Cubic Corp. Q2'16 Earnings Conference Call: Full Transcript

Operator:

Welcome to Cubic Corporation’s Second Quarter 2016 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference please press star zero on your telephone keypad. As a reminder this conference is being recorded. It now my pleasure to introduce your host, Diane Dyer Director Investor Relations and Treasury Services. Please go ahead Miss Dyer.

 

Diane Dyer:Director Investor Relations:

Thank you, operator. Hello everyone and thank you for joining Cubic’s webcast. Today during market hours, we reported our Second Quarter Fiscal Year 2016 Results. We encourage you to refer to the Company’s press release and most recent reports filed with the SEC as well as today’s presentation slides. You can access these documents on the Investor Relations tab of Cubic’s website at www.cubic.com or on the SEC’s website.

On today’s call, Brad Feldmann, Cubic’s President and CEO; and Jay Thomas, Executive Vice President and CFO will comment on Cubic’s second quarter 2016 results. Mark Harrison, Cubic’s Senior Vice President and Corporate Controller will join us for the Q&A session.

Please note that certain information discussed on the call today is covered under the Safe Harbor provisions of the Private Securities Litigation Reform Act. I caution listeners that during this call Cubic management will be making forward-looking statements about future events or Cubic’s future financial and operating performance. Actual results could differ materially from those stated or implied by these forward-looking statements due to risks and uncertainties associated with the Company’s business. These forward-looking statements should be considered in conjunction with and are qualified by the cautionary statements contained in Cubic’s earnings press release and SEC filings including its annual report on Form 10-K and quarterly reports on Form 10-Q.

This conference call contains time-sensitive information that is accurate only as of the date of this broadcast, May 2nd, 2016. Cubic undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this conference call. This conference call will also include a discussion of non-GAAP financial measures as that term is defined in Regulation G. Cubic believes this information is useful to investors because it provides a basis for measuring the Company’s available capital resources, the actual and forecasted operating performance of the Company’s business, and the Company’s cash flows.

Any discussion of non-GAAP measures is not intended to detract from the importance of comparable GAAP measures.

With that said, I’ll turn the call over to Brad Feldmann, our President and CEO.

 

Brad Feldmann:President and CEO:

Thank you, Diane. Thanks for joining us on the call today. Today, I’ll review our first half fiscal year 2016 operating results as well as provide a segment and strategy update. Joe will cover detailed quarterly financial results, update our improved financial guidance, and provide non-GAAP reconciliations in more detail.

On slide 3 you will find an overview of our first half operating results.

Sales in the first half of fiscal year 2016 were $679.8 million, up 3.4% from the first half of last year including currency headwinds of $72.2 million. Adjusted EBITDA for the first half was $41.6 million, down from $60.2 million for the corresponding period last year driven by currency headwinds, lower profits on our new London contract which no longer includes a usage bonus, decreased profits on our ground training systems which we are delivering in the Far East, and lower high margin air combat shipment volume. Overall however we are very pleased about the improved financial performance in our transportation segment for the first quarter as expected.

In total our Q2 sales increased by 8% compared with the same last year to $366 million and our adjusted EBITDA improved substantially to $30.3 million or 8.9% return on sales from the first quarter. We believe sales and profitability will greatly improve during the second half due to shipments of higher margin products and C4ISR training systems which will occur in our fourth quarter.

As we have previously communicated, FY16 is a transition year for Cubic as we continue to implement structural and cultural changes throughout our organization.

During the quarter we successfully completed the on time implementation of the first phase of our new ERP system to include SAP and Workday. Follow on phases were on track and we expect increased effectiveness and efficiency as a result. Integration is proceeding as planned for our high margin high growth C4ISR acquisitions and we remain confident that we will add considerable value for our customers and shareholders.

