Cubic Corp - Recent Material Event
Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of the
registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K.
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whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definition of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2
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The
aggregate market value of 15,549,143 shares of voting stock held by
non-affiliates of the registrant was: $442,062,135 as of March 31, 2008,
based on the closing stock price on that date.
Number
of shares of common stock outstanding as of November 12, 2008 including
shares held by affiliates is: 26,727,487 (after deducting 8,945,120 shares held
as treasury stock).
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant’s Proxy Statement
for its 2009 Annual Meeting of Shareholders to be held on February 24,
2009, are incorporated by reference into Part III of this Annual Report on
Form 10-K.
PART I
Item 1. BUSINESS.
GENERAL
CUBIC CORPORATION (“Cubic”
or “the Company”), was incorporated in the State of California in 1949 and
began operations in 1951. In 1984, the
Company moved its corporate domicile to the State of Delaware.
We design, develop,
manufacture and install products which are mainly electronic in nature, such
as:
Equipment for use
in customized military range instrumentation, training and applications
systems, simulators, communications and surveillance systems, surveillance
receivers, power amplifiers, and avionics systems.
Automated revenue
collection systems, including contactless smart cards, passenger gates, central
computer systems and ticket vending machines for mass transit networks,
including rail systems, buses, and parking applications.
We also perform a variety
of services, such as computer simulation training, distributed interactive
simulation and development of military training doctrine, as well as field
operations and maintenance. We also manufacture replacement parts for the
products we produce.
During fiscal year 2008,
approximately 54% of our total business was conducted, either directly or
indirectly, with various agencies of the United States government. Most of the remainder of our revenue was from
local, regional and foreign governments or agencies.
Cubic’s internet address
is www.Cubic.com. The content on our website is available for information
purposes only. It should not be relied upon for investment purposes, nor is it
incorporated by reference into this Form 10-K. We make available free of
charge on or through our Internet website under the heading “Investor
Information,” our reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and amendments to those reports as soon as
reasonably practicable after we electronically file such material with the
Securities and Exchange Commission.
BUSINESS SEGMENTS
Information regarding the
amounts of revenue, operating profit and loss and identifiable assets
attributable to each of our business segments, is set forth in Note 11 to the
Consolidated Financial Statements for the year ended September 30, 2008.
Additional information regarding the amounts of revenue and operating profit
and loss attributable to major classes of products and services is set forth in
Management’s Discussion and Analysis which follows at Item 7.
DEFENSE
Cubic’s defense business
segment consists of three market-focused businesses: Mission Support Services, Training
Systems and Communications. Our products
include customized military range instrumentation systems, electro-optical
systems, firearm simulation systems, communications and surveillance systems,
surveillance receivers, power amplifiers, and avionics systems. Our services include training mission
support, computer simulation training, distributed interactive simulation,
development of military training doctrine, and field operations and
maintenance. We market our capabilities
directly to various U.S. government departments and agencies and foreign
governments. In addition, we frequently
contract or team with other leading defense suppliers.
Mission
Support Services
Cubic Mission Support
Services (MSS) is a leading provider of training, operations, maintenance,
technical, and other support services to the U.S. Government and allied
nations, with an emphasis on military training.
MSS comprises approximately 5,000 Cubic employees working at more than
130 locations throughout the world. Our
people serve with clients in actual training and operational environments to
help prepare and support forces through provision of comprehensive training,
exercises, education, operational, and logistical assistance to meet the full
scope of their assigned missions. The
scope of mission support that Cubic provides includes training and rehearsal
for both small and large scale combat operations; combat and material
development; logistics and maintenance support for fielded and deployed
systems; special operations; peacekeeping; consequence management; and
humanitarian assistance operations worldwide.
We plan, prepare, execute and document realistic and focused mission
rehearsal exercises (using both live and computer-based exercises) as final
preparation of forces prior to deployment.
In addition, we provide high level consultation and advisory services to
the governments and militaries of allied nations.
In
July 2008, we acquired all outstanding capital stock of the privately-held
Omega Training Group, Inc. (Omega).
Omega provides training, testing, analysis, logistics and staffing
services to U.S. Army locations at the U.S. Army Infantry School at Fort
Benning, Fort Bliss, Fort Jackson and Fort Hood. Founded in 1990, Omega now has
790 employees. We believe this acquisition will enhance our position in the
defense services market place and add revenues of approximately $60 -70 million
in 2009.
U.S. government service
contracts are typically awarded on a competitive basis with options for
multiple years. In this competitive
market, Cubic is viewed as a premier service provider and formidable
competitor. We typically compete as
prime contractors to the government, but also team with other companies,
depending on the skills required. Much
of our early work centered on battle command training and simulation, in which
military commanders are taught to make correct decisions in battle
situations. More recently, our business
base has broadened to include integrated live, virtual, and constructive
training support; advanced distance learning and other professional military
education; comprehensive logistics and maintenance support; weapons effects and
analytical modeling; intelligence analysis; homeland security training and
exercises; and military force modernization. Additionally, we support the
deployment and re-deployment of both active and reserve component forces at
U.S. Army Mobilization Centers at Fort Bliss, TX and several other U.S.
locations; and we provide in-country logistics, maintenance, operational, and
training support to U.S. Forces deployed in Kuwait, Iraq, and Afghanistan.
Cubic’s contracts include
providing mission support services to three of the Army’s major Combat Training
Centers (CTCs): the Joint Readiness Training Center (JRTC) as prime contractor;
and to the National Training Center (NTC) and Battle Command Training Program
(BCTP) as a principal subcontractor.
These services include planning, executing, and documenting large scale
exercises aimed at stressing both active and reserve U.S. forces in situations
as close to actual combat as possible.
At U.S. Joint Forces
Command (USJFCOM), Cubic is a principal member of the contractor team that
supports and helps manage all aspects of the operations of the Joint
Warfighting Center (JWFC), including support to worldwide exercises and the
development and fielding of the Joint National Training Capability (JNTC). We provide similar technical and management
support services to the U.S. Army’s National Simulation Center (NSC) at Fort
Leavenworth, Kansas. Under the Marine Air Ground Task Force (MAGTF) Training
Systems Support (MTSS) contract, Cubic provides comprehensive training and
exercise support to U.S. Marine Corps forces worldwide, including real-world
mission rehearsals. We have planned and
executed virtually all Marine Corps simulation-based exercises worldwide since
1998, directly preparing Marines for combat operations. Cubic provides training
and professional military education support to the U.S. Army’s Quartermaster
Center and School and to the Transportation School. We also provide contractor
maintenance and instructional support necessary to operate and maintain a wide
variety of flight simulation systems, Unmanned Aerial Vehicles (UAV), and other
facilities worldwide for U.S. and allied forces under multiple long-term
contracts. In addition, we provide a broad range of operational support to the
U.S. Navy’s Anti-Submarine Warfare (ASW) Command.
Cubic initiated and has
continued to operate the Korea Battle Simulation Center (KBSC) since its
inception in 1991. KBSC prepares U.S.
and allied forces in Korea to deal with mission situations that may develop in
their areas of responsibility. Our KBSC
contract includes support to the world’s largest and most complex
simulation-based training events.
At the U.S. Army I Corps
Battle Simulation Center, Cubic provides the technical and operational
expertise necessary to support worldwide training, exercises, evaluations, and
mission rehearsals for I Corps active and reserve component units, the new
Stryker brigades, other services, and joint commands.
Cubic supports the
Defense Threat Reduction Agency (DTRA) with technology-based engineering and
other services necessary to accomplish DTRA’s mission of predicting and
defeating the effects of chemical, biological, radiological, nuclear and high
explosive (CBRNE) weapons. Cubic
supports DTRA with modeling and simulations to analyze, assess and predict the
effects of such weapons in combat and other environments. Additionally, Cubic
provides comprehensive support to help plan, manage, and execute DTRA’s
worldwide CBRNE exercise program, which trains senior U.S. and allied civilian
and military personnel, first responders, and other users of DTRA products.
Cubic has multiple
contracts with the U.S. Army and other government agencies to improve the quality
and reach of training and education initiatives for individuals up through
large organizations. Cubic’s products and capabilities include development and
deployment of curriculum and related courseware, computer-based training,
knowledge management and distribution, advanced distance learning, serious
games for training, and other advanced education programs for U.S. and allied
forces.
An important part of
Cubic’s services business is to provide specialized teams of military experts
to advise the governments and militaries of the nations of the former Warsaw
Pact and Soviet Union, and other former communist countries in the
transformation of their militaries to a NATO environment. These very broad defense modernization
contracts entail sweeping vision and minute detail, involving both the nations’
strategic foundation and the detailed planning of all aspects of reform. Cubic
also operates battle simulation centers for select countries in Central and
Eastern Europe.
We believe the
combination and scope of Cubic’s growing mission support services and training
systems business is unique in the industry, permitting us to offer customers a
complete training and combat readiness capability from one source.
Training
Systems
Our Training Systems
business is a pioneer and market leader in the design and production of
instrumented training systems for military customers. These systems generally permit live training
in air and ground combat environments, with weapons and other effects simulated
by electronic and/or laser technology.
The systems also enable the collection (based on Global Positioning
System technology) and analysis of behavior and event data for determination of
combat effectiveness and lessons learned.
As such, the systems generally have a high degree of communications and
software sophistication.
Our training business is
organized into Air Combat Training, Ground Combat Training, Electro-optics, and
Simulation Systems. In Air Combat
Training, Cubic was the initial developer and supplier of Air Combat
Maneuvering Instrumentation (ACMI) capability during the Vietnam War and
continues to lead that market with the competitive award in 2003 of a 10-year,
$525 million indefinite delivery/ indefinite quantity (IDIQ) contract to
provide upgraded air combat training capability to the U.S. Air Force, Navy and
Marine Corps. The latest ACMI systems
permit forces to train on either a fixed geographic range or in a “rangeless”
environment. Many other nations employ
Cubic’s ACMI systems.
Our Ground Combat
Training involves systems analogous to air ranges for ground force
training. Cubic provided turnkey systems
to instrument two U.S. Army training centers in past years at Fort Polk, LA
(Joint Readiness Training Center – JRTC) and Hohenfels, Germany (Combat
Maneuver Training Center – CMTC) and is engaged in a multiyear effort to expand
capability of the Alaska Training Range.
The unit also built ranges in recent years for the British Army in the
U.K. and Canada. We are currently
working on similar ground combat training centers for Canada, Australia and for
customers in the Middle East and Far East. To meet new customer demand for
mobile instrumented training, Cubic has also developed a transportable, deployable
system, known as I-HITS. In 2005, Cubic was awarded a five-year $72 million
IDIQ contract to produce I-HITS for the U.S. Army.
Electro-optics includes
laser-based tactical engagement simulation systems, generally known as MILES
(Multiple Integrated Laser Engagement Simulators), which are used at combat
training centers (CTC) and in other training environments to permit weapons to
be used realistically, registering hits or kills, without live ammunition. We supply MILES equipment as part of CTC
contracts and as an independent product line.
Cubic MILES systems are being heavily utilized by U.S. Army and Marine
Corps forces, as well as Air Force security forces, other U.S. agencies and
many international customers. We produce
MILES equipment in the U.S. and at our New Zealand-based subsidiary, Cubic
Defence New Zealand. In 2005, Cubic was
awarded a 5-year $113 million IDIQ contract to produce MILES Individual Weapon
System (IWS) kits for the U.S. Army.
Our Simulation Systems
Division (SSD) produces virtual training systems, employing actual or realistic
weapons and systems together with visual imagery to simulate actual battlefield
or other environments. SSD also produces
combat system and maintenance trainers.
Communications
Our Communications business
is a supplier of secure data links, intelligence receivers, high power RF
amplifiers, direction finding systems and search and rescue avionics to the
U.S. military, other agencies and allied nations. Our products support the strong military
trend toward network-centric warfare, intelligence collection and overall
modernization initiatives. The unit has
long supplied the air/ground secure data link for the U.S. Army/Air Force Joint
STARS system and supplies the principal datalink for the United Kingdom’s ASTOR
program. Capitalizing on a multiyear
internal R&D program, we won a competitive contract in fiscal 2003 to
develop and produce the next-generation Common Data Link Subsystem (CDLS) for
the U.S. Navy. CDLS has been installed
on major surface ships of the U.S. fleet.
Smaller, tactical versions of our Common Data Link have been selected
for both legacy and new military platforms, such as UAVs, which require high
performance in a small package. These
contracts include the U.K. Watchkeeper and the U.S. Firescout.
