News Column

CUBIC CORP /DE/ - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

August 4, 2014

CONDITION AND RESULTS OF OPERATIONS

June 30, 2014 We are a leading international provider of cost-effective systems and solutions that address the transportation and global defense markets' most pressing and demanding requirements. We are engaged in the design, development, manufacture, integration, and sustainment of advanced technology systems and products. We also provide a broad range of engineering, training, technical, logistic, and information technology services. We serve the needs of various federal and regional government agencies in the U.S. and other allied nations around the world with products and services that have both defense and civil applications. Our main areas of focus are in transportation payment and information systems, defense, intelligence, homeland security, and information technology, including cyber security. We operate in three reportable business segments: Cubic Transportation Systems (CTS), Mission Support Services (MSS) and Cubic Defense Systems (CDS). We organize our business segments based on the nature of the products and services offered. CTS is a systems integrator that develops and provides fare collection infrastructure, services and technology, traffic management and road enforcement systems and services, and real-time passenger information systems and services for transportation authorities and operators worldwide. We offer fare collection devices, software systems and multiagency, multimodal transportation integration technologies, as well as a full suite of operational services that help agencies efficiently collect fares, manage operations, reduce revenue leakage and make transportation more convenient. We provide a wide range of services for transportation authorities in major markets worldwide, including computer hosting services, call center and web services, payment media issuance and distribution services, retail point of sale network management, payment processing and enforcement, financial clearing and settlement, software application support and outsourced asset operations and maintenance. MSS is a leading provider of highly specialized support services to the U.S. government and allied nations. Services provided include live, virtual and constructive training, real-world mission rehearsal exercises, professional military education, intelligence support, information technology, information assurance and related cyber support, development of military doctrine, consequence management, infrastructure protection and force protection, as well as support to field operations, and logistics. CDS is focused on two primary lines of business: Training Systems and Secure Communications. CDS is a diversified supplier of live and virtual military training systems, and secure communication systems and products to the U.S. Department of Defense, other U.S. government agencies and allied nations. We design and manufacture instrumented range systems for fighter aircraft, armored vehicles and infantry force-on-force live training weapons effects simulations, laser-based tactical and communication systems, and precision gunnery solutions. Our secure communications products are aimed at intelligence, surveillance, asset tracking and search and rescue markets. Consolidated Overview Sales for the quarter ended June 30, 2014 increased 1% to $340.4 million from $337.2 million last year. Sales from CTS and CDS increased 14% and 22%, respectively, while MSS sales decreased 26% compared to the third quarter of last year. For the first nine months of the fiscal year, sales decreased to $1.002 billion compared to $1.021 billion last year, a decrease of 2%. MSS sales decreased 19% compared to the first nine months of last year, while CTS and CDS sales increased 8% and 7%, respectively. The sales generated by businesses we acquired during 2014 and 2013 totaled $36.0 million and $82.7 million for the three- and nine-month periods ended June 30, 2014 compared to $14.6 million and $25.7 million for the three- and nine-month periods ended June 30, 2013, respectively. See the segment discussions following for further analysis of segment sales. Operating income was $19.2 million in the third quarter compared to $26.9 million in the third quarter of last year, a decrease of 29%. CTS, MSS and CDS operating income decreased 19%, 50% and 46%, respectively. Businesses we acquired during 2014 and 2013 contributed operating losses of $3.0 million for the three months ended June 30, 2014 compared to operating losses of $0.9 million for the three months ended June 30, 2013. Unallocated corporate and other costs for the third quarter of 2014 were $1.2 million compared to $1.8 million in 2013. 30

