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 December 31, 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 February 1, 1998, Registrant had only one class of common stock of which there were 8,907,004 shares outstanding (after deducting 2,981,239 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) Three Months Ended December 31 1998 1997 -------- -------- Revenues: Sales $ 98,758 $ 91,752 Other income 789 1,394 -------- -------- 99,547 93,146 -------- -------- Costs and expenses: Cost of sales 77,078 68,805 Selling, general and administrative expenses 16,039 17,994 Research and development 1,586 1,702 Interest 779 503 -------- -------- 95,482 89,004 -------- -------- Income before income taxes 4,065 4,142 Income taxes 1,400 1,500 -------- -------- Net income $ 2,665 $ 2,642 -------- -------- -------- -------- Net income per share $ .30 $ .30 -------- -------- -------- -------- Average shares of common stock outstanding 8,907 8,943 -------- -------- -------- -------- SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS 2 CUBIC CORPORATION CONSOLIDATED CONDENSED BALANCE SHEET (thousands of dollars) December 31 September 30 1998 1998 (Unaudited) (See note below) -------------- ---------------- ASSETS Current assets: Cash and cash equivalents $ 12,111 $ 3,500 Marketable securities, available-for-sale 2,086 2,086 Accounts receivable 159,661 149,640 Inventories -- Note 3 53,774 39,623 Deferred income taxes and other current assets 13,514 15,296 -------------- ---------------- Total current assets 241,146 210,145 -------------- ---------------- Property, plant and equipment - net 40,838 40,400 Cost in excess of net tangible assets of purchased businesses, less amortization 24,959 25,788 Deferred income taxes and other assets 16,833 17,658 -------------- ---------------- $ 323,776 $ 293,991 -------------- ---------------- -------------- ---------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term borrowings $ 20,921 $ 30,321 Trade accounts payable 8,495 14,534 Customer advances 25,867 27,157 Other current liabilities 23,226 31,344 Income taxes payable 4,358 1,305 Current portion of long-term debt 5,000 5,000 -------------- ---------------- Total current liabilities 87,867 109,661 -------------- ---------------- Long-term debt 55,000 5,000 Deferred income taxes and other liabilities 5,853 5,778 Shareholders' equity: Common stock 234 234 Additional paid-in capital 12,123 12,123 Retained earnings 198,389 195,724 Accumulated other comprehensive income 366 1,527 Treasury stock at cost (36,056) (36,056) -------------- ---------------- 175,056 173,552 -------------- ---------------- $ 323,776 $ 293,991 -------------- ---------------- -------------- ---------------- NOTE: THE BALANCE SHEET AT SEPTEMBER 30, 1998 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) Three Months Ended December 31 1998 1997 --------- --------- Operating Activities: Net income $ 2,665 $ 2,642 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 2,514 2,493 Changes in operating assets and liabilities (34,490) 8,970 --------- --------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (29,311) 14,105 --------- --------- Investing Activities: Net additions to property, plant and equipment (2,586) (1,537) Other items - net (378) 84 --------- --------- NET CASH USED IN INVESTING ACTIVITIES (2,964) (1,453) --------- --------- Financing Activities: Change in short-term borrowings (9,081) 1,097 Change in long-term borrowings 50,000 - Purchases of treasury stock - (561) --------- --------- NET CASH PROVIDED BY FINANCING ACTIVITIES 40,919 536 --------- --------- Effect of exchange rates on cash (33) (86) --------- --------- NET INCREASE IN CASH AND CASH EQUIVALENTS 8,611 13,102 Cash and cash equivalents at the beginning of the period 3,500 53,257 --------- --------- CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD $ 12,111 $ 66,359 --------- --------- --------- --------- SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS 4 CUBIC CORPORATION CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED) (thousands of dollars) Accumulated Other Additional Comprehensive Retained Comprehensive Treasury Paid-in Common Income Earnings Income Stock Capital Stock ------------- ---------- ------------- ---------- ----------- -------- September 30, 1998 $ 195,724 $ 1,527 $ (36,056) $ 12,123 $ 234 Comprehensive income: Net income $ 2,665 2,665 Foreign currency translation adjustment (1,161) (1,161) ------------ Comprehensive income $ 1,504 ------------ ------------ ----------- ----------- ----------- --------- ------- December 31, 1998 $ 198,389 $ 366 $ (36,056) $ 12,123 $ 234 ----------- ----------- ----------- --------- ------- ----------- ----------- ----------- --------- ------- Accumulated Other Additional Comprehensive Retained Comprehensive Treasury Paid-in Common Income Earnings Income Stock Capital Stock ------------- ---------- ------------- ---------- ----------- -------- September 30, 1997 $ 198,213 $ (557) $ (34,693) $ 12,123 $ 234 Comprehensive income: Net income $ 2,642 2,642 Foreign currency translation adjustment 132 132 ------------ Comprehensive income $ 2,774 ------------ ------------ Treasury stock purchases (561) ----------- ----------- ----------- --------- ------- December 31, 1997 $ 200,855 $ (425) $ (35,254) $ 12,123 $ 234 ----------- ----------- ----------- --------- ------- ----------- ----------- ----------- --------- ------- SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS 5 CUBIC CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) December 31, 1998 NOTE 1 -- BASIS FOR PRESENTATION The accompanying unaudited consolidated condensed financial statements 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. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the quarter are not necessarily indicative of the results that may be expected for the year ended September 30, 1999. 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, 1998. The preparation of the 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 and 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. NOTE 3 -- INVENTORIES December 31 September 30 1998 1998 ----------- ------------- Inventories consist of the following: Finished products $ 2,150 $ 2,615 Work in process 40,210 27,172 Raw material and purchased parts 11,414 9,836 ----------- ------------- $ 53,774 $ 39,623 ----------- ------------- ----------- ------------- Work in process inventories increased from September 30, 1998 to December 31, 1998 primarily as a result of additional gates being built during the period for use in automatic fare collection systems. Virtually all of these gates were built to meet requirements under existing contracts, the most significant of which is the PRESTIGE contract. It is expected that inventory levels will decrease in future quarters as these gates are installed and the costs are charged to contracts. 6 CUBIC CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)--continued December 31, 1998 NOTE 4 - ADOPTION OF NEW ACCOUNTING PRONOUNCEMENT As of October 1, 1998, the Company adopted FASB Statement No. 130, "Reporting Comprehensive Income." This pronouncement establishes standards for reporting and displaying comprehensive income, which includes all components of the change in Shareholders' Equity during a given period, except those resulting from investment by or distribution to shareholders. As a result of adopting this statement, the Company began displaying a Consolidated Statement of Changes in Shareholders' Equity, which reconciles the beginning and ending balances of each component of Shareholders' Equity, and provides a Statement of Comprehensive Income. 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. 7 CUBIC CORPORATION ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS December 31, 1998 RESULTS OF OPERATIONS Sales for the first quarter of fiscal 1999 were 8% higher than the first quarter of fiscal 1998, as the result of higher sales in the defense segment. The higher sales were from the MILES 2000 product line and from the contract to produce a ground combat training system for the British military, known as Area Weapons Effect Simulator (AWES), which was awarded in the fourth quarter of fiscal 1998. Sales in the transportation systems segment for the first quarter of fiscal 1999 were comparable to the first quarter of fiscal 1998. It is expected that this segment will generate higher sales volume in the remaining quarters of the year, as work on the PRESTIGE contract escalates. Operating profits in the defense segment were somewhat higher in the quarter ended December 31, 1998 than in the first quarter of the previous year, but did not increase in proportion to the sales increase. The AWES contract is at an early stage of completion and has not yet generated operating profits, while the profit margins in the MILES 2000 product line continue to be minimal due to cost growth incurred in previous years. In late January of 1999, it was determined that there may be additional cost growth in the MILES 2000 contract with the U.S. Department of Defense, which may result in somewhat reduced profits in the defense segment during the second quarter of the fiscal year. Operating profits in the transportation systems segment were higher in the first quarter of fiscal 1999 than in the same period last year, due primarily to a reduction in selling, general and administrative expenses. This was the result of lower contract proposal costs and the organizational restructuring which began in the third quarter of fiscal 1998. As mentioned above, sales in this segment should increase in the remaining quarters of the year and are expected to result in higher profits from this segment. The Company continued the marketing and development of its video email product during the first quarter while the Company sought out a partner or new owner of this business. The additional investment amounted to nearly $1 million before income taxes, which was comparable to the first quarter of fiscal 1998. Costs for this product line have been reduced and product orders have increased in recent months, therefore, it is expected that further losses will be minimal until the future of this business is determined. For the three-month period, selling, general and administrative expenses decreased, both nominally and as a percentage of sales, from the level in fiscal 1998. This decrease resulted primarily from lower selling costs in both the defense and transportation systems segments and the organizational restructuring mentioned above. 