Welcome to Cubic Corporation's Second Quarter Fiscal 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. At this time, I would like to turn the floor over to Diane Dyer, Director of Investor Relations. Please go ahead.

Thank you, operator. Good afternoon, everyone. And thank you for joining us. Today after the market closed, we issued a press release reporting the company's financial results for the quarter ended March 31, 2013. A copy of the press release is available on the Investor Relations section of our website at www.cubic.com. We encourage everyone to read today's press release and refer to our most recent reports on Form 10-Q and Form 10-K. These documents are available from the SEC and from our website. An archive of this call will be available later today on Cubic's website at the Investor Relations tab under Webcasts and Events. On the call today are William Boyle, Chief Executive Officer; John D. Thomas, Executive Vice President and Chief Financial Officer; Mark Harrison, Senior Vice President and Corporate Controller; and James Edwards, Senior Vice President and General Counsel. Now I'd like to turn the call over to Jim Edwards for the Safe Harbor disclosure.

Thank you, Diane. Please note that certain information discussed on this 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. 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-K 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, May 2, 2013. Cubic undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this conference call. Also, please note that the management will discuss certain non-GAAP financial measures. A reconciliation between the GAAP financial measures that correspond to these non-GAAP financial measures is contained in our earnings press release and our SEC Form 10-Q report for the quarter ended March 31, 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 Bill Boyle, our Chief Executive Officer.

Thanks, Jim. Good afternoon, everyone, and thank you for joining us today. For those of you who are listening for the first time, Cubic Corporation is a leading international provider of cost-effective systems and solutions for the mass transit and global defense markets. I'd like to begin today with the summary of the second quarter results. Sales for the quarter were $364.3 million, an increase of $24.7 million or 7% over the same quarter last year, and an increase of $50.9 million over this year's first quarter. Both product and service sales increased during the quarter with services growing a bit faster. The main reason for the sales increase during the quarter were our strong shipments from our Defense Systems business and the 2 acquisitions we recently completed. For the 6 months ended March 31, sales were $677.7 million, a 3% increase over the same period last year. The acquisitions added $10.6 million to sales in the quarter and $11.1 million for the 6 months. Operating income in the second quarter was $34.6 million, which exceeded last year's second quarter of $32.5 million by 6% and increased 90% from this year's first quarter of $18.2 million. For the 6-month period, after our weak first quarter, operating income was $52.9 million, down from the $60.3 million a year ago. Net income for the quarter was $27.2 million, $1.02 per share compared to $23.4 million last year, $0.88 per share, a 16% increase. The second quarter earnings per share of $1.02 more than doubled that of this year's first quarter. For the 6-month period, net income this year was $39.6 million compared to $44.1 million last year, down 10% due to the lower operating profit in the first quarter. Adversely affecting net income were higher interest expenses and lower investment in other…

Thank you, Bill. Now I would like to review our segment results for the second quarter. I'll begin with Cubic Transportation Systems or CTS. Sales increased 5% in the second quarter to $138.8 million from $131.7 million last year. The increase was driven by higher sales on contracts in the U.K., which included an annual system usage incentive based on the customers' most recent fiscal year that ended on March 31. This year, the incentive contributed $13.2 million in the second quarter sales compared to $12.2 million last year. The annual system usage was higher due to an increase in ridership during the Queen's Diamond Jubilee and the London Olympics. CTS sales for the second quarter were also higher because of a contract with a suburban Chicago bus operator. The operator's bus fleet will be integrated with Chicago Transit's new Open Standards Fare System. We continue to make significant progress on the Chicago open standards payment system. Through March 31, approximately $51.8 million in costs have been capitalized for this project. The new fare system is anticipated to achieve system acceptance in the second quarter of fiscal year 2014. Once we achieve system acceptance, we will be amortizing the capitalized cost over the remaining term of the contract. CTS operating income increased 38% in the second quarter to $32.2 million compared to $23.4 million last year. CTS operating income is after a charge for amortization of intangibles related to acquisitions we have made. For the quarter this charge was $736,000. For the fiscal year, we are estimating the charge for amortization of intangibles for CTS will total approximately $2.8 million. The increase in operating profit was primarily due to higher sales on contracts in the U.K., including the annual system usage incentive we mentioned, as well as improved profitability in…

Thanks, Jay. After our mediocre first quarter, we were pleased today to report what we feel was an outstanding second quarter. Now being mindful of your time, rather than rambling on, why don't we spend whatever time we have left to hear any questions you might have. Operator?

[Operator Instructions] Our first question comes from the line of Jim Ricchiuti with Needham & Company. James Ricchiuti - Needham & Company, LLC, Research Division: So if we exclude the incentive in the transportation business, the business looks like it was up about 5% year-over-year.

That's true. The incremental value of the incentive in terms of sales was about $1 million. James Ricchiuti - Needham & Company, LLC, Research Division: Okay. And as we look at the balance of the year, would you anticipate that kind of growth or do you see potentially the momentum from the acquisition and the new contract helping the growth rate in the transportation business in the back half of the year?

