**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

**QUARTERLY REPORT**

 

**Pursuant to Section 13 or 15(d) of theSecurities Exchange Act of 1934**

 

**For theQuarter Ended June 30, 2005**

 

**1-8931**

**CommissionFile Number**

 

##### **CUBIC CORPORATION**

Exact Name of Registrant asSpecified in its Charter

 
| **Delaware**            | ** ** | **95-1678055**                   |
|-------------------------|------------|----------------------------------|
| State of  Incorporation |       | IRS Employer  Identification No. |

 

**9333Balboa AvenueSan Diego, California 92123Telephone (858) 277-6780**

 

Indicateby check mark whether the Registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months, and (2) has been subject to suchfiling requirements for the 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 July 29, 2005, Registrant had only one class of common stockof which there were 26,719,845 shares outstanding (after deducting 8,944,884 sharesheld as treasury stock).

 

 

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**PART I- FINANCIAL INFORMATION**

ITEM 1 - FINANCIAL STATEMENTS

 

### **CUBICCORPORATION**

CONDENSED CONSOLIDATEDSTATEMENTS OF INCOME (UNAUDITED)

(amounts in thousands, exceptper share data)

 
| ** **                                    | ** ** | **Nine Months Ended  June 30,** | ** ** | **Three Months Ended  June 30,** | ** ** |
|-----------------------------------------------|------------|---------------------------------|------------|----------------------------------|------------|
| ** **                                    | ** ** | **2005**                        | ** ** | **2004**                         | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                          |       |                            |       |                             |       |   |   |   |   |
| Sales                                         |       | $                               | 585,783    |                             | $          | 537,045 |   | $ | 213,790 |   | $ | 190,829 |   |
|                                          |       |                            |       |                             |       |   |   |   |   |
| Costs and expenses:                           |       |                            |       |                             |       |   |   |   |   |
| Cost of sales                                 |       | 486,992                         |       | 417,615                          |       | 185,981 |   | 147,703 |   |
| Selling, general and administrative  expenses |       | 83,464                          |       | 76,432                           |       | 24,955 |   | 26,821 |   |
| Research and development                      |       | 4,614                           |       | 3,214                            |       | 1,236 |   | 1,306 |   |
|                                          |       | 575,070                         |       | 497,261                          |       | 212,172 |   | 175,830 |   |
| Operating income                              |       | 10,713                          |       | 39,784                           |       | 1,618 |   | 14,999 |   |
|                                          |       |                            |       |                             |       |   |   |   |   |
| Other income (expenses)                       |       |                            |       |                             |       |   |   |   |   |
| Gain on sale of insurance policy              |       | —                          |       | 4,237                            |       | — |   | 4,237 |   |
| Interest expense                              |       | (3,842                          | )          | (3,347                           | )          | (1,202 | ) | (1,115 | ) |
| Other income                                  |       | 2,462                           |       | 1,630                            |       | 350 |   | 297 |   |
| Minority interest                             |       | 196                             |       | —                           |       | 56 |   | — |   |
| Income before income taxes                    |       | 9,529                           |       | 42,304                           |       | 822 |   | 18,418 |   |
|                                          |       |                            |       |                             |       |   |   |   |   |
| Income taxes                                  |       | 2,900                           |       | 14,800                           |       | — |   | 6,700 |   |
|                                          |       |                            |       |                             |       |   |   |   |   |
| Net income                                    |       | $                               | 6,629      |                             | $          | 27,504 |   | $ | 822 |   | $ | 11,718 |   |
|                                          |       |                            |       |                             |       |   |   |   |   |
| Net income per share                          |       | $                               | 0.25       |                             | $          | 1.03 |   | $ | 0.03 |   | $ | 0.44 |   |
|                                          |       |                            |       |                             |       |   |   |   |   |
| Dividends per common share                    |       | $                               | 0.09       |                             | $          | 0.07 |   | $ | — |   | $ | — |   |
|                                          |       |                            |       |                             |       |   |   |   |   |
| Average shares of common stock outstanding    |       | 26,720                          |       | 26,720                           |       | 26,720 |   | 26,720 |   |

* *

*See accompanying notes.*

 

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## **CUBIC CORPORATION**

CONDENSED CONSOLIDATED BALANCESHEETS

(in thousands)

