10-Q 1 a12-12805_110q.htm 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT

 

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the Quarter Ended June 30, 2012

 

001-08931

Commission File Number

 

CUBIC CORPORATION

Exact Name of Registrant as Specified in its Charter

 

Delaware

 

95-1678055

State of Incorporation

 

IRS Employer Identification No.

 

9333 Balboa Avenue

San Diego, California 92123

Telephone (858) 277-6780

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Small Reporting Company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12-b-2 of the Exchange Act). Yes o  No x

 

As of November 30, 2012, registrant had only one class of common stock of which there were 26,736,307 shares outstanding (after deducting 8,945,300 shares held as treasury stock).

 

 

 



 

EXPLANATORY NOTE REGARDING RESTATEMENT

 

This Quarterly Report on Form 10-Q of Cubic Corporation (“Company”, “we”, and “us”) for the three- and nine-months ended June 30, 2012, includes restatement of the following previously filed consolidated financial statements and data (and related disclosures): (1) our Condensed Consolidated Balance Sheet as of September 30, 2011 and the Condensed Consolidated Statements of Income and Cash Flows for the three- and nine-months ended June 30, 2011; and (2) our management’s discussion and analysis of financial condition and results of operations as of and for the three- and nine-month periods ended June 30, 2011, located in Part I Item 2 of this Form 10-Q.  The restatement results from our review of revenue recognition practices.  See Note 2, “Restatement of Consolidated Financial Statements” of the Notes to Condensed Consolidated Financial Statements in Part I Item 1 for a detailed discussion of the review and effect of the restatement.

 

Financial information included in the reports on Form 10-K, Form 10-Q and Form 8-K filed by us prior to July 31, 2012, and all earnings press releases and similar communications issued by us prior to July 31, 2012, should not be relied upon. The restatements are more fully described in our 2012 Annual Report on Form 10-K filed concurrently herewith.

 



 

PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

 

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,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

(As Restated)

 

 

 

(As Restated)

 

Net sales:

 

 

 

 

 

 

 

 

 

Products

 

$

498,829

 

$

428,854

 

$

189,743

 

$

142,055

 

Services

 

522,979

 

523,706

 

175,654

 

180,732

 

 

 

1,021,808

 

952,560

 

365,397

 

322,787

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Products

 

338,564

 

296,090

 

118,431

 

101,486

 

Services

 

430,602

 

419,605

 

153,552

 

144,992

 

Selling, general and administrative

 

121,010

 

114,631

 

42,751

 

37,981

 

Research and development

 

21,395

 

17,807

 

8,427

 

6,281

 

Amortization of purchased intangibles

 

11,357

 

10,607

 

3,650

 

4,257

 

 

 

922,928

 

858,740

 

326,811

 

294,997

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

98,880

 

93,820

 

38,586

 

27,790

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest and dividend income

 

2,423

 

1,729

 

697

 

490

 

Interest expense

 

(899

)

(1,155

)

(221

)

(374

)

Other income (expense) - net

 

95

 

(462

)

(950

)

1,232

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

100,499

 

93,932

 

38,112

 

29,138

 

 

 

 

 

 

 

 

 

 

 

Income taxes

 

29,538

 

24,702

 

11,338

 

7,032

 

 

 

 

 

 

 

 

 

 

 

Net income

 

70,961

 

69,230

 

26,774

 

22,106

 

 

 

 

 

 

 

 

 

 

 

Less noncontrolling interest in income of VIE

 

149

 

261

 

53

 

56

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Cubic

 

$

70,812

 

$

68,969

 

$

26,721

 

$

22,050

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net income per common share

 

$

2.65

 

$

2.58

 

$

1.00

 

$

0.82

 

 

 

 

 

 

 

 

 

 

 

Dividends per common share

 

$

0.12

 

$

0.19

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

Average number of common shares outstanding

 

26,736

 

26,736

 

26,736

 

26,735

 

 

See accompanying notes.

 

2



 

CUBIC CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands)

 

 

 

June 30,

 

September 30,

 

 

 

2012

 

2011

 

 

 

 

 

(As Restated)

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

231,129

 

$

329,148

 

Restricted cash

 

68,681

 

 

Short-term investments

 

 

25,829

 

Accounts receivable - net

 

323,118

 

227,290

 

Recoverable income taxes

 

15,150

 

24,917

 

Inventories - net

 

49,622

 

38,359

 

Deferred income taxes and other current assets

 

16,708

 

30,563

 

Total current assets

 

704,408

 

676,106

 

 

 

 

 

 

 

Long-term contract receivables

 

22,850

 

23,700

 

Long-term capitalized contract costs

 

13,695

 

 

Property, plant and equipment - net

 

56,166

 

48,467

 

Goodwill

 

146,597

 

146,355

 

Purchased intangibles - net

 

42,836

 

54,139

 

Other assets

 

20,135

 

17,757

 

 

 

$

1,006,687

 

$

966,524

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Trade accounts payable

 

$

40,341

 

$

43,984

 

Customer advances

 

127,190

 

134,316

 

Accrued compensation and other current liabilities

 

84,238

 

106,519

 

Income taxes payable

 

24,778

 

18,716

 

Current portion of long-term debt

 

4,545

 

4,541

 

Total current liabilities

 

281,092

 

308,076

 

 

 

 

 

 

 

Long-term debt

 

6,995

 

11,377

 

Other long-term liabilities

 

67,384

 

67,761

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Common stock

 

12,574

 

12,574

 

Retained earnings

 

697,164

 

629,560

 

Accumulated other comprehensive loss

 

(22,340

)

(26,493

)

Treasury stock at cost

 

(36,078

)

(36,078

)

Shareholders’ equity attributable to Cubic

 

651,320

 

579,563

 

Noncontrolling interest in variable interest entity

 

(104

)

(253

)

Total shareholders’ equity

 

651,216

 

579,310

 

 

 

$

1,006,687

 

$

966,524

 

 

See accompanying notes.

 

3



 

CUBIC CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

 

 

 

Nine Months Ended

 

Three Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

(As Restated)

 

 

 

(As Restated)

 

Operating Activities:

 

 

 

 

 

 

 

 

 

Net income

 

$

70,961

 

$

69,230

 

$

26,774

 

$

22,106

 

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

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

17,140

 

16,246

 

5,843

 

6,160

 

Changes in operating assets and liabilities

 

(126,916

)

9,176

 

(31,524

)

23,758

 

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

 

(38,815

)

94,652

 

1,093

 

52,024

 

 

 

 

 

 

 

 

 

 

 

Investing Activities:

 

 

 

 

 

 

 

 

 

Acquisitions, net of cash acquired

 

 

(126,825

)

 

 

Purchases of property, plant and equipment

 

(13,244

)

(5,601

)

(3,094

)

(2,026

)

Proceeds from sales or maturities of short-term investments

 

25,829

 

57,973

 

7,895

 

16,180

 

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES

 

12,585

 

(74,453

)

4,801

 

14,154

 

 

 

 

 

 

 

 

 

 

 

Financing Activities:

 

 

 

 

 

 

 

 

 

Principal payments on long-term borrowings

 

(4,411

)

(4,416

)

(137

)

(142

)

Purchases of treasury stock

 

 

(4

)

 

 

Dividends paid

 

(3,208

)

(5,080

)

 

(5,080

)

Change in restricted cash

 

(68,584

)

 

 

 

NET CASH USED IN FINANCING ACTIVITIES

 

(76,203

)

(9,500

)

(137

)

(5,222

)

 

 

 

 

 

 

 

 

 

 

Effect of exchange rates on cash

 

4,414

 

6,724

 

(5,394

)

925

 

 

 

 

 

 

 

 

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

(98,019

)

17,423

 

363

 

61,881

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at the beginning of the period

 

329,148

 

295,434

 

230,766

 

250,976

 

 

 

 

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD

 

$

231,129

 

$

312,857

 

$

231,129

 

$

312,857

 

 

See accompanying notes.

