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Cubic Corp (NYSE:CUB)
Q3 2020 Earnings Call
Aug 5, 2020, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, welcome to Cubic Corporation's Third Quarter Fiscal Year 2020 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. Now I would like to turn the call over to Kirsten Nielsen, Vice President of Investor Relations. You may begin.

Kirsten Nielsen -- Vice President,of Investor Relations

Hello, everyone, and thank you for joining Cubic's webcast. I'm joined today by Brad Feldmann, Chairman, President and Chief Executive Officer; and Anshooman Aga, Executive Vice President and Chief Financial Officer. Before we begin, a friendly reminder that our presentation contains forward-looking statements that are made pursuant to the safe harbor provisions of the federal securities laws. Our most recent SEC filings include risk factors that could cause the company's actual results to differ materially from our expectations. In addition, we have included non-GAAP financial measures in our discussion. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures can be found in today's press release and in the appendix to today's presentation.

With that, I'll turn the call over to Brad.

Bradley H. Feldmann -- Chairman, President & Chief Executive Officer

Thank you, Kirsten. Welcome, everyone, and thank you for joining us today. Please turn to slide three. Before we discuss the quarterly results, I want to comment on recent events. The killings of George Floyd, Breonna Taylor and sadly, many others are tragic reminders of the injustice that continues to threaten the black community here in the United States. Recently, we came together as an organization virtually to educate each other and support our fellow cubes, who are hurting from racial injustice.

Our employee resource group of black employees led multiple sessions with all of Cubic facilitating open dialogue to discuss recent events, share personal experiences and discuss potential actions to address inequalities. Additionally, we have launched a new training course for all employees to help us identify and mitigate unconscious bias. These are small steps, and there is more to be done. We are committed to listening, learning and improving together. As I've said before, diversity fuels innovation, which is the lifeblood of our company. Cubic is committed to an inclusive workplace, where everyone is respected, supported and empowered and has the opportunity to contribute to innovation.

Now let me briefly comment on the current economic environment. Since the onset of COVID-19 pandemic, the health and safety of our employees and customers has been our top priority. At the same time, we focused on ensuring business continuity and effectively managing expenses during this uncertain period. We believe that our resilient corporate culture and adaptable experience teams have enabled us to effectively address these priorities, and our results this quarter demonstrate that. At the same time, we have not taken our eye off of the future and our strategic priorities, specifically building technology-driven, market-leading businesses, and we believe the long-term favorable industry dynamics in both transportation and defense remain intact. Lastly, while we continue to face the near-term dynamics related to COVID-19, we believe Cubic remains well positioned to drive growth, improved cash flow and reduce leverage.

Please turn to slide four. Last year, we launched our diversity and inclusion strategy with ambitious goals across three pillars: first, strategy and leadership; second, talent life cycle; and third, workforce engagement. With this launch, we also established several global employee resource groups. ERGs are proven catalysts to building an inclusive culture. We will continue to expand this important initiative. And in support of our strategy and commitment to diversity and inclusion, we are actively seeking to increase our diverse employee population. Although Cubic is relatively early in this journey, I am proud of our team's progress, which is driving innovation, recruiting, talent development and corporate responsibility initiatives that benefit our employees, customers and shareholders. As COVID-19 persists, we continue to proactively monitor the health and well-being of our employees globally and maintain robust safety protocols.

Cubic's businesses are deemed essential, and we believe that our operations and supply chain remain fully prepared to meet our customer commitments. While our transit agency customers are experiencing unprecedented challenges, we believe the industry will continue to adapt and evolve. And we are taking an active role in elevating and advancing the future of transportation. In the last several weeks, we met with all our major transit customer CEOs to discuss how we can continue to support their immediate needs and help make transportation network safer, more efficient and more resilient in the long term.

Turning to slide five. I'll provide an overview of our performance for the third quarter, and Anshooman will discuss the financial results in more detail. Third quarter results were in line with our expectations. In June, we announced that Cubic and the Massachusetts Bay Transportation Authority completed the financial close of the contract reset, a key milestone for our continued delivery of the MBTA's next-generation fare payment system. Our book-to-bill ratio for both the third quarter and year-to-date was 1.3. And our backlog remains very strong at $3.7 billion, up 10% since the beginning of the fiscal year.

Third quarter sales were $350.4 million, a decrease of 8% year-on-year as a result of impacts related to COVID-19 and the timing of shipments in Mission Solutions, which we continue to expect to be weighted to the fourth quarter. This expectation is supported by recent bookings and our current outlook for additional Q4 orders and shipments. Adjusted EBITDA was $38.2 million in the third quarter, an increase of 25% year-on-year, reflecting strong performance in transportation, including the reset of our Boston contract and companywide cost management. We estimated that COVID-19 impacted sales by approximately $41 million and adjusted EBITDA by approximately $14 million, including delayed awards, project slowdowns and lower transit ridership.