Our Personnel Locator
System (PLS) is standard equipment on U.S. aircraft with a search-rescue mission.
We have continued to receive orders for an upgraded PLS which has been
redesigned to interface with all modern search and rescue system standards,
thus positioning us for major platform upgrades expected over the next few
years.
We
also supply high power amplifiers, intelligence receivers and direction finding
systems to major primes and end users for both domestic and international
applications. These include systems used
by the Canadian Coast Guard, the U.S. Navy and the U.S. Air Force. System level applications of these products
to the worldwide Electronic Warfare marketplace is a major thrust for this
business area.
Raw Materials:
The
principal raw materials used by the defense segment are sheet aluminum and
steel, copper electrical wire, and composite products. A significant portion of the segment's end
products are composed of purchased electronic components and subcontracted
parts and supplies. These items are primarily procured from commercial
sources. In general, supplies of raw
materials and purchased parts are adequate to meet the requirements of the
segment.
Backlog:
Funded
sales backlog of the defense segment at September 30, 2008 was $593 million
compared to $602 million at September 30, 2007.
Total backlog, including unfunded customer orders, was $1,292
million at September 30, 2008 compared to $1,247 million at September 30, 2007. Approximately $805 million of
the September 30, 2008 total backlog is not expected to be completed by
September 30, 2009.
Competition:
Cubic’s
broad defense business portfolio means we compete with numerous companies,
large and small, domestic and international.
Well known Cubic competitors include Lockheed Martin, Northrop Grumman,
General Dynamics, Boeing, L3 Communications, and SAIC. In many cases, we have also teamed with these
same companies on specific bid opportunities.
While Cubic is generally smaller than its competitors, we believe our
competitive advantages include an outstanding record of past performance,
strong incumbent relationships, our ability to control operating costs, and the
ability to rapidly focus technology and innovation to solve customer problems.
Projects
must compete for funding in the defense budget.
While the U.S. defense budget has seen above average increases in recent
years, long-term growth will only occur in those segments that offer very high
payoff and are consistent with warfighting priorities and growing fiscal
restraints. The U.S. defense market
today can be characterized as highly dynamic, with priorities and funding
shifting in reaction to, or anticipation of, world events much more rapidly than
during the Cold War or since.
Overarching military priorities include lighter, faster, more lethal
forces with the ability and training to rapidly adapt to new situations based
on superior knowledge of the battle environment. Superior knowledge is enabled by systems that
rapidly collect, process and disseminate the right information to the right
place at the right time, resulting in what DoD calls network-centric
warfare. We believe Cubic’s training
systems, training support and intelligence, surveillance and reconnaissance
capabilities are well matched to these sustainable defense priorities.
TRANSPORTATION SYSTEMS
Cubic Transportation
Systems (CTS) is the leading turnkey solution provider of automated fare
collection systems for public transport authorities worldwide. We provide a range of service and system
solutions for the bus, bus rapid transit, light rail, commuter rail, heavy
rail, ferry and parking markets. These solutions
and services include system design, central computer systems, equipment design
and manufacturing, device-level software, integration, test, installation,
warranty, maintenance, computer hosting services, call center services, card
management and distribution services, financial clearing and settlement,
multi-application support and outsourcing services. In addition, CTS designs, develops and
manufactures special
technology components, such as smart card readers and magnetic ticket
transports for use within its suite of fare collection equipment consisting of
on-bus solutions, access control solutions, vending solutions, retail and card
issuing solutions, and mobile inspection and sales solutions.
Over the years, the transportation segment has been awarded over 400
projects in 40 major markets on 5 continents.
Active projects include London, and various other cities around the
U.K., Miami, Florida, Vancouver, B.C. Canada,
the New York / New Jersey region, the Washington, D.C. / Baltimore /
Virginia region, the Los Angeles region, the San Diego region, San Francisco,
Minneapolis/St. Paul, Chicago, Atlanta, Brisbane, Australia, and Sweden.
These programs provide a base of current business and the potential for
additional future business as the systems are expanded. In 1998, Transaction Systems Limited
(TranSys), a company in which Cubic has a 37.5% ownership, was awarded a
contract called “PRESTIGE” to outsource the London Transport fare collection
services. This contract, now in its
tenth year, is the largest automated fare collection contract ever awarded. In August 2008, Transport for London (TfL) notified TranSys that they it would
terminate the PRESTIGE fare collection system contract as of August 2010 in
accordance with an early termination option in the contract. To replace
PRESTIGE, TfL, awarded a contract directly to Cubic for continuing the services
until 2013. The new contract, with an
initial value of £170 million ($255 million), will include all the existing
operational services as well as laying the groundwork for future ticketing
innovations such as mobile phone ticketing and bank card ticketing.
Industry Overview
Transport agencies, particularly those based in the U.S., rely heavily
on federal, state and local government for subsidies in capital investments,
including new procurements and/or upgrades of automated fare collection
systems. The average lifecycle for rail
fare collection systems is 12 to 15 years, and for bus systems is 7 to 10
years. Procurements tend to follow a
long and strict competitive bid process where low price is a significant
factor.
The automated fare collection business is a niche market able to
sustain only a relatively few number of suppliers. Because of the long life expectancy of these
systems and only a few companies able to supply them, there is fierce
competition to win these jobs, often resulting in low initial contract
profitability.
Advances in communications, networking and security technologies are
enabling interoperability of multiple modes of transportation within a single
networked system as well as interoperability of multiple operators within a
single networked system. As such, there
is a growing trend for regional ticketing systems, usually built around a large
transit agency and including neighboring operators, all sharing a common
regional smart card. There is an
emerging trend for other applications to be added to these regional systems to
expand the utility of the smart card, offering higher value and incentives to
the end users and lowering costs and creating new revenue streams for the
regional system operators. As a result,
these regional systems have created opportunities for new levels of systems
support and services including call center support, smart card production and
distribution, financial clearing and settlement and multi-application
support. In some cases, operators are
choosing to outsource the ongoing operations and commercialization of these
regional ticketing systems. This growing new market provides the opportunity to
establish lasting relationships and grow revenues and profits over the
long-term.
Raw Materials:
Raw
materials used in this segment include sheet steel, composite products, copper
electrical wire and castings. A significant portion of the segment's end
product is composed of purchased electronic components and subcontracted parts
and supplies. All of these items are procured from commercial sources. In general, supplies of raw materials and
purchased parts are adequate to meet the requirements of the segment.
Backlog:
Funded sales backlog of
the transportation systems segment at September 30, 2008 and 2007 amounted
to $481 million and $787 million, respectively. As mentioned above, TfL
exercised an early termination option in the PRESTIGE contract and, as a result,
the last five years of our contracts with TranSys and the other major TranSys
shareholder were also terminated, effective August 2010. Therefore, this portion of the contract value
was removed from backlog as of September 30, 2008. Transportation systems
backlog at September 30, 2007 included $290 million (£142 million)
relating to these contracts covering the period from August 2010 through August 2015.
In November 2008, TfL awarded Cubic directly a new three year contract
that includes virtually all of the services currently being performed by
TranSys through the major shareholders. The term of this contract is for the
time period from August 2010 to August 2013, with a base value of
approximately $255 million (£170 million), which will be added to backlog in
the quarter ending December 31, 2008. Approximately $221 million of the September 30,
2008 backlog is not expected to be completed by September 30, 2009.
Competition:
We
are one of several companies involved in providing automated fare collection
systems solutions and services for public transport operators worldwide
including such foreign competitors as Thales, ACS and Scheidt &
Bachmann. In addition, there are many
smaller local companies, particularly in European and Asian markets. For large national tenders, our competitors
may form consortiums that could include, in addition to the fare collection
companies noted above, telecommunications, financial institutions, consulting
and computer services companies. These
procurement activities are very competitive and require that we have highly
skilled and experienced technical personnel to compete. We believe that our
competitive advantages include intermodal and interagency regional integration
expertise, technical skills, past contract performance, systems quality and
reliability, experience in the industry and long-term customer relationships.
BUSINESS STRATEGY
Our
objective is to consistently grow sales, improve profitability and deliver
attractive returns on capital. We intend
to build on our position with U.S. and foreign governments as the leading full
spectrum supplier of training systems and mission support services, grow our
niche position as a supplier of network-centric technologies for communications
systems and products, and maintain our position as the leading provider of
integrated intermodal regional transit fare collection systems to transit
authorities worldwide. Our strategies to achieve these objectives include:
Leverage Long-Term Relationships
We
seek to maintain long-term relationships with our customers through repeat
business by continuing to achieve high levels of performance on our existing
contracts. By achieving this goal we can
leverage our returns through repeat business with existing customers and expand
our presence in the market through sales of similar systems at “good value” to
additional customers.
An
example of this in our defense segment is the recent award of a contract to
provide the next generation U.S. air combat training system. Starting in 1971 Cubic developed the first
generation of Air Combat Maneuvering Instrumentation system, or ACMI, for the
U.S. Military for live combat training.
In 2003 the company was awarded the P5 $525 million ID/IQ contract to
deliver the latest technology for rangeless live training to the U.S. and
foreign militaries. In 2007 the company
was awarded a $50.3 million contract to develop the next generation of live
training for the F-35 Joint Strike Fighter aircraft using embedded
technology. Thus since the initial contract
in 1971 the company has successfully and continuously supplied the U.S. and
foreign militaries with the latest in air combat training technologies.
In
our transportation segment we have had a continuous relationship with Transport
for London (TfL) since the 1970’s.
Starting with a small trial of magnetic ticketing and gating in 1978,
the company has continuously delivered fare collection equipment and systems to
TfL as its exclusive fare collection system supplier. Today under the PRESTIGE contract more than
22 million Oyster smart cards have been sold, making this one of the largest
transportation smart card systems in the world.
In August 2008 TfL notified our 37.5% owned company, TranSys, that it
was exercising its option to terminate the PRESTIGE contract for convenience
effective in August 2010 and, subsequently, awarded Cubic the follow-on
contract to operate and maintain the Oyster system under a contract called the
Future Ticket Agreement, thus continuing Cubic’s relationship through
2013. Similarly, we are regionalizing
integrated fare collection systems in Washington D.C., New York and Southern
California.
Maintain a Diversified Business Mix
We
have a diverse mix of business in our defense and transportation systems
segments. Approximately 54% of our sales are made directly or indirectly to the
U.S. government; however, this represents a wide variety of product and service
sales to many different U.S. government agencies. The largest single contract
in the transportation segment is the PRESTIGE contract in London which
represented about 13% of consolidated sales in 2008.
We also seek a reasonable
balance between systems and service work in both the defense and transportation
segments. In aggregate, approximately 46% of our sales revenue in 2008 was from
service type work. We believe that a strong base of service work helps to
smooth the revenue fluctuations inherent in systems type work.
Pursue Strategic Acquisitions
We
are focused on finding attractive acquisitions to enhance our market
positions. We look for specific growth
opportunities in the defense and transportation marketplaces, and adjacent
markets in smart cards and security. In
2008 we acquired a company whose business included strong positions in training
services and logistical support. This
acquisition enhanced our position at key U.S. Army installations that will
become more important as the Base Realignment and Closing efforts continue. This acquisition should also enable us to
expand our service offerings to the U.S. Army
OTHER
MATTERS
We pursue a policy of
seeking patent protection for our products where deemed advisable, but do not
regard ourselves as materially dependent on patents for the maintenance of our
competitive position.
We do not engage in any
business that is seasonal in nature. Because our revenues are generated
primarily from work on contracts performed by our employees and subcontractors,
first quarter revenues tend to be lower than the other three quarters due to
our policy of providing many of our employees seven holidays in the first
quarter, compared to one or two in each of the other quarters of the year. This
is not necessarily a consistent pattern as it depends upon actual activities in
any given year.
The cost of Company
sponsored research and development (R&D) activities was $12.2 million, $5.2
million and $6.1 million in 2008, 2007 and 2006, respectively. We do not rely
heavily on internally funded R&D, as most of our new product development
occurs in conjunction with the performance of work on our contracts. The amount
of contract-required product development activity was $55 million in 2008
compared to $66 million and $64 million in 2007 and 2006, respectively;
however, these costs are included in cost of sales as they are directly related
to contract performance.
We comply with federal,
state and local laws and regulations regarding discharge of materials into the
environment and the handling and disposal of materials classed as hazardous and/or
toxic. Such compliance has no material effect upon the capital expenditures,
earnings or competitive position of the Company.
We employed approximately
7,000 persons at September 30, 2008.
Our domestic products and
services are sold almost entirely by our employees. Overseas sales are made either directly or
through representatives or agents.
