- Sales of $1.361 billion for fiscal year 2013
- Net income of $19.8 million, or $0.74 per diluted share for fiscal year 2013
- Non-cash goodwill impairment of $50.9 million, or $1.61 per diluted share, net of applicable taxes, recorded in the fourth quarter of 2013
- Non-GAAP Adjusted EBITDA of $112.6 million for fiscal year 2013
- Backlog of $2.669 billion as of September 30, 2013
SAN DIEGO, Calif. – December 5, 2013 – Cubic Corporation (NYSE: CUB) today reported its financial results for the fiscal year ended September 30, 2013.
Sales in fiscal year 2013 were $1.361 billion compared to $1.381 billion in 2012, a decrease of 1%. Four acquisitions made during the fiscal year added $43.1 million in sales, while organic sales decreased 5%.
Operating income was $36.4 million for the year compared to $128.0 million in 2012. Operating income decreased in all three operating segments. The largest contributor to lower operating income was a goodwill impairment charge of $50.9 million taken in the fourth quarter within our Mission Support Services (MSS) segment. In addition, the decline was driven by an 8% decrease in gross profit margins on product sales, partially offset by a 4% increase in gross profit margins for services revenues. The decrease in product gross profit was due in part to growth in estimated costs to complete transportation projects in Sydney, Australia and Vancouver, B.C. Canada that impacted operating income by $17.2 million in the fourth quarter. In addition, during the year we incurred $8.1 million in restructuring charges primarily in our Defense Systems (CDS) segment.
Non-GAAP Adjusted EBITDA was $112.6 million or 8% of sales in fiscal year 2013 compared to $150.9 million or 11% of sales in 2012. The product gross margin decrease and restructuring charges, mentioned above, contributed to the decrease in Adjusted EBITDA (see the table included in the section titled “Use of Non-GAAP Financial Information” for a reconciliation of GAAP and non-GAAP financial measures).
Net income was $19.8 million, or $0.74 per share, in fiscal year 2013 compared to $91.9 million last year, or $3.44 per share, reflecting lower operating income, including the goodwill impairment, and a higher effective income tax rate. Our effective tax rate increased this year due to an unfavorable impact associated with the goodwill impairment because a large portion of our goodwill is not deductible for income tax purposes. In addition, we increased our valuation allowance by $3.9 million in the fourth quarter of 2013 for a deferred tax asset related to our Australian operations.
Backlog was $2.669 billion at the end of fiscal year 2013 compared to $2.832 billion in the prior year, a decrease of $162.7 million. The decrease was due to lower backlog in our Transportation Systems (CTS) and MSS segments due to sales in 2013 in excess of new contract orders added, partially offset by an increase in CDS backlog, which was driven by more than $125 million of new contracts in the Asia Pacific region in 2013.
“Fiscal year 2013 was a transition year for the company, which concluded with a very difficult fourth quarter” said William W. Boyle, Chief Executive Officer of Cubic Corporation. “While our performance in 2013 was poor, it was an important year in terms of positioning the businesses for the long-term. We believe fiscal 2014 will be a much better year with a turnaround in operating income and cash flows, as major design and build projects in the transportation segment move into the services phase. We also expect the restructuring and realignment of the defense systems business coupled with recently awarded contracts with the Navy and international customers to improve margins in defense systems. Next year we expect sales to grow from $1.361 billion to a range of $1.42 billion to $1.45 billion and EPS to grow from $0.74 per share to somewhere between $2.60 and $2.75 per share.”
Reportable Segment Results
Transportation Systems (38% of fiscal 2013 consolidated sales)
| Years ended September 30, | 2013 | 2012 | ||
| (in millions) | ||||
| Transportation Systems Sales | $ | 516.9 | $ | 513.6 |
| Transportation Systems Operating Income | $ | 62.4 | $ | 76.3 |
CTS sales increased 1% in 2013 to $516.9 million from $513.6 million last year. During 2013 we had higher sales from transit system contracts in North America and a $7.8 million sales contribution from NextBus which was acquired in January 2013. These increases were partially offset by a decrease in design and build activities in Sydney, Vancouver and with UK train operating companies. Revenue comparisons were also negatively impacted for the year by $6.6 million in foreign currency exchange rate differences.
CTS operating income was down 18% to $62.4 million for fiscal 2013 compared to $76.3 million last year. The major cause for the decrease was growth in estimated costs to complete design and build projects in Sydney, Australia and Vancouver, B.C. Canada, as mentioned above.