Adjusted free cash flow for the quarter was strong at $43.8 million, including the benefit of the Boston reset. We continue to prioritize reducing leverage and paid down $54 million of net debt in the third quarter. Overall, we delivered on what we said we were going to do despite the challenging economic environment. Lastly, while transit ridership levels have improved from the lows of the pandemic, it remains significantly below normal levels with uncertainty surrounding the pace and timing of recovery. As a result, many of our transit agency customers continue to experience a decline in their fare and nonfare revenues. We continue to believe that Cubic's large backlog is largely insulated from the impacts of COVID-19 due to the critical service of fare collection.

Additionally, contactless, account-based, fare collection is critical to support the removal of cash and minimize physical touch points in a transportation fare payment environment. However, capital projects that have not yet been awarded are likely to be delayed until the funding situation improves for our customers. While transit ridership is seeing a slow recovery, vehicle traffic has returned quickly and many cities are concerned about congestion. With Cubic's best-in-class, intelligent traffic solutions, we enable effective and safe control of intersections and allow advanced optimization of traffic flows. So while our pipeline in urban revenue management for transit agencies may move to the right, we believe there are upsides in potentially accelerated demand for Cubic's market-leading, high-margin, traffic management products.

Turning to slide six. Let me provide an update on our strategic priorities, starting with transportation. In New York, installation work on the OMNY project resumed at the beginning of May, after a six-week pause, due to the pandemic. The new contactless payment system is now installed at more than half of all New York City subway stations. This new system is more important than ever due to the critical need to remove physical touch points within our public transportation networks. We remain on track to deploy the OMNY readers at every subway station and on all New York City buses by the end of the year. Next, the San Francisco Muni Board approved a contract for NextBus, our cloud-based software-as-a-service solution that provides real-time passenger information.

With this next-generation system, we will implement new features over the next couple of years, including real-time arrival information for buses and trains and a display of alternate routes. The new informational display will show bus capacity, allowing passengers to decide whether to wait for the next arriving bus. Additionally, we've made good progress in Los Angeles and D.C. with our mobile apps and virtual card functionality, including initial pilots with partners and customers. In Chicago, the pilot was extended due to the COVID-19 lockdown, but is now in testing phase. While our large transportation projects remain on schedule, we continue to see broader impacts and disruptions in transportation, and we are experiencing about a three to nine month delay from previous project projections on the timings of new awards. However, we continue to advance key pursuits.

In North America, we have submitted proposals, including an account-based back office and mobile upgrade to Vancouver and an open payment upgrade to Atlanta. In Washington, we are addressing a bus open-payments proposal. And for New York state, we are responding to various tolling RFPs. In Toronto, we participated in the Metrolinx Industry Day Presentations and are now awaiting the RFP. In Asia Pacific, we are addressing account-based, open-payment system proposals for Sydney, Canberra and New Zealand as well as a new mass platform in Queensland. In Europe, we are progressing proposals in Dublin as well as several in the U.K. and an opportunity in Warsaw, Poland. These examples total more than $1 billion in near-term pipeline opportunities.

Turning to Mission Solutions. Our investments in innovation continue to drive strategic wins in this business. In July, we were awarded a $38 million prime contract to prototype and demonstrate the United States Air Force's High Capacity Backbone system. HCB is a critical enabler for the United States Air Force's Joint All Domain Command and Control capability. This win is a testament to our strategy and investments in technology, such as our HALO software-defined antenna. Our solution integrates capabilities across our protected communications and C2ISR portfolio, and we expect this to drive growth over time as we execute and transition to platforms. Additionally, Mission Solutions won an IDIQ contract for the United States Air Force's Advanced Battle Management System, providing us with a strategic avenue to continue positioning our military IoT solutions to intelligently connect distributed sensors and effectors in complex operating environments.

Lastly, key order activity in the third quarter included orders for GATR and supported the United States Army T2C2 program, orders for our command post computing solutions and a follow-on order to deliver Sharklink systems for U.S. Navy aircraft carriers. Turning to training business. In July, Cubic was awarded the highly competitive, Surface Training Immersive Gaming and Simulations program, known as STIGS. This is a single vendor, 5-year IDIQ contract with $99 million. And under this program, we will provide a new virtual environment training system for the United States Navy. We are pursuing another opportunity with the U.S. Navy in support of its fiscal year 2021 Ready Relevant Learning Content Conversion Program in support of the Sailor 2025 program, with the overarching goal of improving sailors' transfer of training to the operational work environment.

