CUBIC CORPORATION CONDITION AND RESULTS OF OPERATIONS
March 31, 2021 OverviewCubic Corporation ("we," "us," the "Company" and "Cubic") is a technology-driven, market-leading global provider of innovative, mission-critical solutions that reduce congestion and increase operational readiness and effectiveness through superior situational understanding. Cubic designs, integrates and operates systems, products and services focused in the transportation, command, control, communication, computers, intelligence, surveillance and reconnaissance ("C4ISR"), and training markets. We operate in two reportable business segments: Cubic Transportation Systems ("CTS") andCubic Mission and Performance Solutions ("CMPS"). CTS specializes in the design, development, production, installation, maintenance and operation of automated fare payment, traffic management and enforcement solutions, real-time information systems, and revenue management infrastructure and technologies for transportation agencies. As part of our turnkey solutions, CTS also provides these customers with a comprehensive suite of business process outsourcing services and expertise, such as card and payment media management, central systems and application support, retail network management, customer call centers and financial clearing and settlement support. As transportation authorities seek to optimize their operations by outsourcing bundled systems and services, CTS has transformed itself from a provider of automated fare collection systems into a systems integrator and services company focused on the intelligent transportation market. CMPS provides networked C4ISR capabilities for defense, intelligence, security and commercial missions and is a leading provider of live, virtual, constructive and game-based training solutions for theU.S. and allied forces. CMPS's core competencies include protected wide-band communications for space, aircraft, unmanned aerial vehicle, and terrestrial applications. It provides rugged internet of things cloud solutions, interoperability gateways, and artificial intelligence/machine learning based command and control, intelligence, surveillance and reconnaissance applications for video situational understanding and offers cloud-based platforms designed to manage and share large amounts of imagery data, wide-area motion imagery and geospatial data. It's LVC training solutions blend virtual and constructive elements into live training to provide the highest fidelity and most threat realistic secure training environments. Beginning onOctober 1, 2020 , we concluded that the combination of our legacy Cubic Mission Solutions ("CMS") and our legacyCubic Global Defense ("CGD") segments into our newCubic Mission and Performance Solutions ("CMPS") segment resulted in CMPS becoming a single operating segment. Applicable prior period amounts have been adjusted retrospectively to reflect the reportable segment change. The three months endedMarch 31, 2021 and 2020 represent the second quarters of our fiscal years endingSeptember 30, 2021 ("fiscal 2021") andSeptember 30, 2020 ("fiscal 2020"), respectively. OnMarch 30, 2021 , we executed Amendment No. 1 to that certain Agreement and Plan of Merger, dated as ofFebruary 7, 2021 , by and among the Company,Atlas CC Acquisition Corp. andAtlas Merger Sub Inc. (as amended and as may be further amended from time to time, the "Merger Agreement"). Pursuant to the Merger Agreement, the Company will be acquired byVeritas Capital andEvergreen Coast Capital Corporation at a price of$75.00 per outstanding share of common stock of the Company, without interest and subject to required tax withholding in accordance with the terms of the Merger Agreement, in an all-cash transaction. OnApril 27, 2021 , the Company's stockholders voted upon and approved a proposal to adopt the Merger Agreement. The transaction is expected to close during our third quarter of fiscal 2021, subject to customary closing conditions, including the receipt of shareholder and regulatory approvals. Our financial statements and associated disclosures for the three- and six- month periods endedMarch 31, 2021 andMarch 31, 2020 do not reflect any potential impacts or effects the Merger might have on our financial statements if the Merger is finalized.
There can be no assurance that the transaction will close in the timeframe contemplated or on the terms anticipated, if at all.
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COVID-19 Update
The COVID-19 pandemic has presented challenges and impacts on each of our
businesses, including delays of customer orders, slowdown of certain projects
and impacts due to travel restrictions and remote work. We have taken proactive
measures in order to reduce the potential impacts of the pandemic. To date we
have not experienced significant disruptions in our supply chain, nor have we
experienced any significant disruptions at our manufacturing facilities.
The vast majority of revenue from our CTS businesses is earned under fixed-price
contracts. However, approximately 2% of our annual revenue is directly tied to
the level of transit ridership. While transit ridership levels have improved
from the lows of the pandemic, they remain significantly below normal levels
impacting our transit agency customer's revenue, with uncertainty surrounding
the pace and timing of recovery. While we continue to believe that CTS's backlog
is largely insulated from the impacts of COVID-19 due to the critical service of
fare collection, there could be potential delays in the award of new business.
While the U.S. National Defense Strategy continues to drive demand, our CMPS
business has experienced some delays in timing of orders and shipments dueto the COVID-19 pandemic.
We believe that the fundamentals of our Company remain strong in the midst of the global pandemic. We expect to have sufficient liquidity on hand to continue business operations during this volatile period and we have taken a number of steps to strengthen liquidity and manage cash flow. The extent to which COVID-19 will adversely impact our business depends on future developments, which are highly uncertain and unpredictable, including the severity and duration of the outbreak and the effectiveness of actions to contain or mitigate its effects. While we expect the pandemic to continue to negatively impact our results, the current level of uncertainty over the economic and operational impacts of COVID-19 could lead to variability in results.