 

4


 


 

CUBIC CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

June 30, 2012

 

Note 1 — Basis of Presentation

 

We have prepared the accompanying unaudited condensed consolidated financial statements in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

 

In our opinion, all adjustments necessary for a fair presentation of these financial statements have been included, and are of a normal and recurring nature as well as all adjustments discussed in Note 2, “Restatement of Condensed Consolidated Financial Statements,” considered necessary to fairly state the financial position of Cubic Corporation at June 30, 2012 and September 30, 2011; the results of its operations for the three- and nine-month periods ended June 30, 2012 and 2011; and its cash flows for the three- and nine-month periods ended June 30, 2012 and 2011. Operating results for the three- and nine- month periods ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending September 30, 2012. For further information, refer to the consolidated financial statements and footnotes thereto included in our annual report on Form 10-K for the year ended September 30, 2012 filed concurrently herewith.

 

The preparation of the financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Note 2—Restatement of Condensed Consolidated Financial statements

 

We have restated our Condensed Consolidated Balance Sheet at September 30, 2011 and our Condensed Consolidated Statements of Income and Cash Flows for the three and nine-month periods ended June 30, 2011.

 

The cumulative adjustments to correct the errors in the consolidated financial statements for all periods prior to October 1, 2010 are recorded as adjustments to retained earnings and accumulated other comprehensive income (loss) at September 30, 2010, as shown in the table below. The cumulative effect of those adjustments increased previously reported retained earnings by $31.9 million and reduced previously reported accumulated other comprehensive income by $6.6 million at September 30, 2010.

 

The following tables present the summary impacts of the restatement adjustments on the Company’s previously reported consolidated retained earnings at September 30, 2010 and consolidated net income for the three and nine months ended June 30, 2011 (in thousands):

 

Retained earnings at September 30, 2010 - As previously reported

 

$

521,567

 

Revenue Recognition Adjustments, net of taxes on revenue recognition adjustments

 

35,518

 

Other Adjustments

 

(3,633

)

Retained earnings at September 30, 2010 - As restated

 

$

553,452

 

 

5



 

 

 

For the Nine

 

For the Three

 

 

 

Months Ended

 

Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2011

 

2011

 

Net Income - As previously reported

 

$

60,668

 

$

20,814

 

Revenue Recognition Adjustments

 

10,166

 

1,246

 

Other Adjustments

 

(1,865

)

(10

)

Net Income - As restated

 

$

68,969

 

$

22,050

 

 

In the table above, we have separately identified the impact of errors related to revenue recognition, and related to other individually immaterial errors on net income.  Descriptions of the restatement adjustments related to revenue recognition matters follow:

 

Revenue Recognition Adjustments

 

Historically, we recognized sales and profits for development contracts using the cost-to-cost percentage-of-completion method of accounting, modified by a formulary adjustment. Under the cost-to-cost percentage-of-completion method of accounting, sales and profits are based on the ratio of costs incurred to estimated total costs at completion. We have consistently applied a formulary adjustment to the percentage completion calculation for development contracts that had the effect of deferring a portion of the indicated revenue and profits on such contracts until later in the contract performance period. The cost-to-cost percentage-of-completion method as described in ASC 605-35 (formerly SOP 81-1) does not support the practice of using a formulary calculation to defer a portion of the indicated revenue and profits on such contracts. Instead, sales and profits should have been recognized based on the ratio of costs incurred to estimated total costs at completion, without using a formulary adjustment. As such, revenue has been restated for development contracts using the cost-to-cost percentage-of completion-method of accounting to eliminate the formulary adjustment.

 

We also evaluated the Company’s long-standing practice of using the cost-to-cost percentage-of-completion method to recognize revenues for many of its service contracts. Under the accounting literature the cost-to-cost percentage of completion method is acceptable for U.S. government service contracts but not for service contracts with commercial customers or other governmental customers, whether domestic or foreign. As such, revenue has been restated for service contracts with non-U.S. government customers to record revenue generally on a straight-line basis.  In addition, in some cases our contracts with non-U.S. government customers may also include multiple deliverables, including service deliverables. During the course of our revenue review we noted situations in which we did not historically identify the units of accounting in accordance with the appropriate authoritative guidance. For example, for certain contracts that we entered with a customer prior to the adoption of Accounting Standards Update 2010-13, Multiple-Deliverable Revenue Arrangements (ASU 2010-13), to design and build a system for the customer and to operate and maintain the system for the customer after its delivery, we inappropriately separately accounted for the unit of accounting related to the designing and building of the system and the unit of accounting related to providing services for operating and maintaining the system without having vendor specific objective evidence, which was a requirement for separating units of accounting prior to the adoption of ASU 2010-13.  In these cases, in connection with our restatement, we considered the multiple-element revenue recognition guidance in existence at the time that the transaction was entered into or materially modified and revenue was restated to recognize revenue based upon either the individual elements of the arrangement or the combined unit of accounting when the elements were not separable.

 

The company’s historical policy has been to allocate and capitalize general and administrative (G&A) costs on its U.S. government units-of-delivery type contracts, as permitted by SOP 81-1 and the AICPA Audit and Accounting Guide for Federal Government Contractors. During our review of revenue recognition for the issues identified above it was determined that from fiscal 2007 through March of 2012, this policy was inconsistently applied so that G&A costs were not inventoried on certain U.S. government contracts in accordance with the policy. As such, inventory and cost of sales have been restated for these types of contracts with the U.S. government to include G&A costs in inventory until sales are recognized.

 

6



 

Historically the Company has allocated G&A costs to all of its contracts with the U.S. government and with other domestic or foreign governmental agencies. These costs were included in the calculation of percentage completion as well as the measurement of losses on contracts. SOP 81-1 generally does not permit G&A costs to be included as contract costs which are used to measure progress towards completion on percentage-of-completion contracts and to estimate losses, though it does include an exception for government contractors. The Company has historically considered itself to be a government contractor and followed this exception for virtually all of its contracts accounted for on a cost-to-cost percentage-of-completion basis. However, we now recognize that this exception was intended to apply only to contracts with the U.S. federal government and not to contracts with other governmental entities, such as governmental transit agencies and foreign governments. Consequently, for contracts with customers other than the U.S. federal government, revenue is being restated to reflect the impact of excluding general and administrative costs from the calculation of the percentage-of-completion and projected losses on long-term development projects.

