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Cubic Corporation (NYSE:CUB)

Q3 2014 Earnings Conference Call

August 4, 2014 16:30 ET

Executives

Diane Dyer - Director, IR

Brad Feldmann - President, CEO

Jay Thomas - CFO

Jim Edwards - VP, General Counsel

Analysts

Julian Mitchell - Credit Suisse

Jim Ricchiuti - Needham & Company

Josephine Millward - Benchmark Company

Andrew Storm - Cortina

Operator

Welcome to the Cubic Corporation's Third Quarter Fiscal Year 2014 Earnings Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

At this time, I would like to turn the conference over to Diane Dyer, Director of Investor Relations. Please go ahead.

Diane Dyer

Thank you, Operator. Good afternoon everyone and thank you for joining the call. We have two speakers today, Brad Feldmann, Cubic's President and CEO; and John Thomas, Cubic's CFO who will review the fiscal 2014 third quarter and nine months financial results and operational highlights that we announced this afternoon. After our prepared remarks, our executive team will be happy to take your questions.

By now, you should have a copy of our earnings press release. If you need a copy of the press release, you can go to www.cubic.com under the Investor Relations tab to find an electronic copy. We encourage everyone to read today's press release and refer to our most recent reports on Form 10-Q and Form 10-KA. For anyone who has not seen a copy of these documents, they're available on Cubic Corporation's Web site and on the SEC's Web site.

Now I'll turn the call over to Jim Edwards, Cubic's Senior Vice President and General Counsel, for the Safe Harbor disclosure.

Jim Edwards

Thank you, Diane. 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 the 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-KA 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, August 4, 2014. 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 flow.

A reconciliation between the GAAP financial measures that correspond to these non-GAAP financial measures is contained in our earnings press release and our amended SEC Form 10-K report for the fiscal year ended September 30, 2013. Any discussion of non-GAAP measures is not intended to detract from the importance of comparable GAAP measures.

With that said, let me turn the call over to Brad Feldmann, our President and Chief Executive Officer.

Brad Feldmann

Thank you, Jim. Good afternoon everyone. Thanks for joining us on the call today. Today is my first conference call as Cubic's CEO. I would like to thank the Board for my recent appointment as the President and CEO. I have over 15 years of service with the company. And I look forward to working with our team to make the company even better.

Cubic is a great company that as a diversified portfolio of markets, systems and services, technologies as well as geographies. I want to express appreciation for our founder Walter J. Zable and thank long-term executive Bill Boyle for creating such a great company and serving a strong examples of leadership. I'm very passionate about the growth and future success of the company.

During the last year, our team as reexamined our strategy, growth and performance. As a result, we have started a number of initiatives that we believe will improve the company. As we began to implement this plan, we will update you on our progress.

Cubic Corporation has been run as a holding company of various operating businesses for many years. Going forward, we intend to run the company as one Cubic, where we will share people, technologies, the innovation, strategies, our global reach, common processes and systems to create value for our customers, employees and shareholders. But, one Cubic really means is a restructuring of the company and a fundamental change in how we operate. That means better execution and better capture and this should translate into higher profitability and growth for the company.

The team has also defined a new vision and strategy for the company. Our vision is to be the global market leader by winning the customer to accelerate our growth. Today, we are fortunate that 2/3rds of core businesses are in market leading positions. You will note that our main stay of our vision is the phrase of winning the customer.

Our company must continually do better with the customer than our competitors. We must have top-notch performance by delivering the highest quality systems and services and we must do it earlier than expected. We must be thought leaders. We must continually innovate and exceed our customers' expectations. Simply put, we must earn their trust.

We believe that by continually winning the customer, Cubic will achieve accelerated growth and maintain or create new global market leading positions. Our strategy involves three key tenants.

Number one, we must have market leading positions, market leading businesses have many advantages with customers, technology, processes and people. Today most of our portfolio is in market leading positions and intelligent transportation systems and defense training. We have plans to improve those businesses that are not in market leading positions or we conclude that this is not possible, we will take action to divest such underperforming businesses.

Number two, this Cubic strategy to drive superior operational performance through accountability and execution. By having the advantages of market leading businesses, supported by the alignment of our goals and incentives, we will drive superior operational performance in sales and margin growth as well as cash flow generation.

Number three, is to strategically manage our intellectual and financial capital to maintain and create additional market leading positions. Since our quarter end, we have had a number of successes in terms of contract awards that I would like to share.

