Lionheart Holdings (CUB) Q2 2016 Earnings Report, Transcript and Summary

Greetings and welcome to the Cubic Corporation Second Quarter 2016 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Diane Dyer, Director of Investor Relations and Treasury Services. Please go ahead Miss Dyer.

Thank you, operator, hello everyone, and thank you for joining Cubic’s webcast. Today during market hours, we’ve reported our second quarter fiscal year 2016 results. We encourage you to refer to the company’s press release and most recent reports filed with the SEC as well as today’s presentation slides. You can access these documents on the Investor Relations tab of Cubic’s website at www.cubic.com or on the SEC’s website. On today’s call, Brad Feldmann, Cubic’s President and CEO; and Jay Thomas, Executive Vice President and CFO will comment on Cubic’s second quarter 2016 results; Mark Harrison, Cubic’s Senior Vice President and Corporate Controller, will join us for the Q&A session. Please note that certain information discussed on the call today is covered under the Safe Harbor provisions of the Private Securities Litigation Reform Act. I caution listeners that during this call Cubic management will be making forward-looking statements about future events or Cubic’s future financial and operating performance. Actual results could differ materially from those stated or implied by these forward-looking statements due to risks and uncertainties associated with the Company’s business. These forward-looking statements should be considered in conjunction with and are qualified by the cautionary statements contained in Cubic’s earnings press release and SEC filings including its annual report on Form 10-K and quarterly reports on Form 10-Q. This conference call contains time-sensitive information that is accurate only as of the date of this broadcast, May 02, 2016. Cubic undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this conference call. This conference call will also include a discussion of non-GAAP financial measures as that term is defined in Regulation G. Cubic believes this information is useful to investors because it provides a basis for measuring the Company’s available capital resources, the actual and forecasted operating performance of the Company’s business, and the Company’s cash flows. Any discussion of non-GAAP measures is not intended to detract from the importance of comparable GAAP measures. With that said, I’ll turn the call over to Brad Feldmann, our President and CEO.