 
| ** **                                      | ** ** | **June 30,  2005** | ** ** | **September 30,  2004** | ** ** |
|-------------------------------------------------|------------|--------------------|------------|-------------------------|------------|
| ** **                                      | ** ** | **(Unaudited)**    | ** ** | **(See note below)**    | ** ** |
| **ASSETS**                                      |       |               |       |                    |       |
| Current assets:                                 |       |               |       |                    |       |
| Cash and cash equivalents                       |       | $                  | 29,171     |                    | $          | 10,622 |   |
| Marketable securities, available-for-sale       |       | —             |       | 6,200                   |       |
| Accounts receivable                             |       | 319,744            |       | 343,197                 |       |
| Recoverable income taxes                        |       | 440                |       | —                  |       |
| Inventories                                     |       | 30,543             |       | 23,967                  |       |
| Deferred income taxes and other current  assets |       | 29,397             |       | 29,310                  |       |
| Total current assets                            |       | 409,295            |       | 413,296                 |       |
|                                            |       |               |       |                    |       |
| Long-term contract receivables                  |       | 35,100             |       | 33,000                  |       |
| Property, plant and equipment - net             |       | 51,859             |       | 52,359                  |       |
| Goodwill                                        |       | 35,621             |       | 35,173                  |       |
| Other assets                                    |       | 9,040              |       | 9,096                   |       |
|                                            |       | $                  | 540,915    |                    | $          | 542,924 |   |
|                                            |       |               |       |                    |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**   |       |               |       |                    |       |
| Current liabilities:                            |       |               |       |                    |       |
| Short-term borrowings                           |       | $                  | 43,391     |                    | $          | 25,048 |   |
| Trade accounts payable                          |       | 23,947             |       | 28,317                  |       |
| Customer advances                               |       | 36,631             |       | 51,182                  |       |
| Other current liabilities                       |       | 57,940             |       | 53,658                  |       |
| Accrued pension liability                       |       | 7,481              |       | 8,618                   |       |
| Income taxes payable                            |       | —             |       | 5,908                   |       |
| Current portion of long-term debt               |       | 6,062              |       | 6,057                   |       |
| Total current liabilities                       |       | 175,452            |       | 178,788                 |       |
|                                            |       |               |       |                    |       |
| Long-term debt                                  |       | 44,188             |       | 50,037                  |       |
| Accrued pension liability                       |       | 10,136             |       | 9,009                   |       |
| Deferred compensation                           |       | 7,398              |       | 6,323                   |       |
| Minority interest                               |       | 304                |       | —                  |       |
|                                            |       |               |       |                    |       |
| Shareholders' equity:                           |       |               |       |                    |       |
| Common stock                                    |       | 234                |       | 234                     |       |
| Additional paid-in capital                      |       | 12,123             |       | 12,123                  |       |
| Retained earnings                               |       | 316,605            |       | 312,381                 |       |
| Accumulated other comprehensive income          |       | 10,541             |       | 10,095                  |       |
| Treasury stock at cost                          |       | (36,066            | )          | (36,066                 | )          |
|                                            |       | 303,437            |       | 298,767                 |       |
|                                            |       | $                  | 540,915    |                    | $          | 542,924 |   |

 

*Note: The balance sheet at September 30,2004 has been derived from the audited financial statements at that date.*

# *See accompanying notes.*

 

3

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**CUBICCORPORATION**

CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS (UNAUDITED)

(in thousands)

 
| ** **                                                                                   | ** ** | **Nine Months Ended  June 30,** | ** ** | **Three Months Ended  June 30,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|---------------------------------|------------|----------------------------------|------------|
| ** **                                                                                   | ** ** | **2005**                        | ** ** | **2004**                         | ** ** | **2005** | ** ** | **2004** | ** ** |
| Operating Activities:                                                                        |       |                            |       |                             |       |   |   |   |   |
| Net income                                                                                   |       | $                               | 6,629      |                             | $          | 27,504 |   | $ | 822 |   | $ | 11,718 |   |
| Adjustments to reconcile net income to net  cash provided by (used in) operating activities: |       |                            |       |                             |       |   |   |   |   |
| Depreciation and amortization                                                                |       | 6,358                           |       | 6,191                            |       | 1,941 |   | 2,073 |   |
| Gain on sale of insurance policy                                                             |       | —                          |       | (4,237                           | )          | — |   | (4,237 | ) |
| Changes in operating assets and liabilities                                                  |       | (4,105                          | )          | (37,070                          | )          | 8,676 |   | 22,925 |   |
| NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES                                          |       | 8,882                           |       | (7,612                           | )          | 11,439 |   | 32,479 |   |
|                                                                                         |       |                            |       |                             |       |   |   |   |   |
| Investing Activities:                                                                        |       |                            |       |                             |       |   |   |   |   |
| Net additions to property, plant and  equipment                                              |       | (5,509                          | )          | (5,258                           | )          | (806 | ) | (1,909 | ) |
| Proceeds from sale of insurance policy                                                       |       | —                          |       | 13,337                           |       | — |   | 13,337 |   |
| Acquisitions net of cash acquired                                                            |       | —                          |       | (4,934                           | )          | — |   | — |   |
| Proceeds from sale of marketable securities                                                  |       | 6,200                           |       | 3,021                            |       | — |   | — |   |
| NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES                                          |       | 691                             |       | 6,166                            |       | (806 | ) | 11,428 |   |
|                                                                                         |       |                            |       |                             |       |   |   |   |   |
| Financing Activities:                                                                        |       |                            |       |                             |       |   |   |   |   |
| Change in short-term borrowings, net                                                         |       | 17,919                          |       | 2,644                            |       | (629 | ) | (32,007 | ) |
| Long-term borrowings                                                                         |       | —                          |       | 9,026                            |       | — |   | — |   |
| Principal payments on long-term borrowings                                                   |       | (5,913                          | )          | (1,745                           | )          | (321 | ) | (317 | ) |
| Dividends paid                                                                               |       | (2,405                          | )          | (1,871                           | )          | — |   | — |   |
| NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES                                          |       | 9,601                           |       | 8,054                            |       | (950 | ) | (32,324 | ) |
|                                                                                         |       |                            |       |                             |       |   |   |   |   |
| Effect of exchange rates on cash                                                             |       | (625                            | )          | 1,113                            |       | (146 | ) | 948 |   |
|                                                                                         |       |                            |       |                             |       |   |   |   |   |
| NET INCREASE IN CASH AND CASH EQUIVALENTS                                                    |       | 18,549                          |       | 7,721                            |       | 9,537 |   | 12,531 |   |
|                                                                                         |       |                            |       |                             |       |   |   |   |   |
| Cash and cash equivalents at the beginning  of the period                                    |       | 10,622                          |       | 22,370                           |       | 19,634 |   | 17,560 |   |
|                                                                                         |       |                            |       |                             |       |   |   |   |   |
| CASH AND CASH EQUIVALENTS AT THE END OF THE  PERIOD                                          |       | $                               | 29,171     |                             | $          | 30,091 |   | $ | 29,171 |   | $ | 30,091 |   |

