Winding Down In Iraq Costs Cubic
Cubic Corporation (CUB) is a mid-size defense and government contractor recently announced their results for the quarter ending December 31st. The company did post a profit of almost $14 million but the analysts and stock market were disappointed. Total sales were $250 million which was $13 million less then predicted for the quarter a gain of about 2.4 percent.
The company has three main segments: Defense Systems, Mission Support Services and Transportation Systems. The first two segments are primarily defense oriented while Transportation Systems provides fare and control systems to mass transit systems all over the world. One of the reasons for the slight growth was that a contract in the San Francisco area for Transportation Systems actually lost money while another contract in the Segment cost $1.6 million in dispute resolution.
The Defense Systems was the bright spot for the company with overseas sales of some electro-optic training systems as well as equipment for ground combat training increasing. Some of these sales were also related to Cubic's support of Lockheed Martin's (LMT) Joint Strike Fighter (JSF) contract. That segment had $75.6 million in sales an increase of almost fifteen percent over the last year's quarter.
Mission Support Services saw a drop of over $6 million in sales. A good part of this was due to the end of a contract in Iraq that added $5.7 million in sales last year ended and was not replaced. That contract was also very good to the company as it contributed $2 million in operating income in 2009.
The company has a decent funded backlog of over $1.5 billion but there was an increase of only $10 million from the prior year. The company actually saw a decline in their backlog. This may mean that new contracts are not being won at a rate to make up for the ones ending or being lost.
As the U.S. begins to wind down its presence in Iraq there will be more contracts ending and not being renewed or replaced. This means more companies will see sales, revenue and profit going down unless there are other markets making up for this. Certainly the expanded number of troops in Afghanistan will make up for some of this but the total troops sent there is no where near the total commitment to Iraq. There are also existing support contracts in Afghanistan that could be expanded to meet the needs of the new forces.
While the 2011 defense budget is slightly larger then the 2010 the long term prediction is that it will decline. The decline in operating budgets will happen first as troops return from Iraq and Afghanistan as the Obama Administration currently plans. There will be money available for new weapons but there are many companies that provide services and support to the deployed forces and not make hardware. These companies will begin to see less-and-less business and unless they shift to different business line they may have a hard time finding work.