Thank you, Diane. Thanks for joining us on the call today. Today, I will review our first half fiscal year 2016 operating results as well as provide a segment and strategy update. Jay will cover detailed quarterly financial results, update our improved financial guidance, and provide non-GAAP reconciliations in more detail. On Slide 3, you will find an overview of our first half operating results. Sales in the first half of fiscal year 2016 were $679.8 million, up 3.4% from the first half of last year, including currency headwinds of $17.2 million. Adjusted EBITDA for the first half was $41.6 million, down from $60.2 million for the corresponding period last year driven by currency headwinds, lower profits on our new London contract, which no longer includes a usage bonus, decreased profits on a ground training systems which we were delivering in the Far East and lower high margin air combat shipment volume. Overall, however, we are very pleased about the improved financial performance in our transportation segment from the first quarter as expected. In total, our Q2 sales increased by 8% compared to the same period last year to $366 million and our adjusted EBITDA improved substantially to $30.3 million or 8.9% return on sales from the first quarter. We believe sales and profitability will greatly improve during the second half due to shipments of higher margin products in C4ISR and training systems, which will occur in our fourth quarter. As we have previously communicated, FY 2016 is a transition year for Cubic as we continue to implement structural and cultural changes throughout our organization. During the quarter, we successfully completed the on-time implementation of the first phase of our new ERP system to include SAP and Workday. Follow-on phases are on track, and we expect to increase effectiveness and efficiency as a result. Integration is proceeding as planned for our high margin high growth C4ISR acquisitions and we remain confident that we will add considerable value for our customers and shareholders. During the quarter, we started integrating marketing efforts between the legacy Cubic businesses and the acquired C4ISR entities and the initial feedback has been very positive. Overall, we expect FY 2016 to have higher sales and adjusted EBITDA compared to FY 2015, which is reflected in our revised guidance, and we continue to expect record performance in FY 2017. Moving to Slide 4, I’d like to update you on our business segments. In Cubic Transportation systems, we enjoyed improved financial performance compared to the previous quarter. Profitability has increased across the Sydney, Vancouver and Chicago contracts, driven by an improved performance as well as negotiated changes and upgrades to our existing systems. We expect this trend to continue in the second half. Recently, the Transport Minister of New South Wales announced that Sydney will trial open payments on their Opal system, similar to what we’ve done in London and Chicago. We are pleased as this trial could lead to revenue increases in FY 2017 and 2018 and is a cornerstone of the one account portion of our Next City strategy. In the Washington, DC Metro area, another contractors’ pilot effort to update the WMATA system was recently canceled, and the customer will likely make incremental upgrades to the SmarTrip system we have supplied. We believe there will be further consolidation in the transportation fare collection market. In addition, our organic opportunity pipeline continues to expand and we are confident, there are many opportunities to grow our transportation business. Most notably, the upgrade request for proposal, or RFP, for the system in New York City has been released. Our team is working hard on the proposal and we expect a decision on the award to come in fiscal year 2017. In Cubic Global Defense Systems, our training systems business continues to innovate to provide superior solutions for our global customers. In air combat training systems, we are very proud that our system is the live training solution for the Joint Strike Fighter. We are also working on the future of fighter pilot training with an R&D contract to update air combat, training by adding live virtual and constructive simulations capabilities, which will greatly enhance the effectiveness and efficiency of future training for the U.S. and our allies. In ground training systems, we are delivering the future of home station instrumentation system, and we are working to add indirect fire, synthetic ISR, cyber, social media effects to combat training centers. In virtual training, we are now delivering state-of-the-art immersive courseware to the Littoral Combat Ship program. We have parlayed this technology into our adjacent win with Emirates Airlines as well as our KC46 proposal, which we expect to be awarded later this fiscal year. The opportunity pipeline remains strong and we expect modest growth going forward. We have transformed our legacy secure communications business over the past year into a niche C4ISR business with the acquisitions of DTECH, TeraLogics and GATR Technologies. With these additions to the Cubic portfolio, we are now a prime contractor offering expeditionary communication solutions to multiple customers. DTECH and GATR Technologies are currently providing best-in-class solutions to the U.S. special operations command and the United States Marine Corps. We have recently won new contracts with the United States Army. TeraLogics is the prime contractor to the Defense Information Systems Agency, distributing demand high full-motion video products through a secure, massively-scalable cloud implementation to the Department of Defense. We are pursuing co-development with our customers to integrate cross-domain solutions, software-definable radios, and advanced antenna capabilities that will closely align with our customers’ mission. This impressive transformation of our data links portfolio into a niche C4ISR prime contractor communications business will deliver enhanced value for our customers and shareholders. The C4ISR business will have rapid growth and deliver higher margins going forward. In Cubic Global Defense Services, we are seeing gradual revenue and profit improvement. Additionally, we continue to pursue more best-value contract opportunities. The large U.S. Army Joint Readiness Training Center, or JRTC re-compete, is now underway, with the award expected later this fiscal year. We believe we are well-positioned to win, as we have been delivering exceptional value to this critical customer since 2001. This quarter, we won important training and IDIQ contracts, most notably supporting the Maneuver Center of Excellence Battle Simulation Center and the Joint Training Division of the Joint Staff Joint Forces Development Directorate. There is also a large opportunity set of ground-based services that we are planning to bid, and therefore, we expect growth in this segment going forward. Moving