Consolidated Financial Results
Three Months Ended Six Months Ended
March 31, March 31,
2021 2020 % Change 2021 2020 % Change
(in millions, except per share and
percentage data)
Sales $ 343.4 $ 321.5 7 % $ 662.2 $ 650.3 2 %
Operating loss (25.6) (29.9) (14) % (24.3) (36.4) (33) %
Net loss from continuingoperations attributable to Cubic (36.0) (39.3) 8 % (49.0) (59.2) (17) % Diluted loss per share from continuing operations attributable to Cubic (1.14) (1.25) 9 % (1.55) (1.89) (18) % Adjusted EBITDA 22.7 4.5 409 % 52.3 15.9 229 % Adjusted net income (loss) 4.8 (3.9) Nm 16.5 (7.6) Nm % Adjusted EPS 0.15 (0.12) Nm 0.52 (0.24) Nm % Nm - Not meaningful Note on non-GAAP measures: Throughout the following results of operations discussion, we disclose certain non-U.S. generally accepted accounting principles ("GAAP") financial measures, including Adjusted EBITDA, Adjusted Net Income and Adjusted EPS. For an explanation and reconciliation of such measures, see the section titled 'Non-GAAP Financial Information' below. Sales: Second Quarter of 2021 vs. Second Quarter of 2020: Sales for the second quarter of fiscal 2021 increased 7% to$343.4 million from$321.5 million in the same period last year. Sales from CTS and CMPS increased by 10% and 2%, respectively. The average exchange rates between the prevailing currency in our foreign operations and theU.S. dollar had favorable impacts on sales of$10.1 million for the second quarter of fiscal 2021 compared to the same period last 35
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year. Sales generated by businesses we acquired during fiscal 2020 totaled$7.1 million for the second quarter of fiscal 2021, compared to$1.8 million in
the same period last year.
First Six Months of 2021 vs. First Six Months of 2020: Sales for the first six months of fiscal 2021 increased 2% to$662.2 million from$650.3 million in the same period last year. Sales from CTS increased by 7%, which was partially offset by a decrease in CMPS sales of 6%. The average exchange rates between the prevailing currencies in our foreign operations and theU.S. dollar had a favorable impact on sales of$14.0 million for the first six months of fiscal 2021 compared to the same period last year. Sales generated by businesses we acquired during fiscal 2020 totaled$9.7 million for the first six months of fiscal 2021, compared to$1.8 million in the same period last year.
See the segment discussions below for further analysis of segment sales.
Gross Margin: Our gross margin percentage on product sales increased to 25% in both the second quarter and first six months of fiscal 2021, as compared to 18% in the same periods last year. The increase was primarily due to improved performance in CTS. Our gross margin percentage on service sales decreased to 31% for the second quarter of fiscal 2021, compared to 34% in the second quarter of last year due to lower margins on international service contracts in our CMPS segment. For the first half of both fiscal 2021 and fiscal 2020, service margins were 35% in both periods.
Selling, General and Administrative ("SG&A"):
Second Quarter of 2021 vs. Second Quarter of 2020: SG&A expenses increased in the second quarter of fiscal 2021 to$83.1 million compared to$78.3 million in the same period last year. As a percentage of sales, SG&A expenses were 24% in both the second quarter of fiscal 2021 and fiscal 2020. The increase in SG&A expenses was driven by$16.7 million of costs incurred in connection with proposals to acquire Cubic, partially offset by company-wide cost reduction initiatives. First Six Months of 2021 vs. First Six Months of 2020: SG&A expenses increased in the first six months of fiscal 2021 to$146.8 million compared to$144.2 million in the same period last year. As a percentage of sales, SG&A expenses were 22% in both the first six months of fiscal 2021 and fiscal 2020. The increase in SG&A expenses was driven by$18.4 million of costs incurred in connection with proposals to acquire Cubic, partially offset by company-wide cost reduction initiatives. Restructuring: Restructuring expenses increased to$7.7 million in the second quarter of fiscal 2021 compared to$3.8 million in the same period last year, and for the first six months of fiscal 2021, restructuring expenses increased to$11.9 million compared to$5.4 million for the same period last year. The increase is due to headcount reductions, NextCubic consultant and advisory costs, and costs incurred by CMPS related to modifying its go-to market and legal structure
in theMiddle East . 36 Table of Contents Research and Development: Internally funded company-sponsored research and development ("R&D") expenses, as reflected in our Condensed Consolidated Statements of Operations (as included in Part I, Item 1 of this Quarterly Report on Form 10-Q) are as follows (in
thousands):
Three Months Ended Six Months Ended
March 31, March 31,
2021 2020 2021 2020
Company-Sponsored Research and
Development Expense:
Cubic Transportation Systems $ 1,368 $ 1,666 $ 4,032 $ 3,116
Cubic Mission and Performance Solutions 12,329 9,694 21,746 16,666
Unallocated corporate expenses 671 - 736 -
Total company-sponsored research and
development expense $ 14,368 $ 11,360 $ 26,514 $ 19,782 Company-sponsored R&D expense increased by$3.0 million and$6.7 million in the second quarter and first half of fiscal 2021, respectively, compared to the same periods last year. The increase was primarily due to the acceleration of work on CMPS secure communication initiatives. In addition to internally funded Company-sponsored R&D, a significant portion of our new product development occurs during the performance of contractual work for our customers. These costs are included in cost of sales in our Condensed Consolidated Statements of Operations (included in Part I, Item 1 of this Quarterly Report on Form 10-Q) as they are directly related to contract performance. The estimated cost of contract R&D activities included in our cost of sales is as follows (in thousands): Three Months Ended Six Months Ended March 31, March 31, 2021 2020 2021 2020 Cost ofContract Research and Development Activities: Cubic Transportation Systems$ 15,159 $ 15,509 $ 29,080 $ 30,299 Cubic Mission and Performance Solutions 21,076 20,672 40,549 35,858 Total cost of contract research and development activities$ 36,235 $ 36,181 $ 69,629 $ 66,157 Amortization of Purchased Intangibles: Amortization of purchased intangibles for the second quarter of fiscal 2021 decreased to$15.0 million from$16.5 million in the same period last year due to lower amortization of purchased intangible