--------------------------------------------------------------------------------



Table of Contents

Operating income for the nine-month period decreased 37% to $53.2 million from $84.8 million last year. CTS and MSS operating income decreased 49% and 47%, respectively, compared to the first nine months of last year, while CDS operating income increased 112%. CDS operating results for the nine-month period ended June 30, 2013 included restructuring costs of $6.2 million. Businesses we acquired in 2014 and 2013 generated operating losses of $8.9 million for the nine months ended June 30, 2014 and $1.7 million for the nine months ended June 30, 2013. Unallocated corporate and other expenses for the first nine months of the fiscal year were $4.1 million for 2014 and $3.7 million for 2013. Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (Adjusted EBITDA) decreased to $26.7 million in the quarter from $33.3 million in the third quarter of last year. For the first nine months of the fiscal year, Adjusted EBITDA decreased to $76.0 million compared to $102.8 million last year. The changes in Adjusted EBITDA for the quarter and nine-month period ended June 30, 2014 are primarily related to the changes in operating income for the corresponding periods. See below for a reconciliation of this non-GAAP metric to net income and an explanation of why we believe it to be an important measure of performance. Net income attributable to Cubic for the third quarter of fiscal 2014 decreased to $12.2 million, or 45 cents per share, compared to $18.4 million, or 69 cents per share last year. Net income decreased for the quarter primarily due to the decrease in operating income described above partially offset by a decrease in income tax expense. In addition, interest expense increased due to the higher average outstanding debt balance over the quarter ended June 30, 2014 compared to the corresponding quarter of 2013. We recorded a loss of $0.7 million during the quarter ended June 30, 2014 related to changes in the fair value of our forward starting swap. No gains or losses related to our forward starting swap were recognized in fiscal year 2013. For the first nine months of the year, net income attributable to Cubic decreased to $36.7 million, or $1.36 per share, from $62.3 million, or $2.33 per share last year. The decrease in net income for the nine-month period was primarily due to a decrease in operating income, partially offset by a decrease in income tax expense. In the first quarter of fiscal 2013, we recorded $0.6 million of interest expense related to a judgment against us, which required us to pay such amount of interest to the court on behalf of a party that had filed claims against us. Also, interest and dividend income decreased for the nine-month period based upon the decrease in our average cash balances over the periods. Included in other income was a net foreign currency exchange loss of $1.6 million in the first nine months this year compared to a loss of $1.2 million last year, before applicable income taxes. Net gains recognized in other income related to our forward starting swap totaled $0.2 million for the nine-month period ended June 30, 2014. Our gross margin percentage on product sales decreased to 21% in the third quarter of 2014 from 29% last year, and decreased to 25% for the nine months ended June 30, 2014 from 28% last year. The decrease in the gross margin percentages in the third quarter of 2014 and for the nine months ended June 30, 2014 are primarily due to increased cost estimates on a contract to design and build a fare collection system in Vancouver which is further described in the CTS segment discussion below. Our gross margin percentage on service sales decreased to 19% in the first nine months of 2014 from 22% last year. The decrease in the gross margin percentages on services sales for the nine-month period was primarily the result of increased costs of providing services on a transportation contract in Chicago. The provision of services under this contract began just prior to the end of fiscal 2013. Revenue recognized on this contract is limited to billable amounts, which were significantly less than costs incurred to provide these services until the billable amounts increased upon system acceptance, which occurred effective January 1, 2014. For the three-month period ended June 30, 2014, our gross margin percentage on service sales increased to 23% compared to 22% last year, primarily because of revenue recognized on this transportation contract in Chicago. For this contract, although the customer system acceptance occurred effective January 1, 2014, we did not receive notice of this acceptance until our third fiscal quarter of 2014. Therefore, service revenue recognized in the quarter ended June 30, 2014 includes $7.5 million related to amounts that were billable for the months ended January 2014 through March 2014. Selling, general and administrative (SG&A) expenses increased in the third quarter of 2014 to $46.5 million compared to $44.1 million in 2013. For the nine-month period, SG&A increased to $131.5 million compared to $126.4 million last year. As a percentage of sales, SG&A expenses were 14% for the third quarter and 13% for the nine-month period of fiscal 2014 compared to 13% and 12%, respectively, in 2013. The increase in SG&A expenses in the third quarter was primarily due to SG&A expenses associated with companies acquired in 2013 and 2014. In addition, share based compensation expense added $1.6 million and $4.0 million to SG&A expenses for the third quarter and first nine months of the year, respectively, compared to $1.5 million for each of the corresponding periods last year. Company funded research and development expenditures, which relate to new defense and transportation technologies under development, decreased to $3.9 million for the third quarter compared to $6.4 million last year, and decreased to $13.8 million for the nine-month period this year compared to $19.3 million last year. Amortization of purchased intangibles increased for the third quarter of 2014 to $5.7 million compared to $4.4 million last year due to the increase in intangible assets related to businesses acquired during 2013 and 2014. Amortization of purchased intangibles for the first nine months of 2014 increased to $17.1 million from $12.2 million in 2013. 31 --------------------------------------------------------------------------------



Table of Contents

We estimate our annual effective income tax rate for fiscal 2014 will be approximately 23%. The effective rate for fiscal 2014 could be affected by, among other factors, the mix of business between the U.S. and foreign jurisdictions, our ability to take advantage of available tax credits and audits of our records by taxing authorities.