to Slide 5, I would like to reiterate our strategy and provide an update. Our overarching corporate strategic objective is embodied by Goal 2020. By continually winning the customer, we will grow the Company’s topline at 10% or more annually, in line with our historic performance, and we will grow our bottom line at a faster rate through our One Cubic efficiency initiatives. With that in mind, there are five key strategic objectives to our strategy. The first is winning the customer. Winning the customer is absolutely paramount to our success. We must do better with the customer than anyone else. We must deliver early, be more responsive and empathetic, discover key insights, and continuously innovate. We must provide our customers with superior solutions spurred by innovation and ultimate customer focus to earn their trust and loyalty. Our second strategic objective is our NextCity vision for the future of our Transportation segment. We intend to build NextCity globally. We are in the process of expanding from providing mass transit fare collection to deploying smart mobility information and payments across all transportation modes in a city. Our NextCity vision is anchored on three pillars. The first is called One Account, where we will focus on providing one account for all transportation payments, no matter the mode. The second is called Integrated User Experience, where we will provide transportation, multimodal payment and real-time journey information to mobile devices and other user interfaces in a personalized and predictive fashion. The third pillar is called Operations and Analytics, where we will synergistically and cost-effectively provide tools, applications, and analytics to manage and plan across all modes of transportation in the city. We believe this strategic initiative is in line with the future of transportation, and that its effective implementation will propel our transportation business to our target goals of 13% to 15% EBITDA margins, and 10%-plus compounded annual growth rate. Right now, we are making great progress implementing our NextCity strategy. And I would like to provide you with some highlights. Winning the New Hampshire toll contract opens an attractive adjacent market that is aligned with One Account. We are delighted with the Sydney contactless payment trial, as this will be yet another extension of the One Account initiative. We believe that this, along with the recent implementations in London, Chicago and Vancouver, will give us a technological edge going forward. There is already demand for our Chicago mobile solution from several other CTS customers. The North American expansion of our Traffic Management business represents the opportunity to grow our UK Intelligent Transportation System Road Instrumentation capability. The third strategic objective is to grow our C4ISR business. We are on track to achieve our goal of creating a niche $200 million-plus communications business with high-teen margins by the end of the fiscal year – a goal that we set for ourselves only last year. We are also exploring other C4ISR niche areas where we can add enhanced value. In addition to the acquisitions, progress includes winning and delivering on the initial phase of a key U.S. Army tactical satellite ground terminal contract; expanding our work for the Defense Information Systems Agency in providing full-motion video dissemination to combatant commands; continuing our strong performance in delivering innovative satellite communication and tactical networking solutions for the U.S. Special Operations Command; innovating on new technologies with our customers that will lead to further growth. The fourth strategic objective is to build our next training capability globally. We have a great training business that we are providing our customers with systems and services across the globe for over 40 years. We are implementing innovative high-fidelity integrated live virtual constructive gaming solutions across all domains of warfare that will help our customers enhance training readiness, efficiency, and effectively. We believe that our Training Systems business will see improved margins to 10%-plus EBITDA, and our Services Training business to 5% EBITDA margin, growing at more than 5% CAGR in the near-term. Key areas where we have made progress with our next training strategy include: developing and delivering simulations to support the integration of indirect fire weapons, cyber, synthetic ISR, and social media in the combat training centers; providing state-of-the-art immersive courseware using gaming technology. For example, we are awarded work for the LCS Mission Bay trainer this month with a value of $9.4 million. Continuing to build our virtual training expertise, we were recently awarded a follow-on Bradley training contract with a value of $13.4 million. We are continuing to strengthen our partnership with international customers in Canada, Europe, and Singapore. We will achieve increased efficiency and effectiveness by implementing our final strategic objective, One Cubic. One Cubic, as we have previously shared, is our strategy to rebuild our Company’s infrastructure to enable decentralized customer-facing functions and centralized support functions to allow for a scalable, efficient and effective enterprise. We know that we can create additional value by intelligently sharing our resources across the globe. Through this journey of changing the culture, we are now sharing analytics, visualization, and communications technology. We are also sharing geographic locations, talent, supply chain, factories, and processes. By implementing SAP and Workday, we will have all the data in one place, enabled by common processes instantiated in the system. We strongly believe that we will – that will lead to several efficiencies in SG&A expenses. We have committed to improving our margins by 2% to 2.5% through these efficiency initiatives. We will organically grow our Company through innovation. We are working hard to understand our customers' endpoints, and develop innovative winning solutions with our customers to shape specific demand early in the process, before request for proposal are released. We will focus our inorganic acquisition-related growth targets on companies that will synergistically drive great solutions for our customers in transportation and defense. We will exercise discipline to ensure that we do not pay more than our risk-adjusted cost of capital, and we will rapidly integrate these companies quickly and effectively to ensure growth and higher margins. We believe our Goal 2020 strategy and its supporting objectives will achieve significant value for our customers and shareholders. We are pleased with the progress to-date, and our team is excited the implementation will achieve great results in the future. I will now like to turn the call over to Jay, our CFO, to discuss our detailed financial results and improved guidance.

