Following a string of acquisitions, including one for a company that provides satcom in a balloon, Cubic Corp. is now looking to go global with C4ISR capabilities for soldiers on the edge of the battlefield, and expand training and simulation for the next generation of fighter pilots and soldiers. And it's all while the company undergoes a major infrastructure refresh. As Cubic president and CEO Brad Feldmann puts it, "the wheels haven't fallen off yet."
You had a solid 2016 in terms of earnings. Give me the rundown.
We had some growth – topline about 3 percent. Earnings were a little less than the year before. We're working hard at expanding the company via acquisition, as well as implementing SAP in the company, so we're rebuilding the infrastructure. But we had a pretty good year. We're well positioned.
What spurred the infrastructure rebuild?
We hadn't upgraded our infrastructure in a long time. Our founder, bless him, ran the company for 61 years as CEO. He passed in 2012, and there was a bunch of catch-up. We had many systems attempting to run the business – north of 100. Moving to one, SAP, we felt was critical to run and expand the business.
What percentage of the business is defense, and do you expect that to change?
Sixty percent is defense and 40 percent is transportation. I would expect the transportation piece to grow organically faster because there are major opportunities in North America. Having said that, we see great opportunities in C4ISR. We've done four acquisitions in the last 16 months, to create niche communications capabilities on the edge of the battlefield.
What kind of niches did you fill?
We had a communications business that moved full-motion video around from UAVs, airplanes, down to aircraft carriers and folks on the battlefield. From there, we did a study of the market, looked at opportunities. What we created was an ability to move data back and forth – people on the edge of the battlefield with SOCOM, the Marine Corps, Army.
We started with DTech – a networking company that provides cloud computing capability tactically. We bought a company that processes full-motion video in the cloud - so all from government is collected and disseminated securely over a web implementation that is massively scalable. We bought [GATR Technologies], a company that created an inflatable satellite communications terminal, so rather than having a dish, you have a balloon you blow up and inside [is antenna technology]. In 15 minutes you can have satcom anywhere on the planet. And last, we recently bought UK-based company Vocality, which makes communications paths more optimal. They take packets and break them into smaller packets, and that eliminates headers and helps ensure resiliency.
[As a result of the acquisitions] we began to offer a product called Atlas. It ended up providing all of that capability in a few Pelican cases. On the edge of the battlefield, you can move full-motion video back and forth over satcom capability. We've sold about 36 to our customers.
C4ISR is a broad and expanding market. Where do you see the most growth opportunity?
Communications on-the-move is an area. There's also a notion of joint area layered network, [which bridges disparate voice and data communications systems] where there is growth.
Training and simulation is a big focus for all the services. Where do you see the greatest opportunities?
Live, virtual, constructive and gaming [is the focus]. By combining simulation techniques, you can create effectiveness and efficiency, [with the] output being readiness. We're fortunate to have good positions in live; some in virtual. And we're the largest operator of constructive simulation.
We actually won a program with the Air Force Research Lab during the last couple weeks. We invented this Top Gun system in the early 70s – something the fighter pilot uses to [train for] firing missiles more effectively. Today [they deal with] live forces against live forces. Wouldn't it be great if you could create some forces synthetically? Create more stress for the pilot [virtually]? We're excited.
President Trump has focused a lot on growing defense. How does that bode for training and sim investments?
We think it increases. The sequester has not been a good deal for defense, for the country. With the alignment of parties, I think there will be a budget deal. And as a result, the tide will rise in defense. The sequester caused a heap of hurt on readiness. And the service chiefs are aware of that. I think we're getting more. The service chiefs know we're in a readiness hole.
How much of your sales are international?
Fifty percent is international, including both FMS and direct sale. We're fortunate. The Top Gun system led to training fighter pilots all around the planet. We saw great sales there. Our force-on-force training for ground is training 25 armies today. It clearly is a global business. We're hoping the C4 business becomes more global. We're working on that.
Which service seems to be investing most in the training and simulation business?
We're fortunate to be on the Joint Strike Fighter combat training [program]. I don't know how many airplanes the world will buy, but it will be something around 3,000. We've started working in that area. We also expect with the introduction of 5th-generation airplanes the training requirements to change. On the ground, we've been providing equipment to the Army combat training centers.
What do you expect from a Trump administration?
I think there's a great chance that the Budget Control Act can go away. That would be tremendous for our industry. But by the same token, the tide will rise. Far be it from me to predict what [Present Trump] will do. I'm not sure I understand that perfectly. But I think he'll hold people accountable. And that's good for the tax payer. I was glad I wasn't tweeted.
Me too. Has Wall Street responded in terms of Cubic's stock price?
Like many in the defense space, the stock went up the day [it was announced] he won the election.
Any more acquisitions planned?
We're always looking. We look at many properties before we consummate a deal. We're picky buyers. We have a strategy and are trying to build a mission chain in C4; and in training we look for capabilities we don't have – niche. We're in the middle of successfully integrating the companies [we recently bought] and are constantly on the lookout. We're going to generate cash, pay down debt in the near term.
There's two points of our strategy. One is this notion of winning the customer. We feel we need to do better than anyone else. We need to deliver early, be responsive. And then we're trying to have intelligent sharing in the company. We've brought seven supply chains to one, seven factories to two, and we're in midst of an SAP transformation. The wheels haven't fallen off yet.