Transportation Systems Segment (CTS)

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



153.0 $ 134.8

Transportation Systems Segment Operating Income $ 35.2 $ 69.5 $ 15.3 $ 19.0 CTS sales increased 14% in the third quarter to $153.0 million compared to $134.8 million last year, and increased 8% for the nine- month period to $429.1 million from $398.4 million last year. Businesses acquired by CTS in fiscal years 2013 and 2014 contributed sales of $14.9 million and $36.9 million during the quarter and nine months ended June 30, 2014, respectively, compared to $3.1 million and $4.6 million for the quarter and nine months ended June 30, 2013. During the quarter and nine months ended June 30, 2014 we increased cost estimates on a contract to design and build a system in Vancouver. Since we use the cost-to-cost percentage of completion method of accounting for the development and build of this system, increases in estimated total costs have an impact of reducing revenue and operating margin. Increases in cost estimates in the quarter ended June 30, 2014 reduced sales and operating income by $13.5 million for the quarter, and increases in cost estimates in the nine months ended June 30, 2014 reduced sales and operating income by $18.3 million for the nine-month period. During the quarter ended June 30, 2014 our customer for a system development and services contract in Chicago determined that we had met the final criteria for system delivery effective January 1, 2014. According to our contract with this customer, monthly payments for this contract increase at the time that delivery of the system is completed and accepted. As such, in the quarter ended June 30, 2014 we billed and collected these increased contractual amounts for the months of January 2014 through June 2014. Revenue is being recognized for this contract based upon when amounts are billable to the customer. Therefore, revenue recognized in the quarter ended June 30, 2014 includes $7.5 million related to amounts that were billable for the months ended January 2014 through March 2014. The average exchange rates between the prevailing currency in our foreign operations and the U.S. dollar resulted in an increase in sales of $5.3 million for the third quarter and an increase of $3.3 million for the nine-month period compared to the same periods last year. CTS operating income decreased 19% in the third quarter to $15.3 million compared to $19.0 million last year, and decreased 49% for the nine-month period to $35.2 million from $69.5 million last year. CTS operating income for the quarter and nine months ended June 30, 2014 decreased due to the changes in cost estimates on the Vancouver contract described above. The decrease in CTS operating income for the nine-month period was also impacted by the increased costs of providing services on our transportation contract in Chicago. The provision of services under this contract began just prior to the end of fiscal 2013. Revenue recognized on this contract is limited to billable amounts, which were significantly less than costs incurred to provide these services until the billable amounts increased upon system acceptance, which occurred effective January 1, 2014. For the nine-month period ended June 30, 2014, the operating loss for this contract was $24.2 million. However, as discussed above, for the quarter ended June 30, 2014, the operating margin on our contract in Chicago improved compared to the first half of the year due to the increase in the billable amounts effective January 1, 2014. The operating margin on this contract was $0.9 million for the quarter. The operating margin for the quarter includes $5.5 million of operating margin related to amounts that were billable for the months ended January 2014 through March 2014, net of the recognition in cost of sales of long-term capitalized costs incurred for those billable amounts. We are also in a phase of the Sydney contract where we are continuing to install the system while transitioning to full operations and the costs incurred to provide services are greater than the billable revenues for those services. Profit margins are expected to improve as the Sydney system moves into full operations in the first half of next year. An increase in estimated development costs of a supplier for new rail ticketing technology for a customer in the U.K. also impacted the nine months ended June 30, 2014 by $3.4 million and we have since diversified the supply of development work for this contract. The decrease in operating income for the nine-month period was partially offset by increased system usage bonuses on our contract in London. 32 --------------------------------------------------------------------------------



