CUB Cubic Corp

Cubic Corporation (NYSE: CUB) today reported its results for the third quarter of fiscal year 2013. Sales for the third quarter of 2013 were $340.4 million compared to $365.4 million in the third quarter of 2012, a decrease of 7 percent. Net income attributable to Cubic shareholders was $18.4 million, or $0.69 per share compared to $26.7 million, or $1.00 per share, in the third quarter of 2012.

Operating income was $27.0 million compared to $38.6 million last year. In comparison to last year, operating income for the third quarter of 2013 was down due to a defense systems contract settlement that occurred in the third quarter of 2012. This settlement resulted in higher operating income and higher sales of $12.5 million for the third quarter of 2012.

Total backlog of $2.87 billion for the quarter ended June 30, 2013 increased from $2.83 billion at September 30, 2012, reflecting strong domestic and international contract award activity in our two defense segments. The negative changes in currency exchange rates for the nine months ended June 30, 2013 reduced backlog by $69.9 million.

Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (Adjusted EBITDA), a non-GAAP measure (as described below), was $33.4 million in this year’s third quarter compared to $44.4 million last year.

“We have said 2013 would be a transition year compared to our record year in 2012. The transportation segment’s performance for the year has been very good while the defense segments are facing a challenging DoD environment. Despite the challenges, we are encouraged by contract awards in our two defense segments and improved operating profit performance in defense systems in the third quarter compared to earlier in the fiscal year,” said William Boyle, Chief Executive Officer of Cubic Corporation.

Reportable Segment Results

Transportation Systems (39% of consolidated sales)

      Nine Months Ended Three Months Ended June 30, June 30, 2013   2012 2013   2012

 

(in millions) Transportation Systems Segment Sales $ 391.2 $ 383.3 $ 133.8 $ 125.8

 

  Transportation Systems Segment Operating Income $ 63.6 $ 60.5 $ 18.2 $ 19.2

 

 

Cubic Transportation Systems (CTS) develops and delivers innovative fare collection systems and services for public transit authorities worldwide. In the third quarter of this year, CTS sales increased 6 percent to $133.8 million compared to $125.8 million in the same period last year. The increase resulted from higher sales on contracts in the U.S., including a contract for a suburban bus system near Chicago, and transit system contracts in Minneapolis, and New York. NextBus, a real-time passenger information system business the company acquired in January 2013, contributed sales of $3.1 million for the third quarter of this year.

Operating income from CTS in the third quarter of this year was $18.2 million compared to $19.2 million last year, a decrease of 5 percent. During the quarter, operating margins declined due to a decrease in work on U.K. development contracts, and due to an increase in the estimated costs to complete the electronic ticketing system in Sydney, Australia. These decreases in operating income were partially offset for the quarter by higher operating income on increased work on contracts in the U.S. described above as well as a settlement from a European service contract claim. CTS total backlog decreased to $1.54 billion at June 30, 2013 from $1.66 billion as of September 30, 2012, about half of the decrease was due to negative changes in currency exchange rates.

Mission Support Services (36% of consolidated sales)

        Nine Months Ended Three Months Ended June 30, June 30, 2013   2012

 

2013   2012

 

(in millions) Mission Support Services Segment Sales $ 359.4 $ 356.8

 

$ 123.8 $ 122.4

 

  Mission Support Services Segment Operating Income $ 11.4 $ 15.0

 

$ 3.6 $ 5.9

 

 

Mission Support Services (MSS) is a leading provider of highly specialized support services to the U.S. government and allied nations. Sales from MSS increased 1 percent to $123.8 million in the third quarter of this year, compared to $122.4 million in the third quarter of last year. Sales generated by NEK, a Special Operation Forces training business acquired in December 2012, totaled $11.4 million in the quarter ended June 30, 2013. MSS had lower sales on certain contracts in the quarter due to a decrease in DoD activity.

MSS operating income was $3.6 million in the third quarter of this year compared to $5.9 million in the third quarter of last year, a decrease of 39 percent. The operating income decrease reflects lower sales on certain contracts for the U.S. military, an operating loss of $0.7 million from NEK inclusive of amortization expense of $0.9 million, and the impact of lower margins due to contracts being awarded by the U.S. government based on low price technically acceptable criteria.

Total backlog for MSS was $800.6 million this quarter compared to $737.0 million at September 30, 2012. The increase in backlog includes $23.9 million of backlog from the acquisition of NEK.