In addition, we continue to advance our initiative to deliver high-fidelity, multi-domain training environments. Most recently, we successfully completed the last user assessment for the Soldier Squad Virtual Trainer and are scheduled for a final user assessment for the live force-on-force training capability. Both programs are key initiatives under the United States Army Synthetic Training Environment program. Additionally, we have entered the final phase of the United States Marine Corps force-on-force Next OTA with Phase three demonstrations taking place until the end of August. With this Phase three demonstration, a service contract will be awarded to deliver new combat training products and services for the United States Marine Corps.

Turning to slide seven. I'd like to share a few more details on the HCB contract and why it is strategically important. First, we won a Tier one competition at the prime contractor level for a capability that the Air Force considers essential to achieve its future Joint All-Domain C2 vision. HCB is a critical element of the Joint Aerial Layer Network, and our innovations will ensure aerial layer network availability and resiliency in all environments and accelerate data delivery for increased decision speed. There is a good production tail, and we expect this win will help us capture a portion of an estimated market opportunity of more than $4 billion over the next 10 years. Second, we use an open-system strategy to integrate acquired capabilities and new solutions from our R&D pipeline to provide an outstanding solution for our customer. This included our recently acquired Nuvotronics business, TeraLogics capabilities and successful innovations for software definable antennas and advanced tactical data links.

We will prototype and demonstrate the entire air and ground system, including networking and active cyberdefense. Turning to slide eight for a discussion on transportation. As a reminder, in January, we announced a partnership with Moovit to develop mobile solutions with industry-leading user experience features. This partnership enables the integration of Cubic and Moovit's market-leading, complementary technologies, while creating sales opportunities within Cubic and Moovit's existing installed base as well as new markets. The extended partnership will leverage Cubic's innovative mobile payment and fare collection technologies as well as Moovit's robust, multimodal, journey planner to create a unique platform that offers travelers a seamless and frictionless mobile experience. The solution includes planning, ticketing and fare collection and step-by-step journey guidance, integrated with real-time arrival and departure information, digital engagement and incentives and operator intelligence.

We are targeting the end of 2020 for the platform's first release, which will be available to Cubic's existing customers of TouchPass, which came with our acquisition of Delerrok. This release will combine Moovit's journey planning with Cubic's multiagency, cloud-based, fare payment solution and additional features will roll out in 2021. In the near term, we expect this marketedly improved mobile experience to drive more users and transaction fees. Over time, we expect this feature set of our enhanced offerings will also lead to more agency wins and create value through mobility as a service offerings. I'm very pleased with our team's progress toward our goal of creating an immersive environment where people can look, book and pay for multimodal journeys all in one app.

Let's turn to slide nine. We have been working closely with our transportation customers globally to understand their current pain points and to accelerate initiatives to help them rebound from the pandemic, with a key focus on building trust in transit. Trust in transit is strongly influenced by providing a touchless experience for travelers and staff and through timely and effective communication to influence travel behavior. As an example, our virtual ticket agent technology provides multilingual customer service reducing the need for close face-to-face proximity contact between transit staff and customers. It is a multichannel service delivered through our ticketing kiosks and the users' smartphone.

Another example, we are working with Moovit to provide a demand and yield management system that allows travelers to check congestion levels prior to leaving home and to collect valuable insights on current and projected demand in the system. We also expect to see increased interest in congestion management technology, including the transport management platform, Trafficware and GRIDSMART. For example, GRIDSMART's artificial intelligence camera can be used to automate pedestrian crossings to protect vulnerable road users, while optimizing traffic flow. This becomes critically important with more people embracing active mobility, such as walking and cycling and the forecast that road traffic will return at a faster rate than transit's rebound.

Turning to slide 10. Cubic has a long-standing history of commitment to corporate social responsibility. Now we are taking steps to further accelerate our ESG journey and become best-in-class in our industries. As I discussed earlier, we rolled out our diversity and inclusion strategy last year. In 2020, we became a signatory to the UN Global Compact and made a commitment to align with the UNGC sustainable development goals. Additionally, we conducted a materiality assessment to help guide our strategy and determine, which corporate responsibility topics matter most to Cubic and our stakeholders.

We're building on the foundation that all our businesses deliver market-leading innovations that help promote sustainability in our industries. In transportation, we help cities reduce congestion, enhance safety and improve the way we move throughout cities. In C4ISR, we improved mission effectiveness by delivering superior performance, while reducing physical footprint. And related to CGD, our live virtual and constructive training solutions improve proficiency and readiness, enabling a safer world. I look forward to keeping you updated on our progress. And as always, we welcome shareholder input on this important initiative.

Now I'll ask Anshooman to discuss the financial results.