assets that are amortized on accelerated methods. For the first half of fiscal 2021, amortization of purchased intangibles increased to$31.1 million from$26.6 million in the same period last year. The increase in amortization expense was driven by the completion of our acquisitions ofDelerrok Inc. ("Delerrok") andPIXIA Corp. ("Pixia") inJanuary 2020 . Operating Income (Loss): Second Quarter of 2021 vs. Second Quarter of 2020: Our operating loss decreased to$25.6 million in the second quarter of fiscal 2021 compared to a loss of$29.9 million in the same period last year. CTS operating income increased to$33.0 million for the second quarter of fiscal 2021 compared to$12.6 million last year and CMPS operating loss decreased to$22.3 million in the second quarter compared to a loss of$25.7 million in the same period last year. Our operating results, and particularly the CMPS operating results, were impacted by accounting for businesses acquired in fiscal 2020. On a consolidated basis, the businesses that we acquired during fiscal 2020 had operating losses totaling$6.7 million in the second quarter of fiscal 2021, as compared to$11.0 million in the second quarter last year. The operating losses include total acquisition-related expenses, including amortization of intangible assets, of$7.4 million in the second quarter of fiscal 2021, as compared to$10.4 million in the same period last year. 37 Table of Contents
Unallocated corporate and other costs for the second quarter of fiscal 2021 were
The average exchange rates between the prevailing currencies in our foreign operations and theU.S. dollar had a net favorable impact on operating income in the second quarter of fiscal 2021 of$1.7 million as compared to the same period last year. First Six Months of 2021 vs. First Six Months of 2020: Our operating loss decreased to$24.3 million in the first six months of fiscal 2021 compared to an operating loss of$36.4 million in the same period last year. CTS operating income increased to$64.7 million for the first six months of fiscal 2021 compared to$26.9 million last year. This increase was partially offset by an increased operating loss from CMPS of$38.8 million in the first six months of fiscal 2021 compared to$34.3 million in the same period last year. Our operating results, and particularly the CMPS operating results, were significantly impacted by accounting for businesses acquired in fiscal 2020. On a consolidated basis, the businesses that we acquired during fiscal 2020 had operating losses totaling$15.8 million in the first six months of fiscal 2021, as compared to losses of$11.0 million in the same period last year. The operating losses include acquisition-related expenses, including amortization of intangible assets, of$15.1 million in the first six months of fiscal 2021, as compared to$10.4 million in the same period last year. Unallocated corporate and other costs for the first six months of fiscal 2021 were$50.1 million compared to$29.0 million in the same period last year. The increase was driven by$18.4 million of costs incurred in connection with proposals to acquire Cubic and higher restructuring costs.
The average exchange rates between the prevailing currencies in our foreign
operations and the
See the segment discussions below for further analysis of segment operating income and loss.
Interest and Dividend Income and Interest Expense:
Interest and dividend income was$1.9 million in the second quarter of fiscal 2021 compared to$1.7 million in the same period last year, and was$3.7 million in the first half of fiscal 2021 compared to$3.9 million in the same period last year. Interest expense was$6.7 million in the second quarter of fiscal 2021 compared to$8.2 million in the same period last year, and was$14.9 million for the first half of fiscal 2021 compared to$13.6 million for the same period last year. The decrease in interest expense during the second quarter of fiscal 2021 was due to lower average debt balances as compared to the same period last year. The increase in interest expense for the first half of Fiscal 2021 was due to a higher average debt balance in the first quarter of our Fiscal 2021 and an increase in the average outstanding non-recourse debt balance of our consolidated variable interest entity ("VIE"). The 90% noncontrolling interest in the net income (loss) of the consolidated VIE, which includes the interest income and expense of such VIE, is added back to our net income (loss) to arrive at net income (loss) attributable to Cubic. Other Income (Expense): Other income (expense) netted to income of$14.5 million in the second quarter of fiscal 2021 compared to expense of$19.7 million in the first quarter of fiscal 2020, and netted to income of$15.8 million in the first half of fiscal 2021 compared to expense of$19.8 million in the same period last year. Changes in our other income (expense) are primarily driven by changes in the fair value of an interest rate swap held by our consolidated VIE, which resulted in income of$15.1 million and$18.3 million for the second quarter and first six months of fiscal 2021, respectively. The 90% noncontrolling interest in the net income (loss) of the consolidated VIE, including the VIE's loss on its interest rate swap, is added back to our net income (loss) to arrive at net income (loss)
attributable to Cubic.
Income Tax Provision:
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The income tax expense recognized on pre-tax loss from continuing operations for
the three and six months ended March 31, 2021 resulted in an effective tax rates
of negative 22% and negative 35%, respectively, which differs from the effective
tax rates of 27% and 17% for the three and six months ended March 31, 2020 ,
respectively. The variability in effective tax rates primarily relates to the
difference in both the level and jurisdictional mix of earnings, discrete
impacts related to current year changes to the existing U.S. deferred tax
valuation allowance, and the impact of deferred tax liabilities acquired in
business combinations.
Our effective tax rate could be affected by, among other factors, the mix of
business between U.S. and foreign jurisdictions, the level of intercompany
transactions, applicability of changes in U.S. or foreign tax law, the impact of
acquisitions, fluctuations in the need for a valuation allowance against
deferred tax assets, and our ability to take advantage of available tax
attributes. After considering these impacts, we have determined that a reliable
estimate of the annual effective tax rate for fiscal 2021 cannot be made.