 

# *See accompanying notes.*

 

4

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# ***CUBICCORPORATION***

NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS

(UNAUDITED)

June 30, 2005

 

**Note 1 – Basis forPresentation**

** **

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-Qand Article 10 of Regulation S-X. Accordingly, they do not include allinformation and footnotes required by accounting principles generally acceptedin the United 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 June 30, 2005 are notnecessarily indicative of the results that may be expected for the year ending September 30,2005. For further information, refer to the consolidated financial statementsand footnotes thereto included in the Company’s annual report on Form 10-Kfor the year ended September 30, 2004.

 

The preparation of the financial statements in conformity with U. S.generally accepted accounting principles requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during the reportingperiod. Actual results could differ from those estimates.

 

### **Note 2– Balance Sheet Details**

 

The components of accountsreceivable are as follows (in thousands):

 
| ** **                               | ** ** | **June 30,  2005** | ** ** | **September 30,  2004** | ** ** |
|------------------------------------------|------------|--------------------|------------|-------------------------|------------|
| ** **                               | ** ** | **(unaudited)**    | ** ** | ** **              | ** ** |
| Trade and other receivables              |       | $                  | 9,249      |                    | $          | 29,771 |   |
| Long-term contracts:                     |       |               |       |                    |       |
| Billed                                   |       | 85,814             |       | 85,056                  |       |
| Unbilled                                 |       | 264,897            |       | 262,230                 |       |
| Allowance for doubtful accounts          |       | (5,116             | )          | (860                    | )          |
| Total accounts receivable                |       | 354,844            |       | 376,197                 |       |
| Less estimated amounts not currently due |       | (35,100            | )          | (33,000                 | )          |
| Current accounts receivable              |       | $                  | 319,744    |                    | $          | 343,197 |   |

 

5

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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 June 30, 2005. Of this amount, approximately $32 million relatesto the Prestige contract in the United Kingdom, which is a transportationsystems contract.

 

Inventories consist of the following (inthousands):

 
| ** **                                                       | ** ** | **June 30,**    | ** ** | **September 30,** | ** ** |
|------------------------------------------------------------------|------------|-----------------|------------|-------------------|------------|
| ** **                                                       | ** ** | **2005**        | ** ** | **2004**          | ** ** |
| ** **                                                       | ** ** | **(unaudited)** | ** ** | ** **        | ** ** |
| Finished products                                                |       | $               | 613        |              | $          | 510 |   |
| Work in process and inventoried costs under  long-term contracts |       | 24,656          |       | 16,491            |       |
| Raw material and purchased parts                                 |       | 5,274           |       | 6,966             |       |
| Total inventories                                                |       | $               | 30,543     |              | $          | 23,967 |   |

 

At June 30, 2005, work in process and inventoried costs underlong-term contracts includes approximately $6 million in costs incurred outsidethe scope of work on several contracts, primarily in the defense segment. Suchcosts were not significant as of September 30, 2004.  Management believes it is probable thesecosts, plus appropriate profit margin, will be recovered under contract changeorders within the next year.

 

**Note 3 –Comprehensive Income**

 

Comprehensiveincome (loss) is as follows (in thousands):

 
| ** **                                                                                    | ** ** | **Nine Months Ended  June 30,** | ** ** | **Three Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|---------------------------------|------------|----------------------------------|------------|
| ** **                                                                                    | ** ** | **2005**                        | ** ** | **2004**                         | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                                          |       |                            |       |                             |       |   |   |   |   |
| Net income                                                                                    |       | $                               | 6,629      |                             | $          | 27,504 |   | $ | 822 |   | $ | 11,718 |   |
| Foreign currency translation adjustments                                                      |       | (671                            | )          | 9,224                            |       | (2,908 | ) | 189 |   |
| Reclassification adjustment for gain on  sale of marketable securities included in net income |       | —                          |       | (160                             | )          | — |   | — |   |
| Net unrealized gains from cash flow hedges                                                    |       | 1,117                           |       | 670                              |       | 1,194 |   | 572 |   |
| Comprehensive income (loss)                                                                   |       | $                               | 7,075      |                             | $          | 37,238 |   | $ | (892 | ) | $ | 12,479 |   |

 

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### **Note 4– Segment Information**

 