Defense Systems (25% of consolidated sales)

        Nine Months Ended Three Months Ended June 30, June 30, 2013     2012  

 

2013     2012  

(in millions)

Defense Systems Segment Sales

Training systems $ 222.6 $ 243.1

 

$ 69.4 $ 108.1 Secure communications   44.6     37.8  

 

  13.4     8.8   $ 267.2   $ 280.9  

 

$ 82.8   $ 116.9    

Defense Systems Segment Operating Income

Training systems $ 17.7 $ 31.4

 

$ 8.8 $ 19.1 Secure communications (3.0 ) (4.7 )

 

(1.7 ) (4.5 ) Restructuring costs   (6.2 )   -     (0.1 )   -   $ 8.5   $ 26.7  

 

$ 7.0   $ 14.6    

Cubic Defense Systems (CDS) is focused on two primary lines of business: training systems and secure communications. In the third quarter, training systems sales were $69.4 million compared to $108.1 million last year, a decrease of 36 percent, which reflects lower sales from ground combat training systems and virtual small arms training systems partially offset by higher sales of air combat training systems. Operating income was down 54 percent to $8.8 million this year from $19.1 million last year primarily due to a defense systems contract settlement that occurred in the third quarter of 2012. This settlement resulted in higher operating income and higher sales of $12.5 million for the third quarter of 2012.

Certain CDS product lines previously categorized as “Other” have been reclassified into “Secure Communications” due to management realignment. Secure Communications sales increased 52 percent to $13.4 million this year from $8.8 million last year due to higher sales from personnel locator systems and data link products. Secure Communications operating loss decreased to $1.7 million in the third quarter from $4.5 million last year. The overall operating loss for Secure Communications is primarily due to the results of operations of our asset tracking and cyber security product lines. In the third quarter of 2013, increased margins on higher sales of data link products were primarily responsible for the reduction in the overall Secure Communications operating loss.

CDS backlog increased to $521.8 million from $430.9 million at September 30, 2012. The increase in backlog includes several international awards and $30 million in task order funding for the recently awarded Littoral Combat Ship ID/IQ contract received during the third quarter.

Conference Call

Cubic management will host a conference call to discuss the company’s third quarter fiscal year 2013 results today, Thursday August 1, 2013 at 4:30 ET (1:30 PT) that will be simultaneously broadcast over the Internet. William W. Boyle, chief executive officer and John “Jay” D. Thomas, chief financial officer, will host the call. Listeners may access the conference call live over the Internet at the company’s website under the “Investor Relations” tab at www.cubic.com.

Please allow 15 minutes prior to the call to visit our website to download any necessary audio software. For those unable to listen to the live broadcast, an archived version will be available at the same location through September 3, 2013.

About Cubic

Cubic Corporation is globally diversified in transportation and defense markets. The company’s Transportation segment is a leading systems integrator that develops and provides fare collection infrastructure, services and technology for public transit authorities and operators worldwide. Cubic’s Mission Support Services segment is a leading provider of training, operations, maintenance, technical and other support services to the U.S. and allied nations. The Defense Systems segment is a leading provider of realistic combat training systems and secure communications systems. For more information about Cubic, see the company's web site at www.cubic.com.

Forward-Looking Statements

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are subject to the safe harbor created by such Act. Forward-looking statements include, among others, statements about our expectations regarding future events or our future financial and/or operating performance. These statements are often, but not always, made through the use of words or phrases such as “may,” “will,” “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “predict,” “potential,” “opportunity” and similar words or phrases or the negatives of these words or phrases. These statements involve risks, estimates, assumptions and uncertainties that could cause actual results to differ materially from those expressed in these statements, including, among others: our dependence on U.S. and foreign government contracts; delays in approving U.S. and foreign government budgets and cuts in U.S. and foreign government defense expenditures; the ability of certain government agencies to unilaterally terminate or modify our contracts with them; our ability to successfully integrate new companies into our business and to properly assess the effects of such integration on our financial condition; the U.S. government’s increased emphasis on awarding contracts to small businesses, and our ability to retain existing contracts or win new contracts under competitive bidding processes; the effects of politics and economic conditions on negotiations and business dealings in the various countries in which we do business or intend to do business; competition and technology changes in the defense and transportation industries; our ability to accurately estimate the time and resources necessary to satisfy obligations under our contracts; the effect of adverse regulatory changes on our ability to sell products and services; our ability to identify, attract and retain qualified employees; business disruptions due to cyber security threats, physical threats, terrorist acts, acts of nature and public health crises; our involvement in litigation, including litigation related to patents, proprietary rights and employee misconduct; our reliance on subcontractors and on a limited number of third parties to manufacture and supply our products; our ability to comply with our development contracts and to successfully develop, introduce and sell new products, systems and services in current and future markets; defects in, or a lack of adequate coverage by insurance or indemnity for, our products and systems; and changes in U.S. and foreign tax laws, exchange rates or our economic assumptions regarding our pension plans. In addition, please refer to the risk factors contained in our SEC filings available at www.sec.gov, including our most recent Annual Report on Form 10-K and Quarterly Reports on Form 10-Q. Because the risks, estimates, assumptions and uncertainties referred to above could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements, you should not place undue reliance on any forward-looking statements. Any forward-looking statement speaks only as of the date hereof, and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date hereof.

