UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarter Ended June 30, 1998 1-8931 ------ Commission File Number CUBIC CORPORATION Exact Name of Registrant as Specified in its Charter Delaware 95-1678055 -------- ---------- State of Incorporation IRS Employer Identification No. 9333 Balboa Avenue San Diego, California 92123 Telephone (619) 277-6780 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of August 1, 1998, Registrant had only one class of common stock of which there were 8,907,067 shares outstanding (after deducting 2,981,176 shares held as treasury stock). PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS CUBIC CORPORATION CONSOLIDATED CONDENSED STATEMENT OF INCOME (UNAUDITED) (amounts in thousands, except per share data) Nine Months Ended Three Months Ended June 30 June 30 1998 1997 1998 1997 -------- -------- -------- -------- Revenues: Net sales $281,121 $290,073 $ 99,544 $109,828 Other income 3,799 4,869 1,271 1,875 -------- -------- -------- -------- 284,920 294,942 100,815 111,703 Costs and expenses: Cost of sales 222,489 223,933 76,789 85,367 Selling, general and administrative expenses 55,815 49,751 18,413 18,828 Research and development 6,931 6,412 2,638 2,240 Interest 1,325 1,269 343 411 -------- -------- -------- -------- 286,560 281,365 98,183 106,846 -------- -------- -------- -------- Income (loss) before income taxes (1,640) 13,577 2,632 4,857 Income taxes (benefit) (400) 4,750 850 1,600 -------- -------- -------- -------- Net income (loss) $ (1,240) $ 8,827 $ 1,782 $ 3,257 -------- -------- -------- -------- -------- -------- -------- -------- Net income (loss) per common share $ (0.14) $ 0.98 $ 0.20 $ 0.36 -------- -------- -------- -------- -------- -------- -------- -------- Dividends per common share $ 0.19 $ 0.19 $ - $ - -------- -------- -------- -------- -------- -------- -------- -------- Average shares of common stock outstanding 8,920 8,981 8,907 8,981 -------- -------- -------- -------- -------- -------- -------- -------- SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 2 CUBIC CORPORATION CONSOLIDATED CONDENSED BALANCE SHEET (thousands of dollars) June 30 September 30 1998 1997 (Unaudited) (See note below) ----------- ---------------- ASSETS Current assets: Cash and cash equivalents $ 17,706 $ 53,257 Marketable securities, available-for-sale 2,181 2,426 Accounts receivable 122,591 107,807 Inventories -- Note 3 36,480 20,955 Deferred income taxes 13,858 10,454 Prepaid expenses and other current assets 3,516 5,329 -------- -------- Total current assets 196,332 200,228 Property, plant and equipment - net 39,556 40,110 Cost in excess of net tangible assets of purchased businesses, less amortization 25,686 27,281 Miscellaneous other assets 12,515 14,663 -------- -------- $274,089 $282,282 -------- -------- -------- -------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term borrowings $ 14,989 $ 9,620 Accounts payable and other current liabilities 47,670 46,270 Customer advances 22,280 30,896 Income taxes payable 2,351 206 Current portion of long-term debt 5,000 5,000 -------- -------- Total current liabilities 92,290 91,992 Long-term debt 5,000 10,000 Deferred income taxes and other liabilities 5,463 4,970 Shareholders' equity: Common stock 234 234 Additional paid-in capital 12,123 12,123 Retained earnings 195,281 198,213 Foreign currency translation adjustment (247) (557) Treasury stock at cost (36,055) (34,693) -------- -------- 171,336 175,320 -------- -------- $274,089 $282,282 -------- -------- -------- -------- Note: The balance sheet at September 30, 1997 has been derived from the audited financial statements at that date. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 3 CUBIC CORPORATION CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED) (thousands of dollars) Nine Months Ended June 30 1998 1997 -------- -------- Operating Activities: Net income (loss) $ (1,240) $ 8,827 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 7,354 6,291 Changes in operating assets and liabilities (35,538) (12,649) -------- -------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (29,424) 2,469 -------- -------- Investing Activities: Sales of marketable securities 245 368 Proceeds from sale of U. S. Elevator Corp. - 31,996 Acquisition of business, net of cash acquired - (11,620) Net additions to property, plant and equipment (5,186) (4,830) Other items - net 1,795 685 -------- -------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (3,146) 16,599 -------- -------- Financing Activities: Change in short-term borrowings 5,038 - Change in long-term debt (5,000) (5,000) Purchases of treasury stock (1,362) (122) Dividends paid (1,692) (1,706) -------- -------- NET CASH USED IN FINANCING ACTIVITIES (3,016) (6,828) -------- -------- Effect of exchange rates on cash 35 (378) -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (35,551) 11,862 Cash and cash equivalents at the beginning of the period 53,257 20,062 -------- -------- CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD $ 17,706 $ 31,924 -------- -------- -------- -------- SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 4 CUBIC CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) June 30, 1998 NOTE 1 -- BASIS FOR PRESENTATION The accompanying unaudited consolidated condensed financial statements of Cubic Corporation (the Company) have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. The interim financial information presented herein includes all normal recurring adjustments which are considered necessary by the Company's management for a fair presentation of the financial position, results of operations, and cash flows for the periods presented. Operating results for the quarter are not necessarily indicative of the results that may be expected for the year ended September 30, 1998. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended September 30, 1997. Certain prior period amounts have been restated to reflect the current period classifications. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NOTE 2 -- PER SHARE AMOUNTS Per share amounts are based upon the weighted average number of shares of common stock outstanding. 5 CUBIC CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) -- continued June 30, 1998 NOTE 3 -- INVENTORIES June 30 September 30 1998 1997 -------- ------------ Inventories consist of the following: (In thousands) Finished products $ 2,367 $ 2,501 Work in process 24,515 10,300 Raw material and purchased parts 9,598 8,154 ------- ------- $36,480 $20,955 ------- ------- ------- ------- Work in process at June 30, 1998 includes approximately $12 million of inventoried costs incurred as pre-contract work performed at the Company's risk. Approximately one-half of this amount relates to a defense segment contract and one-half to a transportation systems segment contract, both of which are in late stages of negotiations. Management believes the Company will ultimately recover this and any future amounts to be incurred through the award of the related contracts. NOTE 4 -- LEGAL MATTER In 1991, the government of Iran commenced an arbitration proceeding against the Company seeking $12.9 million for reimbursement of payments made for equipment that was to comprise an Air Combat Maneuvering Range pursuant to a contract executed in 1977, and an additional $15 million for unspecified damages. The Company contested the action and brought a counterclaim for compensatory damages of $10.4 million. In May 1997, the arbitral tribunal awarded the government of Iran a decision in the amount of $2.8 million, plus simple interest at the rate of 12% per annum from September 1991. On June 24, 1998, the government of Iran commenced an action in the United States District Court for the Southern District of California to enforce the award. The Company strongly believes it did not receive due process in the arbitral proceeding and is vigorously contesting the action. The Company believes that the ultimate outcome of the matter will not have a material effect on the Company's financial statements. NOTE 5 -- REVIEW BY INDEPENDENT ACCOUNTANTS A review of the data presented was made by Ernst & Young LLP, independent accountants, in accordance with established professional standards and procedures, and their report is included herein. 6 CUBIC CORPORATION ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS June 30, 1998 RESULTS OF OPERATIONS Sales for the nine-month period ended June 30, 1998 decreased 3% compared to the same period of fiscal 1997, as a modest sales increase in the transportation systems segment was offset by lower sales in the defense and commercial operations segments. Defense segment sales for the three and nine-month periods ended June 30, 1998 decreased 3% and 5%, respectively, as compared to the same periods of last year, due primarily to lower sales of the Company's Receiver products. However, sales volume in this product line is expected to improve in the fourth quarter as a result of orders recently received. Operating profits in the defense segment for the three and nine-month periods ended June 30, 1998 approximately doubled as compared to the same periods of the previous year. The J-STARS Data Link product line continued to contribute significantly to the operating profits of this segment. In addition, during the first three quarters of fiscal 1997, operating profits in the segment had been depressed by the recognition of losses caused by cost growth in the development of MILES 2000. In the current year, the MILES 2000 product line has operated at a break-even status, which significantly improved the operating profits of this