Businesssegment financial data is as follows (in millions):
| ** **                   | ** ** | **Nine Months Ended  June 30,** | ** ** | **Three Months Ended  June 30,** | ** ** |
|------------------------------|------------|---------------------------------|------------|----------------------------------|------------|
| ** **                   | ** ** | **2005**                        | ** ** | **2004**                         | ** ** | **2005** | ** ** | **2004** | ** ** |
|                         |       |                            |       |                             |       |   |   |   |   |
| **Sales:**                   |       |                            |       |                             |       |   |   |   |   |
| Defense                      |       | $                               | 395.0      |                             | $          | 325.1 |   | $ | 152.8 |   | $ | 112.7 |   |
| Transportation systems       |       | 179.5                           |       | 200.4                            |       | 57.2 |   | 74.2 |   |
| Corporate and other          |       | 11.3                            |       | 11.5                             |       | 3.8 |   | 3.9 |   |
| Total sales                  |       | $                               | 585.8      |                             | $          | 537.0 |   | $ | 213.8 |   | $ | 190.8 |   |
|                         |       |                            |       |                             |       |   |   |   |   |
| **Operating income (loss):** |       |                            |       |                             |       |   |   |   |   |
| Defense                      |       | $                               | 21.8       |                             | $          | 26.2 |   | $ | 7.6 |   | $ | 8.9 |   |
| Transportation systems       |       | (8.9                            | )          | 15.8                             |       | (5.2 | ) | 6.8 |   |
| Corporate and other          |       | (2.2                            | )          | (2.2                             | )          | (0.8 | ) | (0.7 | ) |
| Total operating income       |       | $                               | 10.7       |                             | $          | 39.8 |   | $ | 1.6 |   | $ | 15.0 |   |

 

### **Note 5– Financing Arrangements**

### ** **

The Company has a committed five-year revolving credit agreement with agroup of financial institutions in the amount of $150 million. The interestrate on this debt facility is a daily rate equal to the greater of the primerate or the overnight Federal Funds Rate plus one-half of one percent, plus aspread up to 0.25%; or for Eurodollar loans the Adjusted LIBOR, plus a spreadup to 1.25%. As of June 30, 2005, $40 million was outstanding under thisagreement at a rate of 4.25% and is included in current liabilities because itis management’s intent to repay the borrowing within one year.

 

The credit agreement contains covenants which, among other things,limit the incurrence of additional indebtedness, liens, contingent liabilities,dividends and other distributions to shareholders (but such dividendlimitations are in excess of the Company’s current annual rate of dividends),transactions with affiliates, asset sales, acquisitions of businesses in excessof $20 million without permission of the administrative agent, mergers, andother matters customarily restricted in such agreements.

 

The credit agreement also contains customary events of default,including payment defaults, breach of representations and warranties, covenantdefaults, cross-defaults to certain other indebtedness, certain events ofbankruptcy and insolvency, the occurrence of a change in control and judgmentdefaults.

 

As of June 30, 2005, including the amount above, the Company had atotal of $43.4 million outstanding under its various unsecured short-termborrowing arrangements in the U.S., UK, Canada and New Zealand at an averagerate of 4.3%.

 

7

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### **Note 6– Income Taxes**

### ** **

The Company’s effective tax rate for fiscal 2005 is now 30% of pretaxincome, which is reflected in the provision recorded for the nine-month period.The projected rate is lower than in previous quarters primarily because themajority of the Company’s operating income for the year ending September 30,2005 is now expected to come from the UK, where rates are lower than in theU.S.

 

### **Note 7– Pension Plans**

 

Thecomponents of net periodic pension benefits costs are as follows (inthousands):

 
| ** **                     | ** ** | **Nine Months Ended  June 30,** | ** ** | **Three Months Ended  June 30,** | ** ** |
|--------------------------------|------------|---------------------------------|------------|----------------------------------|------------|
| ** **                     | ** ** | **2005**                        | ** ** | **2004**                         | ** ** | **2005** | ** ** | **2004** | ** ** |
| Service cost                   |       | $                               | 5,718      |                             | $          | 5,038 |   | $ | 1,952 |   | $ | 1,694 |   |
| Interest cost                  |       | 5,963                           |       | 4,825                            |       | 1,961 |   | 1,614 |   |
| Expected return on plan assets |       | (6,192                          | )          | (4,518                           | )          | (2,063 | ) | (1,511 | ) |
| Amortization of:               |       |                            |       |                             |       |   |   |   |   |
| Prior service cost             |       | 20                              |       | 3                                |       | 5 |   | 1 |   |
| Actuarial (gain) loss          |       | 1,178                           |       | 1,302                            |       | 351 |   | 200 |   |
| Administrative expenses        |       | 75                              |       | 50                               |       | 25 |   | 17 |   |
| Net pension cost               |       | $                               | 6,762      |                             | $          | 6,700 |   | $ | 2,231 |   | $ | 2,015 |   |

 

**Note 8 – Legal Matters**

 

In January 2005, a bus fare collection system customer in NorthAmerica issued a “cure notice” to the Company, alleging that the Company’sperformance was not in accord with the contract. After unsuccessfulnegotiations with the customer, in March 2005, the Company filed for atemporary restraining order requesting that the customer be restrained fromfurther interfering with the Company’s performance and from issuing atermination notice. The next business day, the customer issued a letterterminating the contract for default. In April 2005, the customer filed aclaim for breach of contract, seeking damages for “all actual, consequentialand liquidated damages sustained” as well as attorney’s fees. The contractlimits liability to the contract value of $8.2 million, but the customerappears to be attempting to avoid that limitation. In May 2005, theCompany filed an answer and general denial and subsequently filed a verifiedpetition alleging breach of contract and other substantive claims, claiming theamount owed under the contract of $4.2 million, plus interest and attorney’sfees. Management believes that both the customer’s default notice and claim fordamages are unsupported and is vigorously defending against the allegations.Based on the advice of counsel, management believes the Company hassubstantially completed the contract prior to termination and that the remainingcontract value is due and the Company will prevail at trial; however, due tothe uncertainty of collecting the outstanding receivable balance an allowancefor doubtful accounts reserve of $4.2 million was established and all costsincurred in the performance of the contract and costs incurred outside thescope of the contract were expensed in the quarter ended March 31, 2005.