During the quarter, we started integrating marketing efforts between the legacy Cubic businesses and the acquired C4ISR entities and the initial feedback has been very positive. Overall we expect FY16 to have higher sales and adjusted EBITDA compared to FY15 which is reflected in our revised guidance and we continue to expect record performance in FY17.

Moving to Slide 4, I’d like to update you on our business segments. In Cubic Transportation Systems, we enjoyed improved financial performance compared to the previous quarter. Profitability has increased across the Sydney, Vancouver and Chicago contracts, driven by improved performance as well as negotiated changes and upgrades to our existing systems. We expect this trend to continue in the second half.

Recently, the transport minister of New South Wales announced that Sydney trial open payments on their system similar to what we’ve done in London and Chicago. We are pleased this trail could lead to revenue increases in FY17 and ‘18 and is a cornerstone of the one account portion of our Nextcity strategy. In the Washington DC metro area, another contractor’s pilot effort to update the WAMATA system was recently cancelled and the customer will likely make incremental upgrades to the smartrip system we have supplied.

We believe there will be further consolidation in the transportation fair collection market. In addition our organic opportunity pipeline continues to expand and we are confident there are many opportunities to grow our transportation business, most notably the upgrade request for proposal or RFP for the system in New York City has been released. Our team is working hard on the proposal and we expected decision on the award to come in fiscal 2017.

In Cubic Global Defense Systems, our training systems business, continues to innovate to provide superior solutions for our global customers. In air combat training systems we are very proud that our system is the live training solution for the joint strike fighter. We are also working on the future of fighter pilot training with an R&D contract to update air combat, training by adding live, virtual and constructive simulations capabilities which will greatly enhance the effectiveness and efficiency of future training for the US and our allies.

In ground training systems we are delivering the future of homestation instrumentation system and we are working to add indirect fire, synthetic ISR, cyber, social media to combat training centers. In virtual training we are now delivering state of the art immersive sportswear to the combat ship program. We have parleyed this technology into our adjacent win with lines as well as our KC46 proposal which we expect to be awarded later this fiscal year.

The opportunity pipeline remains strong and we expect modest growth going forward. We have transformed our legacy secure communications business over the past year into a mix C4ISR business with the acquisitions of D Tech, Terra Logics, and GATR Technologies. With these additions to the Cubic portfolio, we are now a prime contractor offering expeditionary communications solutions to multiple customers. D Tech and GATR technologies are currently providing best in class solutions to the US special operations command and the United States Marine Corp.

We have recently won new contracts with the Unites States Army. Terra Logics is the prime contractor to the defense information systems agency distributing high demand, full motion video products through a secure massively scalable cloud implementation to the Department of Defense. We are pursuing co-development with our customers to integrate cost demand solutions, software definable radios, and advanced antenna abilities that will closely align with our customer’s mission. This impressive transformation of our data links portfolio into our C4ISR prime contractor communications business will deliver enhanced value for our customers and shareholders.

The C4ISR business will have rapid growth and deliver higher margins going forward.

In Cubic Global Defense services we’re seeing gradual revenue and profit improvement. Additionally, we continue to pursue more best value contract opportunities the large US army Joint Readiness Training Center or JRTC re-compete in now underway with the award expected later this fiscal year. We believe they are well positioned to win as we have been delivering exceptional value to this critical customer since 2001.

This quarter we one important training and IDIQ contracts most notably supporting the Maneuver Center of Excellence Clarke Simulation Center and the joint training division of the joint staff, joint forces development to --. There is also a large opportunity set of ground based services that we will planning a bit and therefore we expect growth in the segment going forward.

Moving to Slide 5, I’d like to reiterate our strategy and provide an update. Our over archive corporate strategic objective is in bodied by goal 2020. By continually wining the customer we will grow the company’s top line at 10% or more annually in line with our historic performance and we will grow our bottom line at a faster rate through our one Cubic efficiency initiatives. With that in mind there are five key strategic objectives towards strategy.