Table of Contents

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



Mission Support Services Segment (MSS)

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



91.8 $ 123.8

Mission Support Services Segment Operating Income $ 6.0 $ 11.4 $ 1.8 $ 3.6 MSS sales decreased 26% in the third quarter to $91.8 million compared to $123.8 million last year, and decreased 19% for the nine-month period to $291.7 million from $359.4 million last year. Sales for the first nine months of the fiscal year were lower due in part to the U.S. government's shut down in October 2013. Sales for the quarter and nine months ended June 30, 2014 also decreased due to reductions in spending by the U.S. government. The decrease in sales was also caused by the loss of a contract early in fiscal year 2014 due to a lower bid by a competitor. These reductions were partially offset by growth in the Simulator Training business area due to the win of a new contract in early fiscal 2014. NEK Special Programs Group LLC (NEK), a Special Operation Forces training business acquired in December 2012 had sales of $14.4 million and $34.0 million for the three- and nine-month periods ended June 30, 2014 compared to sales of $11.4 million and $21.1 million for the three- and nine-month periods ended June 30, 2013. MSS operating income decreased 50% in the third quarter to $1.8 million compared to $3.6 million last year, and decreased 47% for the nine-month period to $6.0 million from $11.4 million last year. The decreased operating income for the quarter and nine-month period resulted from the sales decreases described above and reduced profit margins on contracts due to competitive pressures driving down bid prices. Operating income also decreased as a result of a focused investment we are making to increase our footprint in the Special Operations Forces market, which totaled $0.6 million for the quarter and $1.3 million for the nine months. NEK had an operating loss of $0.2 million for the quarter and $0.8 million for the nine-month period ended June 30, 2014 compared to $0.7 million for the quarter and $1.2 million for the nine-month period ended June 30, 2013, which had included $0.6 million of acquisition-related costs. 33

--------------------------------------------------------------------------------

Table of Contents Defense Systems Segment (CDS) Nine Months Ended Three Months Ended June 30, June 30, 2014 2013 2014 2013 (in millions) (As Restated) (As Restated) Defense Systems Segment Sales Training systems $ 243.7 $ 217.4 $ 84.4 $ 65.2 Secure communications 37.5 45.1 11.2 13.4 $ 281.2 $ 262.5 $ 95.6 $ 78.6 Defense Systems Segment Operating Income Training systems $ 19.3 $ 16.8 $ 6.9 $ 7.9 Secure communications (2.8 ) (3.0 ) (3.5 ) (1.7 ) Restructuring costs (0.4 ) (6.2 ) (0.1 ) (0.1 ) $ 16.1 $ 7.6 $ 3.3 $ 6.1 Training Systems Training systems sales increased 29% in the third quarter to $84.4 million compared to $65.2 million last year, and increased 12% for the nine-month period to $243.7 million from $217.4 million last year. Businesses acquired by CDS in 2013 and 2014 contributed training system sales of $6.7 million and $11.8 million for the three- and nine-month periods ended June 30, 2014 and had no sales for the comparable periods ended June 30, 2013. Sales were higher for both the quarter and nine-month period from a new ground combat training system development contract in the Far East, from tactical engagement simulation system contracts and from simulator contracts, including a new contract to develop simulation trainers for the Littoral Combat Ships. These increases in sales were partially offset by lower sales of air combat training systems for the quarter and nine-month period. Operating income decreased 13% in the third quarter to $6.9 million compared to $7.9 million last year, and increased 15% for the nine-month period to $19.3 million from $16.8 million last year. For the nine-month period ended June 30, 2014 increases in operating income of organic Training Systems business were partially offset by operating losses from businesses purchased in 2013 and 2014. For the quarter ended June 30, 2014 the operating losses from businesses purchased in 2013 and 2014 more than offset the increases in operating income from organic business. For the quarter and for the nine month period ended June 30, 2014 Training Systems had higher operating income on increased sales from the ground combat training system, simulator and development contracts mentioned above. Profit margins on a number of Training Systems contracts improved in fiscal 2014 due to the restructuring activity in the third quarter of 2013, which reduced ongoing costs. The Training Systems business had decreased operating income on lower sales of air combat training systems during the three and nine-month periods ended June 30, 2014. Training system businesses acquired by CDS in 2013 and 2014 incurred operating losses of $1.8 million and $6.0 million for the three- and nine-month periods ended June 30, 2014, respectively, and had no operating losses in the comparable periods ended June 30, 2013. These operating losses for the nine-month period ended June 30, 2014 included $0.2 million of transaction costs and $3.7 million of compensation expense for amounts paid to Intific employees upon the close of the acquisition. Secure Communications Our secure communications products business supplies secure data links, search and rescue avionics, high power RF amplifiers, cyber security appliances, and asset tracking solutions for the U.S. military, government agencies, and allied nations. Secure communications sales decreased 16% in the third quarter to $11.2 million compared to $13.4 million last year, and decreased 17% for the nine-month period to $37.5 million from $45.1 million last year. Sales were lower from personnel locator system and asset tracking products. Data link sales were slightly lower for the quarter but were higher for the nine-month period ended June 30, 2014. 34