 

In June 2005, a company that Cubic had an alleged agreement withto potentially bid on a portion of automated fare collection contracts, filed acourt claim for breach of contract, fraud, negligent

 

8

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misrepresentation, theft of trade secrets, and other relatedallegations. The claim seeks $15.0 million in compensatory damages, punitivedamages, disgorgement of profits and a permanent injunction. In accordance withthe underlying contract arbitration clause, in July 2005 the Company fileda claim with the American Arbitration Association and requested the court casebe stayed or dismissed. Based on information currently available, managementbelieves there is no merit to the claim and that the Company will prevail inthis matter. Therefore, no liability has been recorded as of June 30,2005.

 

9

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### **CUBICCORPORATION**

ITEM 2 - MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OFOPERATIONS

 

June 30, 2005

 

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 vehicle and infantryforce-on-force live training; weapons effects simulations; laser-based tacticalengagement and virtual simulation systems; and precision gunnery solutions. Ourservices are focused on training mission support, computer simulation training,distributed interactive simulation, development of military training doctrine,force modernization services for NATO entrants and field operations andmaintenance. Our communications products are aimed at intelligence,surveillance, and tactical system markets.

 

CubicTransportation Systems develops and delivers innovative fare collection systemsfor public transit authorities worldwide. We provide hardware, software and multi-agency, multimodaltransportation integration technologies and services that allow the agencies toefficiently collect fares, manage their operations, reduce shrinkage and makeusing public transit a more convenient and attractive option for commuters.

 

**ConsolidatedOverview**

Sales increased during the quarter ended June 30, 2005 to $214million, from $191 million in the third quarter last year, an increase of 12%.Sales growth came from the defense segment, with each of its business unitscontributing to the increase, while transportation systems segment sales weredown significantly from last year. Defense sales in the third quarter were $153million compared to $113 million last year, an increase of 36%. Transportationsystems sales were $57 million for the quarter, a 23% decrease from $74 millionin the third quarter last year.

 

Sales for the first nine months of fiscal 2005 were $586 millioncompared to $537 million for the same period last year, an increase of 9%.Defense segment sales were $395 million for the nine-month period, an increaseof 22% over last year’s sales of $325 million for the same period.Transportation systems sales were down from last year for the first nine monthsto $180 million from $200 million, a decrease of 10%. (See the segmentdiscussions following for further analysis of segment sales.)

 

Operating income decreased to $1.6 million in the third quarter thisyear compared to $15.0 million last year. The transportation segment incurredan operating loss of $5.2 million for the quarter, compared to operating incomeof $6.8 million in the third quarter last year. Defense segment operatingincome declined from $9.0 million last year to $7.6 million in the thirdquarter this year.

 

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For the first nine months of fiscal 2005, transportation systemsincurred an operating loss of $8.9 million compared to operating income of$15.8 million for the same period last year. Defense segment operating incomedecreased to $21.8 million, from $26.2 million last year. (See the segmentdiscussions following for further analysis of operating income by segment.)

 

Net income decreased in the third quarter to $822,000 this year, or 3cents per share, from $11.7 million last year, or 44 cents per share, dueprimarily to the operating loss in the transportation segment. Interest expensewas slightly higher for the quarter than last year due to an increase inshort-term borrowings. In addition, last year’s third quarter included a $4.2million gain from the sale of a life insurance policy, which equated to about$2.1 million after taxes, or 8 cents per share. For the first nine months ofthe fiscal year, net income decreased from $27.5 million, or $1.03 per share,to $6.6 million, or 25 cents per share, due primarily to the operating lossfrom the transportation segment. Foreign currency gains totaling $1.2 million,or about $700,000 after applicable income taxes added 3 cents to net income pershare in the first nine months this year, while the gain from the lifeinsurance policy mentioned above added 8 cents to net income per share for thesame period last year.

 

Selling, general and administrative (SG&A) expenses for the thirdquarter were down from last year by almost $2 million. A decrease in legal feesin the third quarter this year accounted for most of the decline. SG&Aexpenses grew by $7.0 million compared to the first nine months of last year,but remained at about 14.2% of sales. In the defense segment, the increase wasdue primarily to increased selling expenses incurred during the first quarterthis year in pursuit of new contracts which we were awarded in the secondquarter. Transportation segment SG&A was higher in the nine-month periodthis year because of a bad debt provision of $4.2 million recorded in thesecond quarter related to dispute with a North American customer of the Company.

 

Our projected effective tax rate for fiscal 2005 is now 30% of pretaxincome, which is reflected in the provision recorded for the nine-month period.The projected rate is lower than in previous quarters primarily because themajority of our operating income is now expected to come from the UK, whererates are lower than in the U.S. 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.