 

We determined the amounts of the revenue recognition adjustments on a contract-by-contract basis and did not calculate or accumulate the errors by type of revenue error because certain errors are interrelated and the adjustments to many contracts were impacted by more than one of the types of revenue recognition error described above. The aggregate impact of these revenue adjustments and the related adjustments made to income tax expense as a result of the revenue recognition adjustments described above are included in the “Revenue Recognition Adjustments” columns in the following tables for the Consolidated Statements of Income.

 

Other Adjustments

 

In addition to the errors related to revenue recognition described above, we also made adjustments related to other individually immaterial errors including certain corrections that had been previously identified but not recorded because they were not material, individually or in the aggregate, to the Company’s consolidated financial statements. These corrections included certain accrued liabilities, reserves and miscellaneous reclassification entries; entries to correct errors in the treatment of return-to-provision income tax reconciliation items; adjustments to various income tax accrual accounts; and adjustments related to the impact of exchange rates on our U.S. dollar denominated investments held by our wholly-owned subsidiary in the U.K., that has the British pound as its functional currency.

 

Reclassifications

 

In the first quarter of fiscal year 2012, we revised our method of categorizing sales and the related cost of sales between products and services. We reconsidered whether certain projects related predominantly to product or service sales. The “Reclassifications” column in the following tables includes the reclassifications of sales and cost of sales for products and services in the Condensed Consolidated Statements of Income in order to conform to the current year presentation, and to correct certain errors in classification of cost of sales between products and services. For both the nine and three month periods ended June 30, 2011 $8.9 million of costs were erroneously classified as product costs. As such, these costs were reclassified to service costs in the following tables.

 

Goodwill Impairment Assessment Date Disclosure Error

 

In our consolidated financial statements for the year ended September 30, 2011 and previous years we had disclosed that we evaluated goodwill for potential impairment annually as of June 30, or when circumstances indicate that the carrying value may not be recoverable. However, our annual goodwill impairment evaluation date is July 1 of each year rather than June 30. This was an error in disclosure only and had no impact on our assessment of goodwill impairment, our financial condition, results of operations or cash flows.

 

7



 

The following tables present the impact of the restatement on our previously issued unaudited Condensed Consolidated Balance Sheet as of September 30, 2011, and our Condensed Consolidated Statements of Income and Cash Flows for the three- and nine-month periods ended June 30, 2011:

 

 

 

Condensed Consolidated Balance Sheet

 

 

 

September 30, 2011

 

 

 

Previously

 

 

 

As

 

 

 

Reported

 

Adjustments

 

Restated

 

 

 

(in thousands)

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

329,148

 

$

 

$

329,148

 

Short-term investments

 

25,829

 

 

25,829

 

Accounts receivable - net

 

223,984

 

3,306

 

227,290

 

Recoverable income taxes

 

20,725

 

4,192

 

24,917

 

Inventories

 

36,729

 

1,630

 

38,359

 

Deferred income taxes and other current assets

 

34,230

 

(3,667

)

30,563

 

Total current assets

 

670,645

 

5,461

 

676,106

 

 

 

 

 

 

 

 

 

Long-term contract receivables

 

23,700

 

 

23,700

 

Property, plant and equipment - net

 

48,467

 

 

48,467

 

Goodwill

 

146,355

 

 

146,355

 

Purchased intangibles

 

54,139

 

 

54,139

 

Other assets

 

15,534

 

2,223

 

17,757

 

 

 

 

 

 

 

 

 

Total assets

 

$

958,840

 

$

7,684

 

$

966,524

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Trade accounts payable

 

$

38,870

 

$

5,114

 

$

43,984

 

Customer advances

 

183,845

 

(49,529

)

134,316

 

Accrued compensation and other current liabilities

 

103,339

 

3,180

 

106,519

 

Income taxes payable

 

7,902

 

10,814

 

18,716

 

Current portion of long-term debt

 

4,541

 

 

4,541

 

Total current liabilities

 

338,497

 

(30,421

)

308,076

 

 

 

 

 

 

 

 

 

Long-term debt

 

11,377

 

 

11,377

 

Other long-term liabilities

 

57,168

 

10,593

 

67,761

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

Common stock

 

12,574

 

 

12,574

 

Retained earnings

 

598,849

 

30,711

 

629,560

 

Accumulated other comprehensive loss

 

(23,294

)

(3,199

)

(26,493

)

Treasury stock at cost

 

(36,078

)

 

(36,078

)

Shareholders’ equity attributable to Cubic

 

552,051

 

27,512

 

579,563

 

Noncontrolling interest in variable interest entity

 

(253

)

 

(253

)

Total shareholders’ equity

 

551,798

 

27,512

 

579,310

 

 

 

$

958,840

 

$

7,684

 

$

966,524

 

 

8


 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statement of Income

 

Condensed Consolidated Statement of Income

 

 

 

Nine Months Ended June 30, 2011

 

Three Months Ended June 30, 2011

 

 

 

Previously

 

Revenue Recognition

 

Other

 

 

 

As

 

Previously

 

Revenue Recognition

 

Other

 

 

 

As

 

 

 

Reported

 

Adjustments

 

Adjustments

 

Reclassifications

 

Restated

 

Reported

 

Adjustments

 

Adjustments

 

Reclassifications

 

Restated

 

 

 

(amounts in thousands, except per share data)

 

(amounts in thousands, except per share data)

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

$

441,162

 

$

(6,262

)

$

(2,376

)

$

(3,670

)

$

428,854

 

$

148,441

 

$

(3,037

)

$

321

 

$

(3,670

)

$

142,055

 

Services

 

497,131

 

22,905

 

 

3,670

 

523,706

 

171,464

 

5,598

 

 

3,670

 

180,732

 

 

 

938,293

 

16,643

 

(2,376

)

 

952,560

 

319,905

 

2,561

 

321

 

 

322,787

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

310,922

 

2,116

 

(1,931

)

(15,017

)

296,090

 

114,325

 

487

 

722

 

(14,048

)

101,486

 

Services

 

405,688

 

690

 

 

13,227

 

419,605

 

131,424

 

341

 

 

13,227

 

144,992

 

Selling, general and administrative

 

111,238

 

 

1,603

 

1,790

 

114,631

 

36,831

 

 

329

 

821

 

37,981

 

Research and development

 

17,807

 

 

 

 

17,807

 

6,281

 

 

 

 

6,281

 

Amortization of purchased intangibles

 

10,607

 

 

 

 

10,607

 

4,257

 

 

 

 

4,257

 

 

 

856,262

 

2,806

 

(328

)

 

858,740

 

293,118

 

828

 

1,051

 

 

294,997

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

82,031

 

13,837

 

(2,048

)

 

93,820

 

26,787

 

1,733

 

(730

)

 

27,790

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and dividend income

 

1,729

 

 

 

 

1,729

 

490

 

 

 

 

490

 

Interest expense

 

(1,155

)

 

 

 

(1,155

)

(374

)

 

 

 

(374

)

Other income (expense) - net

 

524

 

(123

)

(863

)

 