Net Loss from Continuing Operations attributable to Cubic:
Our net loss from continuing operations attributable to Cubic in the second quarter of fiscal 2021 was$36.0 million compared to$39.3 million in the same period last year. For the first half of fiscal 2021, our net loss from continuing operations attributable to Cubic was$49.0 million compared to$59.2 million last year. The decrease in net loss from continuing operations attributable to Cubic was primarily due to the increase in operating income and other income (expense) as described above. Adjusted EBITDA:
Adjusted EBITDA increased to$22.7 million in the second quarter of fiscal 2021 compared to$4.5 million in the same period last year. For the first half of fiscal 2021, Adjusted EBITDA increased to$52.3 million compared to$15.9 million last year. The increase in Adjusted EBITDA was due to the same factors described above in operating income (loss), but excludes amortization expense, restructuring costs and acquisition-related expenses. Adjusted Net Income (Loss):
Our Adjusted Net Income increased to$4.8 million in the second quarter of fiscal 2021 compared to Adjusted Net Loss of$3.9 million in the same period last year. For the first half of fiscal 2021, Adjusted Net Income was$16.5 million compared to Adjusted Net Loss of$7.6 million last year. The increase in Adjusted Net Income was primarily due to the same factors described above in net loss from continuing operations attributable to Cubic, but excludes amortization expense, restructuring costs, acquisition-related expenses and non-operating gains and losses. Adjusted EPS: Adjusted EPS increased to$0.15 in the second quarter of fiscal 2021 compared to negative$0.12 in the same period last year. For the first half of fiscal 2021, Adjusted EPS increased to$0.52 compared to negative$0.24 last year. The changes in Adjusted EPS was due to the same factors that impacted Adjusted Net Income (Loss) noted above. CTS Segment Three Months Ended Six Months Ended March 31, March 31, 2021 2020 % Change 2021 2020 % Change (in millions) Sales$ 217.4 $ 197.6 10 %$ 414.5 $ 386.2 7 %
Operating income 33.0 12.6 162 % 64.7 26.9 141 % Adjusted EBITDA 38.4 24.2
59 % 74.2 46.4 60 %
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Sales:
Second Quarter of 2021 vs. Second Quarter of 2020: CTS sales for the second quarter of fiscal 2021 increased 10% to$217.4 million from$197.6 million in the same period last year. Sales were higher in theU.S due to increased work on our system development contracts inBoston andNew York . Sales were higher in theU.K. andAustralia primarily due to the impact of foreign currency exchange rates as the average exchange rates between the prevailing currencies in our foreign operations and theU.S. dollar resulted in an increase in sales of$8.2 million for the second quarter of fiscal 2021, compared to the second quarter last year. First Six Months of 2021 vs. First Six Months of 2020: CTS sales for the first six months of fiscal 2021 increased 7% to$414.5 million from$386.2 million in the same period last year. Sales were higher in theU.S. andU.K. due to increased work on our system development contracts inBoston andChicago and the impact of foreign currency exchange rates. Sales were slightly lower inAustralia due to lower work on our system development contract inBrisbane . The average exchange rates between the prevailing currencies in our foreign operations and theU.S. dollar resulted in an increase in sales of$11.3 million for the first six months of fiscal 2021, compared to the same period last year. Operating Income:
Second Quarter of 2021 vs. Second Quarter of 2020: CTS operating income for the second quarter of fiscal 2021 increased 162% to$33.0 million compared to$12.6 million in the same period last year. Operating income was higher in theU.S. ,U.K. , andAustralia due to increased work and higher profitability on our system development contracts in theU.S and the impact of cost savings initiatives in all our regions. The average exchange rates between the prevailing currencies in our foreign operations and theU.S. dollar resulted in an increase in operating income of$1.4 million for the second quarter of fiscal 2021 compared to the same period last year. First Six Months of 2021 vs. First Six Months of 2020: CTS operating income for the first six months of fiscal 2021 increased 141% to$64.7 million compared to$26.9 million in the first six months last year. Operating income was higher in theU.S. ,U.K. , andAustralia due to increased work and higher profitability on our system development contracts in theU.S. and the impact of cost savings initiatives in all our regions. The average exchange rates between the prevailing currencies in our foreign operations and theU.S. dollar resulted in an increase in operating income of$2.1 million for the first six months of fiscal 2021 compared to the same period last year.