Item 1A. RISK FACTORS.
The following are some of the factors we
believe could cause our actual results to differ materially from expected and
historical results. Additional
risks and uncertainties not presently known to us, or that we currently see as
immaterial, may also harm our business.
If any of the risks or uncertainties described below or any such additional
risks and uncertainties actually occur, our business, results of operations or
financial condition could be materially and adversely affected.
We
depend on government contracts for substantially all of our revenues and the
loss of government contracts or a delay or decline in funding of existing or
future government contracts could adversely affect our sales and cash flows and
our ability to fund our growth.
Our
revenues from contracts, directly or indirectly, with foreign and United
States, state, regional and local governmental agencies represented more than
95% of our total revenues in fiscal year 2008.
Although these various government agencies are subject to common
budgetary pressures and other factors, many of our various government customers
exercise independent purchasing decisions.
Because of the concentration of business with governmental agencies, we
are vulnerable to adverse changes in our revenues, income and cash flows if a
significant number of our government contracts or subcontracts or prospects are
delayed or canceled for budgetary or other reasons.
The
factors that could cause us to lose these contracts or could otherwise
materially harm our business, prospects, financial condition or results of
operations include:
· re-allocation
of government resources as the result of actual or threatened terrorism or
hostile activities;
· budget
constraints affecting government spending generally, or specific departments or
agencies such as U.S. or foreign defense and transit agencies and regional
transit agencies, and changes in fiscal policies or a reduction of available
funding;
· Disruptions
in our customers’ ability to access funding from capital markets;
· changes
in government programs or requirements or their timing;
· curtailment
of government’s use of technology products and service providers;
· the
adoption of new laws or regulations pertaining to government procurement;
· government
appropriations delays or shutdowns;
· suspension
or prohibition from contracting with the government or any significant agency
with which we conduct business;
· impairment
of our reputation or relationships with any significant government agency with
which we conduct business;
· impairment
of our ability to provide third-party guarantees and letters of credit; and
· delays
in the payment of our invoices by government payment offices.
Government
spending priorities may change in a manner adverse to our businesses.
In the
past, our businesses have been adversely affected by significant changes in
government spending during periods of declining budgets. A significant decline in overall spending, or
the decision not to exercise options to renew contracts, or the loss of or
substantial decline in spending on a large program in which we participate
could materially adversely affect our business, prospects, financial condition
or results of operations. As an example,
the U.S. defense and intelligence budgets generally, and spending
in
specific agencies with which we work, such as the Department of Defense, have
declined from time to time for extended periods since the 1980s, resulting in
program delays, program cancellations and a slowing of new program starts. Although spending on defense-related programs
by the U.S. government has recently increased, future levels of expenditures
and authorizations for those programs may decrease, remain constant or shift to
programs in areas where we do not currently provide products or services.
Even
though our contract periods of performance for a program may exceed one year,
Congress must usually approve funds for a given program each fiscal year and
may significantly reduce funding of a program in a particular year. Significant reductions in these appropriations
or the amount of new defense contracts awarded may affect our ability to
complete contracts, obtain new work and grow our business. Congress does not always enact spending bills
by the beginning of the new fiscal year.
Such delays leave the affected agencies under-funded which delays their
ability to contract. Future delays and
uncertainties in funding could impose additional business risks on us.
Our contracts with
government agencies may be terminated or modified prior to completion, which
could adversely affect our business.
Government
contracts typically contain provisions and are subject to laws and regulations
that give the government agencies rights and remedies not typically found in
commercial contracts, including providing the government agency with the
ability to unilaterally:
· terminate
our existing contracts;
· reduce
the value of our existing contracts;
· modify
some of the terms and conditions in our existing contracts;
· suspend
or permanently prohibit us from doing business with the government or with any
specific government agency;
· control
and potentially prohibit the export of our products;
· cancel
or delay existing multiyear contracts and related orders if the necessary funds
for contract performance for any subsequent year are not appropriated;
· decline
to exercise an option to extend an existing multiyear contract; and
· claim
rights in technologies and systems invented, developed or produced by us.
Most
U.S. government agencies and some other agencies with which we contract can
terminate their contracts with us for convenience, and in that event we
generally may recover only our incurred or committed costs, settlement expenses
and profit on the work completed prior to termination. If an agency terminates a contract with us
for default, we are denied any recovery and may be liable for excess costs
incurred by the agency in procuring undelivered items from an alternative
source. We may receive show-cause or
cure notices under contracts that, if not addressed to the agency’s
satisfaction, could give the agency the right to terminate those contracts for
default or to cease procuring our services under those contracts.
In the
event that any of our contracts were to be terminated or adversely modified,
there may be significant adverse effects on our revenues, operating costs and
income that would not be recoverable.
Failure to retain
existing contracts or win new contracts under competitive bidding processes may
adversely affect our revenue.
We
obtain most of our contracts through a competitive bidding process, and
substantially all of the business that we expect to seek in the foreseeable
future likely will be subject to a competitive bidding process. Competitive bidding presents a number of
risks, including:
· the need to compete against
companies or teams of companies with more financial and marketing resources and
more experience in bidding on and performing major contracts than we have;
· the need to compete against
companies or teams of companies that may be long-term, entrenched incumbents
for a particular contract for which we are competing and that have, as a
result, greater domain expertise and better customer relations;
· the need to compete to
retain existing contracts that have in the past been awarded to us on a
sole-source basis;
· the expense and delay that
may arise if our competitors protest or challenge new contract awards;
· the need to bid on some
programs in advance of the completion of their design, which may result in
higher research and development expenditures, unforeseen technological
difficulties, or increased costs which lower our profitability;
· the substantial cost and
managerial time and effort, including design, development and marketing
activities, necessary to prepare bids and proposals for contracts that may not
be awarded to us;
· the need to develop,
introduce, and implement new and enhanced solutions to our customers’ needs;
· the need to locate and
contract with teaming partners and subcontractors; and
· the need to accurately
estimate the resources and cost structure that will be required to perform any
fixed-price contract that we are awarded.
We may
not be afforded the opportunity in the future to bid on contracts that are held
by other companies and are scheduled to expire if the agency decides to extend
the existing contract. If we are unable
to win particular contracts that are awarded through the competitive bidding
process, we may not be able to operate in the market for services that are
provided under those contracts for a number of years. If we win a contract, and upon expiration, if
the customer requires further services of the type provided by the contract,
there is frequently a competitive rebidding process and there can be no
assurance that we will win any particular bid, or that we will be able to
replace business lost upon expiration or completion of a contract.
Because
of the complexity and scheduling of contracting with government agencies, we
occasionally incur costs before receiving contractual funding by the government
agency. In some circumstances, we may
not be able to recover these costs in whole or in part under subsequent
contractual actions.
If we
are unable to consistently retain existing contracts or win new contract
awards, our business prospects, financial condition and results of operations
will be adversely affected.
Government audits of our contracts could result in
a material charge to our earnings and have a negative effect on our cash
position following an audit adjustment.
Many
of our government contracts are subject to cost audits which may occur several
years after the period to which the audit relates. If an audit identifies significant
unallowable costs, we could incur a material charge to our earnings or
reduction in our cash position.
Our international business exposes us to additional risks, including
exchange rate fluctuations, foreign tax and legal regulations and political or
economic instability that could harm our operating results.
Our
international operations, including our contract for the London Transport fare
collection system, subject us to risks associated with operating in and selling
products or services in foreign countries, including:
· devaluations and
fluctuations in currency exchange rates;
· changes in foreign laws that
adversely affect our ability to sell our products or services or our ability to
repatriate profits to the United States;
· increases or impositions of
withholding and other taxes on remittances and other payments by foreign
subsidiaries or joint ventures to us;
· increases in investment and
other restrictions or requirements by foreign governments in order to operate
in the territory or own the subsidiary;
· costs of compliance with
local laws, including labor laws;
· export control regulations
and policies which govern our ability to supply foreign customers;
· unfamiliar and unknown
business practices and customs;
· domestic and foreign
government policies, including requirements to expend a portion of program
funds locally and governmental industrial cooperation requirements;
· the complexity and necessity
of using foreign representatives and consultants;
· the uncertainty of the
ability of foreign customers to finance purchases;
· imposition of tariffs or
embargoes, export controls and other trade restrictions;
· the difficulty of management
and operation of an enterprise in various countries; and
· economic and geopolitical
developments and conditions, including international hostilities, acts of
terrorism and governmental reactions, inflation, trade relationships and
military and political alliances.
Our
foreign subsidiaries generally conduct business in foreign currencies and enter
into contracts and make purchase commitments that are denominated in foreign
currencies. Accordingly, we are exposed
to fluctuations in exchange rates, which could have a significant impact on our
results of operations. We have no
control over the factors that generally affect this risk, such as economic,
financial and political events and the supply of and demand for applicable
currencies. While we use foreign
exchange forward and option contracts to hedge significant contract sales and
purchase commitments that are denominated in foreign currencies, our hedging
strategy may not prevent us from incurring losses due to exchange fluctuations.
Our operating margins may decline under our
fixed-price contracts if we fail to estimate accurately the time and resources
necessary to satisfy our obligations.
Approximately
73% of our revenues in 2008 were from fixed-price contracts under which we bear
the risk of cost overruns. Our profits
are adversely affected if our costs under these contracts exceed the
assumptions we used in bidding for the contract. Sometimes we are required to fix the price
for a contract before the project specifications are finalized, which increases
the risk that we will incorrectly price these contracts. The complexity of many
of our engagements makes accurately estimating the time and resources required
more difficult.
We may be liable
for civil or criminal penalties under a variety of complex laws and
regulations, and changes in governmental regulations could adversely affect our
business and financial position.
Our
businesses must comply with and are affected by various government regulations
that impact our operating costs, profit margins and our internal organization
and operation of our businesses. These regulations affect how we do business
and, in some instances, impose added costs.
Any changes in applicable laws could adversely affect our financial
performance. Any material failure to
comply with applicable laws could result in contract termination, price or fee
reductions or suspension or debarment from contracting. The more significant regulations include:
· the Federal Acquisition
Regulations and all department and agency supplements, which comprehensively
regulate the formation, administration and performance of U.S. government
contracts;
· the Truth in Negotiations
Act and implementing regulations, which require certification and disclosure of
all cost and pricing data in connection with contract negotiations;
· laws, regulations and
executive orders restricting the use and dissemination of information
classified for national security purposes and the exportation of certain
products and technical data;
· regulations of most state
and regional agencies and foreign governments similar to those described above;
· the Sarbanes-Oxley Act of
2002; and
· tax laws and regulations in
the U.S. and in other countries in which we operate.
Our failure to
identify, attract and retain qualified technical and management personnel could
adversely affect our existing businesses.
We may
not be able to attract and retain the highly qualified technical personnel,
including engineers, computer programmers, and personnel with security
clearances required for classified work, or management personnel to supervise
such activities that are necessary for maintaining and growing our existing
businesses.
We may incur
significant costs in protecting our intellectual property which could adversely
affect our profit margins. Our inability to protect our patents and proprietary
rights could adversely affect our businesses’ prospects and competitive
positions.
We
seek to protect proprietary technology and inventions through patents and other
proprietary-right protection. The laws
of some foreign countries do not protect proprietary rights to the same extent
as the laws of the United States. If we
are unable to obtain or maintain these protections, we may not be able to
prevent third parties from using our proprietary rights. In addition, we may
incur significant expense both in protecting our intellectual property and in
defending or assessing claims with respect to intellectual property owned by
others.
We
also rely on trade secrets, proprietary know-how and continuing technological
innovation to remain competitive. We
have taken measures to protect our trade secrets and know-how, including the
use of confidentiality agreements with our employees, consultants and
advisors. These agreements may be
breached and remedies for a breach may not be sufficient to compensate us for
damages incurred. We generally control
and limit access to our product documentation and other proprietary
information. Other parties may
independently develop our know-how or otherwise obtain access to our
technology.
We compete primarily for government contracts
against many companies that are larger, better capitalized and better known
than us. If we are unable to compete
effectively, our business and prospects will be adversely affected.
Our
businesses operate in highly competitive markets. Many of our competitors are larger, better
financed and better known companies who may compete more effectively than we
can. In order to remain competitive, we
must keep our capabilities technically advanced and compete on price and on
value added to our customers. Our
ability to compete may be adversely affected by limits on our capital resources
and our ability to invest in maintaining and expanding our market share.
The terms of our
financing arrangements may restrict our financial and operational flexibility,
including our ability to invest in new business opportunities.