Anshooman Aga -- Executive Vice President & Chief Financial Officer

Thank you, Brad, and hello, everyone. Please turn to slide 11 to cover the third quarter financial results. As Brad mentioned, we executed well this quarter, and our results were in line with our expectations. Bookings grew 40% to $453 million, driven by the contract amendment with our Boston customer including additional scope on both the design-build and services portion of the project. Sales in the third quarter were $350 million, down 8% as reported and 9% on an organic basis year-over-year, reflecting the timing of shipments and Mission Solutions and estimated impacts related to COVID-19 as a result of delayed awards, project pauses and slowdowns and lower transit ridership revenue.

Adjusted EBITDA was $38.2 million, up 25% year-over-year, reflecting growth in transportation and defense training and benefits from the previously announced companywide cost management initiative, which was partially offset by a decline in Mission Solutions. We estimate that the unfavorable impacts related to the COVID-19 pandemic totaled up to $41 million for sales and up to $14 million for adjusted EBITDA in the third quarter. Adjusted earnings per share were $0.74, up 12% year-over-year, reflecting higher adjusted EBITDA, partially offset by higher taxes and depreciation expense. Additionally, we delivered strong adjusted free cash flow of $44 million in the third quarter, driven by a payment on the Boston contract with the financial close and the milestone payment on the New York contract. As a reminder, last year's adjusted free cash flow included $45 million of net proceeds from the sale of real estate in June 2019.

Moving to our Transportation segment results on slide 12. Bookings more than doubled year-over-year, which reflects the $228 million booking on the Boston contract amendment. Sales were in line with the prior year, reflecting growth from the Boston project, but were offset by impacts from COVID-19, primarily due to delayed bookings in our Intelligent Transport Systems business, project pauses and slowdowns and lower transit ridership. However, adjusted EBITDA increased 71% year-over-year to $41.9 million, while adjusted EBITDA margin increased 790 basis points to 19.4%, driven by the Boston contract reset, cost savings and overall strong performance. As I mentioned, Trafficware and GRIDSMART have experienced some delays this year, due to the pandemic. However, bookings grew year-over-year, and we continue to expect growth in this high-margin business in future periods.

Moving to our Mission Solutions segment, on slide 13. Bookings in the third quarter were $79 million, in line with the prior year. Sales declined in the third quarter as compared to the prior year, reflecting lower GATR deliveries, due to the timing of shipments, which had an unfavorable impact on adjusted EBITDA as these products are high margin. Adjusted EBITDA also reflects continued investments in franchise programs. We continue to expect a strong fourth quarter for CMS, which I'll cover in a moment. Turning to slide 14. Bookings in our Global Defense segment were lower than last year, due to program award delays, including delays associated with COVID-19, which, in turn, impacted sales.

The top line decline also reflects lower year-over-year sales in ground training, partially offset by growth in air training. Adjusted EBITDA margin of 13.1% increased 320 basis points year-over-year, reflecting strong operational execution and cost management. Turning to slide 15 for some fourth quarter guideposts. We expect to deliver a strong fourth quarter, leading to full year anticipated adjusted EBITDA to be at or slightly above fiscal year 2019, where we delivered $146.6 million. While this is a large fourth quarter ramp, please keep in mind our Mission Solutions business is typically heavily weighted toward the fourth quarter due to the timing of orders. Additionally, the acquisition of Pixia, which is a high-margin software business, generates most of its profit in the fourth quarter since the largest annual license renewal occurs in Q4.

And we are pleased to confirm that this order was received at the end of July as expected. I'll touch on some other key drivers. In addition to the meaningful Pixia contribution, we expect strong shipments of GATR in the fourth quarter, driven by the $73 million in backlog. Also, in CMS, we expect strong deliveries of a DTECH product line, supported by current backlog and additional orders expected in the fourth quarter. We also anticipate modest growth in our short-cycle Intelligent Transport Systems business. Lastly, a design-build, fare collection project in CTS continue to be on track, including the manufacturing schedule. Moving to slide 16. We believe our cost savings initiative, which were announced in May are currently on track to generate cumulative net savings of $30 million to $35 million over the course of FY 2020 and 2021.

While we feel comfortable with where we are from an expense management perspective, to help mitigate the impacts of COVID-19, we have additional levers should we need to take further action. Our bank net leverage ratio improved to 3.7 times at quarter end, and our credit agreement allows us to have a net leverage ratio of up to 4.75 times through December 2020, as a result of our acquisition of Pixia. We remain focused on cash preservation and lowering our leverage ratio to our target of below three times. As a reminder, the debt issued by the variable interest entity in connection with the Boston contract is non-recourse to Cubic and is not included by our banks in the calculation of our leverage ratio.