--------------------------------------------------------------------------------



Table of Contents

Secure communications operating loss was $3.5 million in the third quarter compared to an operating loss of $1.7 million last year. The operating loss decreased for the nine-month period to $2.8 million from an operating loss of $3.0 million last year. The primary contributors to our secure communications operating losses were losses incurred by our cyber security appliance and asset tracking product lines. Cyber security appliance operating losses were relatively consistent for the three- and nine-month periods in 2014 and the comparable periods in 2013, while operating losses on asset tracking products decreased for the three- and nine-month periods due to cost reduction efforts. In the quarter ended June 30, 2014 the secure communication operating loss was impacted by a research and development investment of $0.6 million that we made in wideband satellite communications technologies as well as $0.6 million of costs incurred related to a cyber behavior virtualization technology in development. For the quarter and nine-month period ended June 30, 2014, operating profits were lower on decreased sales of personnel locator systems, and for the quarter operating profits were lower on decreased data link sales. For the nine month period ended June 30, 2013 the operating loss was impacted by cost increases of $2.6 million we experienced in the first half of fiscal 2013 on a U.S. government contract for data link products. This cost increase had no impact on the operating profit for the quarter ended June 30, 2014. Backlog June 30, September 30, 2014 2013 (in millions) (As Restated) Total backlog Transportation Systems $ 1,323.9$ 1,526.4 Mission Support Services 505.5 626.7 Defense Systems: Training systems 553.5 457.8 Secure communications 45.3 35.7 Total Defense Systems 598.8 493.5 Total $ 2,428.2$ 2,646.6 Funded backlog Transportation Systems $ 1,323.9$ 1,526.4 Mission Support Services 147.9 221.0 Defense Systems: Training systems 553.5 457.8 Secure communications 45.3 35.7 Total Defense Systems 598.8 493.5 Total $ 2,070.6$ 2,240.9 Total backlog decreased $218.4 million from September 30, 2013 to June 30, 2014. Decreases in backlog for CTS and MSS were partially offset by an increase in backlog for CDS. The decrease at MSS primarily pertains to a decrease in unfunded backlog due to the Government recompeting the JRTC contract early. Changes in exchange rates between the prevailing currency in our foreign operations and the U.S. dollar as of the end of the quarter increased backlog by $27.4 million compared to September 30, 2013. The difference between total backlog and funded backlog represents options under multiyear MSS service contracts. Funding for these contracts comes from annual operating budgets of the U.S. government and the options are normally exercised annually. Funded backlog includes unfilled firm orders for our products and services for which funding has been both authorized and appropriated by the customer (Congress, in the case of U.S. government agencies). Options for the purchase of additional systems or equipment are not included in backlog until exercised. In addition to the amounts identified above, we have been selected as a participant in or, in some cases, the sole contractor for several substantial indefinite delivery/ indefinite quantity (ID/IQ) contracts. ID/IQ contracts are not included in backlog until an order is received. In the past, many of the contracts we were awarded in MSS were long-term in nature, spanning periods of five to ten years. The U.S. Department of Defense now awards shorter-term contracts for the services we provide and increasingly relies upon ID/IQ contracts which can result in a lower backlog and/or lower funded backlog due to the shorter-term nature of Task Orders issued under these ID/IQ awards. We also have several service contracts in our transportation business that include contingent revenue provisions tied to meeting certain performance criteria. These variable revenues are also not included in the amounts identified above. 35

