**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

**QUARTERLYREPORT**

 

**Pursuantto Section 13 or 15(d) of the Securities Exchange Act of 1934**

 

**For the Quarter Ended December 31, 2003**

 

| **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 (858) 277-6780**                          |

 

Indicateby check mark whether the Registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months, and (2) has been subject to such filing requirements forthe past 90 days.

 

Yes ý    No o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act).

 

Yes ý    No o

 

As of January 30, 2004, Registrant had only one class of common stockof which there were 26,719,845 shares outstanding (after deducting 8,944,884shares held as treasury stock).

 

 

----

 

**PARTI - FINANCIAL INFORMATION**

ITEM 1 - FINANCIAL STATEMENTS

 

**CUBIC CORPORATION**

CONSOLIDATED CONDENSED STATEMENTS OF INCOME(UNAUDITED)

(amounts in thousands, except per share data)

 
|                                         |   | **Three Months Ended  December 31,** |    |
|----------------------------------------------|--------|--------------------------------------|---------|
|                                         |   | **2003**                             |    | **2002** |   |
|                                         |   |                                 |    |   |   |
| Net sales                                    |   | $                                    | 171,032 |   | $ | 148,356 |   |
|                                         |   |                                 |    |   |   |
| Costs and expenses:                          |   |                                 |    |   |   |
| Cost of sales                                |   | 135,047                              |    | 116,371 |   |
| Selling, general and administrative expenses |   | 23,531                               |    | 20,409 |   |
| Research and development                     |   | 860                                  |    | 1,411 |   |
|                                         |   | 159,438                              |    | 138,191 |   |
| Operating income                             |   | 11,594                               |    | 10,165 |   |
|                                         |   |                                 |    |   |   |
| Other income (expenses)                      |   |                                 |    |   |   |
| Interest expense                             |   | (1,053                               | )       | (871 | ) |
| Other income                                 |   | 825                                  |    | 676 |   |
| Income before income taxes                   |   | 11,366                               |    | 9,970 |   |
|                                         |   |                                 |    |   |   |
| Income taxes                                 |   | 3,900                                |    | 3,300 |   |
|                                         |   |                                 |    |   |   |
| Net income                                   |   | $                                    | 7,466   |   | $ | 6,670 |   |
|                                         |   |                                 |    |   |   |
| Net income per share                         |   | $                                    | 0.28    |   | $ | 0.25 |   |
|                                         |   |                                 |    |   |   |
| Average shares of common stock outstanding   |   | 26,720                               |    | 26,720 |   |

 

*See accompanying notes.*

 

2

----

 

**CUBIC CORPORATION**

CONSOLIDATED CONDENSED BALANCE SHEETS

(in thousands)

 
|                                            |   | **December 31,  2003** |    | **September 30,  2003** |   |
|-------------------------------------------------|--------|------------------------|---------|-------------------------|--------|
|                                            |   | **(Unaudited)**        |    | **(See note below)**    |   |
| **ASSETS**                                      |   |                   |    |                    |   |
| Current  assets:                                |   |                   |    |                    |   |
| Cash  and cash equivalents                      |   | $                      | 16,532  |                    | $      | 22,370 |   |
| Marketable  securities, available-for-sale      |   | —                 |    | 2,994                   |   |
| Accounts  receivable                            |   | 281,084                |    | 251,021                 |   |
| Inventories                                     |   | 27,438                 |    | 24,922                  |   |
| Deferred  income taxes and other current assets |   | 28,412                 |    | 26,963                  |   |
| Total  current assets                           |   | 353,466                |    | 328,270                 |   |
|                                            |   |                   |    |                    |   |
| Long-term  contract receivables                 |   | 38,600                 |    | 29,200                  |   |
| Property,  plant and equipment - net            |   | 53,033                 |    | 52,272                  |   |
| Goodwill                                        |   | 33,922                 |    | 33,311                  |   |
| Other  assets                                   |   | 16,753                 |    | 17,173                  |   |
|                                            |   | $                      | 495,774 |                    | $      | 460,226 |   |
|                                            |   |                   |    |                    |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**   |   |                   |    |                    |   |
| Current  liabilities:                           |   |                   |    |                    |   |
| Short-term  borrowings                          |   | $                      | 18,957  |                    | $      | 6,254 |   |
| Trade  accounts payable                         |   | 16,829                 |    | 25,222                  |   |
| Customer  advances                              |   | 48,525                 |    | 40,422                  |   |
| Other  current liabilities                      |   | 46,120                 |    | 49,594                  |   |
| Accrued  pension liability                      |   | 24,401                 |    | 22,669                  |   |
| Income  taxes payable                           |   | 8,420                  |    | 6,064                   |   |
| Current  portion of long-term debt              |   | 5,806                  |    | 1,429                   |   |
| Total  current liabilities                      |   | 169,058                |    | 151,654                 |   |
|                                            |   |                   |    |                    |   |
| Long-term  debt                                 |   | 50,543                 |    | 47,142                  |   |
| Deferred  compensation                          |   | 6,459                  |    | 6,138                   |   |
|                                            |   |                   |    |                    |   |
| Shareholders’  equity:                     |   |                   |    |                    |   |
| Common  stock                                   |   | 234                    |    | 234                     |   |
| Additional  paid-in capital                     |   | 12,123                 |    | 12,123                  |   |
| Retained  earnings                              |   | 287,212                |    | 279,746                 |   |
| Accumulated  other comprehensive income (loss)  |   | 6,211                  |    | (745                    | )      |
| Treasury  stock at cost                         |   | (36,066                | )       | (36,066                 | )      |
|                                            |   | 269,714                |    | 255,292                 |   |
|                                            |   | $                      | 495,774 |                    | $      | 460,226 |   |