8 CUBIC CORPORATION ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued December 31, 1998 Cash available for investment was significantly lower in the quarter ended December 31, 1998 than in the same quarter of the previous year, resulting in lower investment income. In addition, interest expense was moderately higher in the current year due to a higher level of both short- and long-term borrowing. Consequently, while operating profits in the first quarter were higher in each segment, net income was comparable to the first quarter of the previous year. LIQUIDITY AND CAPITAL RESOURCES During the three month period ended December 31, 1998, operating activities used $29.3 million, primarily as a result of growth in inventories and accounts receivable. The increase in inventories resulted primarily from additional gates being built for use in automatic fare collection systems. Virtually all of these gates were built to meet requirements under existing contracts, the most significant of which is the PRESTIGE contract. It is expected that inventory levels will decrease in future quarters as these gates are installed and the costs are charged to contracts. The increase in accounts receivable was primarily related to U. S. Government contracts. This situation has begun to improve subsequent to the end of the quarter, as large payments have been received. In November 1998, the Company completed a private placement of $50 million in senior unsecured notes with an average duration of approximately 10 years, at an average coupon rate of 6.27%. The first principal payment of $1.4 million is due in November of 2002, with interest due semi-annually, beginning in May 1999. Proceeds of this borrowing were used to reduce short-term borrowings from U.S. banks and to provide working capital. The Company expects that cash on hand and its available debt capacity will be adequate to meet its short-term working capital requirements. The Company's financial condition remains strong with working capital of $153 million and a current ratio of 2.7 to 1 at December 31, 1998. The backlog of orders at December 31, 1998 was $966 million compared to $972 million at September 30, 1998 and $380 million at December 31, 1997. The increase from December 31, 1997 to December 31, 1998, was the result of major contracts awarded in the fourth quarter of fiscal 1998, primarily the AWES and PRESTIGE contracts. 9 CUBIC CORPORATION ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued December 31, 1998 YEAR 2000 ISSUE The Year 2000 issue arises from the fact that many existing computer software programs use only the last two digits to refer to a specific year, instead of all four digits. As a result, computer programs that have date-sensitive software, or operate with date-sensitive data, may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculation causing disruptions in operations, including, among other things, the temporary inability to process transactions or engage in normal business activities. General The Company has assembled a Year 2000 Task Force, which includes personnel from corporate and business unit management to ensure that the Company, as a whole, is Year 2000 compliant by December 31, 1999. The objectives of this task force are to: (1) identify non-compliant operating systems, software, and data files, (2) assess, to the extent possible, the potential problems of being non-compliant, (3) estimate both the amount and timing of costs to be incurred to fix the potential problems of being non-compliant, and (4) develop and execute a comprehensive strategy, including contingency plans, to fix these problems. Identification of Operating Systems, Software and Data Files The Company recognizes that it must make remedial changes to its own operating systems, software and data files, as well as assess the remedial efforts undertaken by its suppliers and customers. In addition, the Company may have potential exposure to make products previously delivered compliant, depending on the terms and conditions of its existing contracts. The Company is making appropriate modifications and updates to its internal information systems, some of which have been or are being done in the ordinary course of business. Final testing of all systems should be completed by the third calendar quarter of 1999. The Company's goal is to ensure, to the extent possible, that the transition from the year 1999 to the year 2000 will not have a materially adverse impact on its engineering, manufacturing or administrative capabilities. The Company began contacting key suppliers and subcontractors in 1998. The current plan is to obtain written certification of their compliance to the Year 2000 issue. In cases where this cannot be obtained, the Company will develop precautionary plans, on a case by case basis, to minimize disruptions caused by their non-compliance. There is no possible way to ensure that all suppliers and subcontractors will be Year 2000 compliant by December 31, 1999, and any such failure to be compliant could have a materially adverse impact on the Company's business. Therefore, the Company's goal is to minimize the potentially adverse impact by monitoring suppliers and subcontractors' compliance efforts, and by identifying alternate suppliers where possible. 