(462

)

767

 

(44

)

509

 

 

1,232

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

83,129

 

13,714

 

(2,911

)

 

93,932

 

27,670

 

1,689

 

(221

)

 

29,138

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income taxes

 

22,200

 

3,548

 

(1,046

)

 

24,702

 

6,800

 

443

 

(211

)

 

7,032

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

60,929

 

10,166

 

(1,865

)

 

69,230

 

20,870

 

1,246

 

(10

)

 

22,106

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less noncontrolling interest in income of VIE

 

261

 

 

 

 

261

 

56

 

 

 

 

56

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Cubic

 

$

60,668

 

$

10,166

 

$

(1,865

)

$

 

$

68,969

 

$

20,814

 

$

1,246

 

$

(10

)

$

 

$

22,050

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net income per common share

 

$

2.27

 

$

0.38

 

$

(0.07

)

$

 

$

2.58

 

$

0.78

 

$

0.05

 

$

 

$

 

$

0.82

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average number of common shares outstanding

 

26,736

 

 

 

 

26,736

 

26,736

 

 

 

 

26,736

 

 

9



 

 

 

Condensed Consolidated Statement of Cash Flows

 

Condensed Consolidated Statement of Cash Flows

 

 

 

Nine Months Ended June 30, 2011

 

Three Months Ended June 30, 2011

 

 

 

Previously

 

 

 

As

 

Previously

 

 

 

As

 

 

 

Reported

 

Adjustments

 

Restated

 

Reported

 

Adjustments

 

Restated

 

 

 

 

 

(in thousands)

 

 

 

 

 

(in thousands)

 

 

 

Operating Activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

60,929

 

$

8,301

 

$

69,230

 

$

20,870

 

$

1,236

 

$

22,106

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

16,246

 

 

16,246

 

6,160

 

 

6,160

 

Changes in operating assets and liabilities

 

18,999

 

(9,823

)

9,176

 

24,915

 

(1,157

)

23,758

 

NET CASH PROVIDED BY OPERATING ACTIVITIES

 

96,174

 

(1,522

)

94,652

 

51,945

 

79

 

52,024

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investing Activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition of businesses, net of cash acquired

 

(126,825

)

 

(126,825

)

 

 

 

Proceeds from sale of short-term investments

 

57,973

 

 

57,973

 

16,180

 

 

16,180

 

Purchases of short-term investments

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

(5,601

)

 

(5,601

)

(2,026

)

 

(2,026

)

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES

 

(74,453

)

 

(74,453

)

14,154

 

 

14,154

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financing Activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Principal payments on long-term debt

 

(4,416

)

 

(4,416

)

(142

)

 

(142

)

Purchases of treasury stock

 

(4

)

 

(4

)

 

 

 

Dividends paid to shareholders

 

(5,080

)

 

(5,080

)

(5,080

)

 

(5,080

)

NET CASH USED IN FINANCING ACTIVITIES

 

(9,500

)

 

(9,500

)

(5,222

)

 

(5,222

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of exchange rates on cash

 

5,202

 

1,522

 

6,724

 

1,004

 

(79

)

925

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

 

17,423

 

 

17,423

 

61,881

 

 

61,881

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at the beginning of the period

 

295,434

 

 

295,434

 

250,976

 

 

250,976

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD

 

$

312,857

 

$

 

$

312,857

 

$

312,857

 

$

 

$

312,857

 

 

10



 

Note 3 — Balance Sheet Details

 

The components of accounts receivable are as follows (in thousands):

 

 

 

June 30,

 

September 30,

 

 

 

2012

 

2011

 

 

 

 

 

(As Restated)

 

 

 

 

 

 

 

Trade and other receivables

 

$

16,581

 

$

20,259

 

Long-term contracts:

 

 

 

 

 

Billed

 

99,252

 

89,056

 

Unbilled

 

230,806

 

142,070

 

Allowance for doubtful accounts

 

(671

)

(395

)

Total accounts receivable

 

345,968

 

250,990

 

Less estimated amounts not currently due

 

(22,850

)

(23,700

)

Current accounts receivable

 

$

323,118

 

$

227,290

 

 

The amount classified as not currently due is an estimate of the amount of long-term contract accounts receivable that will not be collected within one year from June 30, 2012 under transportation systems contracts in the U.S., Australia and the U.K. The non-current balance at September 30, 2011 represented non-current amounts due from customers under transportation systems contracts in the same locations.

 

Inventories consist of the following (in thousands):

 

 

 

June 30,

 

September 30,

 

 

 

2012

 

2011

 

 

 

 

 

(As Restated)

 

Work in process and inventoried costs under long-term contracts

 

$

73,096

 

$

71,855

 

Customer advances

 

(24,211

)

(34,582

)

Raw material and purchased parts

 

737

 

1,086

 

Net inventories

 

$

49,622

 

$

38,359

 

 

Long-term capitalized contract costs include costs incurred on a contract to develop and manufacture a transportation fare system for a customer for which revenue will not be recognized until delivery of the system.

 

Note 4 — Comprehensive Income

 

Comprehensive income is as follows (in thousands):

 

 

 

Nine Months Ended

 

Three Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

(As Restated)

 

 

 

(As Restated)

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

70,961

 

$

69,230

 

$

26,774

 

$

22,106

 

Foreign currency translation adjustments

 

3,313

 

6,120

 

(4,880

)

543

 

Net unrealized gain (loss) from cash flow hedges

 

840

 

(9,305

)

(1,288

)

(232

)

Comprehensive income

 

$

75,114

 

$

66,045

 

$

20,606

 

$

22,417

 

 

Note 5 — Fair Value of Financial Instruments

 

We carry financial instruments, including cash equivalents, accounts receivable, accounts payable and accrued liabilities at cost, which we believe approximates fair value because of the short-term maturity of these instruments. Receivables consist primarily of amounts due from U.S. and foreign governments for defense products and local government agencies for transportation systems.  Due to the nature of our customers, we generally do not require collateral.  We have limited exposure to credit risk as we have historically collected substantially all of our receivables from government agencies.

 

11



 

The valuation techniques required for fair value accounting are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect internal market assumptions. The two types of inputs create the following fair value hierarchy:

 

·                  Level 1 - Quoted prices for identical instruments in active markets.

·                  Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

·                  Level 3 - Significant inputs to the valuation model are unobservable.

 

The following table presents assets and liabilities measured and recorded at fair value on our Condensed Consolidated Balance Sheets on a recurring basis (in thousands). The fair value of cash equivalents and short term investments approximates their cost. The fair value of tax exempt bonds are generally determined using standard observable inputs, including reported trades, quoted market prices, broker/dealer quotes, and issuer spreads. The maturities of tax exempt bonds are within the next year. Derivative financial instruments related to foreign currency forward contracts are measured at fair value, the material portions of which are based on active or inactive markets for identical or similar instruments or model-derived valuations whose inputs are observable. Where model-derived valuations are appropriate, the company uses the applicable credit spread as the discount rate. Credit risk related to derivative financial instruments is considered minimal and is managed by requiring high credit standards for counterparties and through periodic settlements of positions.