At the end of July, it was announced that our transportation businesses won two critical recompete contracts including our primary contract with Transport for London. The Electra contract follows the Oyster contract we originally won in 1998. The new contract should provide the company with more than $1 billion in sales over 10 years starting in August 2015.

We are very grateful to Transport for London for their continued trust in us since 1978. This contract is a mainstay of our transportation business and a show piece of success for Transport for London as well as Cubic.

Our recently acquired ITMS business recently received a follow-on $85 million six year contract from Transport for London to maintain and expand the use of intelligent traffic signals as well as new crossings for pedestrians and cyclists. This is a continuation of the work that ITMS has been doing for many years.

Last week, we also announced that our mission support services segment won a recompete contract with the Defense Threat Reduction Agency, DTRA, against four other strong competitors. We have been supporting DTRA for many years in the field of chemical biological radiological nuclear and explosive exercise training and support services. Our annual revenue with this customer has been about $10 million. With this $500 million single award IDIQ ten-year contract, we will see substantial incremental increase in revenue depending upon task quarter funding. This morning we were notified by the government that a protest has been submitted.

In addition to the successes in our CTS and MSS segments, late last week our defense systems business was awarded a delivery order from the U.S. army for a next generation home station training solution know as AMATs. The initial funding is approximately $12.5 million. Over the next five years, we believe AMATs could generate over $200 million of U.S. and international orders.

AMATs is an innovation in our ground training systems that will reinforce our market leading positions. We believe that mission support services will rebound from its downturn in sales during the last two years because of its recent successes in contract awards and robust bid pipeline. We recently hired Bill Toti who succeeds Jim Balentine to lead this business. Bill has a strong DoD services background and most recently led HP's defense services business. I would like to thank, Jim Balentine for his many years of service to Cubic and for building mission support services into a market leader.

Our Defense Systems business continues to receive air and ground training orders as a result of its strong international footprint. Our recent investments in our ISR data links and cyber training have had a negative impact on CDS operating profits. However, we are actively pursuing several growth opportunities that can leverage our unique capabilities. We have bolstered the defense systems management team with the addition of Mike Twyman, who has a 30-year track record in building ISR businesses. Over the last few quarters transportation systems operating performance has been impacted by execution issues on the Chicago, Sydney and Vancouver projects. This quarter, we took a $13.5 million charge on the Vancouver project. As a consequence, we are revising our guidance for fiscal year 2014. Jay Thomas will discuss this in detail later in the call.

Importantly, our transportation segment is now transitioning from delivery to operational use on the Chicago and Sydney contracts. In Chicago, we have successfully completed the transition to the new Ventra open payment system as of July 1st, making it the first fully open contact list payment system in North America.

We continued to have an excellent relationship with our Sydney customer. The Opal Card Rollout is on track to complete this fall. In Vancouver, we are solving certain technical issues and are in commercial discussions regarding a broader service rollout which is expected in the spring of 2015. I'm working with the transportation systems management team to improve their execution and will announce more about these initiatives in the future.

In the next fiscal year, we expect much improved operating performance from this segment. We still expect to have a strong fourth quarter. With the recent major contract wins from all three of our businesses, we will finish the year with record total backlog. Our management has taken the time to revisit our vision and strategy and feel very confident, the company will be even stronger next year and into the future.

Now, I will turn it over to Jay Thomas, our CFO, who will discuss our financial performance.

Jay Thomas

Thanks Brad. I will start by reviewing our guidance for the year and then discuss our consolidated highlights for the quarter and for the nine months ended June 30. And after that I will review our segment results and give some color as to what is happening in each of our businesses.

We are revising our revenue guidance from a previous range of $1.42 billion to $1.45 billion for the year and to $1.39 billion to $1.42 billion. The primary factors for the revision are mission support services sales have continued to be adversely impacted by the slowdown in U.S. government spending through the third quarter. And the transportation segment incurred and increased and the cost to complete the Vancouver project. The increase had a corresponding reduction of $13.5 million in this segment sales. We are also revising our earnings per share guidance from a previous range of $2.60 to $2.75 down to $2.30 to $2.60 for the year.

In the third quarter, completion cost for the Vancouver contract increased – was impacted operating profits by $13.5 million which makes reaching our prior guidance somewhat problematic.