The first is winning the customer, winning the customer is absolutely pair amount to our success. We must do better with our customer than anyone else. We must deliver early, we more responsive than empathetic, discovered key insights and continuously innovate. We must provide our customers with superior solutions speared by innovation and ultimate customer focused to earn their trust and loyalty.

Our second strategic objective is our next city vision for the future of our transportation segment. We intend to build next city globally we are in the process of expanding from providing mass transit fair collection to deploying smart mobility information and payments across all transportation modes in a city.

Our next city vision is incurred on three pillars, the first is called one account where we will focused on providing one account for all transportation payments no matter the mode. The second is called integrated user experience, where we will provide transportation multi-modal payment and real time journey information to mobile devices and other user interfaces in a personalized and predictive fashion. The third pillar is called operations in analytics, where we will synergistically and cost effectively provide tools, applications, and analytics to manage and plan across all modes of transportation in the city.

We believe the strategic initiative is in line with the future of transportation and that its effective implementation will prepare our transportation business to our target goals of 13% to 15% EBITDA margins and 10% plus compounded annually annual growth rate.

Right now we are making great progress implementing our Nextcity strategy and I’d like to provide you with some highlights. Winning the new -- contract opens in attractive adjacent market that is aligned with one account. We’re delighted with the Sydney contactless payment trail as this will be yet another extension of the one account initiative. We believe that this along with the recent implementations in London, Chicago and Vancouver will give us a technological edge going forward.

There is already demand for our Chicago mobile solution from several others CTS customers.

The North American expansion of our traffic management business represents the opportunity to grow our UK intelligent transportation system road instrumentation capability. The third strategic objective is to grow our C4ISR business. We are on track to achieve our goal of creating a niche $200 million plus communications business with high teen margins by the end of the fiscal year. Our goal that we set for ourselves only last year.

We’re also exploring other C4ISR niche areas where we can add enhanced value. In addition of the acquisitions progress includes winning and delivering on the initial phase of the key US army tactical satellite ground terminal contract expanding our work for the defense information systems agency and providing full motion video dissemination to come back and commands. Continuing our strong performance and delivering innovative satellite communications and tactical networking solutions for the US Special Operations Command, innovative our new technologies with our customers that will lead to further growth.

The fourth strategic objective is to build our next training capability globally. We have a great training business that we have provided our customers with systems and services across the globe for over 40 years. We are implementing innovative high fidelity integrated live virtual construct gaming solutions across all domains of warfare that will help our customers enhance training readiness, efficiency, and effectively. We believe that our training systems business will see improved margins to 10% plus EBITDA and a services training business to 5% EBITDA margin growing at more than 5% CAGR in the near term.

Key areas we have made progress with our next training strategy include; developing and delivering stimulations to support the integration of indirect fire weapons, cyber, synthetic ISR, and social media, into combat training centers, providing state of the art immersive courseware using gaming technology. For example, we are awarded work for the LCS mission day trainer this month with a value of $9.4 million. Continuing to build our virtual training expertise we are recently awarded a follow on Bradley training contract with the value of $13.4 million. We’re continuing to strengthen our partnership with international customers in Canada, Europe, and Singapore.

We will achieve increased efficiency and effectiveness by implementing our final strategic objective, One Cubic. One Cubic as we have previously shared is our strategy to rebuild our company’s infrastructure to enable de-centralize customer facing functions and centralize support functions to allow for a scalable, efficient, and effective enterprise.

We know that we can create additional value by intelligently sharing our resources across the globe. Through this journey of changing the culture, we are now sharing analytics visualization and communications technology. We are also sharing geographic locations, talent, supply chain, factories and processes. By implementing SAP and Workday, we will have all the data in one place enabled by common processes instantiated in the system.

We strongly believe that that will lead to several efficiencies in SG&A expenses. We are committed to improving our margins by 2% to 2.5% through these efficiency initiatives.