 

 

 

June 30, 2012

 

 

 

Level 1

 

Level 2

 

Total

 

Assets

 

 

 

 

 

 

 

Cash equivalents

 

$

173,451

 

$

 

$

173,451

 

Current derivative assets

 

 

648

 

648

 

Non-current derivative assets

 

 

4,471

 

4,471

 

Total assets measured at fair value

 

$

173,451

 

$

5,119

 

$

178,570

 

Liabilities

 

 

 

 

 

 

 

Current derivative liabilities

 

$

 

$

3,071

 

$

3,071

 

Non-current derivative liabilities

 

 

7,010

 

7,010

 

Total liabilities measured at fair value

 

$

 

$

10,081

 

$

10,081

 

 

 

 

 

 

 

September 30, 2011

 

 

 

Level 1

 

Level 2

 

Total

 

Assets

 

 

 

 

 

 

 

Cash equivalents

 

$

266,842

 

$

 

$

266,842

 

Short-term investments - U.S. government agency securities

 

 

25,829

 

25,829

 

Current derivative assets

 

 

7,466

 

7,466

 

Total assets measured at fair value

 

$

266,842

 

$

33,295

 

$

300,137

 

Liabilities

 

 

 

 

 

 

 

Current derivative liabilities

 

$

 

$

7,522

 

$

7,522

 

Non-current derivative liabilities

 

 

6,164

 

6,164

 

Total liabilities measured at fair value

 

$

 

$

13,686

 

$

13,686

 

 

Long-term debt is carried at amortized cost. The fair value of long-term debt is estimated by discounting the value of the note based on market interest rates for similar debt instruments, which is a Level 2 valuation technique. At June 30, 2012, the fair value of our long-term debt was estimated to be approximately $12.5 million compared to a carrying value of $11.5 million.  At September 30, 2011, the fair value of our long-term debt was estimated to be approximately $17.5 million compared to a carrying value of $15.9 million.

 

12



 

Note 6 — Financing Arrangements

 

In May 2012 we entered into a committed five-year revolving credit agreement with a group of financial institutions in the amount of $200 million, expiring in May 2017 (Revolving Credit Agreement).This five-year revolving credit agreement replaced a revolving credit agreement in the amount of $150 million which would have expired in December 2012. The available line of credit on the Revolving Credit Agreement is reduced by any letters of credit issued under the Revolving Credit Agreement. As of June 30, 2012, there were no borrowings under this agreement; however, there were letters of credit outstanding under the Revolving Credit Agreement totaling $26.8 million, which reduce the available line of credit to $173.2 million.

 

On January 12, 2012 we entered into a secured letter of credit facility agreement with a bank (Secured Letter of Credit Facility). At June 30, 2012 there were letters of credit outstanding under this agreement of $57.7 million. In support of the Secured Letter of Credit Facility, we placed $68.7 million of our cash on deposit in the U.K. as collateral in a restricted account with the bank providing the facility. We are required to leave the cash in the restricted account so long as the bank continues to maintain associated letters of credit under the facility.  The maximum amount of letters of credit currently allowed by the facility is $66.7 million, and any increase above this amount would require bank approval and additional restricted funds to be placed on deposit. The initial term of the facility is one year; however we may choose at any time to terminate the facility and move the associated letters of credit to another credit facility. Letters of credit outstanding under the Secured Letter of Credit Facility do not reduce the available line of credit available under the Revolving Credit Agreement.

 

The terms of the notes payable include provisions that require and/or limit, among other financial ratios and measurements, the permitted levels of debt and tangible net worth and coverage of fixed charges. As a result of our restatement, we have been unable to comply with covenants requiring us to provide our lenders with audited financial statements and interim financial information on a timely basis. However, we have entered into amendments to our financing arrangements which have included waivers to extend the dates by which the Company is required to deliver its audited financial statements and interim financial information to December 31, 2012, and as such we are not in default under our lending arrangements or credit agreements.

 

Note 7 — Pension Plans

 

The components of net pension costs are as follows (in thousands):

 

 

 

Nine Months Ended

 

Three Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

(As restated)

 

 

 

(As restated)

 

Service cost

 

$

381

 

$

411

 

$

127

 

$

137

 

Interest cost

 

7,167

 

7,035

 

2,389

 

2,345

 

Expected return on plan assets

 

(7,563

)

(7,482

)

(2,521

)

(2,494

)

Amortization of:

 

 

 

 

 

 

 

 

 

Prior service cost

 

(48

)

(39

)

(16

)

(13

)

Actuarial loss

 

1,239

 

777

 

413

 

259

 

Administrative expenses

 

63

 

63

 

21

 

21

 

Net pension cost

 

$

1,239

 

$

765

 

$

413

 

$

255

 

 

13



 

Note 8 — Recent Accounting Pronouncements

 

In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS, which amends Accounting Standards Codification (ASC) Topic 820, Fair Value Measurement. ASU 2011-04 clarified the intent about the application of existing fair value measurement requirements and changed certain requirements for measuring fair value and for disclosing information about fair value measurements. We adopted ASU 2011-04 in the quarter ended March 31, 2012. This adoption had no material impact to our financial statements.

 

In September 2011, the FASB issued ASU 2011-08, Intangibles — Goodwill and Other, which amends the existing guidance on goodwill impairment testing. The new standard allows an entity the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If this is the case, the entity will need to perform a more detailed two-step goodwill impairment test which is used to identify potential goodwill impairments and to measure the amount of goodwill impairment losses to be recognized, if any. The standard is effective for annual or interim goodwill impairment tests performed by us after December 31, 2011, and did not have an effect on our measurement for potential goodwill impairment.

 

In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income, which eliminates the option to present other comprehensive income (OCI) in the statement of shareholders’ equity and instead requires net income, the components of OCI, and total comprehensive income to be presented in either one continuous statement or two separate but consecutive statements. The standard also requires that items reclassified from OCI to net income be presented on the face of the financial statements. The new standard will be effective for us beginning in the quarter ending December 31, 2012 and will be applied retrospectively. The adoption of the new standard will not have an effect on our results of operations, financial position, or cash flows as it only requires a change in the presentation of OCI in our consolidated financial statements.

 

Note 9 — Income Taxes

 

Our effective tax rate for the nine months ended June 30, 2012 was 29.4% which is lower than the U.S. federal statutory tax rate of 35%. This is primarily due to the amount of income earned in foreign tax jurisdictions that is taxed at lower rates than the U.S. federal statutory tax rate, the lapse of various tax statutes, the favorable resolution of income tax uncertainties, and the impact of research and development tax credits.

 

The effective tax rate for the three months ended June 30, 2012 was 29.7%, compared to 24.1% for the three months ended June 30, 2011. The prior year was favorably impacted primarily as a result of the closing of tax statutes in significant jurisdiction and the settlement of certain tax uncertainties.