 

*Note: The balancesheet at September 30, 2003 has been derived from the audited financialstatements at that date.*

*See accompanying notes.*

 

3

----

 

**CUBICCORPORATION**

CONSOLIDATED CONDENSED STATEMENTS OF CASHFLOWS (UNAUDITED)

(in thousands)

 
|                                                                           |   | **Three Months Ended  December 31,** |   |
|--------------------------------------------------------------------------------|--------|--------------------------------------|--------|
|                                                                           |   | **2003**                             |   | **2002** |   |
| Operating  Activities:                                                         |   |                                 |   |   |   |
| Net  income                                                                    |   | $                                    | 7,466  |   | $ | 6,670 |   |
| Adjustments  to reconcile net income to net cash used in operating activities: |   |                                 |   |   |   |
| Depreciation  and amortization                                                 |   | 1,902                                |   | 1,614 |   |
| Changes  in operating assets and liabilities                                   |   | (31,798                              | )      | (51,853 | ) |
| NET  CASH USED IN OPERATING ACTIVITIES                                         |   | (22,430                              | )      | (43,569 | ) |
|                                                                           |   |                                 |   |   |   |
| Investing  Activities:                                                         |   |                                 |   |   |   |
| Net  additions to property, plant and equipment                                |   | (1,616                               | )      | (2,202 | ) |
| Acquisitions,  net of cash acquired                                            |   | (4,934                               | )      | — |   |
| Proceeds  from sale of marketable securities                                   |   | 3,021                                |   | — |   |
| Other  items - net                                                             |   | —                               |   | (2 | ) |
| NET  CASH USED IN INVESTING ACTIVITIES                                         |   | (3,529                               | )      | (2,204 | ) |
|                                                                           |   |                                 |   |   |   |
| Financing  Activities:                                                         |   |                                 |   |   |   |
| Change  in short-term borrowings, net                                          |   | 12,369                               |   | 6,975 |   |
| Long-term  borrowings                                                          |   | 8,906                                |   | — |   |
| Principal  payment on long-term borrowings                                     |   | (1,428                               | )      | (1,429 | ) |
| NET  CASH PROVIDED BY FINANCING ACTIVITIES                                     |   | 19,847                               |   | 5,546 |   |
|                                                                           |   |                                 |   |   |   |
| Effect  of exchange rates on cash                                              |   | 274                                  |   | 121 |   |
|                                                                           |   |                                 |   |   |   |
| NET  DECREASE IN CASH AND CASH EQUIVALENTS                                     |   | (5,838                               | )      | (40,106 | ) |
|                                                                           |   |                                 |   |   |   |
| Cash  and cash equivalents at the beginning of the period                      |   | 22,370                               |   | 78,656 |   |
|                                                                           |   |                                 |   |   |   |
| CASH  AND CASH EQUIVALENTS AT THE END OF THE PERIOD                            |   | $                                    | 16,532 |   | $ | 38,550 |   |

 

*See accompanying notes.*

 

4

----

 

**CUBIC CORPORATION**

NOTES TO CONSOLIDATED CONDENSED FINANCIALSTATEMENTS

(UNAUDITED)

 

December 31, 2003

 

**Note 1 – Basis for Presentation**

 

The accompanying unaudited consolidated condensed financial statementshave been prepared in accordance with generally accepted accounting principlesfor interim financial information and with the instructions to Form 10-Q andArticle 10 of Regulation S-X. Accordingly, they do not include all informationand footnotes required by accounting principles generally accepted in theUnited States for complete financial statements.