Amortization of Purchased Intangibles:
Amortization of purchased intangibles included in the CTS results amounted to$4.3 million in the second quarter of fiscal 2021 compared to$4.8 million in the second quarter of fiscal 2020, and$9.1 million in the first six months of fiscal 2021 compared to$9.3 million in the same period last year. Adjusted EBITDA:
CTS Adjusted EBITDA increased 59% to$38.4 million in the second quarter of fiscal 2021 compared to$24.2 million in the same period last year, and increased 60% to$74.2 million in the first six months of fiscal 2021 compared to$46.4 million in the same period last year. The increase in Adjusted EBITDA was primarily driven by the same factors that drove the increase in operating income described above, excluding amortization of purchased intangibles and acquisition-related expenses. 40 Table of Contents CMPS Segment Three Months Ended Six Months Ended March 31, March 31, 2021 2020 % Change 2021 2020 % Change (in millions) Sales$ 126.0 $ 123.9 2 %$ 247.7 $ 264.1 (6) %
Operating loss (22.3) (25.7) (13) % (38.8) (34.3)
13 %
Adjusted EBITDA (4.8) (8.7) (45) % (2.1) (10.5) (80) %
Sales: Second Quarter of 2021 vs. Second Quarter of 2020: CMPS sales for the second quarter of fiscal 2021 increased 2% to$126.0 million from$123.9 million in the same period last year. The increase was due to higher sales generated by our C2ISR business and expeditionary satellite communications, which were partially offset by lower sales from our LVC training systems business. Businesses acquired by CMPS in fiscal 2020 had sales of$6.2 million in the second quarter of fiscal 2021, compared to sales of$1.1 million in the same period last year. In addition, average exchange rates between the prevailing currencies in our foreign operations and theU.S. dollar resulted in an increase in sales of$1.9 million for the second quarter of fiscal 2021, compared to the same period
last year. First Six Months of 2021 vs. First Six Months of 2020: CMPS sales for the first six months of fiscal 2021 decreased 6% to$247.7 million from$264.1 million in the same period last year. The decrease in sales primarily resulted from reduced work on LVC training systems, which was partially offset by higher sales from our C2ISR business and sales generated by recently acquired businesses. Businesses acquired by CMPS in fiscal 2020 had sales of$8.5 million for the first six months of fiscal 2021, compared to$1.1 million of sales in the same period last year. In addition, average exchange rates between the prevailing currencies in our foreign operations and theU.S. dollar resulted in an increase in sales of$2.7 million for the first six months of fiscal 2021, compared
to the same period last year. Operating Loss:
Second Quarter of 2021 vs. Second Quarter of 2020: CMPS operating loss for the second quarter of fiscal 2021 decreased 13% to$22.3 million compared to a loss of$25.7 million in the second quarter last year. The decrease in operating loss was primarily driven by lower SG&A expenses as a result of cost saving initiatives and an increase in profits from higher sales from our C2ISR business. These items were partially offset by higher R&D expenses. The average exchange rates between the prevailing currencies in our foreign operations and theU.S. dollar resulted in an increase in operating income of$0.3 million for the second quarter of fiscal 2021 compared to the same period last year. First Six Months of 2021 vs. First Six Months of 2020: The CMPS operating loss for the first six months of fiscal 2021 increased to$38.8 million compared to an operating loss of$34.3 million in the same period last year. The increase in operating loss was driven by a$3.3 million increase in restructuring expense, a$5.0 million increase in R&D expense, and a$4.7 million increase in the amortization of purchased intangibles. Partially offsetting these increased expenses were cost saving initiatives that resulted in a reduction in SG&A expenses as well as an increase in profits on higher sales from our C2ISR business.
Amortization of Purchased Intangibles:
Amortization of purchased intangibles included in the CMPS results amounted to$10.7 million in the second quarter of fiscal 2021 compared to$11.7 million in same period last year, and$22.0 million in the first six months of fiscal 2021 compared to$17.3 million in the first six months of last year. The increase in amortization for the first half of fiscal 2021 was due to the amortization of purchased intangibles related to our acquisition of Pixia inJanuary 2020 .
Adjusted EBITDA:
CMPS Adjusted EBITDA loss was$4.8 million in the second quarter of fiscal 2021 compared to a loss of$8.7 million in the same period last year, and a loss of$2.1 million in the first six months of fiscal 2021 compared to a loss of$10.5 million in the same period last year. The change in Adjusted EBITDA was primarily driven by the same factors that 41
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drove the change in operating loss described above, excluding amortization of
purchased intangibles, acquisition-related expenses, and restructuring expenses.
Backlog
March 31, September 30,
2021 2020
(in millions)
Total backlog
Cubic Transportation Systems $ 3,072.1 $ 3,139.9
Cubic Mission and Performance Solutions 554.3 527.1
Total $ 3,626.4 $ 3,667.0
Total backlog decreased by $40.6 million from September 30, 2020 to March 31,
2021 including the impact of foreign currency exchange rates. Changes in
exchange rates between the prevailing currencies in our foreign operations and
the U.S. dollar as of March 31, 2021 increased backlog by a net $71.8 million as
compared to September 30, 2020 .
Reconciliation of Non-GAAP Financial Information
In addition to results reported underU.S. generally accepted accounting principles ("GAAP"), this Quarterly Report on Form 10-Q also contains non-GAAP measures as defined under Regulation G. These non-GAAP measures consist of Adjusted EBITDA, Adjusted Net Income and Adjusted EPS. We believe that these non-GAAP measures provide additional insight into our ongoing operations and underlying business trends, facilitate a comparison of our results between current and prior periods, and facilitate the comparison of our operating results with the results of other public companies that provide non-GAAP measures. We use Adjusted EBITDA internally to evaluate the operating performance of our business, for strategic planning purposes and as a factor in determining incentive compensation for certain employees. These non-GAAP measures facilitate company-to-company operating comparisons by excluding items that we believe are not part of our core operating performance. Adjusted Net Income is defined as GAAP net income (loss) from continuing operations attributable to Cubic excluding amortization of purchased intangibles, restructuring costs, loss on extinguishment of debt, acquisition-related expenses, strategic and IT system resource planning expenses, gains or losses on the disposal of fixed assets, other non-operating expense (income), tax impacts related to acquisitions, and the impact of the Tax Cuts and Jobs Act ("U.S. Tax Reform"). Adjusted EPS is defined as Adjusted Net Income on a per share basis using the weighted average diluted shares