Mission Support Services (34% of fiscal 2013 consolidated sales)
| Years ended September 30, | 2013 | 2012 | ||
| (in millions) | ||||
| Mission Support Services Sales | $ | 468.5 | $ | 491.4 |
| Mission Support Services Operating Income (Loss) | $ | (36.1) | $ | 21.9 |
MSS sales decreased 5% in 2013 to $468.5 million from $491.4 million in 2012. During the year we acquired NEK Services which contributed $31.6 million in sales. The decline in organic sales for MSS was 11% for the year. MSS sales declined 28% in the fourth quarter of 2013 compared to 2012, excluding NEK sales.
MSS had an operating loss of $36.1 million in 2013 compared to an operating profit of $21.9 million in 2012. The loss was primarily related to a goodwill impairment charge taken in the fourth quarter. The impacts of sequestration and other changes in the business environment caused significant impacts on MSS beginning late in 2013. In light of this, during our strategic and financial planning process late in 2013, we made downward revisions in our estimates of future revenues and margins. As a result, in the fourth quarter of 2013 we estimated that there was a decline in the estimated fair value of MSS, which resulted in the recognition of goodwill impairment totaling $50.9 million.
Defense Systems (28% of fiscal 2013 consolidated sales)
| Years ended September 30, | 2013 | 2012 | ||
| (in millions) | ||||
| Defense Systems Sales | $ | 375.1 | $ | 375.4 |
| Defense Systems Operating Income | $ | 14.2 | $ | 34.6 |
CDS sales were virtually unchanged in 2013 from 2012 at $375.1 million. Included in sales for 2013 was $3.7 million in sales from two small acquisitions completed during the year. During the year CDS was awarded a new $298.5 million indefinite delivery/indefinite quantity (ID/IQ) contract for immersive game based training for the U.S. Navy’s Littoral Combat Ship program. For the fiscal year CDS had $4.4 million in sales associated with this contract.
Operating income in 2013 for CDS was $14.2 million compared to $34.6 million in 2012. In 2012 operating income was higher by $12.5 million due to a favorable change in estimate on a ground combat training system. Negatively impacting operating income in 2013 was a higher operating loss in the secure communications business. The increased loss this year was attributable to cost growth on an Intelligence, Surveillance and Reconnaissance (ISR) data link program and a $2.8 million inventory valuation write down for the global tracking product line. In addition, operating income in 2013 was negatively impacted by restructuring costs of $7.8 million.
Conference Call
Cubic management will host a conference call to discuss the company’s fourth quarter and fiscal year 2013 results today, Thursday December 5, 2013 at 4:30 PM ET (1:30 PM 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 for approximately 30 days following the live webcast.
About Cubic Corporation
Cubic Corporation is the parent company of three major business segments: Transportation Systems, Defense Systems, and Mission Support Services. Cubic Transportation Systems is a leading provider of automated fare collection systems and services for public transit authorities. Cubic Defense Systems is a leading provider of realistic combat training systems and secure communications. Mission Support Services is a leading provider of training, operations, maintenance, technical and other support services for the U.S. and allied nations. 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, including, but not limited to, statements about future events or Cubic’s future financial and 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
Adjusted EBITDA represents net income attributable to Cubic before interest, taxes, non-operating income, goodwill impairment charges, 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, the age and book depreciation of property, plant and equipment (affecting relative depreciation expense), goodwill impairment charges 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.
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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.
| Year Ended September 30, | ||||||||
| 2013 | 2012 | 2011 | ||||||
| Reconciliation: | (in thousands) | |||||||
| Net income attributable to Cubic | $ | 19,798 | $ | 91,900 | $ | 83,594 | ||
| Add: | ||||||||
| Provision for income taxes | 14,205 | 38,183 | 32,373 | |||||
| Interest expense (income), net | 1,839 | (1,444) | (1,107) | |||||
| Other expense (income), net | 367 | (821) | (1,662) | |||||
| Noncontrolling interest in income of VIE | 183 | 204 | 310 | |||||
| Depreciation and amortization | 25,359 | 22,857 | 22,341 | |||||
| Impairment of goodwill | 50,865 | - | - | |||||
| ADJUSTED EBITDA | $ | 112,616 | $ | 150,879 | $ | 135,849 |