**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**QUARTERLY REPORT**

 

**Pursuant to Section 13 or 15(d) of the SecuritiesExchange Act of 1934**

 

**Forthe Quarter Ended June 30, 2003**

 

**1-8931**

**CommissionFile Number**

 

**CUBIC CORPORATION**

Exact Name ofRegistrant 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**    |

 

Indicate by check mark whether the Registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months, and (2) has been subject to such filingrequirements for the past 90 days.

 

Yes ý   No o

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act). Yes ý No o

 

As of August 1, 2003, Registrant had only one class of common stock ofwhich there were 26,719,845 shares outstanding (after deducting 8,944,884shares held as treasury stock).

 

 

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**PART I - FINANCIAL INFORMATION**

ITEM 1 - FINANCIALSTATEMENTS

 

**CUBICCORPORATION**

CONSOLIDATEDCONDENSED STATEMENTS OF INCOME (UNAUDITED)

(amounts inthousands, except per share data)

 
|                                          |   | **Nine Months Ended  June 30,** |    | **Three Months Ended  June 30,** |   |
|-----------------------------------------------|--------|---------------------------------|---------|----------------------------------|--------|
|                                          |   | **2003**                        |    | **2002**                         |   | **2003** |   | **2002** |   |
|                                          |   |                            |    |                             |   |   |   |   |   |
| Sales                                         |   | $                               | 473,463 |                             | $      | 410,578 |   | $ | 157,950 |   | $ | 148,208 |   |
|                                          |   |                            |    |                             |   |   |   |   |   |
| Costs and expenses:                           |   |                            |    |                             |   |   |   |   |   |
| Cost of sales                                 |   | 372,047                         |    | 314,883                          |   | 121,973 |   | 114,439 |   |
| Selling, general and administrative  expenses |   | 63,249                          |    | 61,509                           |   | 21,869 |   | 21,683 |   |
| Research and development                      |   | 3,852                           |    | 6,687                            |   | 818 |   | 1,797 |   |
|                                          |   | 439,148                         |    | 383,079                          |   | 144,660 |   | 137,919 |   |
| Operating income                              |   | 34,315                          |    | 27,499                           |   | 13,290 |   | 10,289 |   |
|                                          |   |                            |    |                             |   |   |   |   |   |
| Other income (expenses)                       |   |                            |    |                             |   |   |   |   |   |
| Gain on sale of real  estate                  |   | 8,426                           |    | —                           |   | 2,236 |   | — |   |
| Interest expense                              |   | (2,775                          | )       | (2,664                           | )      | (906 | ) | (894 | ) |
| Other income                                  |   | 1,879                           |    | 3,925                            |   | 409 |   | 1,333 |   |
|                                          |   |                            |    |                             |   |   |   |   |   |
| Income before income taxes                    |   | 41,845                          |    | 28,760                           |   | 15,029 |   | 10,728 |   |
|                                          |   |                            |    |                             |   |   |   |   |   |
| Income taxes                                  |   | 13,800                          |    | 9,500                            |   | 4,900 |   | 3,600 |   |
|                                          |   |                            |    |                             |   |   |   |   |   |
| Net income                                    |   | $                               | 28,045  |                             | $      | 19,260 |   | $ | 10,129 |   | $ | 7,128 |   |
|                                          |   |                            |    |                             |   |   |   |   |   |
| Net income per share                          |   | $                               | 1.05    |                             | $      | 0.72 |   | $ | 0.38 |   | $ | 0.27 |   |
|                                          |   |                            |    |                             |   |   |   |   |   |
| Dividends per common share                    |   | $                               | 0.070   |                             | $      | 0.063 |   | $ | — |   | $ | — |   |
|                                          |   |                            |    |                             |   |   |   |   |   |
| Average shares of common  stock outstanding   |   | 26,720                          |    | 26,720                           |   | 26,720 |   | 26,720 |   |

 

*See accompanying notes.*

 