Use of Non-GAAP Financial Information

To supplement our consolidated financial statements presented in accordance with U.S. generally accepted accounting principles (GAAP), we use Adjusted EBITDA which represents net income attributable to Cubic before interest, taxes, non-operating income, depreciation and amortization. We believe that the presentation of Adjusted EBITDA 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, we believe that Adjusted EBITDA is frequently used by securities analysts, investors and other interested parties in their evaluation of companies, many of which present an Adjusted EBITDA measure when reporting their results. Adjusted EBITDA is not a measurement of financial performance under GAAP and should not be considered as an alternative to net income as a measure of performance. In addition, other companies may define Adjusted EBITDA differently and, as a result, our measure of Adjusted EBITDA may not be directly comparable to Adjusted EBITDA of other companies. Furthermore, Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under GAAP.

Because of these limitations, Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using Adjusted EBITDA only supplementally. You are cautioned not to place undue reliance on Adjusted EBITDA.

The following table reconciles Adjusted EBITDA to net income attributable to Cubic, which we consider to be the most directly comparable GAAP financial measure to Adjusted EBITDA.

                        Nine Months Ended Three Months Ended June 30,

June 30,

2013 2012 2013 2012 (in thousands) Reconciliation: Net income attributable to Cubic $ 57,968 $ 70,812 $ 18,364 $ 26,721 Add: Provision for income taxes 19,859 29,538 7,416 11,338 Interest expense (income), net 1,159 (1,524 ) 392 (476 ) Other income, net 764 (95 ) 813 950 Noncontrolling interest in income of VIE 149 149 24 53 Depreciation and amortization   18,014   17,140     6,417   5,843   ADJUSTED EBITDA $ 97,913 $ 116,020   $ 33,426 $ 44,429    

Summary Results

The company's three reportable segments are: Transportation Systems, Mission Support Services and Defense Systems. The following table presents sales, operating profits, and depreciation and amortization for each of the three business segments, in millions.