By consolidated basis, net sales for the nine months were down about 2% from last year. Through the quarter, consolidated sales of $340.4 million were up about 1% from last year. For the quarter and year-to-date decreases in mission support services sales were offset by increases in defense systems and transportation systems.

Acquisitions completed during fiscal years 2013 and 2014 contributed $82.7 million sales for the nine months and $36 million in the quarter. Adjusted EBITDA was $76 million for the nine months or a decrease of 26%. For the quarter, adjusted EBITDA was $26.7 million compared to $33.3 million last year.

Operating income was $53.2 million for the nine month a decrease of 37% from last year. For the quarter, operating income was $19.2 million compared to $26.9 million last year or 29% decrease. The primary reasons for the decline in operating income for the quarter and for the nine months are higher completion and start-up cost on major projects at our transportation segment, lower operating profits due to lower activity in our mission support services segment and operating losses on businesses we acquired in 2013 and 2014. I will discuss the relative impacts on our segment results from these items later in the call.

Net income attributable to Cubic in the third quarter was $12.2 million or $0.45 fully diluted compared to $18.4 million or $0.69 per share last year. For the nine months, net income decreased to $36.7 million or $1.36 per share fully diluted compared to $62.3 million or $2.33 per share last year.

For the current fiscal year, we estimate our effective tax rate at 23%. Consolidated total backlog was $2.428 billion at June 30th, down from $2.647 billion at September 30th. During the quarter, we de-booked $100 million in unfunded backlog related to the JRTC contract in our MSS segment. The customer has notified us that they do not intend to exercise out year options and the contract and we'll recompete the contract in the next fiscal year. As Brad mentioned, subsequent to June 30, we received several major contract awards across our three business segments. We expect to finish the year with a good increase in total backlog.

Now, I will discuss segment operating results starting with Cubic Transportation System or CTS. CTS sales increased 14% in the quarter to $153 million and increased 8% for the nine months to $429.1 million compared to last year. Businesses acquired contributed $14.9 million sales for the quarter and $36.9 million during the nine months. For the quarter, the organic growth rate was 5% and for the nine months organic sales were down less than 1%. During the quarter, we had higher sales on the Chicago contract due to acceptance of the system by the customer. $7.5 million in sales in the quarter related to services we provided in the second quarter, but we were not able to deal until system acceptance.

We had significantly lower sales in the quarter on the Vancouver contract. This was a result of higher completion cost, which lowered sales by $13.5 million because we used the cost to cost percentage method of accounting. These cost increases also negatively impacted operating income by the same amount. CTS operating income decreased 19% to $15.3 million in the quarter and decreased 49% to $35.2 million for the nine months. As mentioned previously, operating income for the quarter and for the nine months was significantly impacted due to the increase on the Vancouver project.

Also impacting operating income for the nine months were the start-up cost on the Chicago project incurred during the first two quarters. On the Chicago contract, we had an operating profit of $1.2 million in the quarter and an operating loss of $24.2 million for the nine months. During the quarter, we amortized $5.1 million of capitalized cost against operating income for the nine months we amortized $6.1 million of capitalized cost. Somewhat offsetting the cost issue on the Vancouver and Chicago projects with better performance on fare collection projects and services in Europe. Businesses acquired by CTS had an operating loss of $400,000 in the quarter and $2.1 million for the nine months.

Now turning to Mission Support Services or MSS. MSS sales decreased 26% to $91.8 million in the quarter and were $291.7 million for the nine months down 19% compared to last year. NEK which was acquired in the first quarter of 2013 had sales of $14.4 million in the quarter, up 26% compared to last year. For the nine months, NEK had sales of $34 million compared to $21.1 million last year. MSS organic sales were down 31% in the quarter and 24% for the nine months. As Brad noted, we are cautiously optimistic that this trend will reverse in the next year.

MSS operating income decreased 50% in the third quarter to $1.8 million and decreased 47% for the nine months to $6 million. Operating income in MSS was adversely impacted due to margin pressures resulting from LPTA contract awards, a shift from a prime to subcontract relationship with the government customer and a focused investment to increase our footprint in the special operations market. This investment was $600,000 in the quarter and $1.3 million for the nine months.

Now turning to Cubic Defense Systems or CDS, CDS sales were $95.6 million for the quarter, an increase of 22% compared to last year. For the nine months, sales were $281.2 million, an increase of 7%. Training System sales were higher in both the quarter and for the nine months. The increase in Training System sales related to higher sales of ground, virtual, game based and live fire systems which were offset by lower air combat sales.

