 2014 compared to $0.7 million for the quarter and $1.2 million for the nine-month period ended June 30, 2013, which had included $0.6 million of acquisition-related costs.


Table of Contents

Defense Systems Segment (CDS)



                                          Nine Months Ended                 Three Months Ended
                                               June 30,                          June 30,
                                       2014             2013             2014             2013
                                                             (in millions)
                                                    (As Restated)                     (As Restated)
Defense Systems Segment Sales
Training systems                    $     243.7    $         217.4    $      84.4    $          65.2
Secure communications                      37.5               45.1           11.2               13.4
                                    $     281.2    $         262.5    $      95.6    $          78.6

Defense Systems Segment
Operating Income
Training systems                    $      19.3    $          16.8    $       6.9    $           7.9
Secure communications                      (2.8 )             (3.0 )         (3.5 )             (1.7 )
Restructuring costs                        (0.4 )             (6.2 )         (0.1 )             (0.1 )
                                    $      16.1    $           7.6    $       3.3    $           6.1

Training Systems

Training systems sales increased 29% in the third quarter to $84.4 million compared to $65.2 million last year, and increased 12% for the nine-month period to $243.7 million from $217.4 million last year. Businesses acquired by CDS in 2013 and 2014 contributed training system sales of $6.7 million and $11.8 million for the three- and nine-month periods ended June 30, 2014 and had no sales for the comparable periods ended June 30, 2013. Sales were higher for both the quarter and nine-month period from a new ground combat training system development contract in the Far East, from tactical engagement simulation system contracts and from simulator contracts, including a new contract to develop simulation trainers for the Littoral Combat Ships. These increases in sales were partially offset by lower sales of air combat training systems for the quarter and nine-month period.

Operating income decreased 13% in the third quarter to $6.9 million compared to $7.9 million last year, and increased 15% for the nine-month period to $19.3 million from $16.8 million last year. For the nine-month period ended June 30, 2014 increases in operating income of organic Training Systems business were partially offset by operating losses from businesses purchased in 2013 and 2014. For the quarter ended June 30, 2014 the operating losses from businesses purchased in 2013 and 2014 more than offset the increases in operating income from organic business.

For the quarter and for the nine month period ended June 30, 2014 Training Systems had higher operating income on increased sales from the ground combat training system, simulator and development contracts mentioned above. Profit margins on a number of Training Systems contracts improved in fiscal 2014 due to the restructuring activity in the third quarter of 2013, which reduced ongoing costs. The Training Systems business had decreased operating income on lower sales of air combat training systems during the three and nine-month periods ended June 30, 2014. Training system businesses acquired by CDS in 2013 and 2014 incurred operating losses of $1.8 million and $6.0 million for the three- and nine-month periods ended June 30, 2014, respectively, and had no operating losses in the comparable periods ended June 30, 2013. These operating losses for the nine-month period ended June 30, 2014 included $0.2 million of transaction costs and $3.7 million of compensation expense for amounts paid to Intific employees upon the close of the acquisition.

Secure Communications

Our secure communications products business supplies secure data links, search and rescue avionics, high power RF amplifiers, cyber security appliances, and asset tracking solutions for the U.S. military, government agencies, and allied nations.

Secure communications sales decreased 16% in the third quarter to $11.2 million compared to $13.4 million last year, and decreased 17% for the nine-month period to $37.5 million from $45.1 million last year. Sales were lower from personnel locator system and asset tracking products. Data link sales were slightly lower for the quarter but were higher for the nine-month period ended June 30, 2014.


Table of Contents

Secure communications operating loss was $3.5 million in the third quarter compared to an operating loss of $1.7 million last year. The operating loss decreased for the nine-month period to $2.8 million from an operating loss of $3.0 million last year. The primary contributors to our secure communications operating losses were losses incurred by our cyber security appliance and asset tracking product lines. Cyber security appliance operating losses were relatively consistent for the three- and nine-month periods in 2014 and the comparable periods in 2013, while operating losses on asset tracking products decreased for the three- and nine-month periods due to cost reduction efforts. In the quarter ended June 30, 2014 the secure communication operating loss was impacted by a research and development investment of $0.6 million that we made in wideband satellite communications technologies as well as $0.6 million of costs incurred related to a cyber behavior virtualization technology in development.

For the quarter and nine-month period ended June 30, 2014, operating profits were lower on decreased sales of personnel locator systems, and for the quarter operating profits were lower on decreased data link sales. For the nine month period ended June 30, 2013 the operating loss was impacted by cost increases of $2.6 million we experienced in the first half of fiscal 2013 on a U.S. government contract for data link products. This cost increase had no impact on the operating profit for the quarter ended June 30, 2014.

Backlog



                           June 30,     September 30,
                             2014           2013
                                  (in millions)
                                        (As Restated)
Total backlog
Transportation Systems     $ 1,323.9   $       1,526.4
Mission Support Services       505.5             626.7
Defense Systems:
Training systems               553.5             457.8
Secure communications           45.3              35.7
Total Defense Systems          598.8             493.5
Total                      $ 2,428.2   $       2,646.6

Funded backlog
Transportation Systems     $ 1,323.9   $       1,526.4
Mission Support Services       147.9             221.0
Defense Systems:
Training systems               553.5             457.8
Secure communications           45.3              35.7
Total Defense Systems          598.8             493.5
Total                      $ 2,070.6   $       2,240.9

Total backlog decreased $218.4 million from September 30, 2013 to June 30, 2014. Decreases in backlog for CTS and MSS were partially offset by an increase in backlog for CDS. The decrease at MSS primarily pertains to a decrease in unfunded backlog due to the Government recompeting the JRTC contract early. Changes in exchange rates between the prevailing currency in our foreign operations and the U.S. dollar as of the end of the quarter increased backlog by $27.4 million compared to September 30, 2013.

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 . . .

  Add CUB to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for CUB - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.