--------------------------------------------------------------------------------

Table of Contents Adjusted EBITDA 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 U.S. generally accepted accounting principles (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. Some of these limitations are:



Adjusted EBITDA does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;

Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

Adjusted EBITDA does not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;

Adjusted EBITDA does not reflect our provision for income taxes, which may vary significantly from period to period; and

Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements. 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. 36 --------------------------------------------------------------------------------



Table of Contents

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, 2014 2013 2014 2013 (in thousands) (As Restated) (As Restated) Reconciliation: Net income attributable to Cubic $ 36,686$ 62,272$ 12,206$ 18,381 Add: Provision for income taxes 13,240 20,437 4,992 7,292 Interest expense, net 2,159 1,168 909 395 Other expense (income), net 1,058 764 1,098 813 Noncontrolling interest in income of VIE 79 149 10 24 Depreciation and amortization 22,740 18,014 7,511 6,417 ADJUSTED EBITDA $ 75,962$ 102,804$ 26,726$ 33,322



Liquidity and Capital Resources

Operating activities provided cash of $36.7 million for the nine-month period primarily due to the excess of cash received from customers over the cash paid to vendors and employees. The cash provided by operating activities was partially offset by an increase in long-term capitalized costs for the nine-month period and a decrease in accounts payable. Long-term capitalized contract costs consist of costs incurred on a contract to develop and manufacture a transportation fare system for a customer for which revenue recognition did not begin until the customer began operating the system in the fourth quarter of 2013. These capitalized costs are being recognized as cost of sales based upon the ratio of revenue recorded during the period compared to the revenue expected to be recognized over the term of the contract. Contract terms, including payment terms on our long-term development contracts, are customized for each contract based upon negotiations with the respective customer. For the nine month period ended June 30, 2014, MSS and CDS provided cash from operating activities, while the operating activities of CTS used cash. For the quarter, all three segments provided cash from operating activities. Investing activities for the nine-month period included $83.5 million of cash paid related to businesses acquired and capital expenditures of $13.5 million. Financing activities for the nine-month period consisted primarily of the net receipt of proceeds of $8.0 million from short-term borrowings, payment of dividends to shareholders of $3.2 million and a payment of $2.4 million related to the acquisition of NEK for contingent consideration. A change in exchange rates between foreign currencies, primarily between the Australian dollar and the U.S. dollar and between the British Pound and the U.S. dollar, resulted in an increase of $16.7 million to our cash balance as of June 30, 2014 compared to September 30, 2013, and an increase in Accumulated Other Comprehensive Income of $19.1 million during the nine-month period. We have a committed revolving credit agreement with a group of financial institutions in the amount of $200.0 million that expires in May 2017 (Revolving Credit Agreement). The available line of credit on the Revolving Credit Agreement is reduced by any letters of credit issued under the agreement. As of June 30, 2014, there were borrowings totaling $8.0 million under this agreement. Any borrowings under the Revolving Credit Agreement bear interest at a variable rate, which was 1.66% at June 30, 2014. At June 30, 2014 there were letters of credit outstanding under the Revolving Credit Agreement totaling $34.2 million, which reduce the available line of credit to $157.8 million. We have a secured letter of credit facility agreement with a bank (Secured Letter of Credit Facility) which is cancellable by us at any time upon the completion of certain conditions to the satisfaction of the bank. At June 30, 2014, there were letters of credit outstanding under this agreement of $62.2 million. In support of the Secured Letter of Credit Facility, we placed $69.0 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 $62.7 million, and any increase above this amount would require bank approval and additional restricted funds to be placed on deposit. 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. 37 --------------------------------------------------------------------------------