 

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**DefenseSegment**

** **
| ** **                           | ** ** | **Nine Months Ended  June 30,** | ** ** | **Three Months Ended  June 30,** | ** ** |
|--------------------------------------|------------|---------------------------------|------------|----------------------------------|------------|
| ** **                           | ** ** | **2005**                        | ** ** | **2004**                         | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                           | ** ** | **(millions)**                  | ** ** |
| **Defense Segment Sales**            |       |                            |       |                             |       |   |   |   |   |
| Communications and electronics       |       | $                               | 40.3       |                             | $          | 47.0 |   | $ | 15.7 |   | $ | 14.5 |   |
| Training systems                     |       | 161.5                           |       | 127.2                            |       | 63.2 |   | 48.8 |   |
| Government services                  |       | 190.1                           |       | 149.3                            |       | 72.2 |   | 48.7 |   |
| Other                                |       | 3.1                             |       | 1.6                              |       | 1.7 |   | 0.7 |   |
|                                 |       | $                               | 395.0      |                             | $          | 325.1 |   | $ | 152.8 |   | $ | 112.7 |   |
|                                 |       |                            |       |                             |       |   |   |   |   |
| **Defense Segment Operating Income** |       |                            |       |                             |       |   |   |   |   |
| Communications and electronics       |       | $                               | (0.8       | )                                | $          | 5.8 |   | $ | (1.0 | ) | $ | 1.1 |   |
| Training systems                     |       | 11.0                            |       | 11.3                             |       | 4.1 |   | 3.6 |   |
| Government services                  |       | 12.8                            |       | 8.9                              |       | 5.4 |   | 4.0 |   |
| Tactical systems and other           |       | (1.2                            | )          | 0.2                              |       | (0.9 | ) | 0.2 |   |
|                                 |       | $                               | 21.8       |                             | $          | 26.2 |   | $ | 7.6 |   | $ | 8.9 |   |

 

Defense segment sales increased to $153 million in the third quarterthis fiscal year from $113 million in the same quarter last year, a 36%increase. Communications and electronics sales increased 8% compared to lastyear’s third quarter due to increased sales of data links and communicationsproducts. Training systems sales increased by almost 30% as a result of growthin sales of ground combat training systems and laser engagement systems to theU.S. and allied governments. Government services sales were significantlyhigher for the quarter, increasing by 48%. The increase in government servicessales came from both new contracts and the expansion of existing programs. Themost significant growth was from a contract at the Joint Readiness TrainingCenter (JRTC) in Fort Polk, LA, in support of combat training exercises.

 

For the nine-month period, defense segment sales increased by 22%, from$325 million in 2004 to $395 million this year. Training systems sales grew byabout $34 million and government services sales increased by more than $40million, while communications and electronics sales decreased by about $7million. Decreased sales of data links, personnel locator systems andcommunications products contributed to the decline in communications andelectronics sales for the first nine months this year. Training systems salesincreased primarily due to new contracts we won last year for ground combattraining systems and laser engagement systems. Government services sales wereup by 27% for the first nine months of the fiscal year, with the mostsignificant growth coming from the JRTC contract and from contracts formodeling the effects of weapons of mass destruction.

 

Operatingincome in the defense segment decreased in the third quarter from $8.9 millionlast year to $7.6 million this year. The decrease came from the communicationsand electronics business unit, which incurred an operating loss of $1.0 millionfor the third quarter compared to operating income of $1.1 million last year.Lower profit margins from the sale of personnel locator systems accounted forabout half of the decline and increased costs of more than $500,000 on aprogram involving a new intelligence application of our data link and receivertechnology also contributed to the decrease. In addition, an evaluation ofinventories in the communications products business during the third quarteridentified about $700,000 of 

 

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componentsand products that are now considered obsolete or unusable, resulting in theirvalue being written down to zero. Training systems operating income was up inthe third quarter this year due to the increase in sales volume, although thepercentage increase was not as great as the sales growth. The reason for thisis that half of the sales growth came from two ground combat training systemsthat are in the early stages of completion and are not generating operatingincome. Government services operating income was higher in the third quarterdue to the growth in sales volume mentioned above.

 

Forthe first nine months of the fiscal year, defense segment operating income wasdown from $26.2 million last year to $21.8 million this year, caused by adecrease in communications and electronics operating profits. In addition tothe reasons identified above related to third quarter operating income,operating income was down for the nine-month period because we havesubstantially completed the profitable data link contracts we were working onlast year, while the most significant data link contract we are working on thisyear was bid at a loss two years ago in a strategic move to expand our datalink business over the long term. Training systems operating profits were aboutthe same as last year for the nine-month period, despite the growth in sales.In addition to the two ground combat training system contracts mentioned abovethat are break-even at this point, we are working on a largeair combat training contract won in 2003 that is also in the early stages ofcompletion and has incurred a small loss on the work performed to date. Weexpect the profit margins from this contract to improve going forward as wereceive additional orders under this contract. Government services operatingincome improved over last year primarily as the result of higher sales volume,but also because of performance improvement in the operations and maintenancedivision of the government services business unit.

 

Weannounced earlier this year that we had entered into a 50/50 joint venturearrangement with the U.S. subsidiary of Rafael Armament Development Authority,Ltd. (Rafael), an Israeli company. The joint venture will manufacture certainRafael products for sale to the U.S. and Israeli defense forces. This newcompany began operations during the second quarter this year but has not yetbeen awarded any contracts. The business has incurred approximately $500,000 ofexpenses which are included in the table above under the caption “Tactical Systemsand Other”.

 

**Transportation Systems Segment**

Transportation segment sales decreased from $74 million in the thirdquarter last year to $57 million this year, a 23% decrease. For the nine-monthperiod, sales decreased 10% from $200 million last year to $180 million thisyear. Sales from contracts in North America were lower this year compared toboth the third quarter and nine-month periods last year. Sales from Europeanand U.S. service contracts were also lower in the third quarter this year;however, for the nine-month period higher sales from European service contractspartially offset the decrease in North American sales.