segment as compared to the same periods of the previous year. Transportation systems segment sales for the three-month period ended June 30, 1998 decreased 16% as compared to the same period of last year primarily due to lower sales on contracts in New York City and Chicago. This decrease in sales to United States customers was partially offset by increased sales to customers in the Far East. For the nine-month period, overall transportation systems sales were up slightly, due primarily to the acquisition of Thorn Transit Systems International (TTSI) in April 1997. During the third quarter, the Company continued its restructuring of management in the United Kingdom to realign resources and address the operating issues which resulted in the significant losses on several large contracts recorded in the second quarter of 1998. Management believes the $9.5 million reserve established in the second quarter is adequate to absorb the expected losses on those contracts. Operating profits for the quarter and year-to-date in the transportation systems segment were also negatively impacted by lower sales volume on contracts in the United States, as described above, and lower profit margins on these and other U.S. based contracts. However, award of the Prestige contract to privatize the London Transport fare collection system is imminent and should result in significant growth of the transportation systems segment in future quarters. 7 CUBIC CORPORATION ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued June 30, 1998 The Company has continued to invest in the development and promotion of its proprietary software technology which delivers compressed video and audio transmission over computer networks for applications including e-mail, intra-net based training and surveillance. This investment, which has resulted in losses in the commercial operations segment, amounted to $1.6 million and $3.7 million, before applicable income taxes, for the three and nine-month periods of this fiscal year, respectively. Selling, general and administrative expenses for the nine-month period ended June 30, 1998 increased, both nominally and as a percentage of sales, over the level in fiscal 1997. This increase resulted from the acquisition of TTSI last year, increased selling expenses incurred at the defense segment in pursuit of new contracts and marketing and promotion expenses related to the video compression software technology mentioned above. The effective tax rate for the nine months ended June 30, 1998 was lower than in the same period of fiscal 1997 because the losses were incurred in the United Kingdom where the corporate tax rates are lower than in the U.S., providing a lower tax benefit. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents has decreased $35.5 million since year end, to $17.7 million at June 30, 1998. During the nine-month period ended June 30, 1998, operating activities used $29.4 million, primarily due to growth in inventoried costs and accounts receivable, in addition to a reduction in customer advances. Investing activities included $5.2 million of planned expenditures for capital equipment. Financing activities included a $5 million net increase in short-term borrowings from credit facilities in the United Kingdom, offset by a scheduled $5 million annual installment payment on a long-term note. The Company expects that cash on hand and its unused debt capacity will be adequate to meet its short and long-term financing needs. The Company's financial condition remains strong with working capital of $104 million and a current ratio of 2.1 to 1 at June 30, 1998. The backlog of orders at June 30, 1998 was $348 million, as compared to the $358 million at September 30, 1997 and the $368 million at June 30, 1997. Except for historical matters contained herein, statements in this discussion and analysis are forward-looking and are made pursuant to the Securities Litigation Reform Act of 1995. Investors are cautioned that forward-looking statements involve risks and uncertainties which may affect the Company's business and prospects, including economic, competitive, governmental, technological and other factors. 8 PART II - OTHER INFORMATION ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are included herein: Exhibit 3(i) Certificate of Incorporation of Cubic Corporation (as amended) Exhibit 15 Independent Accountants' Review Report Exhibit 27 Financial Data Schedule (b) No reports on Form 8-K were filed during the quarter. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CUBIC CORPORATION Date August 6, 1998 /s/ W. W. Boyle -------------- --------------------------------- W. W. Boyle Vice President Finance and CFO Date AUGUST 6, 1998 /s/ T. A. Baz -------------- --------------------------------- T. A. Baz Vice President and Controller 9