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**CUBICCORPORATION**

CONSOLIDATEDCONDENSED BALANCE SHEETS

(in thousands)

 
|                                            |   | **June 30,  2003** |    | **September 30,  2002** |   |
|-------------------------------------------------|--------|--------------------|---------|-------------------------|--------|
|                                            |   | **(Unaudited)**    |    | **(See note  below)**   |   |
| **ASSETS**                                      |   |               |    |                    |   |
| Current assets:                                 |   |               |    |                    |   |
| Cash and cash equivalents                       |   | $                  | 73,428  |                    | $      | 78,656 |   |
| Marketable securities,  available-for-sale      |   | 449                |    | 406                     |   |
| Accounts receivable                             |   | 208,538            |    | 163,283                 |   |
| Inventories                                     |   | 21,483             |    | 29,200                  |   |
| Deferred income taxes and  other current assets |   | 23,346             |    | 25,262                  |   |
| Total current assets                            |   | 327,244            |    | 296,807                 |   |
|                                            |   |               |    |                    |   |
| Accounts receivable                             |   | 27,000             |    | —                  |   |
| Property, plant and  equipment - net            |   | 41,909             |    | 42,419                  |   |
| Goodwill                                        |   | 20,459             |    | 19,650                  |   |
| Other assets                                    |   | 13,314             |    | 15,583                  |   |
|                                            |   | $                  | 429,926 |                    | $      | 374,459 |   |
|                                            |   |               |    |                    |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**  |   |               |    |                    |   |
| Current liabilities:                            |   |               |    |                    |   |
| Trade accounts payable                          |   | $                  | 13,631  |                    | $      | 16,374 |   |
| Customer advances                               |   | 41,555             |    | 30,232                  |   |
| Other current liabilities                       |   | 42,542             |    | 33,424                  |   |
| Accrued pension liability                       |   | 23,791             |    | 22,311                  |   |
| Income taxes payable                            |   | 7,821              |    | 2,558                   |   |
| Current portion of  long-term debt              |   | 1,429              |    | 1,429                   |   |
| Total current liabilities                       |   | 130,769            |    | 106,328                 |   |
|                                            |   |               |    |                    |   |
| Long-term debt                                  |   | 47,142             |    | 48,571                  |   |
| Deferred compensation                           |   | 6,569              |    | 6,397                   |   |
|                                            |   |               |    |                    |   |
| Shareholders’ equity:                      |   |               |    |                    |   |
| Common stock                                    |   | 234                |    | 234                     |   |
| Additional paid-in capital                      |   | 12,123             |    | 12,123                  |   |
| Retained earnings                               |   | 273,142            |    | 246,968                 |   |
| Accumulated other  comprehensive loss           |   | (3,987             | )       | (10,096                 | )      |
| Treasury stock at cost                          |   | (36,066            | )       | (36,066                 | )      |
|                                            |   | 245,446            |    | 213,163                 |   |
|                                            |   | $                  | 429,926 |                    | $      | 374,459 |   |

 

*Note: The balance sheet at September 30, 2002 has beenderived from the audited financial statements at that date.*

*See accompanying notes.*

 