Secured communication sales were down for both the quarter and for the nine months. Sales from acquired businesses contributed $6.7 million in the quarter and $11.8 million for the nine months. CDS operating profits increased for the nine months to $16.1 million compared to $7.6 million last year. Operating profits were $3.3 million for the quarter down from $6.1 million last year primarily due to our $2.5 million investment made in the data link and cyber training area to secure communications. This investment should enable us to capture near term debt opportunities.

Businesses we acquired had an operating loss of $1.8 million in the quarter and $6 million for the nine months included in the $6 million of operating losses was one-time charges of $3.9 million for transaction, retention and stock compensation cost on the Intific acquisition.

Finally, turning to the balance sheet cash flow on our capital allocations, Cubic's balance sheet remains very strong with networking capital of $472 million and a low debt-to-capital ratio of $12%. We hold $166.8 million in cash, $144.2 million of this cash is held by our foreign subsidiaries. In addition, we also have $69 million of restricted cash in U.K., it's readily available.

Operating cash flow was very positive in the quarter totaling $66 million with major cash inflows from CTS. For the nine months operating cash flows was positive by $36.7 million compared to a negative $6.8 million last year. CDS and MSS were providers of cash and CTS was a user of cash for the nine months.

Year-to-date, we have invested $83.5 million in acquisitions. Acquisitions have had a negative impact on our profitability this year, however, over the long-term acquisitions have contributed to keep success in growth. I would like to point out that the $500 million DTRA contract it was announced last week originated from a very small acquisition that we made in 1990s.

Capital expenditures this year increased by over 100% primarily in our CDS segment and relate to our Immersive game-based training business CALS. CALS won the littoral combat work last year.

And with that, I will let Brad share his closing thoughts. Thank you.

Brad Feldmann

Thank you, Jay. We set out this year to win our major recompetes and capture new business. The news over the last few weeks makes us feel good that we are achieving our goals. Unfortunately, this fiscal year our financial performance will likely fall below our earlier guidance. We believe, this is a short-term phenomenon.

To summarize, I believe mission support services has turned the corner. With regard to CDS, I'm very bullish about the future of our ISR business. We are far along in solving CTS' challenges and next year, we expect much improved performance in this business.

I have the privilege of being with our team in London on July 29th, when we signed the Electra contract which is the largest contract in Cubic's history. We are very grateful to Transport for London for their continue trust. I'm very excited to serve Cubic as the next President and CEO. I will focus on improving execution and driving growth of the company. We believe our vision of winning the customer and supporting strategy are sound and will achieve enhanced growth going forward.

And with that, we will open the call for a Q&A session.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Julian Mitchell with Credit Suisse. Please state your question.

Julian Mitchell - Credit Suisse

Hi. Thank you. I guess my question was just on the width of the guidance range because you had been guiding for a $0.15 EPS range for the year and now you have only got about eight weeks left then the range has widened to $0.30. So that's sort of quite unusual cadence maybe just give us some background there?

Jay Thomas

Hey, Julian. Jay Thomas here. The reason why we have the wider than normal range there is, in the fourth quarter a lot of the sales and profits are coming out of our defense business initially tied to shipments, so I think we start a little bit of contingency there around making through shipments happen by September 30th.

Julian Mitchell - Credit Suisse

Thanks. And then, on the quarter specifically I guess looking at the guidance for the year, you are looking at sales up maybe 20% or so sequentially in Q4, the EPS but it looks like you have the sort of more than double in Q3. You need over a dollar and you get $0.45 in Q3, so is that just pure kind of EBIT bouncing with the higher sales or is there some kind of below the line items in Q4, we need to be aware of?

Jay Thomas

It's a combination of – as I mentioned shipments in our defense business and then it would be defective, we are expecting any kind of cost issues in the transportation business going down the results from the fourth quarter.

Julian Mitchell - Credit Suisse

Great. And then lastly, just quickly on MMS, I think you talked before about larger players may start to kind of exit the market eventually. But right now, it seems that competition is getting worse not easier. How you sort of thinking about your cost base there, if the competitive pressures remain the same?

Brad Feldmann

As we have announced there – this is Brad Feldmann. As we have announced, we have had some recent success recently in a bunch of competitive situations. We believe that we have sharpened our pencil well and will be competitive going forward. And as I suggested earlier, we believe this business will grow.