 

In the opinion of management, all adjustments (consisting of normalrecurring accruals) considered necessary for a fair presentation have beenincluded. Operating results for the quarter ended December 31, 2003 are notnecessarily indicative of the results that may be expected for the year endingSeptember 30, 2004. For further information, refer to the consolidatedfinancial statements and footnotes thereto included in the Company’s annualreport on Form 10-K for the year ended September 30, 2003.

 

The preparation of the financial statements in conformity withaccounting principles generally accepted in the United States requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period. Actual results could differ from thoseestimates.

 

**Note 2 – Balance Sheet Details**

 

Thecomponents of accounts receivable are as follows (in thousands):

 
|                                      |   | **December  31,****2003** |    | **September  30,****2003** | ** ** |
|-------------------------------------------|--------|---------------------------|---------|----------------------------|------------|
| Trade  and other receivables              |   | $                         | 7,582   |                       | $          | 11,476 |   |
| Long-term  contracts:                     |   |                      |    |                       |       |
| Billed                                    |   | 85,480                    |    | 67,785                     |       |
| Unbilled                                  |   | 227,777                   |    | 202,013                    |       |
| Allowance  for doubtful accounts          |   | (1,155                    | )       | (1,053                     | )          |
| Total  accounts receivable                |   | 319,684                   |    | 280,221                    |       |
| Less  estimated amounts not currently due |   | (38,600                   | )       | (29,200                    | )          |
| Current  accounts receivable              |   | $                         | 281,084 |                       | $          | 251,021 |   |

 

The amount classified as not currently due is an estimate of the amountof long-term contract accounts receivable that will not be collected within oneyear from December 31, 2003. This amount relates to the Prestige contract inthe United Kingdom and reflects current foreign currency exchange rates.

 

5

----

 

Inventoriesconsist of the following (in thousands):

 
|                              |   | **December 31,  2003** |         | **September 30,  2003** |   |
|-----------------------------------|--------|------------------------|--------------|-------------------------|--------|
| Finished  products                |   | $                      | 336          |                    | $      | 593 |   |
| Work  in process                  |   | 16,567                 |         | 12,300                  |   |
| Raw  material and purchased parts |   | 10,535                 |         | 12,029                  |   |
| Total  inventories                |   | $                      |  27,438 |                    | $      | 24,922 |   |

 

**Note 3 – New Accounting Pronouncements**

 

FASBInterpretation No. 46 (FIN 46), “*Consolidationof Variable Interest Entities*,” was issued in January 2003, and arevised interpretation of FIN 46 (FIN 46-R) was issued in December 2003. FIN 46requires certain variable interest entities to be consolidated by the primarybeneficiary of the entity if the equity investors in the entity do not have thecharacteristics of a controlling financial interest or do not have sufficientequity at risk for the entity to finance its activities without additionalsubordinated financial support from other parties. The provisions of FIN 46 areeffective immediately for all arrangements entered into after January 31, 2003.Since January 31, 2003, the Company has not invested in any entities itbelieves are variable interest entities for which the Company is the primarybeneficiary. For all arrangements entered into after January 31, 2003, theCompany is required to continue to apply FIN 46 through the end of the firstquarter of fiscal 2004. The Company is required to adopt the provisions of FIN46-R for those arrangements in the second quarter of fiscal 2004. For arrangementsentered into prior to February 1, 2003, the Company is required to adopt theprovisions of FIN 46-R in the second quarter of fiscal 2004. The Company is inthe process of determining the effect, if any, the adoption of FIN 46-R willhave on its financials statements.

 

In December 2003, the FASB issued Statement of Financial AccountingStandards No. 132 (revised 2003), *Employers’ Disclosures about Pensions and OtherPostretirement Benefits.*The standard requires that companiesprovide more details about their plan assets, benefit obligations, cash flows,benefit costs and other relevant information. The statement provides forexpanded pension disclosures regarding the components of plan assets bycategory, such as equity, debt and real estate. A description of investmentpolicies and strategies and target allocation percentages, or target ranges,for these asset categories also are required in financial statements. Cashflows disclosures will include projections of future benefit payments and anestimate of contributions to be made in the next year to fund pension and otherpostretirement benefit plans. In addition to expanded annual disclosures,companies are required to report the various elements of pension and otherpostretirement benefit costs on a quarterly basis. The statement is effectivefor fiscal years ending after December 15, 2003, and for quarters beginningafter December 15, 2003, which for the Company will be the quarter ending March31, 2004.  Because the revisions to thestandard only relate to new disclosures they will have no impact on theCompany’s financial position or results of operations.