 

The transportation segment incurred an operating loss of $5.2 millionfor the third quarter this year compared to operating income of $6.8 million inthe same quarter last year. Estimated costs to complete several fare collectionsystems increased by $7.2 million more than we had estimated last quarter;therefore, a loss of that amount was recorded on these contracts during the quarter.Increased engineering hours incurred was the primary cause of the cost growth.We made good progress toward completion of these projects during the quarter,and a significant amount of the 

 

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equipment has been installed; however, the costs of accomplishing thiswere higher than we were previously able to anticipate. The new cost estimatesare our best estimates of the most likely costs to complete these contracts,which we anticipate will be substantially completed within the next six months.

 

In addition to these provisions for cost growth, we recorded a loss of$1.1 million on a contract we were awarded in the third quarter for a regionalbus system in Sweden. In bidding this contract we accepted the risk that acertain number of counties would participate in the regional system. However,not all of the counties chose to participate, leaving us to absorb theassociated non-recurring development costs. Additional counties may join in thefuture and provide additional revenues to cover our fixed costs; however, it isunknown at this time whether they will do so. We also incurred an additional$1.0 million operating loss during the quarter from the parking business weacquired last year. We are evaluating the cost structure of this business, asthere is currently not sufficient sales volume to absorb its overhead costs.Profits from our service business in the U.S. and Europe partially offset theoperating losses described above, however, in the third quarter were lower thanin the third quarter last year, further contributing to the decline inoperating income for the quarter.

 

For the first nine months of the fiscal year, transportation systemsincurred an operating loss of $8.9 million this year, compared to operatingincome of $15.8 million for the same period last year. This decline inoperating performance was caused by cost growth provisions in the first threequarters of the fiscal year totaling $22.5 million, an allowance for doubtfulaccounts provision of $4.2 million recorded in the second quarter related tothe dispute with a North American customer of the Company, an operating losstotaling $2.9 million from the parking business and the $1.1 million loss onthe contract in Sweden described above. Our service business generated higheroperating profits in the first nine months this year, which partially offsetthese operating losses.

 

New operating management in the transportation systems segment is inthe process of evaluating the work performed under various contracts, toascertain the amount of customer directed work performed outside the scope ofthe contracts. It is management’s intent to seek reimbursement from thecustomers once this review is completed. No recoveries have been anticipated inthe accounting for these contracts as of June 30, 2005.

 

While we are very disappointed that the costs of these projects havegrown so significantly, we believe these efforts will be beneficial in thefuture. We are developing new automated fare collection technologies that webelieve will provide a competitive advantage to us in the performance of futurecontracts.

 

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**Backlog**

 
| ** **                     | ** ** | **June 30,**      | ** ** | **September 30,** | ** ** |
|--------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                     | ** ** | **2005**          | ** ** | **2004**          | ** ** |
| ** **                     | ** ** | **(in millions)** | ** ** |
| **Total backlog**              |       |              |       |              |       |
| Transportation systems         |       | $                 | 755.3      |              | $          | 733.9 |   |
| Defense:                       |       |              |       |              |       |
| Communications and electronics |       | 60.2              |       | 61.5              |       |
| Training systems               |       | 315.1             |       | 317.6             |       |
| Government services            |       | 380.9             |       | 377.0             |       |
| Total defense                  |       | 756.2             |       | 756.1             |       |
| Total                          |       | $                 | 1,511.5    |              | $          | 1,490.0 |   |
|                           |       |              |       |              |       |
| **Funded backlog**             |       |              |       |              |       |
| Transportation systems         |       | $                 | 755.3      |              | $          | 733.9 |   |
| Defense:                       |       |              |       |              |       |
| Communications and electronics |       | 60.2              |       | 61.5              |       |
| Training systems               |       | 315.1             |       | 317.6             |       |
| Government services            |       | 101.6             |       | 72.7              |       |
| Total defense                  |       | 476.9             |       | 451.8             |       |
| Total                          |       | $                 | 1,232.2    |              | $          | 1,185.7 |   |

 

As reflected in the table above, total backlog increased by about $22million at June 30, 2005 compared to the beginning of the fiscal year,while funded backlog increased by about $47 million. The increase in totalbacklog came from the transportation segment and the increase in funded backlogcame from transportation systems segment and the government services businessunit of the defense segment.

 

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.

 

###### **Liquidity and Capital Resources**

Cash flows from operations were positive in the third quarter by $11.4million. Transportation systems cash flows came primarily from a reduction inaccounts receivable, while defense cash flows were primarily due to lowerinventories. Overall, inventories were reduced by $8.2 million during thequarter. For the first nine months of the fiscal year, cash flows from operationswere positive by $8.9 million. A reduction in accounts receivable of $19.6million was partially offset by a decrease in customer advances of $14.9million, for the nine-month period.

 

Investing activities for the nine-month period included about $5.5million used for normal capital expenditures and $6.2 million generated by thesale of marketable securities at no significant gain.

 

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During the first nine months of the fiscal year, we made scheduled paymentson long-term debt of $5.9 million, paid dividends to our shareholders of $2.4million and borrowed $17.9 million on a short-term basis.

 

Our financial condition remains strong with working capital of $234million and a current ratio of 2.3 to 1 at June 30, 2005. We expect thatcash on hand and our unused line of credit will be adequate to meet our workingcapital requirements for the foreseeable future.