Table of Contents

In March 2013, we entered into a note purchase and private shelf agreement pursuant to which we issued $100.0 million of senior unsecured notes, bearing interest at a rate of 3.35% and maturing on March 12, 2025. Interest on these notes is due semi-annually and principal payments are due from 2021 through 2025. In addition, pursuant to the agreement, through March 2016 we may from time to time issue and sell, and the purchasers may in their sole discretion purchase additional senior notes in aggregate principal amount of up to $25.0 million that will have terms, including interest rate, as we and the purchasers may agree upon at the time of issuance. As of June 30, 2014, $144.2 million of the $166.8 million of our cash and cash equivalents was held by our foreign subsidiaries. We also had $69.0 million of restricted cash in the U.K. at September 30, 2013.If any of these funds held by our foreign subsidiaries are needed for our operations in the U.S., we would be required to accrue and pay U.S. taxes to repatriate these funds. However, our intent is to permanently reinvest these funds outside of the U.S. and our current plans do not demonstrate a need to repatriate them to fund our U.S. operations. Our financial condition remains strong with working capital of $472.1 million and a current ratio of 2.8 to 1 at June 30, 2014. We expect that cash on hand, cash flows from operations, and our unused lines of credit will be adequate to meet our liquidity requirements for the foreseeable future.



Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2014-09, "Revenue from Contracts with Customers." ASU 2014-09 outlines a comprehensive revenue recognition model and supersedes most current revenue recognition guidance. ASU 2014-09 will be effective for us starting in the first quarter of fiscal 2018. ASU 2014-09 allows for two methods of adoption: (a) "full retrospective" adoption, meaning the standard is applied to all periods presented, or (b) "modified retrospective" adoption, meaning the cumulative effect of applying ASU 2014-09 is recognized as an adjustment to the fiscal 2018 opening retained earnings balance. We are in the process of determining the adoption method as well as the effects the adoption of ASU 2014-09 will have on our consolidated financial statements.



Critical Accounting Policies, Estimates and Judgments

Our financial statements are prepared in accordance with accounting principles that are generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments 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. We continually evaluate our estimates and judgments, the most critical of which are those related to revenue recognition, income taxes, valuation of goodwill, purchased intangibles, accounting for business combinations, and pension costs. We base our estimates and judgments on historical experience and other factors that we believe to be reasonable under the circumstances. Materially different results can occur as circumstances change and additional information becomes known. Besides the estimates identified above that are considered critical, we make many other accounting estimates in preparing our financial statements and related disclosures. All estimates, whether or not deemed critical affect reported amounts of assets, liabilities, revenues and expenses, as well as disclosures of contingent assets and liabilities. These estimates and judgments are also based on historical experience and other factors that are believed to be reasonable under the circumstances. Materially different results can occur as circumstances change and additional information becomes known, even for estimates and judgments that are not deemed critical. For further information, refer to "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies, Estimates and Judgments" and the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K/A for the year ended September 30, 2013. CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING INFORMATION This report, including the documents incorporated by reference herein, 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. Any statements about our expectations, beliefs, plans, objectives, assumptions, future events or our future financial and/or operating performance are not historical and may be forward-looking. These statements are often, but not always, made through the use of words or phrases such as 38 --------------------------------------------------------------------------------



Table of Contents

"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 forward-looking statements involve risks, estimates, assumptions and uncertainties, including those discussed in "Part I - Item 1A. Risk Factors" in our Annual Report on Form 10-K/A for the year ended September 30, 2013, and throughout this report that could cause actual results to differ materially from those expressed in these statements. Such risks, estimates, assumptions and uncertainties include, among others: unanticipated issues related to the restatement of our financial statements;



our ability to develop and implement new processes and procedures to remediate the material weaknesses that exist in our internal control over financial reporting;

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;

negative audits by the U.S. government; 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;

changes in U.S. and foreign tax laws, exchange rates or our economic assumptions regarding our pension plans; and

other factors discussed elsewhere in this report. 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 made by us or on our behalf, you should not place undue reliance on any forward-looking statements. In addition, past financial and/or operating performance is not necessarily a reliable indicator of future performance and you should not use our historical performance to anticipate results or future period trends. Further, any forward-looking statement speaks only as of the date on which it is made, and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict which factors will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. 39

--------------------------------------------------------------------------------



Table of Contents


For more stories covering the world of technology, please see HispanicBusiness' Tech Channel



Source: Edgar Glimpses


Story Tools






HispanicBusiness.com Facebook Linkedin Twitter RSS Feed Email Alerts & Newsletters