outstanding. Adjusted EBITDA is defined as GAAP net income (loss) from continuing operations attributable to Cubic before interest expense (income), loss on extinguishment of debt, income taxes, depreciation and amortization, other non-operating expense (income), acquisition-related expenses, strategic and IT system resource planning expenses, restructuring costs, and gains or losses on the disposal of fixed assets. Strategic and IT system resource planning expenses consists of expenses incurred in the development of our enterprise resource planning system and the redesign of our supply chain which include internal labor costs and external costs of materials and services that do not qualify for capitalization. Acquisition-related expenses include business acquisition expenses including retention bonus expenses, due diligence and consulting costs incurred in connection with the acquisitions, expenses recognized related to the change in the fair value of contingent consideration for acquisitions, and costs incurred in connection with proposals to acquire Cubic. These non-GAAP measures are not measurements of financial performance under GAAP and should not be considered as measures of discretionary cash available to the Company or as alternatives to net income as a measure of performance. In addition, other companies may define these non-GAAP measures differently and, as a result, our non-GAAP measures may not be directly comparable to the non-GAAP measures of other companies. Furthermore, non-GAAP financial measures have limitations as an analytical tool and you should not consider these measures in isolation, or as a substitute for analysis of our results as reported under GAAP. A reconciliation of these non-GAAP measures to the most directly comparable GAAP measures is included below. We reconcile Adjusted EBITDA and Adjusted Net Income to GAAP net income, which we consider to be the most directly comparable GAAP financial measure. We reconcile Adjusted EPS to GAAP EPS, which we consider to be the most directly comparable GAAP financial measure. The following tables reconcile these non-GAAP measures to their most directly comparable GAAP financial measure: 42 Table of Contents
Adjusted Net Income and Adjusted EPS Reconciliation
Three Months Ended Six Months Ended
March 31, March 31,
2021 2020 2021 2020
(in millions, except per share data)
GAAP EPS $ (1.14) $ (1.25) $ (1.55) $ (1.89)
GAAP Net loss from continuing operations attributable to Cubic $ (36.0) $ (39.3) $ (49.0) $ (59.2)
Noncontrolling interest in net income (loss) of VIE 16.8 (13.2) 22.5 (9.2)
Amortization of purchased intangibles 15.0 16.5 31.1 26.6
(Gain) loss on sale of fixed assets 0.1 0.1 0.1 (0.1)
Restructuring costs 7.8 3.8 11.9 5.4
Loss on extinguishment of debt - 16.1 - 16.1
Acquisition-related expenses, excluding amortization 18.5 6.6 20.8 5.9
Strategic and IT system resource planning expenses 0.7 1.8 1.3 2.9
Other non-operating expense (income), net (14.5) 19.6 (15.8) 19.8
Noncontrolling interest in Adjusted Net Income of VIE (3.2) (1.3) (6.0) (2.2)
Tax impact related to acquisitions1 - (13.5) 0.2 (13.5)
Impact of U.S. Tax Reform - 0.5 - 0.5
Tax impact related to non-GAAP adjustments2 (0.4) (1.6) (0.6) (0.6)
Adjusted Net Income (Loss) $ 4.8 $ (3.9) $ 16.5 $ (7.6)
Adjusted EPS $
0.15
Weighted Average Diluted Shares Outstanding (in thousands) 31,633 31,296 31,598 31,284
1 Represents the tax accounting impact of significant discrete items recorded at the time of acquisition.
2 The tax effect of the non-GAAP adjustments is generally based on the statutory tax rate of the jurisdiction of the event.
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Adjusted EBITDA Reconciliation
Three Months Ended Six Months Ended(in millions, except margin data) March 31, March 31, Cubic Transportation Systems 2021 2020 2021 2020 Sales$ 217.4 $ 197.6 $ 414.5 $ 386.2 Operating income$ 33.0 $ 12.6 $ 64.7 $ 26.9
Depreciation and amortization 7.5 7.4 15.0 14.5 Noncontrolling interest in EBITDA of VIE (3.8) (1.3) (7.2) (2.2) Acquisition-related expenses (gains), excluding amortization
0.1 5.4 (0.1) 6.7 Restructuring costs 1.6 0.1 1.8 0.5 Adjusted EBITDA$ 38.4 $ 24.2 $ 74.2 $ 46.4 Adjusted EBITDA margin 17.7% 12.2% 17.9% 12.0% Three Months Ended Six Months Ended
(in millions, except margin data) March 31, March 31, Cubic Mission and Performance Solutions 2021 2020 2021 2020 Sales$ 126.0 $ 123.9 $ 247.7 $ 264.1 Operating loss$ (22.3) $ (25.7) $ (38.8) $ (34.3)
Depreciation and amortization 15.2 15.1 30.3 24.3 Acquisition-related expenses (gains), excluding amortization 1.5 1.2 2.5 (1.0) (Gain) loss on sale of fixed assets
- 0.1 - (0.1) Restructuring costs 0.8 0.6 3.9 0.6 Adjusted EBITDA$ (4.8) $ (8.7) $ (2.1) $ (10.5) Adjusted EBITDA margin (3.8)% (7.0)% (0.8)% (4.0)% Three Months Ended Six Months Ended
(in millions, except margin data)
March 31, March 31, Cubic Consolidated 2021 2020 2021 2020 Sales$ 343.4 $ 321.5 $ 662.2 $ 650.3 Net income (loss) from continuing operations attributable to Cubic$ (36.0) $ (39.3) $ (49.0) $ (59.2) Noncontrolling interest in net income (loss) of VIE 16.8 (13.2) 22.5 (9.2) Income tax provision (benefit) 3.4 (19.7) 6.9 (13.5) Interest expense, net 4.8 6.6 11.2 9.7 Loss on extinguishment of debt - 16.1 - 16.1 Other non-operating expense (income), net (14.5) 19.6 (15.8) 19.8 Operating loss$ (25.6) $ (29.9) $ (24.3) $ (36.4) Depreciation and amortization 25.0 23.4 49.7 40.4 Noncontrolling interest in EBITDA of VIE (3.8) (1.3) (7.2) (2.2) Acquisition-related expenses, excluding amortization 18.5 6.6 20.8 5.9 Strategic and IT system resource planning expenses 0.7 1.8 1.3 2.9 (Gain) loss on sale of fixed assets
0.1 0.1 0.1 (0.1) Restructuring costs 7.8 3.8 11.9 5.4 Adjusted EBITDA$ 22.7 $ 4.5 $ 52.3 $ 15.9 Adjusted EBITDA margin 6.6% 1.4% 7.9% 2.4%
Note: Amounts may not sum due to rounding
Liquidity and Capital Resources
Operating activities used cash of$58.6 million for the first half of fiscal 2021 primarily due to higher balances in our contract assets and long term financing receivables due to timing differences between revenue recognition and when we are able to bill for milestone payments under our customer contracts. Our use of cash from operating activities includes cash outflows of$35.5 million from our consolidated VIE. As further described below, our consolidated operating cash flows exclude$34.4 million of cash received by Cubic from our consolidated VIE during the first half of fiscal 2021. 44 Table of Contents Investing activities used cash of$19.0 million for the first half of fiscal 2021, including capital expenditures of$20.1 million and purchases of non-marketable equity securities of$1.4 million , partially offset by$2.5 million of proceeds received related to the sale of trade receivables to banks which are required to be classified as investing activities under GAAP, as further described below. Financing activities provided cash of$85.8 million for the first half of fiscal 2021 and included net proceeds from short-term borrowings of$63.0 million and payments of$4.6 million on and long-term borrowings. Net long-term borrowings undertaken by our consolidated VIE were$41.5 million for the first half of fiscal 2021. See discussion of our consolidated VIE in the section below.