We
currently have unsecured borrowing arrangements. The terms of these borrowing arrangements
include provisions that require and/or limit our levels of working capital,
debt and net worth and coverage of fixed charges. We also have provided performance guarantees
to various customers that include financial covenants including limits on
working capital, debt, tangible net worth and cash flow coverage.
We may
incur future obligations that would subject us to additional covenants that
affect our financial and operational flexibility or subject us to different
events of default.
Our
current $150 million unsecured revolving credit facility expires in March 2010. Based on current capital market conditions we
anticipate paying higher interest rates, increased fees and having reduced
leverage capacity when we negotiate a new facility. At the present time there are no borrowings
under our present revolving facility and $24.1 million of outstanding letters
of credit.
Our revenues could
be less than expected if we are not able to deliver services or products as
scheduled due to disruptions in supply.
Because
our internal manufacturing capacity is limited, we use contract manufacturers.
While we use care in selecting our manufacturers, we have less control over the
reliability of supply, quality and price of products or components than if we
manufactured them. In some cases, we
obtain products from a sole supplier or a limited group of suppliers. Consequently, we risk disruptions in our
supply of key products and components if our suppliers fail or are unable to
perform because of strikes, natural disasters,
financial
condition or other factors. Any material
supply disruptions could adversely affect our ability to perform our
obligations under our contracts and could result in cancellation of contracts
or purchase orders, penalties, delays in realizing revenues, payment delays, as
well as adversely affect our ongoing product cost structure.
Failure to perform by one of our subcontractors could materially and
adversely affect our contract performance and our ability to obtain future
business.
Our
performance of contracts may involve subcontractors, upon which we rely to
deliver the products to our customers.
We may have disputes with subcontractors. A failure by a subcontractor to satisfactorily
deliver products or services may adversely affect our ability to perform our
obligations as a prime contractor. Any
subcontractor performance deficiencies could result in the customer terminating
our contract for default, which could expose us to liability for excess costs
of reprocurement by the customer and have a material adverse effect on our
ability to compete for other contracts.
We may acquire other companies, which could increase our costs or
liabilities or be disruptive.
Part of
our strategy involves the acquisition of other companies. We may not be able to integrate acquired
entities successfully without substantial expense, delay or operational or
financial problems. The acquisition and
integration of new businesses involves risk.
The integration of acquired businesses may be costly and may adversely
impact our results of operations or financial condition:
· we may need to divert
management resources to integration, which may adversely affect our ability to
pursue other more profitable activities;
· integration may be difficult
as a result of the necessity of coordinating geographically separated
organizations, integrating personnel with disparate business backgrounds and
combining different corporate cultures;
· we may not eliminate
redundant costs in selecting acquisition candidates; and
· one or more of our
acquisition candidates may also have unexpected liabilities or adverse
operating issues that we fail to discover through our due diligence procedures
prior to the acquisition.
Our results of
operations have historically fluctuated and may continue to fluctuate
significantly in the future, which could adversely affect the market price of
our common stock.
Our revenues are affected
by factors such as the unpredictability of contract awards due to the long
procurement process for most of our products and services, the potential
fluctuation of governmental agency budgets, the time it takes for the new
markets we target to develop and for us to develop and provide products and
services for those markets, competition and general economic conditions. Our contract type/product mix and unit
volume, our ability to keep expenses within budget, and our pricing affect our
operating margins. Significant growth in costs to complete our contracts may
adversely affect our results of operations in future periods. These factors and
other risk factors described herein may adversely affect our results of
operations and cause our financial results to fluctuate significantly on a
quarterly or annual basis. Consequently,
we do not believe that comparison of our results of operations from period to
period is necessarily meaningful or predictive of our likely future results of
operations. In some future financial period our operating results may be below
the expectations of public market analysts or investors. If so, the market price of our securities may
decline significantly.
CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING
INFORMATION
This
report, including the documents that we incorporate by reference, contains
forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended, that are subject to the “safe
harbor” created by those sections. Any statements about our expectations,
beliefs, plans, objectives, assumptions or future events or our future
financial and/or operating performance are not historical and may be
forward-looking. These statements are often, but not always, made through the
use of words or phrases such as “may,” “will,” “anticipate,” “estimate,” “plan,”
“project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “predict,” “potential,”
“opportunity” and similar words or phrases or the negatives of these words or
phrases. These statements involve
estimates, assumptions and uncertainties, including those discussed in “Risk
Factors” and elsewhere throughout this filing and in the documents incorporated
by reference into this filing that could cause actual results to differ
materially from those expressed in these statements.
Because
the risk factors referred to above could cause actual results or outcomes to
differ materially from those expressed in any forward-looking statements made
by us or on our behalf, you should not place undue reliance on any
forward-looking statements. In addition,
past financial and/or operating performance is not necessarily a reliable
indicator of future performance and you should not use our historical
performance to anticipate results or future period trends. Further, any forward-looking statement speaks
only as of the date on which it is made, and 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.
Item 1B.
UNRESOLVED STAFF COMMENTS.
None
Item
2. PROPERTIES.
We conduct our operations
in approximately 1.5 million square feet of both owned and leased properties
located in the United States and foreign countries. We own approximately 75% of the square
footage, including 498,000 square feet located in San Diego, California and
467,000 square feet located in Orlando, Florida. All owned and leased properties are
considered in good condition and, with the exception of the Orlando facility,
adequately utilized. The following table
identifies significant properties by business segment:
|
Location of Property
|
|
Owned or
Leased
|
|
|
|
|
|
Corporate Headquarters:
|
|
|
|
San Diego, CA
|
|
Owned
|
|
|
|
|
|
Defense:
|
|
|
|
Aitkenvale, Australia
|
|
Leased
|
|
Arlington, VA
|
|
Leased
|
|
Auckland, New Zealand
|
|
Leased
|
|
Columbus, GA
|
|
Leased and owned
|
|
Cummings, GA
|
|
Leased
|
|
El Paso, TX
|
|
Leased
|
|
Hampton, VA
|
|
Leased
|
|
Honolulu, HI
|
|
Leased
|
|
Kingstowne, VA
|
|
Leased
|
|
Lacey, WA
|
|
Leased
|
|
Leavenworth, KS
|
|
Leased
|
|
Orlando, FL
|
|
Leased and owned
|
|
Prince George, VA
|
|
Leased
|
|
San Diego, CA
|
|
Leased and owned
|
|
San Jose, CA
|
|
Leased
|
|
Shalimar, FL
|
|
Leased
|
|
Singapore
|
|
Leased
|
|
Tijuana, Mexico
|
|
Leased
|
|
|
|
|
|
Transportation Systems:
|
|
|
|
Atlanta, GA
|
|
Leased
|
|
Brisbane, Australia
|
|
Leased
|
|
Glostrup, Denmark
|
|
Leased
|
|
Chantilly, VA
|
|
Leased
|
|
Frankfurt, Germany
|
|
Leased
|
|
London, England
|
|
Leased
|
|
Los Angeles, CA
|
|
Leased
|
|
Merthsham, Surrey,
England
|
|
Leased
|
|
Montreal, Canada
|
|
Leased
|
|
New York, NY
|
|
Leased and owned
|
|
Ontario, Canada
|
|
Leased
|
|
Salfords, Surrey,
England
|
|
Owned
|
|
San Diego, CA
|
|
Owned
|
|
Tullahoma, TN
|
|
Owned
|
|
|
|
|
|
Investment properties:
|
|
|
|
Teterboro, NJ
|
|
Leased
|
|
Vancouver, Canada
|
|
Leased
|
Item 3. LEGAL
PROCEEDINGS.
In 1991, the government of Iran commenced an arbitration
proceeding against the Company seeking $12.9 million for reimbursement of
payments made for equipment that was to comprise an Air Combat Maneuvering
Range pursuant to a sales contract and an installation contract executed in
1977, and an additional $15 million for unspecified damages. The Company
contested the action and brought a counterclaim for compensatory damages of
$10.4 million. In May 1997, the
arbitral tribunal awarded the government of Iran $2.8 million, plus simple
interest at the rate of 12% per annum from September 21, 1991 through May 5,
1997. In December 1998, the United States District Court granted a motion
by the government of Iran confirming the arbitral award but denied Iran’s
request for additional interest and costs. Both parties have appealed. In October 2004,
the 9th Circuit Court of Appeals issued a decision in the case of
two interveners who are attempting to claim an attachment on the amount that
was awarded to Iran in the original arbitration. The Court denied one of the
intervener’s liens but confirmed the second one’s lien. Iran asked the U.S.
Supreme Court to review the 9th Circuit decision and to void the
initial judgment against it. In 2006, the Supreme Court returned the case to
the 9th Circuit for reconsideration, suggesting that the claimed
lien cannot be enforced. The Court of Appeal then ruled that the lien was valid
under the Terrorism Risk Insurance Act. Subsequently, Iran’s petition for
review by the Supreme Court was granted; therefore, while the dispute between
Iran and Cubic is on hold in the 9th Circuit the obligation upon
Cubic to pay is stayed. Under current United States law and policy, any payment
to the Revolutionary Government of Iran must first be licensed by the U.S.
government. The Company is unaware of the likelihood of the U.S. government
granting such a license. The Company is continuing to pursue its appeal in the
9th Circuit case against Iran, and management believes that a
license from the U.S. government would be required in any case to make payment
to or on behalf of Iran. However, in light of the 9th Circuit Court’s
decision in the related intervener’s case, in 2004 the Company established a
reserve of $6 million for the estimated potential liability and will continue
to accrue interest on this amount until the ultimate outcome of the case is
determined.
In January 2005, a bus fare collection system customer in North
America issued a “cure notice” to the Company, alleging that its performance
was not in accord with the contract. After unsuccessful negotiations with the
customer, in March 2005, the Company filed for a temporary restraining
order requesting that the customer be restrained from further interfering with
the Company’s performance and from issuing a termination notice. The next
business day, the customer issued a letter terminating the contract for
default. In April 2005, the customer filed a claim for breach of contract,
seeking damages for “all actual, consequential and liquidated damages sustained”
as well as attorney’s fees. The contract limits liability to the contract value
of $8.2 million, but the customer appears to be attempting to avoid that
limitation. In May 2005, the Company filed an answer and general denial
and subsequently filed a verified petition alleging breach of contract and
other substantive claims, claiming the amount owed under the contract of $4.2
million, plus interest and attorney’s fees. Management believes that both the
customer’s default notice and claim for damages are unsupported and the Company
is vigorously defending against the allegations. Based on the advice of
counsel, management believes the Company had substantially completed the
contract prior to termination and that the remaining contract value is due and
that the Company will prevail at trial; therefore, no liability has been
recorded for the former customer’s claim as of September 30, 2008.
However, due to the uncertainty of collecting the outstanding receivable
balance an allowance for doubtful accounts of $4.2 million was established and
all costs incurred in the performance of the contract and costs incurred
outside the scope of the contract were expensed in the year ended September 30,
2005.
In June 2005, a company that Cubic had an alleged
agreement with to potentially bid on a portion of automated fare collection
contracts, filed a court claim for breach of contract, fraud, negligent
misrepresentation, theft of trade secrets, and other related allegations. The
claim seeks $15.0 million in compensatory damages, punitive damages,
disgorgement of profits and a permanent injunction. In November 2008 the Company agreed to
settle this claim for a nominal amount.
Documents are expected to be finalized in December 2008.
In
May 2007 the Company filed a claim with the U.S. Navy for $6.2 million
arising out of allegedly defective specifications, the late delivery of
government-furnished equipment and the Navy’s attempt to unilaterally impose
additional contract requirements in connection with a contract whose initial
award value was $31.8 million. In February 2008, the Navy asserted a
counter-claim seeking a $4.1 million reduction in the contract price because it
allegedly relaxed certain specifications, provided more government-furnished
equipment than was required and had to revise certain equipment and manuals
furnished by the Company. In November 2008 a negotiated settlement
agreement was reached whereby the Company will receive payment of approximately
$4.0 million for its additional costs incurred in performance of the contract
and will furnish additional equipment in satisfaction of the customer’s
requirements. The settlement also resolves the Navy’s $4.1 million
counterclaim. In the year ended September 30, 2008, inventoried costs
related to this claim were reduced to the settlement amount and a provision was
made for the Company’s remaining obligations arising from the settlement
agreement.
From
time-to-time, agencies of the U.S. and foreign governments may investigate
whether the Company’s operations are being conducted in accordance with
applicable regulatory requirements. Such investigations, whether relating to
government contracts or conducted for other reasons, could result in
administrative, civil or criminal liabilities, including repayments, fines or
penalties being imposed upon the Company, or could lead to suspension or
debarment from future government contracting.