 

6

----

 

**Note 4 – Comprehensive Income**

 

Comprehensiveincome is as follows (in thousands):

 
|                                                                                          |   | **Three Months Ended  December 31,** |   |
|-----------------------------------------------------------------------------------------------|--------|--------------------------------------|--------|
|                                                                                          |   | **2003**                             |   | **2002** |   |
|                                                                                          |   |                                 |   |   |   |
| Net  income                                                                                   |   | $                                    | 7,466  |   | $ | 6,670 |   |
| Foreign  currency translation adjustments                                                     |   | 6,738                                |   | 1,910 |   |
| Reclassification  adjustment for gain on sale of marketable securities included in net income |   | (160                                 | )      | — |   |
| Unrealized  holding gain on marketable securities during the period                           |   | —                               |   | 2 |   |
| Net  unrealized gains from cash flow hedges                                                   |   | 378                                  |   | — |   |
| Comprehensive  income                                                                         |   | $                                    | 14,422 |   | $ | 8,582 |   |

 

**Note 5 – Segment Information**

 

Businesssegment financial data is as follows (in millions):

 
|                         |   | **Three Months Ended  December 31,** |   |
|------------------------------|--------|--------------------------------------|--------|
|                         |   | **2003**                             |   | **2002** |   |
|                         |   |                                 |   |   |   |
| **Sales:**                   |   |                                 |   |   |   |
| Transportation  systems      |   | $                                    | 63.1   |   | $ | 62.2 |   |
| Defense                      |   | 104.0                                |   | 82.2 |   |
| Corporate  and other         |   | 3.9                                  |   | 4.0 |   |
| Total  sales                 |   | $                                    | 171.0  |   | $ | 148.4 |   |
|                         |   |                                 |   |   |   |
| **Operating income (loss):** |   |                                 |   |   |   |
| Transportation  systems      |   | $                                    | 4.0    |   | $ | 5.9 |   |
| Defense                      |   | 8.6                                  |   | 4.5 |   |
| Corporate  and other         |   | (1.0                                 | )      | (0.2 | ) |
| Total  operating income      |   | $                                    | 11.6   |   | $ | 10.2 |   |

 

**Note 6 – Financing Arrangements**

 

In December 2003, the Company borrowed £5.2 million (equivalent toapproximately $9.2 million) from a United Kingdom financial institution.  The loan is collateralized by a building inthe United Kingdom, bears interest at 6.5 percent and is payable in quarterlyinstallments over 15 years.  Maturitiesof this debt for each of the next five years in the period ending December 2008are as follows (in thousands):  2004 –$377; 2005 – $401; 2006 – $429; 2007 – $458; 2008 – $458.

 

As of December 31, 2003, the Company had $19 million outstanding underits various unsecured short-term borrowing arrangements in the U.S., U.K. andNew Zealand at an average rate of 3.7 percent. The terms of these arrangementsrequire repayment on demand.

 

7

----

 

**Note 7 – Related Party Transaction**

 

In 1992, the Company and a trust established by Walter J. Zable, CEO ofthe Company, and Mrs. Zable agreed that the Company would make advances ofpremiums payable on a split-dollar life insurance policy purchased by the truston the life of Mrs. Zable. In December 2003, the agreement was terminated andthe Company became the sole owner and beneficiary of the policy. The Company isin the process of selling the policy and expects the net proceeds from the saleto at least equal the $9 million cash value of the policy recorded as an asseton the Company’s balance sheet.

 

8

----

 

**CUBIC CORPORATION**

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

 

December 31, 2003

 

Our two primary businesses are in the defense and transportation industries. These are high technology businesses that design, manufacture and integrate complex systems and provide essential services to meet the needs of various federal and regional government agencies in the U.S. and other nations around the world.

 

Cubic DefenseApplications is a diversified supplier of constructive, live and virtualmilitary training systems, services and communication products to the U.S.Department of Defense, other government agencies and allied nations. We designinstrumented range systems for fighter aircraft, armored vehicles and infantryforce-on-force live training; weapons effects simulations; laser-based tacticalengagement simulation systems; and precision gunnery solutions.  Our services are focused on training missionsupport, computer simulation training, distributed interactive simulation,development of military training doctrine, force modernization services forNATO entrants and field operations and maintenance. Our communications productsare aimed at intelligence, surveillance, and search and rescue markets.

 

CubicTransportation Systems develops and delivers innovative fare collection systemsfor public transit authorities worldwide. We provide hardware, software and multiagency, multimodal transportationintegration technologies and services that allow the agencies to efficientlycollect fares, manage their operations, reduce shrinkage and make using publictransit a more convenient and attractive option for commuters.