Our Boston MBTA contract was structured as a public-private partnership, where we formed a joint venture with John Laing, in which we only have a 10% equity stake, but this entity must be consolidated under U.S. GAAP. I'll close by reiterating that we are pleased with our execution this quarter, especially given the challenging environment, and we look forward to delivering a strong fourth quarter to end the fiscal year.

Now I'll turn the call back over to Brad.

Bradley H. Feldmann -- Chairman, President & Chief Executive Officer

Thank you, Anshooman. Turning to slide 17. We are pleased with our performance and strategic progress this quarter and what continues to be a challenging and fast-changing environment. Cubic remains well positioned in our markets and to successfully execute our business strategy, but we are not taking that for granted. We will continue to effectively navigate the current landscape, fine-tune our strategy, mobilize our resources and take actions to best serve our customers and create value for our stakeholders.

With that, let's proceed to the Q&A session.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of Ken Herbert with Canaccord. Your line is open.

Ken Herbert -- Canaccord -- Analyst

Yeah, hi, good afternoon. I can, have you drawn pretty good. Brad. Hey, it sounds like you've obviously on good pace with bookings in CMS in the fourth quarter. Can you just provide a little bit more confidence or maybe a little bit more color on sort of fourth quarter and CMS and expectations around, not only the top line, but then to expound upon some of your comments on what we should expect in terms of EBITDA and margin on those products? Because obviously, it's, as you've talked about, historically, such a major swing factor for the segment in the fourth quarter and the full company. But any more detail on confidence around the fourth quarter and CMS would be great.

Bradley H. Feldmann -- Chairman, President & Chief Executive Officer

Yes. We've remained confident regarding the fourth quarter. From a revenue perspective, we have north of 85% of the orders in backlog through the recent days and more actually regarding the profitability. So at the end of the year, I actually expect them to have higher profits year-on-year than they did last year.

Ken Herbert -- Canaccord -- Analyst

Does the revenues in CMS this year surpass what we saw in fiscal 2019?

Bradley H. Feldmann -- Chairman, President & Chief Executive Officer

It will some. As you know, Pixia was in addition to what we were doing last year.

Ken Herbert -- Canaccord -- Analyst

Okay, that's helpful. And then can you just there's a lot of speculation around, and I know you've talked a lot about within CTS, the impact of or the limited impact of ridership on your direct revenues now, but it clearly sounds like it's a bit of a headwind for timing on new contracts and some activity in the segment. Can you just three to nine months, I think, you called out on sort of new contract wins. Is there any way that could get helped if we get more stimulus for state and local governments? And how are you viewing the potential there to maybe speed up some of the activity from a booking standpoint?

Bradley H. Feldmann -- Chairman, President & Chief Executive Officer

Yes. So obviously, if there's stimulus that comes from governments that helps the situation. As you know, we've seen stimulus provided around the world to mass transit. Mass transit is essential. And just to point out that we provide contactless, i.e., safe, fare collection methods. And so having said all that, the delays could be shorter if there were stimulus. I think you'll note that we're working on lots of proposal activity, I think, we said north of $1 billion of activity in various cities around the world. And the ridership around the world: Asia has rebounded much more strongly; Europe, a little bit less; U.S., just a little bit. And so I would expect ridership to continue to rebound going forward.

Ken Herbert -- Canaccord -- Analyst

Okay. And just finally, aside from the MBTA contract reset, was there anything else that directly impacted margins positively in CTS in the quarter?

Bradley H. Feldmann -- Chairman, President & Chief Executive Officer

Just really good go ahead, Anshooman, sorry.

Anshooman Aga -- Executive Vice President & Chief Financial Officer

So as Brad was saying, we had very good execution across the board, both on the design-build and the services side. And then also, as I pointed out, we had the cost savings initiative companywide, which also impacted CTS positively.

Ken Herbert -- Canaccord -- Analyst

Great. All right, thank you.

Anshooman Aga -- Executive Vice President & Chief Financial Officer

Thanks, Ken.

Operator

The next question comes from the line of Jon Raviv with Citi. Your line is open.

Jon Raviv -- Citi -- Analyst

Thank you very much. So a question to sort of carrying on Ken's first point about CMS margin. How are you thinking about that business going forward? You're building backlog. You've gotten the nice position. You're investing. But when should we be able to see some of that positive EBITDA margin going forward? Goal 2020, I assume, that's pegged at 14% to 15%. Is there some kind of inflection point that we should be looking out for over the next year or two? Any help on any perspective on that time would be much appreciated.

Bradley H. Feldmann -- Chairman, President & Chief Executive Officer

Yes. I think this year, there will be margin expansion. And we would expect that to continue the next year or two to the levels that you suggested. We're in a cycle now where we've been winning a lot of programs that have nonrecurring engineering in them. Recurring obviously follows. Those recurring jobs were bid at much higher margins. So the mix will change quite a bit in the next few years.