Government investigations often take years to complete and most result
in no adverse action against the Company.
The
Company is not a party to any other material pending proceedings and management
considers all other matters to be ordinary proceedings incidental to the
business. Management believes the outcome of these proceedings and the
proceedings described above will not have a materially adverse effect on the
Company’s financial position.
Item 4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Information regarding
submission of matters to a vote of security holders is incorporated herein by
reference from our definitive Proxy Statement, which will be filed no later than
30 days prior to the date of the Annual Meeting of Shareholders.
PART II
Item
5. MARKET FOR THE REGISTRANT’S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS.
As of September 2008,
the principal market on which our common stock is being traded is the New York
Stock Exchange under the symbol CUB. Our
stock previously was traded on the American Stock Exchange under the same
symbol. The closing high and low sales prices for the stock, as reported in the
consolidated transaction reporting systems of the American and New York stock
exchanges for the quarterly periods during the past two fiscal years, and
dividend information for those periods, are as follows:
MARKET AND DIVIDEND
INFORMATION
|
|
|
Sales Price of Common Shares
|
|
|
|
|
|
|
|
|
Fiscal 2008
|
|
Fiscal 2007
|
|
Dividends per Share
|
|
|
Quarter
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|
Fiscal 2008
|
|
Fiscal 2007
|
|
|
First
|
|
$
|
47.80
|
|
$
|
34.90
|
|
$
|
22.82
|
|
$
|
19.06
|
|
—
|
|
—
|
|
|
Second
|
|
35.99
|
|
25.42
|
|
22.37
|
|
19.99
|
|
$
|
0.09
|
|
$
|
0.09
|
|
|
Third
|
|
28.72
|
|
20.12
|
|
30.14
|
|
20.12
|
|
—
|
|
—
|
|
|
Fourth
|
|
29.58
|
|
21.43
|
|
46.43
|
|
27.23
|
|
$
|
0.09
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On November 12,
2008, the closing price of our common stock on the New York Stock Exchange was
$19.98. There were approximately 1,000 shareholders of record of our common
stock as of November 12, 2008.
Item 6. SELECTED
FINANCIAL DATA.
FINANCIAL
HIGHLIGHTS AND SUMMARY OF CONSOLIDATED OPERATIONS
(amounts in
thousands, except per share data)
|
|
|
Years Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results
of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
881,135
|
|
$
|
889,870
|
|
$
|
821,386
|
|
$
|
804,372
|
|
$
|
722,012
|
|
|
Cost of sales
|
|
709,481
|
|
727,540
|
|
687,213
|
|
672,541
|
|
549,170
|
|
|
Selling, general
and administrative expenses
|
|
99,956
|
|
95,054
|
|
97,166
|
|
110,644
|
|
107,139
|
|
|
Interest expense
|
|
2,745
|
|
3,403
|
|
5,112
|
|
5,386
|
|
4,658
|
|
|
Income taxes
|
|
20,385
|
|
23,662
|
|
12,196
|
|
|
|
19,394
|
|
|
Net income
|
|
36,854
|
|
41,586
|
|
24,133
|
|
11,628
|
|
36,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number
of shares outstanding
|
|
26,725
|
|
26,720
|
|
26,720
|
|
26,720
|
|
26,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1.38
|
|
$
|
1.56
|
|
$
|
0.90
|
|
$
|
0.44
|
|
$
|
1.38
|
|
|
Cash dividends
|
|
0.18
|
|
0.18
|
|
0.18
|
|
0.18
|
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-End
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity
|
|
$
|
388,852
|
|
$
|
382,771
|
|
$
|
323,226
|
|
$
|
297,158
|
|
$
|
298,767
|
|
|
Equity per share
|
|
14.55
|
|
14.33
|
|
12.10
|
|
11.12
|
|
11.18
|
|
|
Total assets
|
|
641,252
|
|
592,565
|
|
548,071
|
|
547,280
|
|
542,924
|
|
|
Long-term debt
|
|
25,700
|
|
32,699
|
|
38,159
|
|
43,776
|
|
50,037
|
|
This summary
should be read in conjunction with the related consolidated financial
statements and accompanying notes.
Item 7. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Our two primary businesses are in the defense and transportation industries. For the year ended September 30, 2008, 69% of sales were derived from defense, while 31% were derived from transportation fare collection systems and other commercial operations. These are high technology businesses that design, manufacture and integrate complex systems to meet the needs of various federal and regional government agencies in the U.S. and other nations around the world. The U.S. Government remains our largest customer, accounting for approximately 54% of sales in 2008 and 2007 compared to 52% in 2006.
Our defense segment is
focused on three primary lines of business: Training Systems (formerly known as
Readiness Systems), Mission Support Services, and Communications. The segment is a diversified supplier of
constructive, live and virtual military training systems, services and
communication systems and products to the U.S. Department of Defense, other
government agencies and allied nations. We design instrumented range systems
for fighter aircraft, armored vehicles and infantry force-on-force live
training; weapons effects simulations; laser-based tactical and communication
systems; and precision gunnery solutions.
Our services are focused on training mission support, computer
simulation training, distributed interactive simulation, development of
military training doctrine, force modernization services for NATO entrants and
field operations and maintenance. Our communications products are aimed at
intelligence, surveillance, and search and rescue markets.
Cubic Transportation
Systems develops and delivers innovative fare collection systems for public
transit authorities worldwide. We
provide hardware, software and multiagency, multimodal transportation
integration technologies and services that allow the agencies to efficiently
collect fares, manage their operations, reduce shrinkage and make using public
transit a more convenient and attractive option for commuters.
Consolidated Overview
Sales in fiscal
2008 were down slightly from 2007 because of the sale of our corrugated box
business in the fourth quarter of 2007. Sales in 2008 were $881.1 million
compared to $889.9 million in 2007, a 1% decrease. Sales in 2007 had increased
8% over 2006 sales of $821.4 million. In 2008 transportation systems sales
increased 15% over 2007, while defense sales decreased 5%. In contrast, 2007
sales from defense were up 14% and transportations systems sales were down 3%. See the segment discussions following for
further analysis of segment sales.
Operating income decreased 14% in fiscal 2008 to $53.3 million from
$62.1 million in 2007. Operating income in 2007 had doubled from $30.9 million
in 2006. Operating income in the transportation systems segment increased
significantly in 2008, more than doubling from the 2007 level. However,
operating income from defense was down 59%, more than offsetting the
improvement from transportation systems. In addition, in the fourth quarter of
2008 we recorded a restructuring charge of $6.2 million as the result of a
reduction in force in our defense systems subsidiary and corporate headquarters
in San Diego, California. This cost-cutting measure is intended to streamline
operations and enhance competitiveness in the defense-related marketplace. The
improvement in 2007 had come from both segments with transportation systems
increasing significantly from a low level in 2006 and defense improving by more
than 40%. See the segment discussions following for further details of segment
operating results.
Net
income decreased 11% in fiscal 2008 to $36.9 million ($1.38 per share) from
$41.6 million ($1.56 per share) in 2007. Net income had increased 72% in fiscal
2007 from $24.1 million ($.90 per share) in 2006. Lower net income in 2008
resulted primarily from the decrease in defense operating income and the
restructuring costs mentioned above, which impacted net income by approximately
$3.7 million after applicable income taxes, or $0.14 per share. Also included in 2008 was a gain of $1.2
million in the fourth quarter on the sale of our investment in a
defense-related joint venture that added approximately $0.8 million to net
income, after applicable income taxes, or $.03 per share. In 2007 we sold our
corrugated box business, also in the fourth quarter, for a gain of
approximately $0.6 million, after applicable income taxes, or $.02 per
share. Approximately $4.3 million, after applicable income taxes, of
the 2006 net income was from
a gain on the sale of
real estate that added $0.16 per share. Reductions in tax contingency reserves
accounted for approximately $1.2 million, $0.9 million and $1.1 million,
respectively, of the 2008, 2007 and 2006 net income.
The gross margin
from product sales improved in 2008 to 21.4% from 19.6% in 2007 and 16.0% in
2006. Improved performance from our transportation systems segment in both 2007
and 2008 and improvement in defense training systems in 2007 contributed to the
higher margin from product sales. The gross margin from service sales was 17.2%
in 2008, compared to 16.3% in 2007 and 16.9% in 2006. Higher sales and margins
from transportation systems service contracts in Europe contributed to the
improvement in 2008, while the completion of a high margin transportation
service contract in Europe resulted in the decrease in 2007 compared to 2006.
Selling, general and administrative (SG&A) expenses increased to
$100.0 million, or 11.3% of sales, in 2008, compared to $95.1 million, or 10.7%
of sales, in 2007 and $97.2 million, or 11.8% of sales, in 2006. In 2008,
SG&A increased in the defense segment due to increased bid and proposal
efforts and the acquisition of a new subsidiary.
Company sponsored
research and development (R&D) spending increased to $12.2 million in 2008
from $5.2 million in 2007 and $6.1 million in 2006. The increase came primarily
from projects to develop new data link technologies and transportation
security-related development initiatives. Our R&D spending continues to be
incurred primarily in connection with customer funded activities. We do not
rely heavily on company sponsored R&D, as most of our new product
development occurs in conjunction with the performance of work on our
contracts. The amount of contract required development activity in 2008 was $55
million, compared to $66 million in 2007 and $64 million in 2006; however,
these costs are included in cost of sales, rather than R&D, as they are
directly related to contract performance.
Interest and
dividend income increased to $6.4 million in 2008 from $3.4 million in 2007 and
$1.9 million in 2006 due primarily to higher available cash balances for
investment. Other Income (Expense) netted to an expense of $0.6 million in 2008
compared to income of $1.3 million in 2007 and $0.4 million in 2006 primarily
due to foreign currency exchange losses on advances to our foreign
subsidiaries. Interest expense decreased to $2.7 million in 2008 compared to
$3.4 million in 2007 and $5.1 million in 2006 because of a reduction in both
short- and long-term borrowings.
Our effective tax
rate for 2008 was 35.6% of pretax income compared to 36.3% in 2007 and 33.6% in
2006. Our effective rate in 2008 decreased primarily because more of our income
came from foreign tax jurisdictions where we do not incur state tax expenses
and tax rates are generally lower. Partially offsetting this benefit was a $3.9
million provision for U.S. taxes on $26.7 million in dividends from our U.K.
and New Zealand subsidiaries that were paid in 2008 compared to a similar
provision of $2.6 million in 2007 and $1.6 million in 2006. Tax credits were
lower in 2008 than in 2007 and 2006, primarily because the Research and Experimentation (R&E) credit
had expired as of December 31, 2007. Subsequent to the end of the year, in
October 2008, the U.S. Congress reinstated the R&E credit retroactive
to January 1, 2008, however, the benefit of this credit for the nine
months ended September 30, 2008, estimated to be about $0.8 million, will
not be recorded until the first quarter of fiscal 2009. The effective
rate in 2008, 2007 and 2006 also benefited from the reversal of tax contingency
provisions amounting to $1.2 million, $0.9 million and $1.1 million,
respectively. Our effective tax rate could be affected in future years by,
among other factors, the mix of business between U.S. and foreign
jurisdictions, our ability to take advantage of available tax credits, and
audits of our records by taxing authorities.
Restructuring Activity
As
mentioned earlier, in the fourth quarter of 2008 we reduced our defense
segment workforce in San Diego by 139 employees. In addition, 6
corporate office positions were eliminated. This action was the result of a
cost cutting initiative designed to streamline operations, enhance our
competitiveness and better position us in the defense-related marketplace.
Affected employees received severance pay and outplacement assistance, as well
as company paid medical coverage for a defined period based on years of
service. The cost of this restructuring was $6.2 million ($3.7 million after
applicable income taxes) and is reflected in our results for the fourth
quarter. We estimate this cost-cutting action will yield an annual savings of
approximately $15 million, before applicable income taxes.
Business Acquisition
In
July 2008, we acquired all outstanding capital stock of the privately-held
Omega Training Group, Inc. (Omega).
The purchase was for $61.0 million in cash which was funded from
existing cash reserves. Omega provides
training, testing, analysis, logistics and staffing services to U.S. Army
locations at the U.S. Army Infantry School at Fort Benning, Fort Bliss, Fort
Jackson and Fort Hood. Founded in 1990, Omega now has 790 employees. We believe
this acquisition will enhance our position in the defense services market place
and add revenues of approximately $60 -70 million in 2009.