We also know that we won't have to pay for G&A multiple times and we would expect improvements in the margins as we continue to grow.

Julian Mitchell - Credit Suisse

Great. Thank you.

Operator

Our next question comes from Jim Ricchiuti with Needham & Company. Please state your question.

Jim Ricchiuti - Needham & Company

Thank you. I wonder if you can elaborate Jay on the shipments that you are anticipating in defense that seem to be one of the key factors, I think improvement in earnings, are you anticipating in Q4, is it concentrated within the shipping programs or you can highlight that we might able to better understand?

Jay Thomas

Sure. So because in the U.S. DoD market a lot of the work that we do on air and ground are task quarter based. So it won't take revenue until we actually ship when the customer accepts it. So it just happened if you noticed that we often times had very lumpy quarters and that usually been driven by our North American sales. So it just happened to coincide this year that we knew that we have a lot of shipments taking place in the fourth quarter primarily in the U.S.

Brad Feldmann

And I checked this morning with our team and defense systems and those shipments are on track.

Jim Ricchiuti - Needham & Company

Okay. And you discussed the evaluation – evaluating some of the underperforming businesses. I assume that the process that's been in ongoing. But, how should we think about decisions maybe over the next year in terms of whether you decide to take further actions or not. I mean how far along are you in this process and how comfortable are you that you are going to see the improvement in some of these underperforming businesses?

Brad Feldmann

In defense systems, one of the underperforming business is in the cargo tracking business. We had anticipated being able to use that product with the draw down from Afghanistan and it didn't pan out for us. So we are in the process of minimizing our costs in that business and will eliminate the loss going forward. We will continue that thought-process across all of our businesses, sub-businesses and be aggressive and diligent to shut businesses down that aren't generating positive cash flow.

Jim Ricchiuti - Needham & Company

And one final question, if I may, if you could just talk about a little about the pipeline of new business in transportation obviously, some good news in London, but maybe just in broad terms how you see the pipeline for new business out there, new contracts?

Brad Feldmann

So the pipeline is larger than it ever has been as we have chatted in calls and recent past, we kind of moved that business from an automated fare collection business to this idea of next city which has to do with providing situational awareness to people in cities to make it convenient. This change and expansion has doubled the size of the markets that we can look at. We recently as you know did an acquisition of ITMS that's part of that strategy. So there are a plenty of things to bid around the world. And we expect some modest growth going forward.

Jay Thomas

And just on that point, the ITMS business historically has been very focused in the U.K. with a little bit of exposure in Australia with no penetration into North America. So that's an area that we are very focused on to see if we can grow.

Jim Ricchiuti - Needham & Company

Okay. Thanks a lot.

Operator

Thank you. Our next question comes from Josephine Millward with Benchmark Company. Please state your question.

Josephine Millward – Benchmark Company

Hi, guys.

Brad Feldmann

How are you Josephine?

Jay Thomas

Hi, Josephine.

Josephine Millward - Benchmark Company

I'm doing well. How are you Brad, Jay?

Brad Feldmann

Doing well, thank you.

Josephine Millward - Benchmark Company

Can you, Brad – can you talk to us about the U.K. recompete, congratulations by the way. What is roughly your annual run rate and how do you see this contracts growing over the next ten years going forward?

Brad Feldmann

You are speaking about the London contract?

Josephine Millward - Benchmark Company

Yes.

Brad Feldmann

We are doing about $100 million U.S. per year on that contract, the margins in recent days have been very, very good. I would expect that to continue as you know having reviewed the company for some period of time, there are – there is always changes there and we expect that going forward on this contract as well.

Josephine Millward - Benchmark Company

Okay. What about – can you talk – can you extend on investment you are making in data link and cyber. You're seen very excited about the future of ISR, are we gaining traction on data link? When can we see it start to contribute?

Brad Feldmann

So we are making investments Internet technology, we are making investments in, making the data links smaller. We are making investments in adding SatCom capability as well. And as I noted in my remarks, we also have hired Mike Twyman who has a successful track record of growing such businesses. We are – the pipeline is rich and we have been winning some. I would expect next year, you will see positive results in that area.

Josephine Millward - Benchmark Company

Great. Thank you.

Operator

Thank you. (Operator Instructions) Thank you. Our next question comes from Andrew Storm with Cortina.