 

**Consolidated Overview**

Sales for the quarter ended December 31, 2003 were $171 million, anincrease of 15 percent over sales of $148 million for the quarter endedDecember 31, 2002. Sales growth came primarily from the defense segment, whiletransportation systems segment sales were up only slightly from the firstfiscal quarter last year. Defense sales in the first quarter were up 27 percentover the same quarter last year, from $82 million to $104 million. Of thisincrease, approximately $7 million was from ECC International Corporation(ECC), the business acquired in September 2003. Transportation systems saleswere $63 million for the quarter compared to $62 million in the first quarterlast year, despite a decrease in sales from the PRESTIGE contract of more than$10 million.

 

Net income grew by 12 percent in the first quarter to $7.5 million thisyear (28 cents per share) from $6.7 million last year (25 cents per share).This growth in net income resulted from an increase in operating income of 14percent to $11.6 million in the first quarter of fiscal 2004, from $10.2million in the first quarter of fiscal 2003. Defense operating income wassubstantially higher in the first quarter this year, while transportationsystems operating income declined from last year, as described further in thesegment discussions below. Operating income from our paper converting businesswas down by $0.4 million in the first quarter of this year due to costs relatedto the termination of an agreement for the production of paper seat covers,which we had for more than 15 years. This business is included in the“Corporate and Other” line in the segment information.

 

9

----

 

Selling, general and administrative (SG&A) expenses grew by about$3 million from last year’s first quarter and remained at about 13.8 percent ofsales, with the increase coming about equally from both segments. The defensesegment SG&A increase was due to the acquisition of ECC, which began to beconsolidated with Cubic in the first quarter of fiscal 2004. In thetransportation systems segment the SG&A expense increase primarilyreflected legal costs of $1.2 million incurred during the quarter inpreparation for an arbitration hearing scheduled for later this year related tothe PRESTIGE contract, as discussed in previous reports.

 

Our projected effective tax rate for fiscal 2004 is about 34 percent ofpretax income, which is reflected in the provision recorded in the firstquarter, compared a provision of 33 percent recorded in the first quarter lastyear. This increase reflects the fact that more of our income in fiscal 2004 isexpected to come from our U.S. businesses rather than from the U.K., where thecorporate income tax rate is lower. This effective rate could be affected by,among other factors, the mix of business between the U.S. and foreignjurisdictions, our ability to take advantage of available tax credits andaudits of our records by taxing authorities.

 

**Defense Segment**

Defense segment sales increased to $104 million in the first fiscalquarter this year from $82 million in the first quarter of fiscal 2003, a 27percent increase. Approximately one-third of the increase resulted from theacquisition of ECC, with the remaining two-thirds of the growth coming from ourpreviously existing businesses. All three defense business units generatedhealthy sales increases in the first quarter compared to last year. Thecommunications and electronics business unit generated sales growth of 31percent over the first quarter of last year due to new contracts we won lastyear. Not including ECC, training systems sales increased by 14 percent whilegovernment services sales increased by 17 percent.

 

Operating income in the defense segment was up this year by more than90 percent over the first quarter of fiscal 2003, from $4.5 million to $8.6million. Higher operating income came primarily from the training systemsbusiness due to sales growth and improved profit margins from both air andground combat training systems, including MILES. Training systems benefitedfrom the completion of certain air combat training contracts with good profitmargins during the quarter. In addition, ECC contributed about $0.8 million totraining systems operating profits for the quarter. Communications andelectronics also generated higher operating income, while operating income fromgovernment services decreased more than 20 percent compared to the firstquarter last year. This decrease was primarily caused by a customer’s exerciseof a six-month contract extension option that was unfavorable to us andresulted in a loss on this operations and maintenance contract for the quarter.There will possibly be a small impact from this again in the second quarter,although overall operating income from government services is expected toimprove in the second quarter.

 

**TransportationSystems Segment**

Transportation segment sales increased only slightly, from $62 millionin the first quarter of fiscal 2003 to $63 million in the first quarter thisyear. Sales from the PRESTIGE contract declined by more than $10 million, butthis was more than offset by higher sales from other contracts in the U.K.,Australia and the U.S., including Los Angeles, New York, San Diego, Houston andMinneapolis. The decline in PRESTIGE sales was in accordance with the plan forthis program, and we view this decrease in reliance on a single customer as apositive trend for the transportation segment. However, we do anticipateadditional orders from the PRESTIGE contract related to the

 

10

----

 

rollout of the OysterTM card and other system enhancementopportunities.  Although sales from thiscustomer will be lower this year than last year, we expect sales to grow fromthis year’s level in each of the next two years as a result of theseopportunities.