Thanks, Brad. Please turn to Slide 6 for our consolidated operating highlights. Sales in the second quarter were up $27.2 million or 8% compared to last year, and up $22.5 million or 3% year-to-date despite FX headwinds which lowered sales by $7.7 million in the quarter and $17.2 million year-to-date. Recent acquisitions contributed $15.1 million in the quarter, and $22.9 million year-to-date. Adjusted EBITDA was $30.4 million in the quarter down from $41.4 million last year, due to lower margins in our Transportation segment, lower air combat shipments, and cost growth on a ground training system we are delivering in the Far East in our Defense Systems segment, which was somewhat offset by higher margins in our Defense Services business. As Brad noted, we are expecting a much stronger second half of the fiscal year, with materially higher shipments of higher margin air combat training systems and C4ISR products in our fourth quarter. GAAP EPS in the quarter was $0.38 per share, which was favorably impacted by a positive tax adjustment related to purchase accounting on the GATR transaction. Last year in the corresponding quarter, we had a valuation reserve against a deferred tax asset, which negatively impacted EPS in the quarter. The positive tax adjustment in this year's second quarter results from a reduction of the deferred tax valuation reserve that was taken last year. Partially offsetting this positive tax adjustment was additional compensation expense recorded, also related to the GATR transaction. Now turning to Slide 7, I will discuss our Transportation segment or CTS. CTS sales were virtually unchanged in the quarter and year-to-date despite FX headwinds of $6.6 million in the quarter and $13.4 million year-to-date. Higher sales in North America were offset by lower sales in the UK and Australia. Operating income was lower in the quarter due to lower margins on the London contract, as we no longer get a usage bonus on that contract. Offsetting this impact were higher profits, comparisons on contracts in Chicago, Sydney and Vancouver. Adjusted EBITDA margins of 10.3%, while lower than last year, are consistent with our expectations for the year. We expect to see these improve during the year and to be in the range of 10.5% to 11.5%. CTS backlog remained very strong at $1.79 billion. CTS generated operating – positive operating cash flows for the first-half of the year. Now turning to Slide 8, I will discuss Cubic Global Defense Systems, or Defense Systems. Sales increased 23% in the quarter and 10% year-to-date due to recent acquisitions we made in the C4ISR space. Somewhat offsetting this increase in sales from the C4ISR acquisitions were lower shipments of air combat systems. As I noted previously, we are expecting a very strong fourth quarter, where we will have much higher shipments of air combat and C4ISR systems. We saw this phenomenon last year, which materially impacted our sales and profits for the segment. And this is what we are expecting again this year. As part of our recent acquisition of the companies, we recorded compensation costs related to employee stock options for GATR, retention and bonus costs, earn-out consideration, as well as transaction costs, which, when all combined, totaled $19.6 million in the quarter and $23.4 million for the six months for our Defense Systems business. The compensation cost was included in the total consideration that we paid for the acquired companies, and purchase accounting treatment under GAAP requires that these be treated as expenses. Operating profits were negatively impacted for the quarter by $24.8 million and $28.7 million year-to-date operating losses with our recent acquisitions of GATR, TeraLogics and DTECH, inclusive of amortization expense. In addition, cost growth on a ground training system we are delivering in the Far East coupled with lower shipments of higher margin air combat systems, also impacted operating profits for the quarter and the first half. Please see Appendix Schedules 14 through 17 for a detailed reconciliation of adjusted EBITDA for this segment. Adjusted EBITDA reflects adjustments for the impact of the acquisition-related costs that negatively impacted our quarterly and year-to-date operating results. Management believes this metric is more representative of the underlying earnings of this business segment. Defense Systems backlog was $561.8 million at the end of the quarter, down from $595.7 million at the end of our last fiscal year. The C4ISR business – businesses that we have acquired are more book-and-ship type of businesses with lower backlogs than our traditional businesses, due to the shorter cycle between contract award and delivery. Defense Systems was a user of cash in the quarter and year-to-date, due to the operating losses that arose primarily from the acquisition costs discussed previously. Now turning to Slide 9, Cubic Global Defense Services, or Defense Services, continued to show modest improvement in sales and operating profits due to higher activity at the Joint Readiness Training Center for Special Forces training. Sales were up 3.5% for the quarter and year-to-date, while operating profits were up over 300% in the quarter and year-to-date. Lower amortization expense had a positive impact on operating profits as well as higher-margin work. The adjusted EBITDA margins for Defense Services year-to-date is indicative of our expectations for this segment. Defense Services had positive operating cash flows for the quarter and year-to-date. As Brad noted earlier, we will be submitting a bid on the JRTC re-compete later this fiscal year. We expect the award will be for a multi-year period. Now turning to Slide 10, I will discuss key balance sheet and cash flow data. The most significant change to our balance sheet in the quarter resulted from the completion of the GATR acquisition, which resulted in an increase in total debt to $441.4 at March 31. We funded the acquisition with a combination of long-term debt from a private placement for $75 million and through an expanded revolving credit facility. Our near-term capital allocation plans are focused on paying down debt with free cash flows. We are targeting to reduce our gross debt to adjusted EBITDA levels to be closer to 2.25 to 2.5 times by the end of fiscal year 2017. Year-to-date, we have capitalized $14.7 million related to the new IT system. In addition, we have expensed $15.9 million on various One Cubic initiatives, including IT and supply chain. Our guidance for the year assumes at mid-point, we will expense about $35 million in costs relative to these initiatives for the year. As we move towards full system implementation, we will be capitalizing less expense and expensing more of these costs in the next few quarters. In the quarter, cash flows from operations was negatively impacted by costs associated with the GATR acquisition, but this was more than offset by positive cash flows from our Transportation and Defense Services segments. Finally, turning to Slide 11, we have revised our guidance for fiscal year 2016 upwards for sales and adjusted EBITDA. We are increasing the mid-point for our sales guidance for the year by $60 million to $1.535 billion from $1.475 billion. This increase reflects the contribution from the GATR and TeraLogics acquisitions, less the impacts from currency translations headwinds projected for the year. During the year, we have seen the British pound depreciate from £155 to £143 to the dollar. Almost all of the currency headwinds are impacting our Transportation segment. We have assumed that the British pound remains at the levels we saw at the end of the March quarter. We are increasing our adjusted EBITDA guidance mid-point by $5 million for the year. This increase relates to contributions from the GATR and TeraLogics acquisitions, offset by currency headwinds, which are impacting our profits primarily in the UK, due to the British pound weakness in our Transportation segment. We have lowered our GAAP EPS and EBITDA guidance to reflect the impacts of the recent C4ISR acquisition costs and the impact of currency headwinds. And with that, I will now turn it over to Brad for his closing thoughts.