Defense Segment
|
Years ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defense
Segment Sales
|
|
|
|
|
|
|
|
|
Mission support
services
|
|
$
|
332.5
|
|
$
|
308.0
|
|
$
|
262.9
|
|
|
Training systems
|
|
227.7
|
|
263.4
|
|
228.0
|
|
|
Communications
|
|
36.0
|
|
57.4
|
|
64.6
|
|
|
Tactical systems
and other
|
|
11.6
|
|
12.3
|
|
7.3
|
|
|
|
|
$
|
607.8
|
|
$
|
641.1
|
|
$
|
562.8
|
|
|
|
|
|
|
|
|
|
|
|
Defense
Segment Operating Income
|
|
|
|
|
|
|
|
|
Mission support
services
|
|
$
|
27.8
|
|
$
|
27.6
|
|
$
|
20.6
|
|
|
Training systems
|
|
6.8
|
|
18.9
|
|
9.7
|
|
|
Communications
|
|
(15.6
|
)
|
(0.7
|
)
|
3.9
|
|
|
Tactical systems
and other
|
|
(0.7
|
)
|
(1.6
|
)
|
(2.8
|
)
|
|
|
|
$
|
18.3
|
|
$
|
44.2
|
|
$
|
31.4
|
|
As
depicted in the table above, sales from our defense segment decreased 5% to
$607.8 million in 2008, compared to $641.1 million in 2007, after having
increased 14% in 2007 from $562.8 million in 2006. Lower sales from Training
Systems and Communications resulted in the decrease in 2008, while Mission
Support Services sales increased. Sales from Mission Support Services and Training
Systems were both higher in 2007
than in 2006, however, Communications sales decreased in 2007 from the 2006
level. The caption “Tactical systems and other” in the table above includes
advanced programs for the development of new defense technologies and the
operating results of the joint venture company in which we previously owned a
50% interest. We sold our interest in the JV to our former partner in August 2008,
as we no longer believe the venture has the growth potential we had anticipated
at its inception.
Operating income in our
defense segment decreased to $18.3 million in 2008 from $44.2 million in 2007,
a 59% decrease. In 2007, operating income had increased 41% from 2006 operating
income of $31.4 million. Operating income was sharply lower in 2008 from
Training Systems, while the operating loss from Communications increased significantly
from the small operating loss posted in 2007. Mission Support Services operating income increased slightly in
2008 over the 2007 level. Growth in 2007 operating income had come from both
Training Systems and Mission Support
Services, while Communications
had generated an operating loss in 2007 compared to operating income in 2006.
The joint venture company made a small operating profit of $0.4 million in
2008, prior to its sale, after having incurred operating losses of $1.4 million
and $1.9 million in 2007 and 2006, respectively.
Mission
Support Services
Mission
Support Services sales increased 8% in 2008, after having increased 17% in 2007
compared to 2006. About half of the sales increase in 2008 came from Omega, the
company we acquired at the end of July 2008. We believe the addition of
Omega enhances our capability and strategic position in the defense services
marketplace and are pleased with the results from the business thus far. We
also realized higher sales from our contract with the U.S. Marine Corps that
was expanded as a result of the contract renewal in 2008 and from a new
contract at the U.S. Army Quartermaster School. These increases were partially
offset by a decrease in activity during 2008 at the Joint Readiness Training
Center (JRTC) in Fort Polk, LA. The increase in 2007 sales had come from the
expansion of existing programs and from new contracts won in 2007. Sales were
higher in 2007 compared to 2006 by nearly $14 million from the JRTC contract,
due to an increase in training exercises conducted by the customer. In
addition, increased activity from the U.S. Marine Corps contract and higher
sales from contracts for modeling the effects of weapons of mass destruction
had added to the 2007 sales.
Operating
income from Mission Support Services increased only 1% in 2008, after
increasing 34% in 2007. The new company, Omega, contributed over $2 million to
operating profits in the first two months we owned it. In addition, higher
sales from the U.S. Marine Corps contract also contributed to operating income
growth in 2008. However, these increases were nearly offset by lower sales and
profit margins from the JRTC contract and from other Mission Support Services
contracts that had experienced particularly strong performance in 2007. Higher
sales volume and award fees helped to increase profitability in 2007 compared
to 2006 and improved operating income as a percentage of sales to 8.9%,
compared to 7.8%. The most significant increases in 2007 operating income had
come from the U.S. Marine Corp. and JRTC contracts mentioned above.
Training
Systems
Training Systems sales decreased 14% in 2008, returning to
the level of 2006, after having increased 16% in 2007. The decrease in 2008
sales came from each of the major product lines, including air combat training,
ground combat training, electro-optics (laser-based tactical engagement
systems) and small arms virtual training systems. Sales were lower by $23.0
million from the air combat training system contract known as P5 and from an
air combat training system in Australia that was completed in the first
quarter. Partially offsetting these sales decreases was an increase in sales
from the new Joint Strike Fighter (JSF) development contract and other air
combat training contracts. Sales were also lower from a ground combat training
system contract in the Far East and from small arms training systems. Sales in
three of the Training Systems
product lines have been impacted by a transition from the development phase,
where revenue is recognized on a cost-to-cost percentage completion basis, to
the production phase, where we recognize revenues from production orders on a
units-of-delivery percentage completion basis, resulting in the recording of
sales when the product is delivered and accepted by the customer. This includes
the P5 air combat training contract, electro-optics and small arms training
systems. This transition also resulted in an increase in inventories of $30.3
million, offset by customer advances of $11.5 million from these product lines in
fiscal 2008. Most of the increase in 2007 sales compared to 2006 had come from
air combat training systems, while ground combat training and small arms
virtual training systems sales grew slightly.
Training Systems operating income decreased 64% in 2008
compared to 2007 after having nearly doubled in 2007 from 2006. Lower sales
from the P5 and Australian air combat training contracts and small arms virtual
training systems contributed to the decrease in operating income. However, the
primary cause of the decrease was cost growth of $9.6 million on the
electro-optics contract to develop the next generation laser-based tactical
engagement system. This cost growth stemmed from problems encountered in the
second quarter during system integration testing and resulted in greater
difficulties than we had previously anticipated. In addition to increased
engineering development costs for design changes, these changes also resulted
in higher manufacturing costs and rework costs. We also experienced further
cost growth of $4.2 million in 2008 on a contract for the development of a
ground combat training system in the Middle East. This compares to cost growth
of $5.1 million in 2007 on the same contract. Improved profit margins from a
ground combat training system in Canada partially offset the impact from this
contract. The increase in 2007 operating income compared to 2006 had come from
higher profit margins on higher sales of air combat training systems and
improvements in profitability of ground combat training systems and small arms
training systems. Higher profit margins from a ground combat training system in
the Far East in 2007 were offset by cost growth on the ground combat training
system in the Middle East mentioned above, while operating income from other ground
combat training systems improved slightly. Operating income from small arms
training systems had improved in 2007 due to somewhat higher sales and
completion of the development of new weapons simulations systems in 2006,
resulting in decreased costs in 2007.
Communications
Sales
from Communications decreased 37% in 2008, after having decreased 11% in 2007
from the 2006 level. Sales decreased in 2008 from contracts for the development
of data links for unmanned aerial vehicles in the U.S. and U. K. and from a
contract for the development of a data link for the U.S. Navy. These decreases
were partially offset by higher sales of personnel locator systems and power
amplifiers. In 2007 sales increased from the contract for the supply of data
links for unmanned aerial vehicles in the U.K.; however, this increase was more
than offset by decreases in sales from other data link contracts that neared
completion in 2007. Sales of personnel locator systems and power amplifiers
also decreased in 2007.
Communications incurred an operating loss of $15.6 million in 2008
compared to an operating loss of $0.7 million in 2007 and operating income of
$3.9 million in 2006. The primary cause of the loss in 2008 was cost growth of
$9.5 million from a contract to develop new data link technology for unmanned
aerial vehicles for a U.K. customer. We have encountered significant
difficulties in performing this firm fixed-price contract due in part to
customer-caused delay and disruption, directed changes and due to delays caused
by two subcontractors. We have completed discussions with the customer to
substantially restructure the contract and believe we have now established a
reasonable basis for completion of the contract and resolution of the issues
with the most problematic subcontractor. The contract modification, when
signed, will add additional contract value for a portion of the out-of-scope
costs we have incurred and anticipate incurring and remove our responsibility
for the subcontractor’s performance. We continue to have performance risks
going forward but we anticipate that the contract value added by the
modification will be sufficient to cover those risks. Cost growth on two other
data link development contracts impacted profitability by $6.2 million in 2008.
One of these is a contract with the U.S. Navy for which we had inventoried
costs of $5.2 million in 2005 that were the subject of a legal proceeding
before the U.S. Armed Services Board of Contract Appeals. We reached a
settlement agreement with this customer whereby we will be paid for $4.0
million of the $5.2 million in costs and have expensed the remainder. As a part
of the settlement we provided other concessions to the customer, which also
were expensed, in exchange for them dropping all claims against us. In addition,
we started work on several research and development projects for new data link
technology during 2008, which added $2.7 million to the operating loss for the
year. Partially offsetting these increased costs was higher operating income on
higher sales of power amplifiers and personnel locator systems.
Communications
had generated an operating loss of $0.7 million in 2007 due primarily to cost
growth of $4.3 million on a contract for the development of new data link
technology. Profit margins on other data link contracts were also lower than in
2006; however, this decrease was partially offset by improved profit margins
from sales of power amplifiers and personnel locator systems in 2007. Operating
income in 2006 had come primarily from the sale of power amplifiers and data
links, in addition to the favorable settlement of a long-standing dispute with
a customer during the year, which added $1.2 million to operating income.
Transportation
Systems Segment
|
Years ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions)
|
|
|
|
|
Transportation
Segment Sales
|
|
$
|
272.3
|
|
$
|
236.6
|
|
$
|
243.9
|
|
|
|
|
|
|
|
|
|
|
|
Transportation
Segment Operating Income
|
|
$
|
43.0
|
|
$
|
20.1
|
|
$
|
2.8
|
|
Transportation systems
sales increased 15% in 2008 after having decreased 3% in 2007. Sales
increased in 2008 primarily due to additional work from change orders on the
PRESTIGE contract and from other contracts in the U.K. Sales were also higher
from system installation work on a contract in Australia and increased sales of
spare parts in North America. These increases were partially offset by
decreased sales from system installation contracts in North America and
Sweden. The exchange rate between the British Pound and the U.S. Dollar had no
impact on sales for 2008, when compared to 2007, as the average rate for the
year was virtually the same as in 2007.
As a result of a decrease
in the value of the British Pound compared to the U.S. Dollar in late fiscal
2008 and subsequently, we expect that the dollar value of transportation
systems sales and operating income from our U.K. subsidiary will be lower in
fiscal 2009 than in 2008.
Sales in North America
and Sweden had decreased in 2007 compared to 2006, while sales in Australia and
the U.K. had increased.
Sales in Australia increased due in part to a settlement reached with the
customer during 2007 that increased the value of the contract. In the U.K.
sales had been lower in 2007 from a service contract that was phased-out
because old ticket issuing equipment was replaced by modern equipment requiring
less maintenance; however, this decrease was more than offset by higher sales
from other U.K. contracts, including the PRESTIGE contract. A major contributor
to the increase in U.K. sales in 2007 had been the strength of the British
Pound against the U.S. dollar, which resulted in the dollar value of sales in
the U.K. increasing $10.8 million for the year when compared to average
exchange rates experienced in 2006.
Operating income in the transportation systems segment more than
doubled in 2008 when compared to 2007, after having improved significantly in
2007 from the low level of 2006. Higher sales and improved performance from
U.K. contracts, including bonuses earned on the PRESTIGE contract for system
usage, and profits from increased spares sales in the U.S. contributed to the
increase in 2008. Cost growth on North American contracts that had been a
profit drain in recent years was limited to $1.6 million in 2008, a significant
improvement over 2007 when cost growth on the same contracts had been $7.0
million. Partially offsetting the profit improvements in 2008 was cost growth
of $3.4 million on a contract in Sweden and an investment in new technology of
$1.8 million we made related to a new contract in North America. These
development costs are required for this contract; however, they will benefit
future programs as well. A reduction in legal fees of $2.0 million in 2008 also
contributed to the operating income improvement. As mentioned above relating to
sales, currency exchange between the British Pound and U.S. Dollar had no
impact on 2008 operating income when compared to 2007.