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**CUBIC CORPORATION**

CONSOLIDATEDCONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

 
|                                                                                         |   | **Nine Months Ended  June 30,** |   | **Three Months Ended  June 30,** |   |
|----------------------------------------------------------------------------------------------|--------|---------------------------------|--------|----------------------------------|--------|
|                                                                                         |   | **2003**                        |   | **2002**                         |   | **2003** |   | **2002** |   |
| Operating Activities:                                                                        |   |                            |   |                             |   |   |   |   |   |
| Net income                                                                                   |   | $                               | 28,045 |                             | $      | 19,260 |   | $ | 10,129 |   | $ | 7,128 |   |
| Adjustments to reconcile  net income to net cash provided by (used in) operating activities: |   |                            |   |                             |   |   |   |   |   |
| Depreciation and  amortization                                                               |   | 5,025                           |   | 4,807                            |   | 1,779 |   | 1,428 |   |
| Gain on sale of real  estate                                                                 |   | (8,426                          | )      | —                           |   | (2,236 | ) | — |   |
| Changes in operating  assets and liabilities                                                 |   | (32,320                         | )      | (23,543                          | )      | 21,339 |   | (6,576 | ) |
| NET CASH PROVIDED BY (USED  IN) OPERATING ACTIVITIES                                         |   | (7,676                          | )      | 524                              |   | 31,011 |   | 1,980 |   |
|                                                                                         |   |                            |   |                             |   |   |   |   |   |
| Investing Activities:                                                                        |   |                            |   |                             |   |   |   |   |   |
| Net additions to property,  plant and equipment                                              |   | (7,288                          | )      | (10,173                          | )      | (1,371 | ) | (758 | ) |
| Proceeds from sale of real  estate                                                           |   | 11,998                          |   | —                           |   | 4,990 |   | — |   |
| Other items - net                                                                            |   | (15                             | )      | —                           |   | (14 | ) | (10 | ) |
| NET CASH PROVIDED BY (USED  IN) INVESTING ACTIVITIES                                         |   | 4,695                           |   | (10,173                          | )      | 3,605 |   | (768 | ) |
|                                                                                         |   |                            |   |                             |   |   |   |   |   |
| Financing Activities:                                                                        |   |                            |   |                             |   |   |   |   |   |
| Change in short-term  borrowings, net                                                        |   | —                          |   | —                           |   | (5,142 | ) | — |   |
| Principal payment on  long-term borrowings                                                   |   | (1,429                          | )      | —                           |   | — |   | — |   |
| Purchases of treasury  stock                                                                 |   | —                          |   | (3                               | )      | — |   | — |   |
| Dividends paid                                                                               |   | (1,871                          | )      | (1,693                           | )      | — |   | — |   |
| NET CASH USED IN FINANCING  ACTIVITIES                                                       |   | (3,300                          | )      | (1,696                           | )      | (5,142 | ) | — |   |
|                                                                                         |   |                            |   |                             |   |   |   |   |   |
| Effect of exchange rates  on cash                                                            |   | 1,053                           |   | 2,152                            |   | 225 |   | 2,491 |   |
|                                                                                         |   |                            |   |                             |   |   |   |   |   |
| NET INCREASE (DECREASE) IN  CASH AND CASH EQUIVALENTS                                        |   | (5,228                          | )      | (9,193                           | )      | 29,699 |   | 3,703 |   |
|                                                                                         |   |                            |   |                             |   |   |   |   |   |
| Cash and cash equivalents  at the beginning of the period                                    |   | 78,656                          |   | 76,837                           |   | 43,729 |   | 63,941 |   |
|                                                                                         |   |                            |   |                             |   |   |   |   |   |
| CASH AND CASH EQUIVALENTS  AT THE END OF THE PERIOD                                          |   | $                               | 73,428 |                             | $      | 67,644 |   | $ | 73,428 |   | $ | 67,644 |   |

 

*See accompanying notes.*

 

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**CUBICCORPORATION**

NOTES TOCONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

 

June 30, 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 or nine months ended June 30, 2003are not necessarily indicative of the results that may be expected for the yearending September 30, 2003. 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, 2002.

 

The preparation of the financial statements in conformity withaccounting principles generally accepted in the United States requires managementto make estimates and assumptions that affect the reported amounts of assetsand liabilities and disclosure of contingent assets and liabilities at the dateof the financial statements and the reported amounts of revenues and expensesduring the reporting period. Actual results could differ from those estimates.

 

**Note 2 – Balance Sheet Details**

 

The components of accounts receivable are asfollows (in thousands):

 
|                                                   |   | **June 30,  2003** |    | **September 30,  2002** |   |
|--------------------------------------------------------|--------|--------------------|---------|-------------------------|--------|
| Trade and other  receivables                           |   | $                  | 7,040   |                    | $      | 8,760 |   |
| Long-term contracts:                                   |   |               |    |                    |   |
| Billed                                                 |   | 72,763             |    | 42,148                  |   |
| Unbilled                                               |   | 129,194            |    | 112,690                 |   |
| Allowance for doubtful  accounts                       |   | (459               | )       | (315                    | )      |
| Total current                                          |   | 208,538            |    | 163,283                 |   |
| Long-term contracts not  currently due — unbilled |   | 27,000             |    | —                  |   |
| Total accounts receivable                              |   | $                  | 235,538 |                    | $      | 163,283 |   |

 

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, 2003. This amount relates to the Prestige contract in theUnited Kingdom.