Thank you, Jay. Now turning to Slide 12 summary slide. We are confident that fiscal year 2016 sales and adjusted EBITDA will be higher than last year, with higher volume product shipments in Q4. We are very excited to have completed the first phase of our efficiency-enhancing One Cubic ERP implementation, and future releases are on track. We believe our Goal 2020 strategy is sound. We are making progress, and the result will be growing our Company more than 10% while achieving faster margin expansion. We have many large opportunities for which we are positioned to win. We are thrilled with our most recent acquisitions, TeraLogics and GATR Technologies, which position us as the expeditionary communications market leader. We believe our C4ISR strategy is a game-changer for Cubic. Fiscal year 2016 is a pivotal year for us, during which we will improve our performance as well as our overall growth prospects, and set a foundation for fiscal year 2017. Together, our team continues its intense focus on implementing our strategy and providing superior value to our shareholders and customers. We are very excited for the future, and appreciate your partnership in the Company and your continued support. Now let’s proceed to the Question-and-Answer Session.

Thank you. Now we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question today is coming from Julian Mitchell from Credit Suisse. Please proceed with your question.

Hi thank you. Thanks for the extra disclosure in the slides. It's very helpful. Firstly, I guess, just on the Transportation business, I think it seemed as if maybe the lower end of your margin guidance for that segment had come down a little bit versus what you'd thought before. I just wondered if that was right? And if – what the driver of that was? Maybe currency? Or was there anything more fundamental there?

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

Got it, thank you. And then just longer-term, on Defense Services, I wondered if you could be maybe a little bit more ambitious in terms of your margin targets? It sounded as if you were sort of thinking that the current run rate is where you think the long-term appropriate rate is. Just wondered why you don't see room for more upgrades there?

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

Understood, thank you.

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

Thank you. I just wanted to go back to the Transportation business and just get a sense as to – a s we think about the second-half of the year, how you see the operating margins and EBITDA margins for the back-half of the year.

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

Okay. Is there a way to perhaps size the opportunity potential that you alluded to for Sydney and Washington, maybe even on a combined basis? Just potentially what that could mean.

This is Brad, how are you.

Hi Brad.

Both of those opportunities – I’d say the upgrade to WMATA is worth tens of millions of dollars. I think the opportunity in Sydney could be much greater than that.

Sydney will likely – it will be over the term of the contract, so we are talking that could be eight to ten years on the initial term.

Okay. And just with respect to the acquisitions, how would you characterize the performance so far? And I don't know if you can give us a feel for how the two C4ISR businesses are expected to contribute in the back-half of the year?

This is Jay. Pretty much following what we said on the call back in January, they – as far as sales go, it's very backend-loaded to Q4, more on the GATR side because it's a product shipment business. The TeraLogics business is very consistent quarter-to-quarter. So, I would say GATR is a little bit backend-loaded in Q4. But they are performing, margin and sales- what we thought they would do.