 

During the three and nine months ended June 30, 2012, the Company’s uncertain tax positions were reduced by $2.5 million and $2.5 million, respectively, resulting from the closing of tax statutes and the settlement of various tax uncertainties. The amount of unrecognized tax benefits was $8.3 million and $10.7 million at June 30, 2012 and September 30, 2011, respectively, exclusive of interest. The total amount of unrecognized tax benefits that, if recognized, would favorably impact the effective tax rate is $6.3 million at June 30, 2012. During the next 12 months, it is reasonably possible that resolution of reviews by taxing authorities, both domestic and international, could be reached with respect to approximately $4.5 million of the unrecognized tax benefits depending on the timing of examinations, expiration of statute of limitations, either because the Company’s tax positions are sustained or because the Company agrees to their disallowance and pays the related income tax.

 

As of June 30, 2012, our open tax years in significant jurisdictions include 2007-2011 in the UK, 2006-2011 in New Zealand and 2008-2011 in the U.S. We believe appropriate provisions for all outstanding issues have been made for all jurisdictions and all open years.

 

14



 

Note 10 — Derivative Instruments and Hedging Activities

 

We utilize derivative and nonderivative financial instruments, such as foreign currency forwards, foreign currency debt obligations and foreign currency cash balances, to manage our exposure to fluctuations in foreign currency exchange rates. We do not use any derivative financial instruments for trading or other speculative purposes. At June 30, 2012 and September 30, 2011, we had foreign exchange contracts with a notional value of $413.6 million and $290.4 million outstanding, respectively.

 

All derivatives are recorded at fair value, however, the classification of gains and losses resulting from changes in the fair values of derivatives are dependent on the intended use of the derivative and its resulting designation. If a derivative is designated as a fair value hedge, then a change in the fair value of the derivative is offset against the change in the fair value of the underlying hedged item and only the ineffective portion of the hedge, if any, is recognized in earnings. If a derivative is designated as a cash flow hedge, then the effective portion of a change in the fair value of the derivative is recognized as a component of Accumulated Other Comprehensive Loss until the underlying hedged item is recognized in earnings, or the forecasted transaction is no longer probable of occurring. If a derivative does not qualify as a highly effective hedge, any change in fair value is immediately recognized in earnings. We formally document all hedging relationships for all derivative hedges and the underlying hedged items, as well as the risk management objectives and strategies for undertaking the hedge transactions. We classify the fair value of all derivative contracts as current or non-current assets or liabilities, depending on the realized and unrealized gain or loss position of the hedged contract at the balance sheet date, and the timing of future cash flows. The cash flows from derivatives treated as hedges are classified in the Condensed Consolidated Statements of Cash Flows in the same category as the item being hedged.

 

For the three and nine months ended June 30, 2012 and June 30, 2011, the amount of gains and losses from hedges classified as not highly effective was not significant. There are no significant credit risks related to contingent features in our derivative agreements. The amount of estimated unrealized net losses from cash flow hedges which are expected to be reclassified to earnings in the next twelve months is $1.6 million, net of income taxes, which will be offset by net gains on the underlying exposure.

 

In connection with a transportation contract that we entered in December 2011, we will incur significant costs of development of the customer’s fare system before we begin receiving payments under the contract. In order to finance certain of these costs, we plan to issue approximately $83 million of 10-year fixed rate debt on or about January 1, 2014. We are concerned that market interest rates for the 10-year forward period of January 1, 2014 to January 1, 2024 will change through January 1, 2014, exposing the LIBOR benchmark component of each of the 20 projected semi-annual interest cash flows of that future 10-year period to risk of variability. Therefore, in July 2012 we entered a forward-starting 10-year swap contract with a bank to reduce the interest rate variability exposure of the projected interest cash flows. The forward-starting swap has a notional amount of $58.4 million, a termination date of January 1, 2024 and a pay 1.698% fixed rate, receive 3-month LIBOR, with fixed rate payments due semi-annually on the first day each June and December commencing June 1, 2014 through December 2023, floating payments due quarterly on the first day of each quarter commencing March 1, 2014 through December 2023, and floating reset dates 2 days prior to the first day of each calculation period. The swap contracts accrual period, January 1, 2014 to December 1, 2023 is designed to match the tenor of the planned debt issuance.

 

The forward starting swap has been designated a cash flow hedge. The effective portion of the gain or loss on the forward starting swap will be reported as a component of OCI and reclassified into earnings in the same line item (interest expense) associated with the forecasted debt issuance transaction and in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the forward starting swap in excess of the cumulative change in the present value of future cash flows of the hedged transaction, if any (i.e., the ineffectiveness portion) or hedge components excluded from the assessment of effectiveness, will be recognized in the Condensed Consolidated Statement of Income in the period that in which the gain or loss is generated.

 

15



 

Note 11 — Segment Information

 

Business segment financial data is as follows (in millions):

 

 

 

Nine Months Ended

 

Three Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

(As Restated)

 

 

 

(As Restated)

 

Sales:

 

 

 

 

 

 

 

 

 

Transportation Systems

 

$

383.3

 

$

309.6

 

$

125.8

 

$

111.1

 

Defense Systems

 

280.9

 

284.2

 

116.9

 

85.6

 

Mission Support Services

 

356.8

 

357.8

 

122.4

 

125.9

 

Other

 

0.8

 

1.0

 

0.3

 

0.2

 

Total sales

 

$

1,021.8

 

$

952.6

 

$

365.4

 

$

322.8

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss):

 

 

 

 

 

 

 

 

 

Transportation Systems

 

$

60.5

 

$

57.7

 

$

19.2

 

$

17.1

 

Defense Systems

 

26.7

 

22.7

 

14.6

 

4.0

 

Mission Support Services

 

15.0

 

18.2

 

5.9

 

8.0

 

Unallocated corporate expenses and other

 

(3.3

)

(4.8

)

(1.1

)

(1.3

)

Total operating income

 

$

98.9

 

$

93.8

 

$

38.6

 

$

27.8

 

 

Changes in estimates on contracts for which revenue is recognized using the cost-to-cost percentage-of-completion method increased operating profit by approximately $12.8 million and $3.7 million for the three months ended June 30, 2012 and 2011, respectively, and $17.4 million and $10.1 million for the nine months ended June 30, 2012 and 2011, respectively. These adjustments increased net income by approximately $8.3 million ($0.31 per share) and $2.3 million ($0.09 per share) for the three months ended June 30, 2012 and 2011, respectively and by approximately $11.7 million ($0.44 per share) and $6.7 million ($0.25 per share) for the nine months ended June 30, 2012 and 2011, respectively.

 

Note 12 - Acquisition

 

On December 20, 2010 we acquired all of the outstanding capital stock of Abraxas Corporation (Abraxas), a Herndon, Virginia-based company that provides services that are complementary to our Mission Support Services (MSS) business including risk mitigation services, and subject matter and operational expertise for law enforcement and homeland security clients. The results of Abraxas’ operations have been included in our consolidated financial statements since the acquisition date. For the nine months ended June 30, 2012 the amounts of Abraxas’ net sales and net loss after taxes included in our Condensed Consolidated Statement of Income were $56.6 million and $1.7 million, respectively. For the nine months ended June 30, 2011 the amounts were $30.5 million and $1.0 million, respectively.