We will organically grow our company through innovation. We are working hard to understand our customers’ pain points and develop innovative winning solutions with our customers to shape specific demand early in the process before a request for proposal or release. We will focus our inorganic acquisition related growth targets on companies that will synergistically drive great solutions for our customers in transportation and defense. We will exercise discipline to ensure that we do not pay more than a risk adjusted cost to capital and we will rapidly integrate these companies quickly and effectively to ensure growth and higher margins.

We believe our Goal 2020 strategy and its supporting objectives will achieve significant value for our customers and shareholders. We are pleased with the progress today and our team is excited the implementation will achieve great results in the future.

I will now like to turn the call over to our Jay, our CFO to discuss our detailed financial results and improved guidance.

 

John D. Thomas:Executive Vice President and Chief Financial Officer:

Thanks Brad. Please turn to Slide 6 for our consolidated operating highlights.

Sales in the second quarter were up $27.2 million or 8% compared to last year and up $22.5 million or 3% year-to-date despite FX headwinds which lowered sales by $7.7 million in the quarter and $17.2 million year-to-date. Recent acquisitions contributed $15.1 million in the quarter and $22.9 million year-to-date. Adjusted EBITDA was $30.4 million in the quarter down from $41.4 million last year due to lower margins in our transportation segment, lower air combat shipments and cost growth on ground training systems we are delivering in the far east in our Defense Systems segment which was somewhat offset by higher margins in our Defense Services business. As Brad noted, we are expecting a much stronger second half of the fiscal year with materially higher shipments of higher margin air combat training systems and C4ISR products in our fourth quarter.

GAAP EPS in the quarter was $0.38 per share which was favorably impacted by a positive tax adjustment related to purchase accounting on the GATR transaction. Last year on the corresponding quarter we had a valuation reserve against a deferred tax asset which negatively impacted EPS in the quarter. The positive tax adjustment in this year’s second quarter results from a reduction of the deferred tax valuation reserve that was taken last year.

Partially offsetting this positive tax adjustment was additional compensation expense recorded also related to the GATR transaction.

Now turning to Slide 7, I will discuss our transportation segment or CTS. CTS sales were virtually unchanged in the quarter and year-to-date despite FX headwinds of $6.6 million in the quarter and $13.4 million year-to-date. Higher sales in North America were offset by lower sales in the UK and Australia. Operating income was lower in the quarter due to lower margins on the London contract as we no longer get a usage bonus on that contract.

Offsetting this impact were higher profits comparisons on contracts in Chicago, Sydney, and Vancouver.

Adjusted EBITDA margins of 10.3% while lower than last year are consistent with our expectations for the year. We expect to see this improved during the year and to be in the range of 10.5% to 11.5%. CTS backlog remain very strong at $1.7 billion. CTS generated positive operating cash flows for the first half of the year.

Now turning to Slide 8, I will discuss Cubic global defense system or defense systems. Sales increased 23% in the quarter and 10% year-to-date due to recent acquisition remained in the C4ISR space. Somewhat offsetting this increase in sales from the C4ISR acquisitions were lower shipments of their combat. systems. As I noted previously we are expecting a very strong fourth quarter where we have much higher shipments of their combat and C4ISR systems.

We saw this phenomenon last year which materially impacted our sales and profits for this segments and this is what we are expecting again this year.

As part of our recent acquisition of the Company’s we recorded compensation cost related to employee stock options for GATR retention and bonus cost are now consideration as well as transaction cost, which when all combined totaled $19.6 million in the quarter and $23.4 million for the six months for our Defense Systems business. The compensation cost was included in the total consideration that we paid for the acquired companies and purchase accounting treatment under GAAP require at these --- as expenses.

Operating profits were negatively impacted for the quarter $24.8 million and $28.7 million year-to-date, operating losses for the recent acquisitions of GATR, TeraLogics and DTECH inclusive of amortization expense. In addition cost growth on a ground training system we are delivering the far east coupled with lower shipments with higher margins air combats systems also impacting operating profits for the quarter in the first half. Please see appendix schedules 14 through 17 for a detailed reconciliation of adjusted EBITDA for this segment.