In 2007, settlements reached with three customers added $8.6 million to
operating income; however, we also added $3.4 million to our estimate of costs
to complete two of these contracts that year, yielding a net improvement to
operating income of $5.2 million from these contract settlements. Operating
income from the PRESTIGE contract had increased when compared to 2006, including
bonuses earned for system usage and the effect of a higher currency exchange
rate. Currency exchange differences had resulted in an improvement in operating
income of about $1.8 million from all U.K. contracts, when comparing the 2007
average exchange rate to the 2006 rate. As mentioned above, cost growth on
North American system installation contracts in 2007 was $7.0 million compared
to $21.0 million in 2006, helping to improve operating income. Lower operating
income from the U.K. service contract mentioned above and from spare parts
sales in the U.S. partially offset these improvements. In addition, cost growth
from a contract in Sweden totaling $6.3 million in 2007 had also impacted
operating income. Higher legal fees in 2007 further reduced operating income
for the year by $1.3 million when compared to 2006.
Backlog
|
September 30,
|
|
|
|
|
|
|
|
|
(in
millions)
|
|
|
Total
backlog
|
|
|
|
|
|
|
Transportation
systems
|
|
$
|
480.6
|
|
$
|
787.3
|
|
|
Defense
|
|
|
|
|
|
|
Mission support
services
|
|
880.0
|
|
776.6
|
|
|
Training systems
|
|
363.6
|
|
383.4
|
|
|
Communications
|
|
45.9
|
|
56.4
|
|
|
Other
|
|
2.4
|
|
30.6
|
|
|
Total defense
|
|
1,291.9
|
|
1,247.0
|
|
|
Total
|
|
$
|
1,772.5
|
|
$
|
2,034.3
|
|
|
|
|
|
|
|
|
|
Funded
backlog
|
|
|
|
|
|
|
Transportation
systems
|
|
$
|
480.6
|
|
$
|
787.3
|
|
|
Defense
|
|
|
|
|
|
|
Mission support
services
|
|
180.6
|
|
131.2
|
|
|
Training systems
|
|
363.6
|
|
383.4
|
|
|
Communications
|
|
45.9
|
|
56.4
|
|
|
Other
|
|
2.4
|
|
30.6
|
|
|
Total defense
|
|
592.5
|
|
601.6
|
|
|
Total
|
|
$
|
1,073.1
|
|
$
|
1,388.9
|
|
In addition to the amounts
identified above, the company has been selected as a participant in or, in some
cases, the sole contractor for several substantial indefinite delivery/
indefinite quantity (IDIQ) contracts.
IDIQ contracts are not included in backlog until an order is received.
In August 2008,
Transport for London (TfL) notified our 37.5% owned subsidiary, TranSys, that
they will be terminating the PRESTIGE fare collection system contract as of August 2010
in accordance with the early termination provision of the contract. As a result
of this early termination, the last five years of our contracts with TranSys
and the other 37.5% shareholder were also terminated and, therefore, this
portion of the contract value was removed from backlog in the table above as of
September 30, 2008. Our transportation systems backlog at September 30,
2007 included $290 million (£142 million) relating to the terminated portion of
our contracts with TranSys and the other 37.5% shareholder covering the period
from August 2010 through August 2015.
In November 2008,
TfL awarded Cubic directly a new three year contract that includes virtually
all of the services currently being performed by TranSys through its
shareholders. The term of this contract is for the time period from August 2010
to August 2013, with a base value of approximately $255 million (£170
million), which will be added to our backlog in the quarter ending December 31,
2008. The contract value will be indexed for inflation from August 2008
through its completion and additionally includes variable payments that are
contingent upon system usage, similar to provisions that were contained in the
PRESTIGE contract.
Aside from the impact of the PRESTIGE contract early termination
described above, a decrease in the value of the British Pound vs. the U.S.
Dollar between September 30, 2007 and September 30, 2008, resulted in
a decrease in transportation systems backlog of approximately $45 million.
The difference
between total backlog and funded backlog represents options under multiyear
service contracts. Funding for these contracts comes from annual operating
budgets of the U.S. government and the options are normally exercised annually.
Options for the purchase of additional systems or equipment are not included in
backlog until exercised.
New
Accounting Standards
In July 2006, the Financial Accounting Standards Board (FASB)
issued Interpretation No. 48, Accounting
for Uncertainty in Income Taxes (FIN 48), which we adopted on October 1,
2007. The purpose of FIN 48 is to clarify and set forth consistent rules for
accounting for uncertain tax positions in accordance with SFAS 109, Accounting for Income Taxes. The
cumulative effect of applying the provisions of this interpretation are required
to be reported separately as an adjustment to the opening balance of retained
earnings in the year of adoption. The effect of adopting FIN 48 on our
financial condition at September 30, 2008 has been included in the
accompanying consolidated financial statements. See Note 8 for further
discussion of the effect of adopting FIN 48.
In September 2006,
the FASB issued SFAS No. 157, Fair Value Measurements, which
we will adopt in the quarter ending December 31, 2008. SFAS 157 defines
fair value, establishes a framework and gives guidance regarding the methods
used for measuring fair value, and expands disclosures about fair value
measurements. We currently do not expect that the adoption of SFAS 157 will
have a material impact on our results of operations, financial position or cash
flows.
In February 2007,
the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities – Including an Amendment of FASB
Statement No. 115, which we will adopt in the quarter ending December 31,
2008. This statement permits an entity to choose to measure many financial
instruments and certain other items at fair value at specified election dates.
Subsequent unrealized gains and losses on items for which the fair value option
has been elected will be reported in earnings. We currently do not expect that
the adoption of SFAS 159 will have a material impact on our results of
operations, financial position or cash flows.
In
December 2007 the FASB issued SFAS No. 141(R), Business Combinations, which we will
adopt in the fiscal year beginning October 1, 2009. This statement applies
to all transactions or other events in which an entity obtains control of one
or more businesses. This statement applies to all business entities, including
mutual entities that previously used the pooling-of-interests method of
accounting for some business combinations. We currently do not expect
that the adoption of SFAS 141(R) will have a material impact on our
results of operations, financial position or cash flows.
In March 2008 the FASB issued SFAS No. 161, Disclosures about
Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133, which we will
adopt in the quarter ending March 31, 2009. This statement requires
enhanced disclosures about an entity’s financial position, financial
performance, and cash flows. The statement requires that objectives for using
derivative instruments be disclosed in terms of underlying risks and accounting
designation. We currently do not expect that the adoption of SFAS 161
will have a material impact on our results of operations, financial position or
cash flows.
Liquidity
and Capital Resources
Cash flows from
operations totaled $92.7 million in 2008, compared to $69.2 million in 2007 and
$31.3 million in 2006. In addition to cash generated by earnings, a decrease in
accounts receivable in each of the three years amounting to $40.5 million,
$18.1 million and $5.8 million in 2008, 2007 and 2006, respectively,
contributed to the positive cash flows. In addition, net customer advances of
$17.0 million, $12.2 million and $2.3 million in 2008, 2007 and 2006,
respectively, added to the positive result. Inventories grew in 2008 and 2007,
using cash of $18.7 million and $7.6 million, respectively, reflecting the transition
from development type contracts to production contracts described in the
defense segment section above. Positive operating cash flows in 2008 came from
both segments, with the greater portion coming from transportation systems. All
of the operating cash flows in 2007 had come from the transportation systems
segment, while defense cash flows were slightly negative for the year. Both the
defense and transportation systems segments had generated positive cash flows
in 2006, with the larger amount contributed by transportation systems in that
year as well.
We have classified
certain unbilled accounts receivable balances as noncurrent because we do not
expect to receive payment within one year from the balance sheet date. At September 30,
2008, this balance was $19.9 million compared to $16.7 million at September 30,
2007.
Cash flows used in
investing activities in 2008 included our acquisition of Omega Training Group, Inc.,
which used cash of $53.8 million, net of cash acquired. The remaining balance
of the purchase price amounting to $6.1 million was paid subsequent to September 30,
2008 and was included in other current liabilities at that date. We made
capital expenditures of $8.1 million in 2008, partially offset by proceeds of
$1.8 million from the sale of our interest in the joint venture mentioned
previously. We liquidated $27.2 million of short-term investments in the first
quarter of fiscal 2008, thereby avoiding much of the turmoil in the credit markets
that occurred later in the year. During 2007 we had invested a net of $18.3
million in these financial instruments, received $3.8 million from the sale of
our former corrugated box business and made $6.1 million in capital
expenditures. Investing activities in 2006 had included capital expenditures of
$9.8 million, proceeds from the sale of investment real estate of $8.0 million
and the addition of $8.9 million to short-term investments.
Financing
activities in 2008 included scheduled payments on long-term borrowings of $6.1
million and the payment of a dividend to shareholders of $4.8 million (18 cents
per share). Financing activities in 2007 had included the repayment of short
term borrowings of $10.0 million and scheduled payments on long-term borrowings
of $6.1 million, in addition to the payment of a dividend to shareholders of
$4.8 million (18 cents per share). Financing activities in 2006 had included
scheduled debt payments of $6.1 million, repayment of short-term borrowings of
$16.4 million and dividends to shareholders of $4.8 million.
Accumulated
other comprehensive income decreased $23.6 million in 2008 because of foreign
currency translation adjustments of $11.2 million and an increase in the
recorded liability for our pension plans of $12.4 million, after applicable
income taxes. These adjustments decreased the positive balance in accumulated
other comprehensive income from $31.2 million as of September 30, 2007 to
$7.6 million at September 30, 2008.
The
pension plan unfunded balance increased from the September 30, 2007
balance of $1.5 million to $16.4 million at September 30, 2008. This
decrease in the funding position can be attributed to a return on plan assets
for the year that was much lower than our assumed rate of return but was partially
offset by the effect of an increase in the discount rate we used to calculate
the pension liability.
The
net deferred tax asset increased to $31.7 million at September 30, 2008
compared to $18.7 million at September 30, 2007. The primary reason for
the increase is that the effect of recording adjustments to the pension
liability through other comprehensive income resulted in a deferred tax asset
of $4.0 million at September 30, 2008 compared to a deferred tax liability
of $2.7 million at September 30, 2007. We expect to generate sufficient
taxable income in the future such that the net deferred tax asset will be
realized.
Our financial condition
remains strong with working capital of $279 million and a current ratio of 2.4
to 1 at September 30, 2008. We expect that cash on hand and our ability to
access the debt markets will be adequate to meet our working capital
requirements for the foreseeable future. In addition to the short-term
borrowing arrangements we have in the U.K. and New Zealand, we have a committed five year credit
facility from a group of financial institutions in the U.S., aggregating $150
million. As of September 30, 2008,
$24.1 million of this capacity was used for letters of credit, leaving an
additional $125.9 million available. Our
total debt to capital ratio at September 30, 2008 was less than 10%. In
addition, our cash balance totaled $112.7 million at September 30, 2008
which exceeded our total long-term debt by $81.0 million. Our cash is invested
primarily in highly liquid government treasury instruments in the U. S. and
Europe.
The
following is a schedule of our contractual obligations outstanding as of September 30,
2008:
|
|
|
Total
|
|
Less than 1
Year
|
|
1 - 3 years
|
|
4 - 5 years
|
|
After 5 years
|
|
|
|
|
(in
millions)
|
|
|
Long-term debt
|
|
$
|
31.7
|
|
$
|
6.0
|
|
$
|
9.2
|
|
$
|
9.2
|
|
$
|
7.3
|
|
|
Interest
payments
|
|
6.5
|
|
1.7
|
|
2.6
|
|
1.3
|
|
0.9
|
|
|
Operating leases
|
|
15.1
|
|
5.6
|
|
6.2
|
|
3.0
|
|
0.3
|
|
|
Deferred
compensation
|
|
8.6
|
|
0.8
|
|
1.2
|
|
0.9
|
|
5.7
|
|
|
|
|
$
|
61.9
|
|
$
|
14.1
|
|
$
|
19.2
|
|
$
|
14.4
|
|
$
|
14.2
|
|
Critical Accounting Policies, Estimates and Judgments Our financial statements are prepared in accordance with accounting principles that are generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We continually evaluate our estimates and judgments, the most critical of which are those related to revenue recognition, income taxes, valuation of goodwill 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. This discussion of critical accounting policies, estimates and judgments should be read in conjunction with other disclosures included in this discussion, and the Notes to the Consolidated Financial Statements related to estimates, contingencies and new accounting standards. Significant accounting policies are identified in Note 1 to the Consolidated Financial Statements. We have discussed each of the “critical” accounting policies and the related estimates with the audit committee of the Board of Directors. Revenue Recognition
A
significant portion of our business is derived from long-term development,
production and system integration contracts which we account for consistent
with the American Institute of Certified Public Accountants’ (AICPA) audit and
accounting guide, Audits of Federal Government Contractors,
and the AICPA’s Statement of Position No. 81-1, Accounting
for Performance of Construction-Type and Certain Production-Type Contracts.