 

Note 13 — Legal Matters

 

In 1997, the Ministry of Defense for the Armed Forces of the Islamic Republic of Iran obtained a judgment in the United States District Court for the Southern District of California enforcing an arbitration award in its favor against us of $2.8 million, plus arbitration costs and interest related to a contract awarded to us by Iran in 1977.  Both parties appealed to the 9th Circuit Court of Appeals. In December 2011, a decision was handed down upholding the arbitration award and requiring the district court to resolve outstanding issues related to the amount of interest to be paid and whether the plaintiff should be awarded attorney’s fees. Under a 1979 Presidential executive order, all transactions by United States citizens with Iran are prohibited; however, in April 2012 we received a license from the U.S. Treasury Department allowing us to remit the $8.8 million owed to the U.S. District Court on April 18, 2012, resulting in the cessation of further post-judgment interest expense. We had recorded a liability for the judgment amount in a previous year and had accrued interest through the date of the payment, so there was no impact on earnings for the nine-months ended June 30, 2012 other than interest accrued of $0.2 million.  We are unable to determine whether the U.S. District Court will award additional pre-judgment interest, which the plaintiff has asserted should be $1.4 million, or reimbursement to the plaintiff for attorney’s fees amounting to $0.1 million, because these are discretionary with the court. Therefore, we have not recorded a liability for these amounts as of June 30, 2012. The District Court heard argument from both parties on September 24, 2012 and we are awaiting their decision.

 

16



 

In November 2011, we received a claim from a public transit authority customer which alleges that the authority incurred a loss of transit revenue due to the inappropriate and illegal actions of one of our former employees, who has plead guilty to the charges. This individual was employed to work on a contract we acquired in a business combination in 2009 and had allegedly been committing these illegal acts from almost two years prior to our acquisition of the contract, until his arrest in May 2011. The transit system was designed and installed by a company unrelated to us. The claim seeks recoupment from us of the alleged lost revenue and an unspecified amount of fees and damages. In March 2012, the county superior court in Boston, Massachusetts entered a default judgment against our former employee and others for $2.9 million based upon the estimated loss of revenue by the public transit authority customer. In the quarter ended March 31, 2012, we recorded an accrued cost of $2.9 million within general and administrative expense in the transportation systems segment based upon the court’s assessment of these losses. We are currently unable to estimate the amount of any other fees or damages related to this matter in excess of the amount that has been recorded through June 30, 2012. Insurance may cover all, or a portion, of any losses we could ultimately incur for this matter. However, any potential insurance proceeds are treated as a gain contingency and will not be recognized in the financial statements until receipt of any such proceeds is assured.

 

We are not a party to any other material pending proceedings and we consider all other matters to be ordinary proceedings incidental to the business. We believe the outcome of these other proceedings will not have a materially adverse effect on our financial position, results of operations, or cash flows.

 

Note 14 — Subsequent Events

 

We have completed an evaluation of all subsequent events through the issuance date of these consolidated financial statements and concluded no subsequent events have occurred that require recognition or disclosure.

 

17



 

CUBIC CORPORATION

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

 

June 30, 2012

 

Our three primary businesses are in the defense and transportation industries. These are high technology businesses that design, manufacture and integrate complex systems and provide essential services to meet the needs of various federal and regional government agencies in the U.S. and other nations around the world.

 

Cubic Transportation Systems (CTS) is the leading delivery, integration and IT service provider of automated fare collection systems and turnkey services for public transit authorities worldwide.  We provide hardware, software and multiagency, multimodal transportation integration technologies and a full scope of operational services that allow the agencies to efficiently collect fares, manage their operations, reduce shrinkage and make using public transit a more convenient and attractive option for commuters.

 

Cubic Defense Systems (CDS) is focused on two primary lines of business: Training Systems and Communications.  The segment is a diversified supplier of live and virtual military training systems, and communication systems and products to the U.S. Department of Defense, other government agencies and allied nations. We design 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 virtual training systems are aimed at marksmanship, armored vehicle, and tactical missile systems. Our communications products are aimed at intelligence, surveillance, and search and rescue markets. Other product lines include multi-band communication tracking devices, and cross domain hardware solutions to address multi-level security requirements.

 

Mission Support Services (MSS) is a leading provider of highly specialized support services including live, virtual, and constructive training; real-world mission rehearsal exercises; professional military education; information technology, information assurance and related cyber support; development of military doctrine; consequence management, infrastructure protection, and force protection; risk mitigation services, and subject matter and operational expertise for national agency and homeland security clients; as well as support to field operations, force deployment and redeployment, and logistics.

 

Consolidated Overview

 

Sales for the quarter ended June 30, 2012 increased 13% to $365.4 million from $322.8 million last year. For the first nine months of the fiscal year, sales increased to $1.022 billion compared to $952.6 million last year, an increase of 7%.  Sales from CTS increased13% for the quarter and 24% for the nine-month period.  CDS sales decreased 1% for the nine-month period but were up by 37% for the quarter. MSS sales decreased slightly for the quarter and the nine-month period. The acquisition of Abraxas added $56.6 million to MSS sales for the nine-month period compared to $30.5 million last year. See the segment discussions following for further analysis of segment sales.

 

Operating income was $38.6 million in the quarter compared to $27.8 million in the third quarter of last year, an increase of 39%. For the quarter, operating income increased primarily due to a due to a favorable change in estimate on a CDS ground combat training range contract during the quarter. Operating income from CTS increased for the quarter, but decreased from the MSS segment. Unallocated corporate and other expenses for the third quarter were $1.1 million in 2012 compared to $1.3 million in 2011.

 

Operating income for the nine-month period increased 5% to $98.9 million from $93.8 million last year. Operating income increased from CTS and CDS, but decreased from MSS for the first nine months. Unallocated corporate and other expenses for the first nine months of the fiscal year were $3.3 million for 2012 and $4.8 million for 2011. The 2011 unallocated corporate and other expenses include costs of $1.0 million for which we have filed an insurance claim. However, any potential recovery is treated as a contingent gain and not recorded until we are assured of receiving the insurance proceeds. See the segment discussions following for further analysis of segment operating income.

 

18



 

Net income attributable to Cubic for the third quarter of fiscal 2012 increased to $26.7 million, or $1.00 per share, compared to $22.1 million, or 82 cents per share last year. For the first nine months of the year, net income increased to $70.8 million, or $2.65 per share, from $69.0 million, or $2.58 per share last year. Net income increased for the quarter and first nine months primarily due to the increase in operating income. Other income (expense) included a net foreign currency exchange gain of $0.9 million for the first nine months of the year compared to a loss of $0.8 million last year, before applicable income taxes. The impact of the increases in operating income and other income on net income were partially offset by the increase in income tax expense described below.

 

Our gross margin percentage on product sales increased to 32% in the first nine months of fiscal 2012 compared to 31% in 2011. The increase in our gross margin percentage on product sales is primarily due to a favorable change in estimate on a contract in the CDS segment in the third quarter of 2012. Our gross margin percentage on service sales decreased to 18% in the nine-month period ended June 30, 2012 compared to 20% in 2011 due primarily to lower profit margins in the MSS segment.