With the acquisition of the NextBus I think what we said in the last call it would have a contribution of around $10 million on an annualized basis. So it will have -- I think the growth rate is pretty consistent for the rest of the year. James Ricchiuti - Needham & Company, LLC, Research Division: Okay. And one follow-up. Just with respect to the plans to expand your served market in transportation, you highlighted intelligent transportation, tolled parking and fare collection. Can you sense as to what are the biggest components to go from the $2 billion served market to $5 billion within those 3 areas?

Parking and toll, incrementally, are probably $1-billion-plus markets, and then this whole new area of passenger information is probably about $1 billion. And then there are parts of fare collection today that we don't serve and primarily in different parts of Europe and South America. So those would be all the kind of components that add up to $5 billion. James Ricchiuti - Needham & Company, LLC, Research Division: And to get to those markets, it's going to involve both internal development and acquisitions, presumably?

Yes.

The next question comes from the line of Brian Gesuale with Raymond James. Brian Gesuale - Raymond James & Associates, Inc., Research Division: I wonder if I could just ask a big picture question. As we look at DoD under cost pressures and austerity measures, are you starting to see any activity whether it's in the RFI stage or RFP stage that shows them having the propensity to really lean on your virtual training versus the more expensive live training measures?

Brian, it's Jay, I appreciate the question. Yes, I mean, we've definitely seen a shift because it's much more cost-effective to do the virtual training. So the win we had on the littoral combat ships is actually serving the next generation of virtual training using a lot of gaming type of software. So we are seeing a tilt on some areas there. But there is still the live training, which is where we kind of always had sort of a great market share. That market isn't going away at the same time. Brian Gesuale - Raymond James & Associates, Inc., Research Division: Right. So overall is maybe these deployments slowed down from an operational type of perspective. We'll see more emphasis on training both the live but also faster growing piece for virtual. And I imagine the margin structure on the virtual's very favorable?

The margin structure right now is probably -- I don't know if we can make a call as to whether it's going to be significantly different just because in the U.S. market, most of the awards are really kind of technically acceptable low priced, whether it's products or services. Definitely the government is looking at using virtual where they can because if they have operational needs for shifting monies around, it may take it away from what they had in the past on services for training and we may see it because it's more cost-effective to do virtual. Brian Gesuale - Raymond James & Associates, Inc., Research Division: Great. Maybe shifting over to transportation as well. Can you give us an update on where we sit with milestones in Sydney and Vancouver? And maybe how you guys are matriculating and executing through those contracts?

So let me see if I can go through the pieces there. In Sydney, we just launched I think it was back earlier in this calendar year, the ferry system for the new card system down there. The next phase of the project then would be to launch a bus and then the final phase will be to integrate the ferry bus with the rail system. So it's probably the hardest part of that project coming up will be, we think, the bus system. In Vancouver, what we're doing there is it's a smart card upgrade to an existing system. And that's just more of a timing issue as to when the customers are comfortable when they want to roll it out. So I think the next phase there is that we will be doing a test pilot on the card system. And then in Chicago, we're getting ready to start doing some pilots sometime later here towards the end of the -- our fiscal year towards the early part of the fall. Brian Gesuale - Raymond James & Associates, Inc., Research Division: Okay, that's very helpful. And then last question just to jump over to the other side of the business one more time. You guys had won a lot of impressive IDIQ contracts over the last 12 or 18 months or so. A lot of those initially kind of ramped as small business awards coming right out of the chute. Are you starting to see anything where the award activity for full and open competition is kind of beginning to happen at a quicker rate?

The simple answer is, it depends on which service. So I think that there's a good case in point with the [indiscernible] contract. The only initial awards on that contract have gone small business, so at some point, we think that it will tip back over to full and open awards. But with that, it's almost like a case-by-case business by service. So it's one of these things we think that once they get caught back up to their goals and some of the services, then will start to see more full and open. So on the Navy side, we have won a couple of contracts there on a full and open basis.

The next question comes from the line of Ken Herbert with Imperial Capital.

First, I just wanted to ask about CTS, and it looks like with the incentive payment you got this quarter if you back that out, you're at maybe mid- to high-teens margin. How do you see that moving over the rest of the year and into '14 as these -- as the other programs start to transition into the more profitable phases?

I think at this point, because we're still -- we've kind of alluded earlier in the year, this is sort of a transition year. So quarter-to-quarter, if you look at our first quarter of operating margins in transportation were a little over 11%, and obviously, very strong in the second quarter, which has been the trend in the last few years. I think we're probably comfortable of saying 11% is probably realistic the next couple of quarters. And until we get all these jobs done, it's probably a little uncertain to say that we're going to see a dramatic change in the margin profile.

Okay. And as you cross the milestones specifically then Vancouver, Sydney and Chicago, I guess, 2014 is when a lot of these step-up into the more profitable phase of the contracts, correct?

Yes, on those specific jobs, that is correct.