We consider the nature of these contracts, and the types of products and
services provided, when we determine the proper accounting for a particular
contract. Generally, we record revenue for long-term fixed price contracts on a
percentage of completion basis using the cost-to-cost method to measure
progress toward completion. Most of our long-term fixed-price contracts require
us to deliver minimal quantities over a long period of time or to perform a
substantial level of development effort in relation to the total value of the
contract. Under the cost-to-cost method of accounting, we recognize revenue
based on a ratio of the costs incurred to the estimated total costs at
completion. For certain other long-term, fixed price production contracts not
requiring substantial development effort we use the units-of-delivery
percentage completion method as the basis to measure progress toward completing
the contract and recognizing sales. The units-of-delivery measure is a
modification
of the percentage-of-completion method, which recognizes revenues as deliveries
are made to the customer generally using unit sales values in accordance with
the contract terms. We estimate profit as the difference between total
estimated revenue and total estimated cost of a contract and recognize that
profit over the life of the contract based on deliveries. Amounts representing
contract change orders, claims or other items are included in the contract
value only when they can be reliably estimated and realization is considered
probable. Provisions are made on a current basis to fully recognize any
anticipated losses on contracts.
We
record sales under cost-reimbursement-type contracts as we incur the costs.
Incentives or penalties and awards applicable to performance on contracts are
considered in estimating sales and profits, and are recorded when there is
sufficient information to assess anticipated contract performance. Incentive
provisions that increase or decrease earnings based solely on a single
significant event are not recognized until the event occurs.
Sales
of products are recorded when a firm sales agreement is in place, delivery has
occurred and collectibility of the fixed or determinable sales price is
reasonably assured. Sales for Fixed-Price Service Contracts that do not contain
measurable units of work performed are generally recognized on straight-line
basis over the contractual service period, unless evidence suggests that the
revenue is earned, or obligations fulfilled, in a different manner. Sales for
Fixed-Price Service Contracts that contain measurable units of work performed
are recognized when the units of work are completed.
Sales and profits on
contracts that specify multiple deliverables are allocated to separate units of
accounting when there is objective evidence that each accounting unit has value
to the customer on a stand-alone basis.
Income Taxes Significant judgment is required in determining our income tax provisions and in evaluating our tax return positions. In accordance with FASB Interpretation No. 48 (FIN 48), we establish reserves when, despite our belief that our tax return positions are fully supportable, we believe it is more-likely-than-not a tax position taken or expected to be taken in a tax return, if examined, would be challenged and that we may not prevail. We adjust these reserves in light of changing facts and circumstances, such as the progress of a tax audit. Tax regulations require items to be included in the tax return at different times than the items are reflected in the financial statements and are referred to as timing differences. In addition, some expenses are not deductible on our tax return and are referred to as permanent differences. Timing differences create deferred tax assets and liabilities. Deferred tax assets generally represent items that can be used as a tax deduction or credit in future years for which we have already recorded the benefit in our income statement. We establish valuation allowances for our deferred tax assets when the amount of expected future taxable income is not likely to support the use of the deduction or credit. Deferred tax liabilities generally represent deductions we have taken on our tax return but have not yet recognized as expense in our financial statements. We have not recognized any United States tax expense on undistributed earnings of our foreign subsidiaries since we intend to reinvest the earnings outside the U.S. for the foreseeable future. These undistributed earnings totaled approximately $52.4 million at September 30, 2008. Annually we evaluate the capital requirements in our foreign subsidiaries and determine the amount of excess capital, if any, that is available for distribution. Whether or not we actually repatriate the excess capital in the form of a dividend, we would provide for U.S. taxes on the amount determined to be available for distribution. This evaluation is judgmental in nature and, therefore, the amount of U.S. taxes provided on undistributed earnings of our foreign subsidiaries is affected by these judgments. Based on this analysis in 2008, we determined that 11.0 million British pounds ($21.7 million) was excess capital in the U.K. and that 7.0 million New Zealand Dollars ($5.0 million) was excess capital in New Zealand and paid dividends in these amounts to the U.S. parent company. U.S. taxes provided on these dividends amounted to $3.9 million in 2008.
Valuation of Goodwill
We evaluate our recorded
goodwill balances for potential impairment annually by comparing the fair value
of each reporting unit to its carrying value, including recorded goodwill. Our
annual testing date is June 30. We have not yet had a case where the
carrying value exceeded the fair value; however, if it did, impairment would be
measured by comparing the derived fair value of goodwill to its carrying value,
and any impairment determined would be recorded in the current period. To date
there has been no impairment of our recorded goodwill. Goodwill balances by
reporting unit are as follows:
|
September 30,
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
Defense systems
and products
|
|
$
|
16.1
|
|
$
|
16.9
|
|
|
Defense services
|
|
36.7
|
|
9.7
|
|
|
Transportation
systems
|
|
8.2
|
|
9.4
|
|
|
Total goodwill
|
|
$
|
61.0
|
|
$
|
36.0
|
|
Determining the fair
value of a reporting unit for purposes of the goodwill impairment test is
judgmental in nature and involves the use of estimates and assumptions. These
estimates and assumptions could have a significant impact on whether or not an
impairment charge is recognized and also the magnitude of any such charge. We
currently perform internal valuation analysis and consider other market
information that is publicly available. Estimates of fair value are primarily
determined using discounted cash flows and comparisons with recent
transactions. These approaches use significant estimates and assumptions
including projected future cash flows, discount rate reflecting the inherent
risk in future cash flows, perpetual growth rate and determination of
appropriate market comparables.
For
fiscal 2008, the discounted cash flows for each reporting unit were based on
discrete three-year financial forecasts developed by management for planning
purposes. Cash flows beyond the three-year discrete forecasts were estimated
based on projected growth rates and financial ratios, influenced by an analysis
of historical ratios, and by calculating a terminal value at the end of ten
years. The compound annual growth rates for sales ranged from 4.0% to 8.0% and
for operating profit margins ranged from 7.0% to 8.0% for the reporting units,
beyond the discrete forecast period. The future cash flows were discounted to
present value using a discount rate of 9.1%. We did not recognize any goodwill
impairment as a result of performing this annual test. Changes in estimates and
assumptions we make in conducting our goodwill assessment could affect the
estimated fair value of one or more of our reporting units and could result in
a goodwill impairment charge in a future period. However, a 10% decrease in the
estimated fair value of any of our reporting units at June 30, 2008 would
not have resulted in a goodwill impairment charge.
Pension Costs The measurement of our pension obligations and costs is dependent on a variety of assumptions used by our actuaries. These assumptions include estimates of the present value of projected future pension payments to plan participants, taking into consideration the likelihood of potential future events such as salary increases and demographic experience. These assumptions may have an effect on the amount and timing of future contributions. The assumptions used in developing the required estimates include the following key factors: · Discount rates · Inflation · Salary growth · Expected return on plan assets · Retirement rates · Mortality rates We base the discount rate assumption on investment yields available at year-end on high quality corporate long-term bonds. Our inflation assumption is based on an evaluation of external market indicators. The salary growth assumptions reflect our long-term actual experience in relation to the inflation assumption. The expected return on plan assets reflects asset allocations, our historical experience, our investment
strategy and the views of investment managers and large pension sponsors. Retirement and mortality rates are based primarily on actual plan experience. The effects of actual results differing from our assumptions are accumulated and amortized over future periods, and therefore, generally affect our recognized expense in such future periods. Changes in the above assumptions can affect our financial statements, although the relatively small size of our defined benefit pension plans in relation to the size of the Company limit the impact any individual assumption changes can have. For example, a 50 basis point change in the assumed rate of return on assets would have changed the pension expense recorded in 2008 by about $0.8 million, before applicable income taxes.
Item 7a. QUANTITATIVE AND
QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Interest Rate Risk
We invest in money market
instruments and short-term marketable debt securities that are tied to floating
interest rates being offered at the time the investment is made. We maintain
short-term borrowing arrangements in the U.S., U.K. and New Zealand which are
also tied to floating interest rates (LIBOR and the U.S. prime rate and the
U.K. and New Zealand base rates). We also have senior unsecured notes payable
to insurance companies that are due in annual installments. These notes have
fixed coupon interest rates. See Note 6 to the Consolidated Financial
Statements for more information.
Interest income earned on
our short-term investments is affected by changes in the general level of U.S.
and U.K. interest rates. These income streams are generally not hedged. Interest expense incurred under the short-term
borrowing arrangements is affected by changes in the general level of interest
rates in the U.S., U.K. and New Zealand. The expense related to these cost
streams is usually not hedged since it is either revolving, payable within
three months and/or immediately callable by the lender at any time. Interest
expense incurred under the long-term notes payable is not affected by changes
in any interest rate because it is fixed.
However, we have in the past, and may in the future, use an interest
rate swap to essentially convert this fixed rate into a floating rate for some
or all of the long-term debt outstanding.
The purpose of a swap would be to tie the interest expense risk related
to these borrowings to the interest income risk on our short-term investments,
thereby mitigating our net interest rate risk. We believe that we are not
significantly exposed to interest rate risk at this point in time. There was no interest rate swap outstanding
at September 30, 2008.
Foreign Currency Exchange Risk
In the ordinary course of
business, we enter into firm sale and purchase commitments denominated in many
foreign currencies. We have a policy to
hedge those commitments greater than $20,000 by using foreign currency exchange
forward and option contracts that are denominated in currencies other than the
functional currency of the subsidiary responsible for the commitment, typically
the British pound, Canadian dollar, Singapore dollar, Euro, Swedish krona, New
Zealand dollar and Australian dollar.
These contracts are designed to be effective hedges regardless of the
direction or magnitude of any foreign currency exchange rate change, because
they result in an equal and opposite income or cost stream that offsets the
change in the value of the underlying commitment. See Note 1 to the Consolidated Financial
Statements for more information on our foreign currency translation and
transaction accounting policies. We also
use balance sheet hedges to mitigate foreign exchange risk. This strategy involves incurring British
pound denominated debt (See Interest Rate Risk above) and having the option of
paying off the debt using U.S. dollar or British pound funds. We do not believe
that we are significantly exposed to foreign currency exchange rate risk at
this point in time.
Investments in our
foreign subsidiaries in the U.K., Australia, New Zealand, and Canada are not
hedged because we consider them to be invested indefinitely. In addition, we generally have control over
the timing and amount of earnings repatriation, if any, and expect to use this
control to mitigate foreign currency exchange risk.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA.
CUBIC CORPORATION
CONSOLIDATED BALANCE SHEETS
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
112,696
|
|
$
|
73,563
|
|
|
Short-term
investments
|
|
—
|
|
27,200
|
|
|
Accounts
receivable:
|
|
|
|
|
|
|
Trade and other
receivables
|
|
9,014
|
|
13,024
|
|
|
Long-term
contracts
|
|
264,748
|
|
297,792
|
|
|
Allowance for
doubtful accounts
|
|
(4,878
|
)
|
(5,144
|
)
|
|
|
|
268,884
|
|
305,672
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
45,118
|
|
27,342
|
|
|
Deferred income
taxes
|
|
27,082
|
|
18,492
|
|
|
Prepaid expenses
and other current assets
|
|
21,548
|
|
21,105
|
|
|
TOTAL CURRENT
ASSETS
|
|
475,328
|
|
473,374
|
|
|
|
|
|
|
|
|
|
LONG-TERM
CONTRACT RECEIVABLES
|
|
19,930
|
|
16,650
|
|
|
|
|
|
|
|
|
|
PROPERTY, PLANT
AND EQUIPMENT
|
|
|
|
|
|
|
Land and land
improvements
|
|
15,408
|
|
14,601
|
|
|
Buildings and
improvements
|
|
43,379
|
|
46,519
|
|
|
Machinery and
other equipment
|
|
83,598
|
|
84,149
|
|
|
Leasehold
improvements
|
|
4,656
|
|
4,299
|
|
|
Accumulated depreciation
and amortization
|
|
(93,154
|
)
|
(92,317
|
)
|
|
|
|
53,887
|
|
57,251
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS
|
|
|
|
|
|
|
Deferred income
taxes
|
|
4,631
|
|
|
|
|
Goodwill
|
|
61,032
|
|
36,003
|
|
|
Purchased
intangibles
|
|
19,060
|
|
1,922
|
|
|
Miscellaneous
other assets
|
|
7,384
|
|
7,170
|
|
|
|
|
92,107
|
|
| |