 

Operating income in transportation systems decreased from $5.9 millionin the first quarter of fiscal 2003 to $4.0 million this year. Profit marginson several of the contracts in North America have been unfavorably affected byour investment in the development of new software technologies for common farecollection solutions. These costs are being incurred in the performance of thecontracts, but have exceeded our original estimates, thereby reducing theprofit margins on these contracts. We believe that the results of ourinvestment in these new fare collection technologies will give us a competitiveadvantage in future system procurements, but in the short run has impacted themargins on our current contracts. These new technologies will allow thetransportation segment to sell similar products to many different customers,thus avoiding the need for repeated customization, and should help secure alarger share of the market, increasing sales and profits. In addition, legalfees of $1.2 million related to the arbitration hearing mentioned above furtherimpacted operating income.

 

**Backlog**

As reflected in the table below, both funded and total backlogincreased during the first quarter with the increase coming from thetransportation systems segment. Transportation systems backlog was enhanced bya $72 million contract awarded to Cubic by MARTA, the city of Atlanta’s transitagency, during the quarter. Due to the numerous opportunities available in our marketsat this time, we believe that the trend of increased backlog should continuethrough our fiscal year end and beyond.

 

In transportation systems, the difference between total backlog andfunded backlog represents extension of the service portion of the PRESTIGEcontract for the final five years of the seventeen year contract. We havetreated this portion of the contract as unfunded until we complete the initialsystem installation phase of the contract, which is expected to occur duringthe second quarter of this year. Options for the purchase of additional systemsor equipment are not included in backlog until exercised.

 

In defense, the difference between total backlog and funded backlogrepresents options under multiyear service contracts. Funding for thesecontracts comes from annual operating budgets of the U.S. government and theoptions are normally exercised annually. Options for the purchase of additionalsystems or equipment are not included in backlog until exercised nor areindefinite delivery, indefinite quantity (IDIQ) contracts until an order isreceived.

 

11

----

 
|                            |   | **December 31,  2003** |    | **September 30,  2003** |   |
|---------------------------------|--------|------------------------|---------|-------------------------|--------|
|                            |   | **(in millions)**      |    |
| **Total backlog**               |   |                   |    |                    |   |
| Transportation  systems         |   | $                      | 842.7   |                    | $      | 761.9 |   |
| Defense                         |   |                   |    |                    |   |
| Communications  and electronics |   | 66.7                   |    | 68.8                    |   |
| Training  systems               |   | 239.5                  |    | 267.3                   |   |
| Government  services            |   | 404.7                  |    | 406.9                   |   |
| Total  defense                  |   | 710.9                  |    | 743.0                   |   |
| Total                           |   | $                      | 1,553.6 |                    | $      | 1,504.9 |   |
|                            |   |                   |    |                    |   |
| **Funded backlog**              |   |                   |    |                    |   |
| Transportation  systems         |   | $                      | 691.9   |                    | $      | 620.2 |   |
| Defense                         |   |                   |    |                    |   |
| Communications  and electronics |   | 66.7                   |    | 68.8                    |   |
| Training  systems               |   | 239.5                  |    | 267.3                   |   |
| Government  services            |   | 78.1                   |    | 52.0                    |   |
| Total  defense                  |   | 384.3                  |    | 388.1                   |   |
| Total                           |   | $                      | 1,076.2 |                    | $      | 1,008.3 |   |

 

**New AccountingPronouncements**

FASB InterpretationNo. 46 (FIN 46), “*Consolidation of VariableInterest Entities*,” was issued in January 2003, and a revisedinterpretation of FIN 46 (FIN 46-R) was issued in December 2003. FIN 46requires certain variable interest entities to be consolidated by the primarybeneficiary of the entity if the equity investors in the entity do not have thecharacteristics of a controlling financial interest or do not have sufficientequity at risk for the entity to finance its activities without additionalsubordinated financial support from other parties. The provisions of FIN 46 areeffective immediately for all arrangements entered into after January 31, 2003.Since January 31, 2003, the Company has not invested in any entities itbelieves are variable interest entities for which the Company is the primarybeneficiary. For all arrangements entered into after January 31, 2003, theCompany is required to continue to apply FIN 46 through the end of the firstquarter of fiscal 2004. The Company is required to adopt the provisions of FIN46-R for those arrangements in the second quarter of fiscal 2004. Forarrangements entered into prior to February 1, 2003, the Company is required toadopt the provisions of FIN 46-R in the second quarter of fiscal 2004. We arein the process of determining the effect, if any, the adoption of FIN 46-R willhave on our financials statements.