Jon Raviv -- Citi -- Analyst

And just to clarify, the mix being those nonrecurring engineering to production?

Bradley H. Feldmann -- Chairman, President & Chief Executive Officer

That's right. So the mix going from nonrecurring engineering to production. The production, just to reiterate, was bid at much higher margins.

Jon Raviv -- Citi -- Analyst

Understood. And then on the CTS side, talking about this almost an air pocket or a delay in some of those other projects you outlined. Is there a chance that some of the roads or non-public transit stuff will be able to accelerate and fill in some of that hole? Or should we be prepared for CTS growth to decelerate here based on pandemic?

Bradley H. Feldmann -- Chairman, President & Chief Executive Officer

No. We'll see growth next year and the year after. But your question has good insight. Roads are coming back much faster. And the acquisitions that we have done, we believe, we have the best technology, and we believe, we'll see expansion there from those products.

Jon Raviv -- Citi -- Analyst

Right.

Operator

Your next question comes from the line of Louie DiPalma with William Blair. Your line is open.

Bradley H. Feldmann -- Chairman, President & Chief Executive Officer

Hey Lori.

Louie DiPalma -- William Blair -- Analyst

Hi, Brad Anshooman and Kirsten. Good afternoon.

Bradley H. Feldmann -- Chairman, President & Chief Executive Officer

Good afternoon. Louie

Louie DiPalma -- William Blair -- Analyst

What is the time line on launching Cubic Interactive? I know you had a pilot in Miami right before the Super Bowl, and you made a couple of announcements during the quarter. But I'm interested in what are your expected investments to launch Cubic Interactive in the Delerrok markets and later potentially the New York, Boston, San Francisco and other Tier one markets?

Bradley H. Feldmann -- Chairman, President & Chief Executive Officer

Yes. So we're working very hard on our partnership with Moovit. As you all recall, Moovit has, from my perspective, the best information regarding mass transit in the world. And I would argue that we have the best payment technology and so to deliver that experience to users or patrons that use mass transit is a tremendous opportunity. And so by the end of the calendar year, we will have a product that amalgamates both capabilities. And that will also have Cubic Interactive with it as well. So you'll see some momentum at the end of this calendar year and into next to see those digital products take hold.

Louie DiPalma -- William Blair -- Analyst

That's helpful. And for Anshooman, you discussed the reduction of leverage is a major priority. During the quarter, you reduced net debt by around $50 million. But there's a lot of work left. What do you expect net leverage to be by the end of the year? And do you have any sense on when the leverage ratio can fall back below three times?

Anshooman Aga -- Executive Vice President & Chief Financial Officer

Thanks, Louie. So yes, we had a strong quarter in Q3 with $54 million of net leverage reduction and our leverage ratio went down to 3.7 times versus 3.96 times in Q2. For the fourth quarter, we expect positive free cash flow again, which will and again, adjusted EBITDA will be stronger than last year's adjusted EBITDA, just given the full year guidepost that we have provided, which will further help leverage ratios go down. We continue to work through the fiscal year and next year also to continue to lower leverage. Regarding the exact timing of three times, we're still working through our business plans. And also, there's a little bit of uncertainty because of the pandemic. But we will continue to make progress toward the three times target.

Louie DiPalma -- William Blair -- Analyst

Thanks.

Operator

Your next question comes from the line of Michael Ciarmoli with SunTrust. Your line is open.

Michael Ciarmoli -- SunTrust -- Analyst

Hey guys, good evening. Thanks for taking the questions here. Brad, just maybe on the contract you called out, the High Capacity Backbone. I mean, it sounds like a great opportunity. And I'm just I think, Jon, was hitting on this about the mix. I mean, clearly, this sounds like it will be a little bit of a margin headwind in the near term. I mean, are there going to be, just trying to, I guess, level set expectations in CMS? You've got the Advanced Battle Management System. Is there a little bit more margin pressure in the near term on some of these wins before we get to that mix shift?

Bradley H. Feldmann -- Chairman, President & Chief Executive Officer

Yes. So overall, we've been doing a lot of nonrecurring from major wins that we had last year: the MQ-25; the Joint Strike Fighter; the MH-60; and Boomslang, those were major wins for us. The High Capacity Backbone starting portion of the contract, the $38 million. The margins there are lower single digit, but when you move into the production phase of these programs, they're double-digit margins and will move us to the mid-teen area that we've talked about in this business. I'll also note that in that portfolio, GATR has very nice margins, DTECH has very nice margins, the Pixia software business that we picked up, has great margins. So I would expect that margins to continue to expand as we go.