Adjusted EBITDA reflects adjustments for the impact of the acquisition related cost that negatively impacted our quarterly and year-to-date operating results. Management believes this metric is more representative of the underlying earnings of this business segment. Defense Systems backlog was $561.8 million at the end of the quarter down from $595.7 million at the end of our last fiscal year. The C4ISR business that we have acquired are more book and shift type of businesses with the lower backlogs in our traditional business due to a shorter cycle between contract award and delivery.

Defense Systems was a user of cash in the quarter and year-to-date due to the operating losses that rose primarily from the acquisition cost discussed previously.

Now turning to slide 9. Cubic global defense services or defense services, continue to show modest improvements in sales and operating profits due to higher activity at the Joint Readiness Training Center for special forces training. Sales were up 3.5% for the quarter and year-to-date while operating profit were up over 300% in the quarter and year-to-date lower amortization expense had a positive impact on operating profits as well as higher margin work.

The adjusted EBITDA margins for defense services year-to-date is indicative of our expectations for this segment. Defense services had positive operating cash flows for the quarter and year-to-date as Brad noted earlier we will be submitting a bid on the GRTC recomplete later this fiscal year we expect the award for will be for a multi year period.

Now turning to slide; 10 I will discuss key balance sheet and cash flow data the most significant change to our balance sheet in the quarter resulted from the completion of a GATR acquisition which resulted is an increase in total debt $441.4 million at March 31. We funded the acquisition with the combination of long-term debt from a private placement for $75 million and through and expanded revolving credit facility. Our near-term capital allocation plans are focused on paying down debt with free cash flows, we are targeting to reduce our gross debt to adjusted EBITDA levels to be closer to 2.5 times by the end of fiscal year ‘17. Year-to-date we have capitalized $14.7 million related to the new IT system.

In addition, we’ve expensed $15.9 million on various One Cubic initiatives including IT and supply chain. Our guidance for the year assumes at midpoint we will expense about $35 million in costs relative to these initiatives for the year. As we move toward its full system implementation, we will be capitalizing less expense and expensing more of these costs in the next few quarters.

In the quarter cash flow from operations was negatively impacted by costs associated with the GATR acquisition but this was more than offset by positive cash flows from our transportation and the defense services segments.

Finally turning to Slide 11, we’ve revised our guidance for fiscal year ‘16 upwards for sales and adjusted EBITDA. We are increasing the midpoint for our sales guidance for the year by $60 million to $1.535 billion from $1.475 billion. This increase reflects the contributions from the GATR and Terra Logics acquisitions less the impacts from currency translation headwinds projected for the year.

During the year, we have seen the British Pound depreciate from $1.55 to $1.43 to the dollar. Almost all of the currency headwinds are impacting our transportation segment. We have assumed that the British Pound remains at the levels we saw at the end of the March quarter.

We are increasing our adjusted EBITDA guidance midpoint by $5 million for the year. This increase relates to contributions from the GATR and Terra Logics acquisitions offset by currency headwinds which are impacting our profits primarily in the UK due to the British pound weakness in our transportation segment. We have lowered our GAAP EPS and EBITDA guidance to reflect the impacts of the recent C4ISR acquisition cost and the impact of currency headwinds and with that I’ll now turn it over to Brad for his closing thoughts.

 

Brad Feldmann:

Thank you, Jay. Now turning to slide 12 our summary slide. We are confident that fiscal year ‘16 sales and adjusted EBITDA will be higher than last year with higher volume product shipments in Q4. We are very excited to have completed the first phase of our efficiency enhancing one Cubic ERP implementation and future releases are on track.