 

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Inventories consist of the following (inthousands):

 
|                              |   | **June 30,  2003** |   | **September 30,  2002** |   |
|-----------------------------------|--------|--------------------|--------|-------------------------|--------|
| Finished products                 |   | $                  | 710    |                    | $      | 1,219 |   |
| Work in process                   |   | 8,436              |   | 14,746                  |   |
| Raw material and purchased  parts |   | 12,337             |   | 13,235                  |   |
| Total inventories                 |   | $                  | 21,483 |                    | $      | 29,200 |   |

 

**Note 3 – New Accounting Pronouncement**

 

In July 2002, the FASB issued Statement of Financial AccountingStandards No. 146 (FAS 146), *Accounting for Costs Associated with Exit or DisposalActivities*. The standard requires companies to recognize costsassociated with exit or disposal activities when they are incurred rather thanat the date of a commitment to an exit or disposal plan. Examples of costscovered by the standard include lease termination costs and certain employeeseverance costs that are associated with a restructuring, discontinuedoperation, plant closing, or other exit or disposal activity. The principaleffect of applying FAS 146 is on the timing of recognition of these costs. Hadthe statement been in effect during fiscal year 2002, the Company’s net incomefor the nine months ended June 30, 2002 would have been higher by approximately$300,000 (1 cent per share). The new standard was effective as of December 31,2002 and will be applied prospectively to exit or disposal activities initiatedafter that date.

 

**Note 4 – Comprehensive Income**

 

Comprehensive income is as follows (inthousands):

 
|                                                                       |   | **Nine Months Ended  June 30,** |   | **Three Months Ended  June 30,** |   |
|----------------------------------------------------------------------------|--------|---------------------------------|--------|----------------------------------|--------|
|                                                                       |   | **2003**                        |   | **2002**                         |   | **2003** |   | **2002** |   |
|                                                                       |   |                            |   |                             |   |   |   |   |   |
| Net income                                                                 |   | $                               | 28,045 |                             | $      | 19,260 |   | $ | 10,129 |   | $ | 7,128 |   |
| Foreign currency  translation adjustments                                  |   | 6,082                           |   | 4,789                            |   | 3,997 |   | 4,686 |   |
| Unrealized holding gain  (loss) on marketable securities during the period |   | 27                              |   | (46                              | )      | 25 |   | (27 | ) |
| Comprehensive income                                                       |   | $                               | 34,154 |                             | $      | 24,003 |   | $ | 14,151 |   | $ | 11,787 |   |

 

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**Note 5 – Segment Information**

 

Business segment financial data is as follows(in millions):

 
|                          |   | **Nine Months Ended  June 30,** |   | **Three Months Ended  June 30,** |   |
|-------------------------------|--------|---------------------------------|--------|----------------------------------|--------|
|                          |   | **2003**                        |   | **2002**                         |   | **2003** |   | **2002** |   |
| **Sales:**                    |   |                            |   |                             |   |   |   |   |   |
| Transportation systems        |   | $                               | 194.1  |                             | $      | 166.5 |   | $ | 60.3 |   | $ | 68.5 |   |
| Defense                       |   | 267.9                           |   | 233.2                            |   | 93.9 |   | 76.1 |   |
| Corporate and other           |   | 11.5                            |   | 10.9                             |   | 3.8 |   | 3.6 |   |
| Total sales                   |   | $                               | 473.5  |                             | $      | 410.6 |   | $ | 158.0 |   | $ | 148.2 |   |
|                          |   |                            |   |                             |   |   |   |   |   |
| **Operating  income (loss):** |   |                            |   |                             |   |   |   |   |   |
| Transportation systems        |   | $                               | 19.6   |                             | $      | 15.7 |   | $ | 7.2 |   | $ | 6.1 |   |
| Defense                       |   | 15.5                            |   | 12.7                             |   | 6.2 |   | 4.7 |   |
| Corporate and other           |   | (0.8                            | )      | (0.9                             | )      | (0.1 | ) | (0.5 | ) |
| Total operating income        |   | $                               | 34.3   |                             | $      | 27.5 |   | $ | 13.3 |   | $ | 10.3 |   |