 

In December 2003, the FASB issued Statement of Financial AccountingStandards No. 132 (revised 2003), *Employers’ Disclosures about Pensions and OtherPostretirement Benefits.*The standard requires that companiesprovide more details about their plan assets, benefit obligations, cash flows,benefit costs and other relevant information. The statement provides forexpanded pension disclosures regarding the components of plan assets bycategory, such as equity, debt and real estate. A description of investmentpolicies and strategies and target allocation percentages, or target ranges,for these asset categories also are required in financial statements. Cash flowswill include projections of future benefit payments and an estimate ofcontributions to be made in the next year to fund pension and otherpostretirement benefit plans. In addition to expanded

 

12

----

 

annualdisclosures, companies are required to report the various elements of pensionand other postretirement benefit costs on a quarterly basis. The statement iseffective for fiscal years ending after December 15, 2003, and for quartersbeginning after December 15, 2003, which for us will be the quarter endingMarch 31, 2004.  Because the revisionsto the standard only relate to new disclosures they will have no impact on ourfinancial position or results of operations.

 

**Liquidity and Capital Resources**

Cash flows from operations were negative for the quarter by $22 milliondue to growth in accounts receivable, which was partially offset by growth incustomer advances. We expect cash flows from operations to improve in thesecond quarter and to be positive by the end of the fiscal year.

 

Cash flows from the defense segment were $5 million negative in thefirst quarter due primarily to a receivable of that amount from a customer thatwas delayed for administrative reasons. The payment has subsequently beenreceived.

 

The transportation segment experienced negative cash flows from thePRESTIGE contract of about $9 million which increased the long-term portion ofaccounts receivable by a comparable amount. We believe that the PRESTIGEcontract receivable balance has now peaked and will begin to gradually decreasein future quarters. In addition to the PRESTIGE contract, transportationsystems accounts receivable grew by about $12 million in the U.S. because ofdelays in meeting payment milestones on several North American contracts. Thiswas caused by additional time required to develop the new technologies forcommon fare collection solutions mentioned above. We expect this situation toimprove late in 2004 as certain milestones are reached that will triggerpayments from the customers. Foreign currency translation also caused accountsreceivable to grow by $7 million.

 

Investing activities included a payment of about $5 million to fund theremaining purchase price of the ECC acquisition during the first quarter and$1.6 million for normal capital expenditures. We sold our remaining marketablesecurities for $3.1 million and realized a modest gain which is included inother income on the Consolidated Condensed Statement of Income.

 

During the first quarter we borrowed $12.4 million on a short-termbasis for working capital needs. We also borrowed $9 million on a long-termbasis in the UK, collateralized by the building we acquired there last year,and made a scheduled debt payment of $1.4 million. The following is a scheduleof those contractual obligations outstanding as of December 31, 2003 that havechanged since September 30, 2003:

 
|               |   | **Total**          |       | **Less than 1  Year** |   | **1 - 3 years** |   | **4 - 5 years** |   | **After 5 years** |   |
|--------------------|--------|--------------------|------------|-----------------------|--------|-----------------|--------|-----------------|--------|-------------------|--------|
|               |   | **(in  millions)** | ** ** |
| Long-term  debt    |   | $                  | 56.3       |                  | $      | 5.8             |   | $               | 11.7   |              | $      | 11.8 |   | $ | 27.0 |   |
| Interest  payments |   | 20.2               |       | 3.5                   |   | 5.9             |   | 4.5             |   | 6.3               |   |
|                    |        |                    |            |                       |        |                 |        |                 |        |                   |        |  |  |  |  |  |

 

AccumulatedOther Comprehensive Income (Loss) improved by $7 million in the first quarterprimarily because of favorable foreign currency translation adjustments. Thisbrings the balance of Accumulated Other Comprehensive Income up to $6 millionas of December 31, 2003.

 

13

----

 

Our financial condition remains strong with working capital of $184million and a current ratio of 2.1 to 1 at December 31, 2003. We expect thatcash on hand and our ability to access the debt markets will be adequate tomeet our working capital requirements for the foreseeable future.

 

We are in the process of putting in place a committed short-term creditfacility for working capital needs from a group of financial institutions,aggregating $60 million.  We contemplatefinalizing this facility by the middle of February 2004.

 

**Critical Accounting Policies, Estimates andJudgments**

Our financial statements are prepared in accordance with accounting principles that are generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments 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. We continually evaluate our estimates and judgments, the most critical of which are those related to revenue recognition, income taxes, valuation of goodwill and pension costs. We base our estimates and judgments on historical experience and other factors that we believe to be reasonable under the circumstances. Materially different results can occur as circumstances change and additional information becomes known.

 

Besides the estimates identified above that are considered critical, we make many other accounting estimates in preparing our financial statements and related disclosures. All estimates, whether or not deemed critical affect reported amounts of assets, liabilities, revenues and expenses, as well as disclosures of contingent assets and liabilities. These estimates and judgments are also based on historical experience and other factors that are believed to be reasonable under the circumstances. Materially different results can occur as circumstances change and additional information becomes known, even for estimates and judgments that are not deemed critical.