We believe our goal 2020 strategy is sound, we are making progress, and the resolve will be growing our company more than 10% while achieving faster margin expansion. We have many large opportunities for which we are positioned to win. We are thrilled with our most recent our most recent acquisitions, Terra Logics and GATR Technologies which position us as the expeditionary communications market leader.

We believe our C4ISR strategy is a game changer for Cubic. Fiscal year ‘16 is a pivotal year for us during which we will improve our performance as well as our overall growth prospects and set a foundation for fiscal ‘17. Together our team continues its intense focus on implementing our strategy and providing superior value to our shareholders and customers. We are very excited for the future and appreciate your partnership in the company and continued support.

Now let’s proceed to the Q&A session.

 

Question & Answer

 

 

Operator:

Thank you. We’ll now be conducting a question-and-answer session. If you would like to ask a question please press star one on your telephone keypad. A confirmation ton e will indicate your line is in the question queue. You may press star two if you would like remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again if you would like ask question today please press star one at this time.


Our first question today is coming from Julian Mitchell from Credit Suisse. Please proceed with your question.

 

Julian Mitchell:Credit Suisse:

Hi thank you. Thanks for the extra disclosure in the slide. That’s very helpful. Firstly, I guess just on the transportation business, I think it seems that maybe the lower end of your margin guidance for that segment had come down a little bit first versus what you thought before.

I was wondered if that was right what the driver that was maybe currency or is there anything more fundamental there?

 

John D. Thomas:

Julian, this is Jay Thomas. Yes we said I think on the last call our adjusted EBITDA margins in that business were going to be sort of 10.5% to 11.5% so we are still in that range. They’ll come up into that range in the next couple of quarters. The first quarter was weaker because of the transition cost that we’re comfortable that’ll hit in that range.

 

Julian Mitchell:

Got it. Thank you and then just longer term on defense services, I wonder if you could be maybe a little bit more ambitious in terms of your margin targets. It sounded as if you were sort of thinking that the current run rate is where you think the long term appropriate rate is. Just wondered why you don’t see room for more upgrades.

 

Brad Feldmann:

As we mentioned earlier, this is Brad. Thanks so much. As we mentioned earlier, there are a number of opportunities that are best value opportunities for us to bid that we’re pretty savvy about. I think we’ll see some improvement going forward So I think we will see margin expansion.

 

Julian Mitchell:

Understood. Thank you.

 

Operator:

Thank you. Our next question today is coming from Jim Ricchiuti from Needham & Company. Please proceed with your question.

 

Jim Ricchiuti:Needham & Company:

Thank you. I just wanted to go back to the transportation business and just get a sense is to we think about second half of the year, how you see the operating margins and EBITDA margins grew for the back half of the year?

 

John D. Thomas:

So, we will see an improvement in the next couple of quarters which will get us into that range of 10.5% to 11.5% I can’t give you specifics by quarter. But the first quarter was very weak. So we are starting to see this quarter improve and then we’ll see the next couple of quarters and for seeing most of the improvement really in the North America.

 

Jim Ricchiuti:

Okay, is there a way to perhaps seize the opportunity potential that you alluded to for Sydney and Washington may be even on a combined basis just potentially what that could mean?

 

Brad Feldmann:

This is Brad. How are you?

 

Jim Ricchiuti:

Hi Brad.

 

Brad Feldmann:

Both of those opportunities I would say the upgrade to the --is more tens of millions of dollars I think the opportunity in Sydney could be much greater than that. Sydney will likely and will be over the term of the contracts so we’re talking that could be 8 to 10 years on the initial term.

 

Jim Ricchiuti:

Okay and just with respect to the acquisitions how would you characterize the performance so far and if you can give us a feel for how the two C4ISR businesses are expected to contributed in the back half of the year?

 

John D. Thomas:

So this is J. Pretty much following what we said on the call back in January. They as far as sales go the very back and loaded to Q4 more on the GATR side because it’s a product shipment business, the TeraLogics business is very consistent quarter-to-quarter.