 

**Note 6 – Legal Proceedings**

 

During the quarter endedMarch 31, 2003, a former subcontractor to the Company on the Prestige projectin London filed a claim against the Company under arbitration provisions of thesubcontract, alleging wrongful termination, in an amount yet to be determined.The Company had previously notified the subcontractor of its intention to filea claim against the subcontractor for failure to perform and in July 2003 theCompany filed its defense and counterclaim with the arbitrator. The Companybelieves that the subcontractor’s claim is without merit and will vigorouslypursue its defense and counterclaim. The Company believes it will ultimately beable to recover some or all of the damages it has incurred due to the subcontractor’sfailure to perform, but has not anticipated recovery in its calculation ofprofits under its contract with Transys because the conditions required byaccounting principles generally accepted in the United States have not yet beenachieved.

 

7

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**CUBICCORPORATION**

ITEM 2 -MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION ANDRESULTS OF OPERATIONS

 

June 30, 2003

 

**Forward-Looking Statements**

In addition to historicalmatters, this report contains forward-looking statements. They can beidentified by words such as *may, likely*, *anticipate, hope, estimate, plan,potential, promising, feel, expect, should*, and *confident*. Theseforward-looking statements are made pursuant to the safe harbor provisions ofthe Securities Litigation Reform Act of 1995. Investors are cautioned thatforward-looking statements involve risks and uncertainties which may affect ourbusiness and prospects. These include the effects of politics on negotiationsand business dealings with government entities, changes in defense budgets,economic conditions in the various countries in which we do or hope to dobusiness, competition and technology changes in the defense and transportationindustries, and other competitive and technological factors.

 

**Results of Operations**

Sales increased 7 percentfor the quarter ended June 30, 2003 to $158 million, compared to $148 millionin the same quarter last year, as defense segment sales increasedsignificantly, while transportation segment sales decreased.

 

Defense segment saleswere up by 23 percent in the third quarter compared to last year, from $76.1million to $93.9 million. Virtually all of the increase came from the trainingsystems business, while government services and communications and electronicssales were about the same as last year. Training systems sales were up due toincreased sales generated by air and ground combat training system contractswon in previous years. New training systems contracts we won this year have notyet had a substantial impact on sales as these contracts are in the start-upphase.

 

Transportation segmentsales were approximately 12 percent lower than last year’s third quarter, at$60.3 million this year compared to $68.5 million last year. This resulted froman anticipated decrease in the level of activity on the Prestige contract inLondon.

 

Sales for the first ninemonths of the fiscal year were $473 million this year compared to $411 millionlast year, an increase of more than 15 percent, with both segments contributingto the increase.

 

Defense sales were upalmost 15 percent over the first nine months of last year, from $233.2 millionto $267.9 million, due to increases from training systems contracts. Governmentservices sales increased modestly as well, while sales were down from the firstnine months of last year. We are optimistic that the communications andelectronics business will grow in the future based on recent new contractawards.

 

During the first ninemonths, transportation systems sales increased nearly 17 percent, from $166.5million last year to $194.1 million this year. Transportation systems saleswere higher in North America, due to new contracts won last year, and inLondon, as work on the Prestige contract hit a high point in the first twoquarters of the year.

 

8

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Operating incomeincreased from $10.3 million in the third quarter last year to $13.3 millionthis year, a 26 percent increase.