 

Selling, general and administrative (SG&A) expenses increased in the third quarter this year to $42.8 million compared to $38.0 million last year. For the nine-month period, SG&A increased to $121.0 million compared to $114.6 million last year. Increases in SG&A reflected general growth of the business and a $2.9 million provision made for a legal claim in the transportation segment during the second quarter of this year. As a percentage of sales, SG&A expenses were 12% for the third quarter and nine-month period in both years. Company funded research and development expenditures, which relate to new transportation and defense technologies we are developing, increased to $8.4 million for the third quarter compared to $6.3 million last year and $21.4 million for the nine-month period this year compared to $17.8 million last year. Amortization of purchased intangibles increased for the nine-month period this year to $11.4 million compared to $10.6 million last year due to the acquisition of Abraxas in December 2010.

 

As of June 30, 2012, our projected effective tax rate for fiscal 2012 is 29.6% and is reflected in the tax provision for the nine months ended June 30, 2012. The projected effective rate for fiscal 2012 is higher than last year’s effective rate of 27.8% primarily due to the expiration of the U.S. federal research and development (R&D) credit on December 31, 2011. In addition, our projected effective income tax rate for the first half of 2011 benefitted from the retroactive reinstatement of the federal R&D credit, which reduced the tax provision by $1.4 million in that period. The effective rate for fiscal 2012 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,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(in millions)

 

 

 

 

 

(As Restated)

 

 

 

(As Restated)

 

Transportation Systems Segment Sales

 

$

383.3

 

$

309.6

 

$

125.8

 

$

111.1

 

 

 

 

 

 

 

 

 

 

 

Transportation Systems Segment Operating Income

 

$

60.5

 

$

57.7

 

$

19.2

 

$

17.1

 

 

19



 

CTS sales increased 13% in the third quarter to $125.8 million compared to $111.1 million last year, and increased 24% for the nine-month period to $383.3 million from $309.6 million last year. Sales for the quarter and the nine-month period ended June 30, 2012 were higher from work on contracts in Australia, a contract in Canada, and our contracts in the U.K. Partially offsetting these increases were lower sales from design and build projects in the U.S. compared to the third quarter and nine-month period last year. The average exchange rates between the prevailing currency in our foreign operations and the U.S. dollar resulted in a decrease in sales of $3.3 million for the third quarter and a decrease of $1.7 million for the nine-month period, compared to the same periods last year.

 

Operating income from CTS increased 12% in the third quarter to $19.2 million compared to $17.1 million last year, and increased 5% for the nine-month period to $60.5 million from $57.7 million last year. Higher sales and operating income from contracts in Canada and the U.K., in addition to improved margins from a service contract in the U.S. contributed toward the increases for the quarter and nine-month periods. The nine month results were impacted by a $2.9 million provision we recorded in the second quarter related to a claim against us, for which we are seeking insurance reimbursement. Any potential insurance recovery is treated as a contingent gain until we are assured of receiving the insurance proceeds. In addition, operating income for the three and nine-month periods in 2012 was impacted by cost growth on contracts in the U.S. and Europe that reduced operating income by $2.0 million for the third quarter and $4.8 million for the nine-month period. We have also increased our research and development expenditures in 2012 to $6.8 million for the first nine months compared to $2.9 million for the first nine months of last year. The average exchange rates between the prevailing currency in our foreign operations and the U.S. dollar reduced operating income by $0.5 million for the quarter and $0.7 million for the nine-month period, compared to the same periods last year.

 

Defense Systems Segment (CDS)

 

 

 

Nine Months Ended

 

Three Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(in millions)

 

 

 

 

 

(As Restated)

 

 

 

(As Restated)

 

Defense Systems Segment Sales

 

 

 

 

 

 

 

 

 

Training systems

 

$

241.8

 

$

248.7

 

$

106.8

 

$

75.8

 

Communications

 

31.7

 

28.7

 

8.4

 

6.7

 

Other

 

7.4

 

6.8

 

1.7

 

3.1

 

 

 

$

280.9

 

$

284.2

 

$

116.9

 

$

85.6

 

 

 

 

 

 

 

 

 

 

 

Defense Systems Segment Operating Income

 

 

 

 

 

 

 

 

 

Training systems

 

$

32.1

 

$

31.4

 

$

18.9

 

$

7.2

 

Communications

 

0.8

 

3.9

 

(2.7

)

2.0

 

Other

 

(6.2

)

(12.6

)

(1.6

)

(5.2

)

 

 

$

26.7

 

$

22.7

 

$

14.6

 

$

4.0

 

 

Training Systems

 

Training systems sales increased 41% in the third quarter this year to $106.8 million compared to $75.8 million last year, and decreased 3% for the nine-month period to $241.8 million compared to $248.7 million last year. Operating income more than doubled for the quarter from $7.2 million last year to $18.9 million this year, and was up by 2% for the nine-month period from $31.4 million last year to $32.1 million this year. Sales were higher for the quarter from two ground combat training ranges we are building in Europe and from sales of small arms training systems. The increase in operating income resulted from a change in estimate during the quarter related to a ground combat training range contract in Europe. We had been working for more than a year under an arrangement without a firm contract price or scope of work and had been recognizing sales equal to costs. We have now reached agreement with the customer on a price and scope of work, resulting in higher operating income in the third quarter because of this favorable change in estimate. Sales were lower for the quarter and nine-month periods from air combat training systems. A delivery of air combat training systems to a U.S. government customer last year had resulted in significant sales and operating income for the nine-month period. Ground combat training sales and operating income in the U.S. and the Far East were also lower this year for the nine-month period, but increased in the third quarter.

 

20



 

Communications

 

Communications sales increased 25% in the third quarter of 2012 to $8.4 million compared to $6.7 million in 2011 and increased 10% for the nine-month period to $31.7 million from $28.7 million in the comparable period in 2011. Higher sales for both the quarter and nine-month period came from data links, while power amplifier sales were higher for the nine-month period but lower for the quarter. Personnel locater systems were lower for both the quarter and nine-month period. Cost growth of $3.1 million on two data links contracts resulted in an operating loss for the third quarter of $2.7 million compared to operating income of $2.0 million in 2011. Operating income was also lower for the quarter on lower sales of personnel locater systems and power amplifiers. Operating income for the first nine months of the fiscal year decreased 79% to $0.8 million this year from $3.9 million last year, primarily as a result of the cost growth in the third quarter mentioned above. Lower sales of personnel locator systems also contributed to lower operating income from communications for the nine-month period.

 

Other

 

The “Other” category of the defense systems segment includes businesses that are developing cross domain and global asset tracking products. In the first nine months of 2012 we continued to invest in the development and marketing of these products, resulting in an operating loss for the quarter and nine-month period. However, increased gross margins on sales of these products reduced the operating losses for the third quarter and nine-month period compared to 2011.

 

Mission Support Services Segment (MSS)

 

 

 

Nine Months Ended

 

Three Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(in millions)

 

 

 

 

 

(As Restated)

 

 

 

(As Restated)

 

Mission Support Services Segment Sales

 

$

356.8

 

$

357.8

 

$

122.4

 

$

125.9

 

 

 

 

 

 

 

 

 

 

 

Mission Support Services Segment Operating Income