So I would say GATR is little bit back and loaded in Q4 but they are performing margin and sales wise very closed to what we’ve thought they would do.

 

Jim Ricchiuti:

Okay. Thanks you.

 

Operator:

Thanks you. As reminder if you like to be place in the question queue please press star, one on your telephone keypad. Our next question today is coming from Brian Gesuale from Raymond James. Please proceed with your question.

 

Brian Gesuale:Raymond James:

Hey guys nice to clear first that ERP hurdle wondering if you can give us an update on what the next milestone might be there and just an update on the overall timing from ERP side of things.

 

Brad Feldmann:

Hi this Brad how are you

 

Brian Gesuale:

Terrific

 

Brad Feldmann:

We’re very pleased to reaching the first hurdle in early in April. The next milestone is after our fiscal year closes and the beginning of October we will roll out a lot more functionality of SAP across all of our defense businesses in the US. It’s then followed by CTS and additional units internationally in next fiscal year. So we’re on track for all the milestones and I would expect to see efficiencies improvement particularly in SG&A and supply chain spending starting to kick in at the end of next fiscal year.

 

Brian Gesuale:

Great. May be just transitioning to kind of a two part question on your pipeline about business opportunities. Can you may be talk a little bit about the defense and services side with the incremental operational tempa that we’ve seen and then also may be just expand a little bit on the Nextcity opportunities as you see out there. Thanks very much.

 

Brad Feldmann:

Sure, we’re seeing a number of opportunities related to ground training services Brian, well worth of a $1 billion in sealing multiple opportunities that we think we have pretty good chances for the pipeline overall has increased by a number of $1 billion. We don’t normally specify those numbers, but it is improved considerably. Nextcity we see opportunities as we noted earlier New York city is out we’ve been as you know the incumbent therefore multiple decades. There are opportunities in the Middle East, opportunities in Australia we see the smartphone initial implementation in Chicago.

Some demand there we see opportunities for road instrumentation business from the UK and the United States. So there are multiple opportunities to grow that business and we are pretty -- that we will be able to grow it going forward.

 

Brian Gesuale:

Great. Thanks. Thanks very much for the color Brad. James just an quick modeling question for you.

Its sounds like the fourth fiscal quarter is going to be substantially stronger from an earnings contributor than the third. Is that the correct way to think about it with some of the timings things that you would mentioned.

 

John D. Thomas:

Yes. Specially in defense systems so you’re really like last year because we are going to ship a lot product systems. So Q4 revenue wise and Defense Systems will that be have a peak and sales and earnings in the Q4. As we looked last year I think we made virtually have most of not all the profits in Defense Systems in Q4.

 

Brian Gesuale:

Great that’s very helpful. Thanks so much guys.

 

Operator:

Thank you. Our next question today coming from Brian Ruttenbur - BB&T. Please proceed with your question.

 

Brian Ruttenbur:BB&T:

Yes. Thank you very much another Brian asking question. First question is air combat was weak in the quarter I assume that just timing issue that you spoke with and it’s going to be about fourth quarter loaded?

 

Brad Feldmann:

That’s correct, it’s just shipments and comparison to last year.

 

Brian Ruttenbur:

Okay, very good. And in terms of cash from operation what kind of cash from operations are you expected to generate this year.

 

Brad Feldmann:

We haven’t given any guidance on that so onto the ---- on the question because we didn’t provide any guidance on that, but it would be something lot less than last year because of the acquisitions in the ERP spend I give you a little bit of color.

 

Brian Ruttenbur:

And did you disclose the foreign exchange impact in total in your guidance what the range was that impacted EPF or EBITDA one?

 

Brad Feldmann:

We didn’t give a specific but we just the currency that is causing everything is the pound. When we gave our initial guidance we gave what was the assume rates for the year so the Australian and New Zealand are relatively flat or little bit that up from where we were but it’s the pound that’s probably down about 10% for the year.