Yes, assuming no change in schedules, obviously? And then if I could on the restructuring you took in the quarter, how -- what's the timing in terms of the benefits of that, I mean, I am sure you will start to see some fairly soon but what's the timing there and how does -- what's the potential magnitude on that particular segment?

Well, I think we'll start seeing some impact right away. The third quarter should begin to show a pickup. There'll be a substantial improvement in Defense Systems margins going forward this year. And I think you'll see some immediate results.

Okay. And then if I could just high level, if you look, Jay, at the acquisition pipeline and you've been very -- it seems like selective and done some really nice deals in the last couple of quarters. What's your take now on the pipeline looking out both within the commercial, as well as the defense worlds? And are you seeing any change perhaps in several expectations from a valuation standpoint or are you seeing anything else shift in terms of the pipeline and areas of activity?

We are, and actually I think we alluded to this on the last call, that the defense pipeline has definitely slowed down compared to last year. I think last year there was a bit of a rush of people trying to sell companies because of the anticipated change in the tax law. This year we are seeing a much smaller set of opportunities in defense. And we're much more cautious, obviously, in looking at opportunities in that space just simply we have to look at what we really think is a realistic growth rates or win rates on some of the things that are reflected in the pipeline that we're seeing there. Interestingly though we've been seeing more opportunities on the transportation side. And a lot of that has to do with the fact that we sort of increased our aperture of things that we'll look at beyond fare collection. So we're much more active looking at acquisition opportunities on the transit side than we are in defense today.

Okay. And just finally, if I -- based on the earlier comments you made, would you look at the addressable market expanding into parking toll and passenger information. I know passenger information is an area that you've been -- particularly attractive in some ways. Fair to say that you are seeing opportunities in all of those areas or is there an area that continues to be a higher priority?

We're seeing stuff in all of those areas. I think the concepts around intelligent transportation is probably at the top of our list. And it's -- we look for places where we crossover with the same customer base. So we can really -- we think there's a lot of synergy in some of these acquisitions where we can leverage what we're doing in our back office systems or capabilities.

[Operator Instructions] Our next question comes from the line of Josephine Millward with Benchmark Company.

Bill, can you talk about how you think sequestration might impact defense business in the coming year? I think previously, you guys have talked about potentially a 5% to 10% downside under sequestration in this case if Congress is unable to reverse sequestration in the coming year?

Well, it's hard to be really precise about it. I mean, we've got all kinds of reports from consultants and so forth that everybody else does. And the reality is we don't know precisely exactly what's going to happen. We think versus most people in the defense business, we'll be least affected or less affected than our competition, mostly because a lot of -- most of our profit comes from transportation. And what this means [ph] in defense, half of our business is coming from international sources. So what's left with the DoD, we'll I think clearly be impacted somewhat. There are, I mean, we've already seen delays and slowdowns and -- what makes us feel a little optimistic is not so much any particular contract that we have a pretty big pipeline of business that we're going after. And while some of them clearly is going to be affected, it's not clear which parts of it would be affected but the bulk of it makes us feel like we're going to come out of this okay.

Okay, that's fair. In terms of Mission Support Services, you talked about expanding overseas. Can you extend on that? Do you need the Congressional approval to train foreign forces? How does that work? And if you can talk about some of the opportunities you're going after?

So the answer is anything we do overseas is usually subject to some form of Department of State or Department of Defense licensing. And we are active right now, I think you are aware we do a lot of work in what we call defense modernization. And so one of the things we are looking to do is to sort of export some of the skill sets that we have with special forces training. So that's an area that we're focused on. And so there's a lot of activity around that area. We do have service activities today in a number of places that we have done systems work. So that's kind of broadly speaking, that's Europe, the Far East and the Middle East. So there are -- always be a pipeline of activity in all those different places. And those areas we're not really seeing any budget pressures in those markets.

Sounds good. Nice winning New York by the way for transportation. Can you talk about if there are other intelligent city transportation bids in the coming year if you can help us size these opportunities for the coming year?

We don't have a specific pipeline I can share with you on the call today. As we've integrated in NextBus, basically what we've done is a [indiscernible] broad across a large or call them smaller cities and then some larger cities. So the first cut is that we would go and take their solution and go and try and sell that into a lot of the larger transit agencies, where we had a big presence and they didn't. And then we'll focus on going at it more as kind of probably a geographic pursuit around where we have some of our key locations. And our key locations are obviously the United States and Canada. And then we have obviously a presence over in Europe, headquartered out of London, and then we have a big presence down in Australia. So those would be the first cut places that we'll focus on.

Mr. Boyle, it appears there are no further questions at this time. I would like to turn the floor back over to you for any additional closing comments.

Okay. Well, thank you. That really concludes our call today. And we thank all of you for your interest in the company. And if anyone has any further questions, please don't hesitate to contact Diane Dyer, our Director of Investor Relations, or obviously, if you would call, Jay or I. Anyway, thank you again for your interest. And I guess that does it.