 

For further information, refer to the consolidated financial statementsand notes thereto included in the Company’s annual report on Form 10-K for theyear ended September 30, 2003.

 

**CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING INFORMATION**

 

This report,including the documents that we incorporate by reference, containsforward-looking statements within the meaning of Section 21E of the SecuritiesExchange Act of 1934, as amended, that are subject to the “safe harbor” createdby those sections. Any statements about our expectations, beliefs, plans, objectives,assumptions or future events or our future financial and/or operatingperformance are not historical and may be forward-looking. These statements areoften, but not always, made through the use of words or phrases such as “may,”“will,” “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,”“expect,” “believe,” “intend,” “predict,” “potential,” “opportunity” andsimilar words or phrases or the negatives of these words or phrases.  These statements involve estimates,assumptions and uncertainties, including those discussed in “Risk Factors” inthe Company’s annual report on Form 10-K for the year ended September 30, 2003,and throughout this filing that could cause actual results to differ materiallyfrom those expressed in these statements.

 

14

----

 

Because the riskfactors referred to above could cause actual results or outcomes to differmaterially from those expressed in any forward-looking statements made by us oron our behalf, you should not place undue reliance on any forward-lookingstatements.  In addition, past financialand/or operating performance is not necessarily a reliable indicator of futureperformance and you should not use our historical performance to anticipateresults or future period trends. Further, any forward-looking statement speaks only as of the date onwhich it is made, and we undertake no obligation to update any forward-lookingstatement to reflect events or circumstances after the date on which thestatement is made or to reflect the occurrence of unanticipated events. Newfactors emerge from time to time, and it is not possible for us to predictwhich factors will arise. In addition, we cannot assess the impact of eachfactor on our business or the extent to which any factor, or combination offactors, may cause actual results to differ materially from those contained inany forward-looking statements.

 

ITEM 4 - STATEMENT ON DISCLOSURE CONTROLS ANDPROCEDURES.

 

Withinthe 90 days prior to the date of filing this Quarterly Report on Form 10-Q, theCompany carried out an evaluation, under the supervision and with theparticipation of the Company’s management, including the Chief ExecutiveOfficer and Chief Financial Officer, of the effectiveness of the design and operationof the Company’s disclosure controls and procedures pursuant to the Securitiesand Exchange Act of 1934 Rules 13a-15 and 15d-15. Based upon that evaluation,the Chief Executive Officer and Chief Financial Officer concluded that, as ofthe end of the three month period ended December 31, 2003, the Company’sdisclosure controls and procedures are effective in timely alerting them tomaterial information relating to the Company (including its consolidatedsubsidiaries) required to be included in the Company’s periodic SEC filings.

 

Duringthe three month period ended December 31, 2003, the Company completed itsacquisition of ECC and successfully integrated ECC into its financial reportingprocess. The Company believes that this acquisition did not result in asignificant change in its internal controls over financial reporting, nor werethere any other changes in internal controls over financial reporting or inother factors that materially affected, or are reasonably likely to materiallyaffect, internal controls over financial reporting, nor were there anycorrective actions required with regard to significant deficiencies andmaterial weaknesses.

 

15

----

 

**CUBICCORPORATION**

 

**PARTII - OTHER INFORMATION**

 

 

ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K

 

(a) The following exhibits are included herein:

 
| **Exhibit No.** |   | **Description**                             |
|-----------------|--------|---------------------------------------------|
| 3(i) —     |   | Articles of Incorporation                   |
| 3(ii) —    |   | Bylaws                                      |
| 15 —       |   | Independent Accountants’ Review Report |
| 31.1 —     |   | Certification of CEO                        |
| 31.2 —     |   | Certification of CFO                        |
| 32.1 —     |   | CEO and CFO Certification                   |

 

(b) Reports on Form 8-K filed during the quarter ended December 31,2003:

 

(1)          A Form 8-K was filed on December 2, 2003,Item 12, disclosing the Company’s results of operations for the quarter andyear ended September 30, 2003.

 

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 theundersigned thereunto duly authorized.

 
|   |                    | CUBIC CORPORATION             |
|--------|-------------------------|-------------------------------|
|   |                    |                          |
|   |                    |                          |
| Date   |   January 30, 2004 |                          |   | /S/ W. W. Boyle |   |
|   |                    | W. W. Boyle                   |
|   |                    | Vice President and CFO        |
|   |                    |                          |
| Date   |   January 30, 2004 |                          |   | /S/  T. A. Baz |   |
|   |                    | T. A. Baz                     |
|   |                    | Vice President and Controller |

 

16

----