Consolidated Variable Interest Entity
InMarch 2018 , Cubic andJohn Laing , an unrelated company that specializes in contracting under public-private partnerships, jointly formed Boston AFC 2.0HoldCo. LLC ("Boston HoldCo"). Also inMarch 2018 , Boston HoldCo created a wholly owned entity, Boston AFC 2.0 OpCo. LLC ("Boston OpCo"), which entered into a contract with theMassachusetts Bay Transit Authority ("MBTA") for the financing, development and operation of a next-generation fare payment system inBoston (the "Original MBTA Contract"). InJune 2020 , MBTA and Boston OpCo executed an amended agreement (the "Amended MBTA Contract") to reset the project and modify certain aspects of the Original MBTA Contract. Collectively,Boston HoldCo and Boston OpCo are referred to as the "P3 Venture".
We have consolidated Boston OpCo into our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Because we consolidate Boston OpCo, any payments from Boston OpCo to Cubic are excluded from our cash flows provided by operating activities, and the cash received by Boston OpCo in connection with its draws on its non-recourse debt are reflected as cash provided by financing activities. Boston OpCo's draws on its non-recourse debt amounted to$41.5 million in the first half of fiscal 2021. Payments we received from Boston OpCo that were not included in our cash provided by operating activities totaled$34.4 million in the first half of fiscal 2021 and have totaled a cumulative$171.7 million since the inception of our contract with Boston OpCo inMarch 2018 . In connection with the execution of the Amended MBTA Contract, Boston OpCo entered into an amended credit agreement with a group of financial institutions (the "Boston OpCo Amended Credit Agreement"), which includes two long-term debt facilities and a revolving credit facility. The long-term debt facilities allow for draws up to an aggregate of$421.6 million during the design and build phase. The long-term debt facilities, including all interest and fees incurred, are required to be repaid on a fixed monthly schedule commencing once the design and build phase is completed in 2024. The long-term debt facilities bear interest at variable rates of LIBOR plus a margin of 1.75% to 2.0%. AtMarch 31, 2021 , the outstanding balance on the long-term debt facilities was$225.3 million , which is presented net of unamortized deferred financing costs of$16.7 million . The revolving credit facility allows for draws up to a maximum aggregate amount of$15.8 million during the operate and maintain phase.Boston OpCo's debt is nonrecourse with respect to Cubic and our subsidiaries. The Boston OpCo Amended Credit Agreement contains covenants that requireBoston OpCo and Cubic to maintain progress on the delivery within a specified timeline and budget and provide regular reporting on such progress. It also contains events of default, including the delivery of a customized fare collection system to the MBTA by a pre-determined date as well as other customary events of default. Failure to meet such delivery date will result in incurring penalties due to the lenders thereunder. Upon execution of the Boston OpCo Amended Credit Agreement, Boston OpCo entered into new pay-fixed/receive-variable interest rate swaps to mitigate variable interest rate associated with its long-term debt. AtMarch 31, 2021 , the outstanding notional principal amounts on open interest rate swaps were$233.5 million . Financing Arrangements OnMarch 27, 2020 , we also executed a Fifth Amended and Restated Credit Agreement (the "Credit Facility") with a group of financial institutions. The Credit Facility provided for a new term loan in the aggregate amount of$450.0 million (the "Term Loan") and increased our existing revolving line of credit limit (the "Revolving Line of Credit") from 45
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$800.0 million to$850.0 million . The commitments under the Credit Facility will mature onMarch 27, 2025 and bear interest generally at the LIBOR rate plus a margin that ranges between 1.00% and 2.00%. AtMarch 31, 2021 , the weighted average interest rate on outstanding borrowings under the Credit Facility was 1.92%. The Credit Facility is unsecured, but it is guaranteed by certain significant domestic subsidiaries of Cubic. OnApril 1, 2020 , we entered into interest rate swaps with a group of financial institutions to mitigate the variable interest rate risk associated with the Credit Facility. The interest rate swaps contain forward starting notional principal amounts which align with our fixed repayment schedules under the Credit Facility and as ofMarch 31, 2021 have an interest rate of approximately 2.49% and outstanding notional principal amounts of$500.0 million . The available credit under our Revolving Line of Credit is reduced by any letters of credit issued under the Credit Facility. As ofMarch 31, 2021 , there were$438.8 million of borrowings under the Term Loan and$279.0 million of borrowings under the Revolving Line of Credit. Letters of credit outstanding under the Credit Facility totaled$94.5 million atMarch 31, 2021 , which reduced our available line of credit to$476.5 million . The$94.5 million of letters of credit includes both financial letters of credit and performance guarantees. As ofMarch 31, 2021 , we had letters of credit and bank guarantees outstanding totaling$101.1 million , which includes the$94.5 million of letters of credit issued under the Revolving Line of Credit and$6.6 million of letters of credit issued under other facilities. The$101.1 million of letters of credit and bank guarantees includes$97.4 million that guarantees either our performance or customer advances under certain contracts and$3.7 million of financial letters of credit that primarily guarantees our payment of certain self-insured liabilities. We have never had a drawing on a letter of credit instrument, nor are any anticipated; therefore, we estimate the fair value of these instruments to be zero. We also use surety bonds as an alternative to letters of credit. We have entered into a short-term borrowing arrangement in theUnited Kingdom for up to £15.0 million British Pounds (equivalent to approximately$20.7 million atMarch 31, 2021 ) to help meet the short-term working capital requirements of our subsidiary located in theUnited Kingdom . AtMarch 31, 2021 , no amounts were outstanding under this arrangement. We maintain a cash account with a bank in theU.K. for which the funds are restricted as to use. The account is required to secure the customer's interest in cash deposited in the account to fund our activities related to our performance under a fare collection services contract in theUnited Kingdom . The balance in the account as ofMarch 31, 2021 was$28.6 million and is classified as restricted cash in our Condensed Consolidated Balance Sheets. The terms of the Credit Facility contain financial covenants setting a maximum total ratio of debt to adjusted earnings before interest, taxes, depreciation and amortization and a minimum interest coverage ratio. In addition, the terms contain covenants that restrict, among other things, our ability to sell assets, incur indebtedness, make investments, grant liens, pay dividends and make other restricted payments. As ofMarch 31, 2021 , we were in compliance with all covenants under the Credit Facility. In the normal course of our business, we may sell trade receivables to financial institutions as a cash management technique. We do not retain financial or legal obligations for these receivables that would result in material losses. Our ongoing involvement is limited to the remittance of customer payments to the financial institutions with respect to the sold trade receivables; therefore, our sold trade receivables are not included in our Condensed Consolidated Balance Sheet in any period presented. As ofMarch 31, 2021 , we did not have any outstanding trade receivables sold to financial institutions. Our financial condition remains strong with net working capital of$151.6 million and a current ratio of 1.2 to 1 atMarch 31, 2021 . We expect that cash on hand and our Revolving Credit Agreement will be adequate to meet our working capital requirements for the foreseeable future. Our total debt to capital
ratio atMarch 31, 2021 was 73%.
As of
Future repatriations of foreign earnings will generally be exempt fromU.S. tax. We will continue to provide applicable deferred taxes based on the tax liability or withholding taxes that would be due upon repatriation of the undistributed foreign earnings. 46 Table of Contents
Recent Accounting Pronouncements
See "Recent Accounting Pronouncements" in Note 1 of the Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.
Critical Accounting Policies, Estimates and Judgments
Our financial statements are prepared in accordance with GAAP. 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. There have been no significant changes to the critical accounting policies disclosed in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K
for
fiscal 2020.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Statements contained in this Quarterly Report on Form 10-Q that are not
statements of historical fact should be considered forward-looking statements
within the meaning of the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Any statements about our expectations, beliefs,
plans, objectives, assumptions, future events or our future financial or
operating performance, including those concerning new programs and growth in the
markets in which we do business, increases in demand for our products and for
fully integrated systems, retention of existing contracts and receipt of new
contracts, the development of new products, systems and services, expansion of
our automated payment and fare collection systems and services, maintenance of
long-term relationships with our existing customers, expansion of our service
offerings and customer base for services, maintenance of a diversified business
mix, expansion of our international footprint, strategic acquisitions, the
uncertainty regarding the scope, duration and impact of COVID-19, U.S. and
foreign government funding, supplies of raw materials and purchased parts, cash
needs, financial condition, liquidity, prospects, and the trends that may affect
us or the industries in which we operate, 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 "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 under "Risk Factors" in Part I,
Item 1A of our Annual Report on Form 10-K for fiscal 2020 and in Part II, Item
1A of this Quarterly Report on Form 10-Q, that could cause actual results to
differ materially from those expressed in these statements.
Such risks, estimates, assumptions and uncertainties include, among others:
the impact of the pending acquisition of Cubic by
?
acquisition will be satisfied and the timing thereof;
the impact of the COVID-19 outbreak or future epidemics on our business,
? including the potential for facility closures or work stoppages; supply chain
disruptions; program delays; our ability to recover our costs under
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contracts; changing government funding and acquisition priorities and payment
policies and regulations; and potential impacts to the fair value of our assets;
? our dependence on
? delays in approving
foreign government defense expenditures;
? the ability of certain government agencies to unilaterally terminate or modify
our contracts with them;
? the effects of potential sequestration on our contracts;
? our assumptions covering behavior by public transit authorities;
? our ability to successfully integrate new companies into our business and to
properly assess the effects of such integration on our financial condition;
the
? businesses, and our ability to retain existing contracts or win new contracts
under competitive bidding processes;
? negative audits by the
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;
? changes in the way transit agencies pay for transit systems;
? 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;
? our failure to properly implement our enterprise resource planning system;
? unforeseen problems with the implementation and maintenance of our information
systems;
? 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
assumptions regarding our pension plans; and
? other factors discussed elsewhere in this Quarterly Report on Form 10-Q.
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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 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.
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