 

Operating income in thedefense segment increased approximately 32 percent over last year, from $4.7million to $6.2 million, with the majority of the profit improvement comingfrom air and ground combat training systems. This resulted from increased salesvolume and from higher profit margins on certain air combat training systemscontracts. The battlefield simulation business generated a modest increase inoperating income; however, government services operating income as a whole wasdown for the quarter because of a change in estimated profits on an operationsand maintenance contract which produced a loss in the period. Work on thiscontract has now been completed and the situation that caused the loss has beenresolved.

 

For the transportationsystems segment, although lower sales from the Prestige contract resulted inlower operating profits from the contract during the quarter, higher profits oncontracts in North America resulted in an increase in operating income of 18percent for the segment, from $6.1 million in last year’s third quarter to $7.2million this year. As has been discussed in previous reports, profit marginsrecorded on the Prestige contract continue to be at a lower level than weexpect ultimately to achieve as the result of work we are performing in placeof a subcontractor that was terminated in fiscal 2002. As discussed in Note 6to the financial statements, we expect to ultimately recover the additionalcosts incurred from the subcontractor, but cannot anticipate recovery in ourcalculation of profits on the contract at this time because the conditionsrequired by generally accepted accounting principles have not yet beenachieved.

 

For the first nine monthsof the fiscal year, operating income was 25 percent higher than last year, from$27.5 million to $34.3 million.

 

Operating income in thedefense segment was up about 22 percent over the nine-month period last year,from $12.7 million to $15.5 million. Higher operating income came from thetraining systems business, while government services operating income was lowerbecause of the contract mentioned above. Operating income for the first ninemonths in communications and electronics was less than last year primarilybecause of a strategic decision we made to invest in new communicationstechnology, which resulted in the award of a new contract in the secondquarter. As discussed last quarter, we expect to spend approximately $3 millionmore than the value of the contract for the engineering development portion ofthe project and recorded an expense provision in the second quarter.

 

Operatingincome for the first nine months of the year in the transportation systemssegment increased from $15.7 million to $19.6 million, a 25 percent increase.As has been discussed in previous reports, we expensed approximately $0.9million for a facility closure in fiscal 2002. Without this provision lastyear, operating income would have been about $16.6 million in the nine monthsended June 30, 2002 and the increase year over year would have been 18 percent.This increase resulted from higher sales volume and higher profit margins oncontracts in North America. As mentioned above, profit margins recorded on thePrestige contract continue to be at a lower level than we expect ultimately toachieve.

 

Net income in the thirdquarter increased from $7.1 million last year to $10.1 million this year, a 42percent increase. This resulted from improved operating income in both segmentsand due to a gain

 

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on the sale of realestate, located south of London, that we had owned for nearly 20 years. Weacquired a different facility in the same area last year and moved into therefurbished building this year, therefore, the old facility was no longerrequired and was sold. Proceeds of the sale were approximately $5 million,resulting in a pretax gain of $2.2 million. After applicable income taxes atthe U.K. rate of 30 percent, the gain from the sale was approximately $1.6million, or about 6 cents per share. Without this real estate gain, earningsfor the quarter would have been 32 cents per share compared to 27 cents pershare in the third quarter last year, a 19 percent increase.

 

For the first nine monthsof the year, net income was up 46 percent compared to last year, from $19.3million to $28.0 million. Approximately $5.3 million of this increase was dueto gains on the sale of real estate in both the second and third quarters,representing about 20 cents per share. Without these non-recurring gains netincome would have been about 85 cents per share for the first nine months, upby approximately 18 percent from last year’s 72 cents, due to improvedoperating income in both major segments.

 

Selling, general andadministrative expenses were up slightly in the first nine months of the yearbut were down from 15.0 percent of sales to 13.4 percent. Higher selling costswere incurred in both segments due to an increase in contract proposalactivities; however, this increase in costs was partially offset by a decreasein legal costs in the defense segment.