Andrew Storm - Cortina

Hi, guys. Thank you. I'm curious just to make sure I understand this from reading the press release, it sounds like between Chicago and Vancouver, year-to-date you lost $42.5 million in operating income is that correct?

Jay Thomas

That is correct. Yes.

Andrew Storm - Cortina

Okay.

Jay Thomas

Now in the case of Chicago, we are going in, we knew we are going to have to write-off services cost before – within the revenue services. So in that respect it's the timing of when all that took place. In the case of Vancouver, we definitely had some issues where the schedule swept in. So we have to provide close to $18 million of additional cost on that program.

Andrew Storm - Cortina

Okay. And so can you – for Chicago is now generating revenue, you are billing so I look forward to next year, I assume that project will be profitable.

Jay Thomas

That is correct.

Andrew Storm - Cortina

Okay. And that starting until next quarter that moves to profitability or is it more of a ramp?

Jay Thomas

I would say we will see a better impact over time because it's really a combination of some growth on the program and if they get through we will call the burn in phase which is – they went fully operational here in the fourth quarter.

Andrew Storm - Cortina

Okay. Got it. And so the Vancouver then you said is in the spring?

Jay Thomas

Vancouver will complete some time next year, the design built phase and then it will go into services. So at this point – we awfully provided all the cost we need to do to get through the design built phase.

Brad Feldmann

We had a technical issue on that contract which we believe we have solved and we are validating with the customers we speak.

Andrew Storm - Cortina

Okay. That's helpful. So if you can remind me – if I remember correctly I think Chicago, the $45 million a year in the variable cost could be $45 million towards the end. So looking into next year, then should be, I don't know $50 million in Vancouver, and when gets running it should be $25 million a year is that…

Jay Thomas

No. Chicago won't be about – on just the Chicago contract it's around $45 million a year plus we've also won pace and then there are some other fall on works. So therefore the magnitude it's in the low 50s.

Andrew Storm - Cortina

Okay. So combined cost $75 million give or take that a reasonable range?

Jay Thomas

Well, Vancouver once we complete the design built phase and it's just services and that's going to be down -- I think down a low $10 million to $15 million per year range on just the services side.

Andrew Storm - Cortina

Okay. Got you. What I'm trying to understand is effectively those two contracts you convert to earnings something in the teen operating income, I would assume combined from this year rate $42.5 million loss, so it's mid-50 million swing in operating income from this year to next or year after?

Jay Thomas

Yes. We don't typically disclose what the margins might be at the contract level, but you are right in that. We shouldn't have the operating losses going forward.

Andrew Storm - Cortina

Okay. I was just trying to understand the magnitude of the earnings hit that you have taken this year versus what a normalized bubble is? So are they at a reasonable range, just what you are saying?

Jay Thomas

Your first comment what's it in the – it's been 40 odd million dollars is correct.

Andrew Storm - Cortina

Okay. That's very helpful. Thank you. With Littoral, that's a pretty large contract. Are you guys up and running on that or is that just still getting ramped?

Brad Feldmann

We are up and running. We are providing immersive course wear to that customer. I would expect that contract volume to expect over time.

Andrew Storm - Cortina

Okay. And is there -- are you in a situation where because it's a newer program that you are incurring cost and excessive revenue early on or is that profitable the whole way through?

Brad Feldmann

It appears to be profitable all the way through. I would expect good results. I think the only challenge that we have seen on that particular program has just been making sure that their funding is there. I mean the customer is growing out to ships and so they need to have the training capability. But, anything in Washington these days it's a flight ticket – make sure your funding state is in place.

Andrew Storm - Cortina

Might be so, I'm just trying to again get a magnitude of sort of what earnings are going forward. And so this is a small level now or it's pretty much at a reasonable level what it should be going forward?

Brad Feldmann

I think it will expand slightly, but Jay's comment, we work very diligently to ensure we keep our program sold.

Andrew Storm - Cortina

That's so helpful. Thank you.

Brad Feldmann

Thank you, Andrew.

Operator

Thank you. There are no further questions at this time, I will turn the call back over to Brad Feldmann to conclude. Thank you.

Brad Feldmann

Thank you all for participating in the call today. As always we appreciate your continued support and interest in our company. Thanks very much.

Operator

This concludes today's conference. All parties may disconnect. Have a great day.

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