Michael Ciarmoli -- SunTrust -- Analyst

Okay. And then maybe dovetailing into that, the $30 million to $35 million of cost savings, Anshooman, can you just give us a sense of what hit in the current quarter, maybe what segment we're seeing at most? And as we look forward into the, I guess, the full realization of that savings, should we expect to see that drop right through to EBITDA margins in 2021?

Anshooman Aga -- Executive Vice President & Chief Financial Officer

Yes. So it's a cumulative $30 million to $35 million. So far, we've, in Q3, we had a little over $8 million hit the books. Obviously, CTS has majority of the people, so majority of the savings would go to CTS. And then we'll have additional savings in Q4 and then the remaining to get to the cumulative $30 million to $35 million would be next fiscal year. And yes, straight to the bottom line.

Michael Ciarmoli -- SunTrust -- Analyst

Straight to the bottom line. Okay...

Anshooman Aga -- Executive Vice President & Chief Financial Officer

Yes. It's offsetting some of the impacts from COVID that we had.

Michael Ciarmoli -- SunTrust -- Analyst

Right. I mean, the COVID impact, too, I guess, my last one, the $41 million of revenue headwinds, I don't have that number in front of me, I think the $13 million or $14 million of EBITDA, do you pick that up in the fourth quarter or 2021? Or how should we think about that from a modeling standpoint?

Anshooman Aga -- Executive Vice President & Chief Financial Officer

Well, a lot of these were project delays. And as Brad mentioned, we're seeing a three to nine month delay in projects. So ultimately, maybe in two years or three years, there's a catch-up where a lot of pent-up demand comes. But there is delay in projects. A couple of the projects, we had pauses or slowdowns. For example, New York, we had announced last quarter that they had a one month pause. We're catching up on the installation on that. We had a project in Los Angeles, where installing the readers was put on hold for the safety of employees. That's back on track, and we're trying to catch up. But the delay and then the ridership impact obviously doesn't come back because we have certain part of our revenue tied to ridership, which just doesn't come back.

Michael Ciarmoli -- SunTrust -- Analyst

Got it, got it. And maybe just one more. Just taking into consideration some of these pauses, delays, I guess, more on your current projects, any changes to the that you see from COVID with if I were to think about that, that sort of three year free cash flow profile that you've guided us to, does anything slide out further to the right in terms of cash collections here as we're thinking about? I know you called out a strong fourth quarter for cash. But anything we should be aware about cash collections with some of these delays?

Anshooman Aga -- Executive Vice President & Chief Financial Officer

No. Our three year target remains on track. The projects remain on track. Wherever the couple of projects that I mentioned where we had a pause, they were temporary pauses, and the customers are interested in us actually catching up. And further to the point where in New York, actually paused the project, we worked with the customer to break the milestone payment into three milestone payments, and we got the first one in Q3. So it talks to the testament of our employees and our relationship with the customer and the good work our employees are doing to serve our MTA customer.

Michael Ciarmoli -- SunTrust -- Analyst

Got it. That's pretty helpful. Thanks guys.

Operator

[Operator Instructions] Your next question comes from the line of Mike Cikos with Needham & Company. Your line is open.

Mike Cikos -- Needham & Company -- Analyst

Hi team you have Mike Cikos here, for Jim Ricchiuti. I wanted to ask you with respect to the COVID-19 impact that we saw in fiscal Q3. Could you help us unpackage, I guess, what was specific maybe to CTS, sort of, I'm thinking about what's coming from the reduced transit ridership? And I guess what I'm ultimately trying to do is unpackage that and get a better sense of what we might anticipate impacting Cubic in fiscal Q4? Or to what extent any COVID-19 impact has been contemplated in the guidepost we've been provided today?

Anshooman Aga -- Executive Vice President & Chief Financial Officer

Sure. So of the $41 million that we talked about, just under $30 million was tied to CTS. About a little less than 1/3 of that was based on ridership and then the rest was delays and slowdowns.

Mike Cikos -- Needham & Company -- Analyst

And then I did want to come back to the HCB contract as well. Just wanted to get a sense because, again, this $4 billion addressable opportunity over 10 years is obviously just a large number. But for Cubic itself, are you guys actively pursuing that entire $4 billion? Are you actively addressing that entire $4 billion? Or do you get there through partnerships or additional acquisitions and internal R&D? Just curious how much of that Cubic can how much of that wallet Cubic can actually grab with its product portfolio.

Bradley H. Feldmann -- Chairman, President & Chief Executive Officer

100%. We'll attack that $4 billion hard with the technology that we've come up with, we've been working on a number of years. And what it allows, in essence, is to put Ethernet in the sky, so that all the participants in the sky can have a common secure picture. And so after we do the development and demonstrate the air and ground pieces, then we'll start putting that on platforms. We called out a couple on the charts. But I think that will continue to expand. It's a key priority of the Department of Defense, the Joint All Domain Command and Control system and our HALO product is in the middle of that. We're thrilled. We beat many prime contractors and our team did a great job. We've been investing and developing that technology that we think is very, very unique. The last five years, not only internally with company monies, but also in partnering with the Air Force Research Lab. So this is a tremendous win for us, and we're thrilled.

