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Cubic Says R&D Expenses Will Pay Off

Research-and-development costs for future transportation projects as well as other charges dragged down Cubic Corp.’s financial results for the first three quarters of fiscal 2017, though the company promised shareholders good things ahead.

Analysts were not pleased. Brian Ruttenbur of Drexel Hamilton grumbled in an Aug. 4 research note that Cubic (NYSE: CUB) had a “sloppy” quarter with its numerous charges.

During the first three quarters of the fiscal year, the transportation side of the house had $6.4 million in engineering expenses as it re-competed for a contract to supply the fare collection system to New York City’s mass-transit system. The scope of the work expanded geographically and the award could come as soon as September, executives told analysts.

Predicting a Win

“We’re basically very confident we’re going to win that job,” Cubic CFO Jay Thomas said in an interview, adding that Cubic is improving the technology now. He said New York authorities want to add radio-frequency identification (RFID) capability, as well as the capability for commuters to use their smartphones to pay fares.

Cubic had an additional $6.6 million in charges related to entering the toll road market in New Hampshire.

There was also $9.4 million in general R&D costs during the first three quarters.

“In our view, CUB is clearly investing more on new business (NY CTS opportunity), start-up costs for existing contracts (toll roads) and on its operational improvement efforts (ERP) than we or investors anticipated in 2017,” wrote analyst Kenneth Herbert of Canaccord Genuity. CTS is Cubic’s transportation business. ERP refers to a computer system.

Cubic splits its business between transportation technology and defense contracting.

Executives promised analysts a strong fourth quarter. Thomas said that over the last three years, delays in getting Pentagon budgets approved have shifted orders to the fourth quarter, making it especially strong.

$22M Net Loss in Q3

The Kearny Mesa-based business reported a net loss of $22 million in its third quarter, which ended June 30. Sales of $361.9 million were off more than 3 percent from the year-ago quarter, when the company had net income of $4.5 million on sales of $375.2 million.

Research and development expenses of $16.9 million in the June quarter were about double the $8.5 million in the year-ago quarter. For the nine months, R&D was $38.8 million — more than double the $18.1 million in the same period of fiscal 2016.

Cubic said that its opportunities with the New York and Boston transportation systems amount to more than $2 billion. There are also opportunities ahead in Brisbane, Australia and San Francisco.

Cubic continues to spend on developing a new corporate information technology system and redesigning its supply chain, with the hope that a streamlined system will save it money.

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