 

**Critical Accounting Policies, Estimates and Judgments**

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 forthe year ended September 30, 2004.

 

**CAUTIONARY STATEMENT ABOUTFORWARD-LOOKING INFORMATION**

 

This report,including the documents that we incorporate by reference, containsforward-looking statements within the meaning of Section 21E of theSecurities Exchange Act of 1934, as amended, that are subject to the “safeharbor” created by those sections. Any statements about our expectations,beliefs, plans, objectives, assumptions or future events or our futurefinancial and/or operating performance are not historical and may beforward-looking. These statements are often, but not always, made through theuse of words or phrases such as “may,” “will,” “anticipate,” “estimate,” “plan,”“project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “predict,” “potential,”“opportunity” and similar words or phrases or the negatives of these words orphrases.  These statements involveestimates, assumptions and uncertainties, including those discussed in “RiskFactors” in the Company’s annual report on Form 10-K for the year ended September 30,2004, and throughout this filing that could cause actual results to differmaterially from those expressed in these statements.

 

Because the riskfactors referred to above could cause actual results or outcomes to differ 

 

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materially fromthose expressed in any forward-looking statements made by us or on our behalf,you should not place undue reliance on any forward-looking statements.  In addition, past financial and/or operatingperformance is not necessarily a reliable indicator of future performance andyou should not use our historical performance to anticipate results or futureperiod trends.  Further, anyforward-looking statement speaks only as of the date on which it is made, andwe undertake no obligation to update any forward-looking statement to reflectevents or circumstances after the date on which the statement is made or toreflect the occurrence of unanticipated events. New factors emerge from time totime, and it is not possible for us to predict which factors will arise. Inaddition, we cannot assess the impact of each factor on our business or theextent to which any factor, or combination of factors, may cause actual resultsto differ materially from those contained in any forward-looking statements.

 

ITEM 4 - STATEMENT ONDISCLOSURE CONTROLS AND PROCEDURES.

 

Withinthe 90 days prior to the date of filing this Quarterly Report on Form 10-Q,the Company 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 andoperation of the Company’s disclosure controls and procedures pursuant to theSecurities and Exchange Act of 1934 Rules 13a-15 and 15d-15. Based uponthat evaluation, the Chief Executive Officer and Chief Financial Officerconcluded that, as of the end of the three month period ended June 30, 2005, the Company’s disclosure controls andprocedures are effective in timely alerting them to material informationrelating to the Company (including its consolidated subsidiaries) required tobe included in the Company’s periodic SEC filings.

 

**PART II- OTHER INFORMATION**

 

ITEM 1 – LEGAL PROCEEDINGS

 

In January 2005, a bus fare collection system customer in NorthAmerica issued a “cure notice” to the Company, alleging that the Company’sperformance was not in accord with the contract. After unsuccessfulnegotiations with the customer, in March 2005, the Company filed for atemporary restraining order requesting that the customer be restrained fromfurther interfering with the Company’s performance and from issuing atermination notice. The next business day, the customer issued a letterterminating the contract for default. In April 2005, the customer filed aclaim for breach of contract, seeking damages for “all actual, consequentialand liquidated damages sustained” as well as attorney’s fees. The contractlimits liability to the contract value of $8.2 million, but the customerappears to be attempting to avoid that limitation. In May 2005, theCompany filed an answer and general denial and subsequently filed a verifiedpetition alleging breach of contract and other substantive claims, claiming theamount owed under the contract of $4.2 million, plus interest and attorney’sfees. Management believes that both the customer’s default notice and claim fordamages are unsupported and is vigorously defending against the allegations.Based on the advice of counsel, management believes the Company hassubstantially completed the contract prior to termination and that theremaining contract value is due and the Company will prevail at trial; however,due to the uncertainty of collecting the outstanding receivable balance anallowance for doubtful accounts reserve of $4.2 million was established and allcosts incurred in the performance of the contract and costs incurred outsidethe scope of the contract were expensed in the quarter ended March 31,2005.

 

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In June 2005, a company that Cubic had an alleged agreement withto potentially bid on a portion of automated fare collection contracts, filed acourt claim for breach of contract, fraud, negligent misrepresentation, theftof trade secrets, and other related allegations. The claim seeks $15.0 millionin compensatory damages, punitive damages, disgorgement of profits and a permanentinjunction. In accordance with the underlying contract arbitration clause, in July 2005the Company filed a claim with the American Arbitration Association andrequested the court case be stayed or dismissed. Based on information currentlyavailable, management believes there is no merit to the claim and that theCompany will prevail in this matter. Therefore, no liability has been recordedas of June 30, 2005.

 

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ITEM 6 - EXHIBITS

 

(a) The following exhibits are included herein:

 
| ** ** | **Exhibit No.** | ** ** | **Description**                                          |
|------------|----------------------|------------|----------------------------------------------------------|
|       | 15 —            |       | Report of Independent Registered Public  Accounting Firm |
|       | 31.1 —          |       | Certification of CEO                                     |
|       | 31.2 —          |       | Certification of CFO                                     |
|       | 32.1 —          |       | CEO and CFO Certification                                |

 

 

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   | August 8,  2005          |   | /s/ W. W. Boyle |   |
|   | W. W. Boyle                   |
|   | Senior Vice President and CFO |
|   |                          |
| Date   | August 8, 2005           |   | /s/  Mark A. Harrison |   |
|   | Mark A. Harrison              |
|   | Vice President and Controller |
|        |                               |  |  |  |  |

 

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