Mike Cikos -- Needham & Company -- Analyst

That's helpful. And one more on the cost savings, if I may. I'm just thinking about the cumulative net savings of this $30 million to $35 million with $8 million hitting the books in fiscal Q3, which was obviously impacted by the COVID-19. But curious, has that I guess, the $8 million that did hit fiscal Q3, was this was there anything onetime in there or faster than we anticipated? Because again, I'm just looking at this stretching over the next five quarters into fiscal 2021 to get a sense of how these savings layer in?

Anshooman Aga -- Executive Vice President & Chief Financial Officer

Yes. I won't say it was unanticipated, it was right according to our plan. There are some onetime actions in there. For example, we stopped the 401(k) match for the rest of this fiscal year. We've put a freeze on salaries. So no merit increases through end of next fiscal year. Obviously, travel and trade shows and stuff like that and discretionary spending is down. And then there are certain actions that are more permanent in nature in terms of organization.

Mike Cikos -- Needham & Company -- Analyst

Great, thank you guys.

Operator

You our next question comes from the line of Jon Raviv with Citi. Your line is open.

Jon Raviv -- Citi -- Analyst

Hi, thanks for the follow-up. Brad, I appreciate the perspective on where CMS margins can go and some of the shape around that. But this question is on CTS, CTS margin opportunity as some of those higher-margin solutions ramp up, maybe this is the kind of thing that would have been covered at the Investor Day that never was. But any thoughts on how you're thinking about long term there and maybe any preview for Goal 2025, if you will.

Bradley H. Feldmann -- Chairman, President & Chief Executive Officer

Well, we're not previewing Goal 2025 today. And Kirsten will let us know when we're going to have the Investor Day. But what I would say, and your question is very insightful. What I would say is that we get these digital products out into the marketplace, they're at much higher margins. And what I also will say is that we're driving down the risk quite a bit as we're delivering these big five contracts. And so I would expect margins to continue to improve. Anshooman was very clear that we were helped by the Boston contract this quarter. But margins in CTS, I think, we had given sort of a guidepost of middle double-digit margins. And so we're headed there.

Jon Raviv -- Citi -- Analyst

Yes, thanks. Thought I'd try. Thanks again.

Operator

Your next question comes from the line of Louie DiPalma with William Blair. Your line is open.

Louie DiPalma -- William Blair -- Analyst

Thanks for the follow-up Regarding the Joint All Domain Command and Control on $950 million IDIQ, should investors think of that IDIQ similar to your like $962 million IDIQ for T2C2 and that like do you expect to realize most of that $950 million? Or is that amount expected to be split between the several awardees for that program?

Bradley H. Feldmann -- Chairman, President & Chief Executive Officer

Yes. It's a multiple-award IDIQ in contrast to the T2C2, which was single award. So and they awarded a lot of contracts. What I would say is, again, the High Capacity Backbone win, that technology is very relevant to that multi-award IDIQ. And we think our technology is unique.

Louie DiPalma -- William Blair -- Analyst

Okay. So is that was that High Capacity Backbone is that not a task order under this $950 million?

Bradley H. Feldmann -- Chairman, President & Chief Executive Officer

It's not. It's not.

Louie DiPalma -- William Blair -- Analyst

Okay. So it's completely separate.

Bradley H. Feldmann -- Chairman, President & Chief Executive Officer

It's a separate contract and was very competitive and fortunately, we beat lots of household names.

Louie DiPalma -- William Blair -- Analyst

Sounds Good. That's helpful. Thanks, Brent.

Operator

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

Bradley H. Feldmann -- Chairman, President & Chief Executive Officer

Thank you for joining us today. Before we sign off, I want to thank the Cubic team for their ongoing commitment to serving our customers and keeping our businesses safely operational during the ongoing pandemic. We appreciate your support and interest in our great company. Thanks so very much.

Operator

[Operator Closing Remarks].

Duration: 57 minutes

Call participants:

Kirsten Nielsen -- Vice President,of Investor Relations

Bradley H. Feldmann -- Chairman, President & Chief Executive Officer

Anshooman Aga -- Executive Vice President & Chief Financial Officer

Ken Herbert -- Canaccord -- Analyst

Jon Raviv -- Citi -- Analyst

Louie DiPalma -- William Blair -- Analyst

Michael Ciarmoli -- SunTrust -- Analyst

Mike Cikos -- Needham & Company -- Analyst

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