Ross Wilkers
In a one-year span that featured announcements of three acquisitions, Cubic Corp. unveiled a nearly $400 million bet that the C4ISR market will spur long-term growth in the San Diego-based contractor’s global defense business that represents roughly 60 percent of its estimated $1.5 billion in revenue.
Cubic made its first move of that C4ISR expansion effort in December 2014 with the $114.5 million acquisition of DTECH Labs, a Sterling, Va.-based manufacturer of ruggedized communications equipment and modular networking tools for use in portable, vehicle, airborne and dismounted settings.
The company then disclosed the second and third steps of its shift one year later through the $232.5 million purchase of tactical communications equipment maker GATR Technologies and in conjunction the $39 million buy of TeraLogics, which designs full-motion video analysis and distribution platforms for customers in the defense, intelligence and commercial arenas.
Altogether, Cubic put $386 million toward the acquisitions in a strategy CEO Brad Feldmann described to ExecutiveBiz as one aimed in part at building a “mission chain” for soldiers and other personnel that use surveillance and communications equipment in missions while on the ground.
“The idea is to be a full lifecycle provider and provide a full subsystem capability for people on the ground,” Feldmann told ExecutiveBiz in an interview conducted at DTECH’s headquarters in Ashburn.
The triple-play of acquisitions positions Cubic as an original equipment manufacturer and a primary source for work on the upgrade cycles, he said.
“We felt by getting all these pieces, we could bid larger opportunities and gain revenue growth with these new sub-capabilities.”
Cubic also added new work with customers such as Special Operations Command and the Defense Information Systems Agency through the deals, plus an added footprint with the U.S. Army through a contract GATR holds with the branch’s Communications-Electronics Command.
Within the government contracting market, consolidation among the largest services-oriented companies has dominated GovCon’s merger-and-acquisition environment within the past 14 months in moves such as Leidos‘ deal to merge with Lockheed Martin‘s information technology segment, CACI International‘s $550 million purchase of the L-3 National Security Solutions business and Science Applications International Corp.’s $820 million buy of intelligence community contractor Scitor.
Other contractors like Cubic that manufacture systems and platforms have looked toward targeted capability-based acquisitions to add new products and other offerings as L-3 Communications purchased ISR and geospatial technology maker ForceX and Boeing bought video processing system manufacturer 2d3 Sensing.
“Generally, you can have higher margins with products, if they are operated efficiently you can get good returns on capital. In the products business, you generally see companies doing opportunistic kinds of buys for things that fit in their strategy,” Feldmann said.
“In our instance with those acquisitions we made one can see the overall strategy in what we’re trying to do with creating a mission chain. We’re a technology company that provides both systems and services.”
The company started its current fiscal year with a first quarter net loss of $5.4 million, or 20 cents per share, with an operating loss of $8.1 million but Feldmann views Cubic’s direction as one set for to set it in direction for growth in the rest of FY 2016.
Both the series of acquisitions and the company’s OneCubic initiative to realign its defense business affected first quarter results, Feldmann said.
“The first quarter is historically not great for us and there are the investments in our business on top of that. We have a lot of shipments in the latter half that have good margins and see FY 2016 being a good year,” he added.
“We see us hitting it out of the park in 2017.”
Cubic’s international market activity will also be a factor in its long-term prospects as Feldmann estimated the defense segment’s revenue as split evenly between the U.S. and foreign customers through either foreign military sales contracts or direct commercial sales.
“We’ve expanded greatly with our ground combat training and are working with 25 armies worldwide,” Feldmann said.
The current global security environment and governments’ strategies to combat terrorism and other potential threats means defense spending environments in the U.S. and abroad will present opportunities for contractors in the training market particularly, Feldmann said.
“We see opportunities in the Middle East and also see increased demand signals with the shift to the Pacific,” he said.
“Peace has not broken out around the world.”