 

Brian Ruttenbur:

Great. Thank you very much.

 

Operator:

Thanks and our next is from the Mark Strouse from JPMorgan. Please proceed with your question.

 

Mark Strouse:JPMorgan:

Hey guys thanks for taking my questions. Just kind of a follow up to Brian’s question there on the guidance. So, updating for the acquisition obviously and for FX is it fair to say that there is no change to your organic guidance excluding FX.?

 

Brad Feldmann:

That is correct.

 

Mark Strouse:JPMorgan:

Yes okay that’s what it is. And then just going back to the Sydney trial can you just remind us how long that trial is expected to last when a decision regarding full implementation might be made and then just for what you know about that contract so far with the system would be would that be kind of similar accounting structure to all of your other major systems whether is a March end headwind upfront before uplift and ---

 

Brad Feldmann:

So, we expect this is Brad. We expect the trial to go end number of months and we expect follow on to happen towards the end of the calendar year, we’re very hopeful that the design and build portion will have an improvement over the past and will have margin expansion there in Australia.

 

Mark Strouse:

Okay. Thanks guys.

 

Operator:

Thank our next question is coming from Josephine Millward with The Benchmark Company. Please proceed with your question.

 

Josephine Millward:The Benchmark Company:

Hi Brad, hi James. When you guys think you could. Hello. When do you thinking to return to 10% growth and are we talking about 2017, 2018 what programs do you have to win to get there?

 

Brad Feldmann:

So, organically there is three large bids, I think we only really need to win one or two of those did really start to growth.

So New York on the MTA bid we have a KC-46 bid. As Brad mentioned there is a bunch of large services contracts defense services and then transportation has got Melbourne Sydney out there as well. So it doesn’t take winning all those it’s a combination of couple of those and our growth historic for many-many years has been a combination of organic as well as growth by acquisition and we intent to follow that path.

 

Josephine Millward:

Okay my next question is related to services do you explain on why you think you can return to 5% annual growth I would imagine it’s high to winning some of these new contracts and what do you think about all three and ---- of the government services business how do you see that changing the competitive environment?

 

Brad Feldmann:

Yes this is Brad. As I mentioned earlier there are a number of government serve or ground services training opportunities that are match to our skill set and there is a number of them so if we win at the same rate that we have been winning there will be growth the portfolio reshaping of these larger companies of the services business may make sense for them. I think the environment continues to be competitive but I am --- by the fact that these opportunities I spoke of are not LPTA they are best value opportunities

 

John D. Thomas:

The margin profile isn’t as attractive as the systems business but the incremental returns on capital are still very high in services. So we are able to grow the business and you know the business is drawing off free cash flows so the incremental returns are decent.

In addition to the asset velocity, we also gained customer intimacy. A lot of the services contracts are in training. We obviously are in the training systems business and that flow of information and experimentation is very helpful to our systems business. I think if you look at other companies, there was not as close up synergy between their services business and the rest of their business and in our case there is.

 

Josephine Millward:

That’s helpful. Thank you lastly can you give us an update on potential cost recovery on transportation cost over runs.

 

Brad Feldmann:

Yes so all of the contracts Chicago, Vancouver, Sydney are profitable now Josephine. We’re getting some monies as we go, kind of an incremental the LCS contract we’re in the middle of negotiating with the customer and as a matter of fact we got some more recently that they are keen on resolving the issues. So we remain savvy we will be able to get it done this fiscal year and we are working towards that.

 

Josephine Millward:

Thank you.

 

Operator:

Thank you. We have reached the end of our question-and-answer session. I will just turn the call back over to Mr. Feldman for any further closing comments.

 

Brad Feldmann:

Thanks for joining us on the call today. We are excited about our future and thank you very much for your interest and support in our great company as we work hard to create greater value.

 

Operator:

Thank you. This conclude today’s teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.

Posted In: EarningsNews
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