            Nine Months Ended Three Months Ended June 30, June 30, 2013       2012 2013       2012 Sales: Transportation Systems $ 391.2 $ 383.3 $ 133.8 $ 125.8 Mission Support Services 359.4 356.8 123.8 122.4 Defense Systems 267.2 280.9 82.8 116.9 Other   0.3     0.8     -     0.3   Total sales $ 1,018.1   $ 1,021.8   $ 340.4   $ 365.4     Operating income (loss): Transportation Systems $ 63.6 $ 60.5 $ 18.2 $ 19.2 Mission Support Services 11.4 15.0 3.6 5.9 Defense Systems 8.5 26.7 7.0 14.6 Unallocated corporate expenses and other   (3.6 )   (3.3 )   (1.8 )   (1.1 ) Total operating income $ 79.9   $ 98.9   $ 27.0   $ 38.6     Depreciation and amortization: Transportation Systems $ 2.7 $ 2.8 $ 1.2 $ 1.1 Mission Support Services 10.0 9.6 3.5 3.1 Defense Systems 4.4 3.9 1.5 1.4 Other   0.9     0.8     0.2     0.2   Total depreciation and amortization $ 18.0   $ 17.1   $ 6.4   $ 5.8                               CUBIC CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (amounts in thousands, except per share data)   Nine Months Ended Three Months Ended June 30, June 30, 2013 2012 2013 2012   Net sales: Products $ 432,226 $ 498,829 $ 131,557 $ 189,743 Services   585,895     522,979     208,888     175,654   1,018,121 1,021,808 340,445 365,397   Costs and expenses: Products 311,964 338,564 93,946 118,431 Services 462,075 430,602 164,458 153,552 Selling, general and administrative 126,447 121,010 44,130 42,751 Research and development 19,346 21,395 6,426 8,427 Amortization of purchased intangibles 12,192 11,357 4,362 3,650 Restructuring costs   6,198     -     114     -     938,222     922,928     313,436     326,811     Operating income 79,899 98,880 27,009 38,586   Other income (expense): Interest and dividend income 1,279 2,423 530 697 Interest expense (2,438 ) (899 ) (922 ) (221 ) Other income (expense) - net   (764 )   95     (813 )   (950 )   Income before income taxes 77,976 100,499 25,804 38,112   Income taxes   19,859     29,538     7,416     11,338     Net income 58,117 70,961 18,388 26,774   Less noncontrolling interest in income of VIE   149     149     24     53     Net income attributable to Cubic $ 57,968   $ 70,812   $ 18,364   $ 26,721     Net income per share attributable to Cubic Basic $ 2.17 $ 2.65 $ 0.69 $ 1.00 Diluted $ 2.17 $ 2.65 $ 0.69 $ 1.00   Dividends per common share $ 0.12 $ 0.12 $ - $ -   Weighted average shares used in per share calculations: Basic 26,736 26,736 26,736 26,736 Diluted 26,745 26,736 26,762 26,736                           CUBIC CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (in thousands)   June 30, September 30, 2013 2012 ASSETS Current assets: Cash and cash equivalents $ 212,451 $ 212,267 Restricted cash 68,853 68,749 Marketable securities 4,049 - Accounts receivable - net 388,436 350,697 Recoverable income taxes 6,673 7,083 Inventories - net 48,312 52,366 Deferred income taxes and other current assets   17,035     21,564   Total current assets   745,809     712,726     Long-term contract receivables 19,850 22,070 Long-term capitalized contract costs 61,782 26,875 Property, plant and equipment - net 54,770 55,327 Goodwill 183,895 146,933 Purchased intangibles - net 58,517 39,374 Other assets   20,974     23,012   $ 1,145,597   $ 1,026,317     LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Trade accounts payable $ 31,293 $ 47,917 Customer advances 107,256 100,764 Accrued compensation and other current liabilities 114,100 108,668 Income taxes payable 7,229 20,733 Current portion of long-term debt   529     4,561   Total current liabilities   260,407     282,643     Long-term debt 102,380 6,942 Other long-term liabilities 66,412 66,390   Shareholders' equity: Common stock 14,208 12,574 Retained earnings 769,803 715,043 Accumulated other comprehensive loss (31,635 ) (21,148 ) Treasury stock at cost   (36,078 )   (36,078 ) Shareholders' equity related to Cubic 716,298 670,391 Noncontrolling interest in variable interest entity   100     (49 ) Total shareholders' equity   716,398     670,342   $ 1,145,597   $ 1,026,317                               CUBIC CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands)   Nine Months Ended Three Months Ended June 30, June 30, 2013 2012 2013 2012 Operating Activities: Net income $ 58,117 $ 70,961 $ 18,388 $ 26,774

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

Depreciation and amortization 18,014 17,140 6,417 5,843 Share-based compensation expense 1,634 - 1,575 - Changes in operating assets and liabilities   (84,595 )   (126,916 )   22,761     (31,524 )

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

  (6,830 )   (38,815 )   49,141     1,093     Investing Activities: Acquisition of businesses, net of cash acquired (60,649 ) - (7,377 ) - Purchases of property, plant and equipment (6,209 ) (13,244 ) (2,348 ) (3,094 ) Purchases of marketable securities (4,054 ) - (4,054 ) -

Proceeds from sales or maturities of marketable securities

  -     25,829     -     7,895  

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES

  (70,912 )   12,585     (13,779 )   4,801     Financing Activities: Proceeds from short-term borrowings 70,000 - - - Principal payments on short-term borrowings (70,000 ) - (25,000 ) - Proceeds from long-term borrowings 100,000 - 50,000 - Principal payments on long-term debt (8,407 ) (4,411 ) (134 ) (137 ) Dividends paid (3,208 ) (3,208 ) - - Net change in restricted cash (104 ) (68,584 ) (20 ) -

Contingent consideration payments related to acquisitions of businesses

  (224 )   -     (224 )   -  

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

  88,057     (76,203 )   24,622     (137 )   Effect of exchange rates on cash   (10,131 )   4,414     3,862     (5,394 )  

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

184 (98,019 ) 63,846 363  

Cash and cash equivalents at the beginning of the period

  212,267     329,148     148,605     230,766    

CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD

$ 212,451   $ 231,129   $ 212,451   $ 231,129       Supplemental disclosure of non-cash investing and financing activities:   Liability incurred to acquire NEK $ 12,108 $ - $ - $ -