Okay, thank you.

Thank you. [Operator Instructions] Our next question today is coming from Brian Gesuale from Raymond James. Please proceed with your questions.

Hey guys. Nice to clear the first ERP hurdle. Wondering if you could give us an update on what the next milestone might be there? And just an upgrade – update on the overall timing from the ERP side of things.

Hi this is Brad, how are you?

Terrific.

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

Great. Maybe just transitioning to kind of a two-part question on your pipeline of business opportunities, can you maybe talk a little bit about the Defense and Services side, with the incremental operational tempo that we've seen? And then also maybe just expand a little bit on the NextCity opportunities that you see out there. Thanks very much.

Sure, we’re seeing a number of opportunities related to ground training services, Brian, well north of $1 billion in ceiling; multiple opportunities that we think we have pretty good chances for. The pipeline overall has increased by a number of billion-dollars. We don't normally specify those numbers, but it has improved considerably. NextCity, we see opportunities. As we noted earlier, New York City is out. We have been, as you know, the incumbent there for multiple decades. There are opportunities in the Middle East; opportunities in Australia. We see the smartphone initial implementation in Chicago, some demand there. We see opportunities for our road instrumentation business from the UK and the United States. So there are multiple opportunities to grow that business, and we are pretty savvy that we will be able to grow it going forward.

Great. Thanks very much for the color, Brad. Jay, just a quick modeling question for you. It sounds like the fourth fiscal quarter is going to be substantially stronger from an earnings contributor than the third. Is that the correct way to think about it, with some of the timing things that you had mentioned?

Yes, and especially in Defense Systems. So, you’re really – like last year, because we are going to ship a lot of product systems, so Q4, revenue-wise, in Defense Systems, will – they will – be have a peak in sales and earnings in the Q4. If you look to last year, I think we made virtually most, if not all, the profits in Defense Systems in Q4.

Great. That’s very helpful. Thanks so much, guys.

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

Yes. Thank you very much. Another Brian asking questions. The first question is air combat was weak in the quarter. I assume that is just a timing issue that you spoke with, and it is going to be – what, fourth-quarter weighted?

That’s correct. It’s just different shipments in comparison to last year.

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

You know, we haven’t given any guidance on that, so I am going to defer on the question, because we didn’t provide any guidance on that. But it will be something less – a lot less than last year because of the acquisitions and the ERP spend, to give you a little bit of color.

Okay. And did you disclose the foreign exchange impact in total in your guidance, what the range was that the impact to EPS or EBITDA, either one?

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

Great, thank you very much.

Sure.

Thank you. Our next today is coming from Mark Strouse from JPMorgan. Please proceed with your question.

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

That is correct.

Yes, okay. That’s what I figured. And then just going back to the Sydney trial, can you just remind us how long that trial is expected to last when a decision regarding full implementation might be made? And then just for what you know about that contract so far, what the system would be, would that be kind of similar – a similar accounting structure at all of your other major systems, where there is a margin headwind upfront before uplift in the outer years?

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

Got it, okay. Thanks, guys.

Thank you. Our next question today is coming from Josephine Millward from The Benchmark Company. Please proceed with your company.

Hi, Brad. Hi, Jay.

Hi, Josephine.

When do you guys think you can – hello, when do you guys think you can return to 10% growth? And are we talking about 2017, 2018? What programs do you have to win to get there?

So, organically, there’s three large bids. I think we only really need to win one or two of those to really kickstart the growth. So, New York on the MTA bit, we have a KC-46 bid. As Brad mentioned, there is a bunch of large services contracts and Defense Services. And then Transportation has got Melbourne sitting out there as well. So it doesn’t take winning all those. It is a combination of a couple of those.

And our growth historic for many, many years has been a combination of organic as well as growth by acquisition, and we intend to follow that path.

Okay. My next question is related to services. Can you expand on why you think you can return to 5% annual growth? I would imagine it is tied to winning some of these new contracts. And what do you think about L3 and Lockheed divestitures of the government services business? How do you see that changing the competitive environment?

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

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

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

That’s helpful, thank you. Lastly, can you give us an update on potential cost recovery on Transportation and LCS cost overruns?

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

Thank you.

Thank you.

Thank you. We have reached the end of our question-and-answer session. I would like to turn the floor back over to Mr. Feldmann for any further closing comments.

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