10 CUBIC CORPORATION ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued December 31, 1998 The Company is in discussions with customers to diagnose and make compliant delivered products and services. The Company has also identified contracts that contained warranty provisions stipulating that the Company is responsible for Year 2000 compliance of products previously delivered. Current estimates indicate that the costs to make these products compliant will be minimal. In certain cases, the Company has received contracts from its customers to upgrade previously delivered products to be Year 2000 compliant. The Company is aware of the potential that claims could be made against it and other companies for damages arising from products and services that are not Year 2000 compliant. The Company is not in a position to identify or to avoid all possible scenarios that could lead to claims against it. However, the Company will assess scenarios and take steps in 1999 to mitigate the impact of various scenarios if they were to occur. Potential Problems of Non-compliance The potential problems of internal or external non-compliance include, but are not limited to: (1) penalties caused by the inability of the Company to receive supplies and subcontracted deliverables in a timely manner to meet delivery schedules stipulated under existing contracts, (2) cash flow restrictions caused by the failure of significant customers to make payments in accordance with contract terms, and (3) productivity loss caused by disruptions in engineering, manufacturing and administrative capabilities. Costs to Address the Issue Through December 31, 1998, the Company expensed approximately $200,000 of incremental Year 2000 remedial costs. Based on current estimates, and assuming there is not a material change in available resources, the Company will incur another $200,000 to $400,000 through the fourth calendar quarter of 1999. These costs consist primarily of in-house labor, outside services, and computer hardware and software purchases and will be expensed as incurred. Development and Execution of Comprehensive Strategy With the assembly of the Year 2000 Task Force in 1998, the Company began the development of a corporate-wide comprehensive strategy to address the problems associated with the Year 2000 transition. It is expected that this strategy will continually evolve as new issues arise and old ones disappear. While the Company continues to believe that the Year 2000 matters discussed above will not have a materially adverse impact on its business, financial condition or results of operations, it is not possible to determine with certainty whether or to what extent the Company may be affected. 11 CUBIC CORPORATION ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued December 31, 1998 FORWARD-LOOKING STATEMENTS In addition to historical matters, this report contains forward-looking statements. They can be identified by words such as MAY, LIKELY, ANTICIPATE, HOPE, ESTIMATE, PLAN, POTENTIAL, FEEL, EXPECT, SHOULD, and CONFIDENT. These forward- looking statements are made pursuant to the safe harbor provisions of 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. These include the effects of politics on negotiations and business dealings with government entities, reductions in defense budgets, economic conditions in the various countries in which the Company does or hopes to do business, competition and technology changes in the defense and transportation industries, and other competitive and technological factors. 12 PART II - OTHER INFORMATION ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are included herein: 15--Independent Accountants' Review Report 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 February 4, 1999 /s/ W. W. Boyle ---------------- ----------------------------------- W. W. Boyle Vice President Finance and CFO Date February 4, 1999 /s/ T. A. Baz ---------------- ----------------------------------- T. A. Baz Vice President and Controller 13 EXHIBIT 15 - INDEPENDENT ACCOUNTANTS' REVIEW REPORT Board of Directors and Shareholders Cubic Corporation We have reviewed the accompanying consolidated condensed balance sheet of Cubic Corporation as of December 31, 1998, and the related consolidated condensed statements of income, cash flows, and changes in shareholders' equity for the three-month periods ended December 31, 1998 and 1997. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, which will be performed for the full year with the objective of expressing an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the accompanying consolidated condensed financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of Cubic Corporation as of September 30, 1998 and the related consolidated statements of income, retained earnings, and cash flows for the year then ended (not presented herein) and in our report dated November 25, 1998, except for the second paragraph of Note 11, as to which the date is December 7, 1998, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated condensed balance sheet at September 30, 1998, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived. ERNST & YOUNG LLP San Diego, California February 4, 1999 14