 

Research and development(R&D) spending was lower in the nine-month period this year than last yearas we shifted engineering resources from company sponsored activities tocustomer funded development activities. We do not rely heavily on independent R&D,as most of our new product development occurs in conjunction with theperformance of work on our contracts. The amount of customer funded productdevelopment activity has increased this year; however, these costs are includedin cost of sales as they are directly related to contract performance.

 

Other income was lower inthe quarter ended June 30, 2003 than in the same quarter of the previous year,as lower cash levels and interest rates reduced interest income. In addition,other income was lower due to decreased rental income because we sold abuilding in the second quarter that was previously leased to an unrelatedcompany.

 

**Backlog**

Both total and fundedbacklog increased again during the third fiscal quarter with the biggestincrease coming from defense. Defense backlog has grown significantly duringthe first nine months of the year while transportation backlog has remained atabout the same level. The fourth quarter is expected to be a strong quarter fortransportation systems contract bookings.

 

Not reflected in the backlog amounts below, because they are indefinite delivery, indefinite quantity(IDIQ) contracts, are two significant defense contracts with the U.S.government we were awarded during the quarter ended June 30, 2003. One is a 10-year contract, awarded to Cubicwith a ceiling value of $525 million to develop and deliver the next-generationof rangeless air-to-air and air-to-ground combat training systems. We expectthat the customer will order most, if not all, of the systems specified by thiscontract from us over the next 10 years.

 

The second major IDIQ contract awarded duringthe quarter is one where Cubic and fourother companies will perform research-and-development services for the U.S.government aimed at reducing threats to national defense and homeland securityfrom Weapons of Mass Destruction.

 

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The five companies will share a total of up to $1.26 billion in taskorders, with the first task order expected to be awarded before the end offiscal 2003. The initial term of this contract is five years, with thepossibility of a five-year option.

 
|                   |   | **June 30,  2003** |    | **September 30,  2002** |   |
|------------------------|--------|--------------------|---------|-------------------------|--------|
|                   |   | **(in millions)**  |    |
| **Total  backlog**     |   |               |    |                    |   |
| Transportation systems |   | $                  | 674.2   |                    | $      | 672.1 |   |
| Defense                |   | 761.3              |    | 493.1                   |   |
| Total                  |   | $                  | 1,435.5 |                    | $      | 1,165.2 |   |
| **Funded  backlog**    |   |               |    |                    |   |
| Transportation systems |   | $                  | 547.2   |                    | $      | 545.0 |   |
| Defense                |   | 403.0              |    | 231.8                   |   |
| Total                  |   | $                  | 950.2   |                    | $      | 776.8 |   |

 

In defense, thedifference between total backlog and funded backlog represents options undermulti-year service contracts. Funding for these contracts comes from annualoperating budgets of the U.S. government and the options are normally exercisedannually. Options for the purchase of additional systems or equipment are notincluded in backlog until exercised nor are IDIQ contracts until an order isreceived.

 

In transportationsystems, the difference between total backlog and funded backlog representsextension of the service portion of the Prestige contract for the final fiveyears of the seventeen year contract. We have treated this portion of thecontract as unfunded until we complete the initial system installation phase ofthe contract, which is expected to occur within the next several months.Options for the purchase of additional systems or equipment are not included inbacklog until exercised.

 

**New Accounting Pronouncement**

In July 2002, the FASB issued Statement of Financial AccountingStandards No. 146 (FAS 146), *Accounting for Costs Associated with Exit or DisposalActivities*. The standard requires companies to recognize costsassociated with exit or disposal activities when they are incurred rather thanat the date of a commitment to an exit or disposal plan. The principal effectof applying FAS 146 is on the timing of recognition of these costs. Had thestatement been in effect during fiscal year 2002, our net income for the ninemonths ended June 30, 2002 would have been higher by approximately $300,000 (1cent per share). The new standard was effective as of December 31, 2002 andwill be applied prospectively to exit or disposal activities initiated afterthat date.

 

**Liquidity and Capital Resources**

Cash flows fromoperations were positive in the third quarter by $31 million, which reduced theyear-to-date cash out flow from operations to less than $8 million through June30, 2003. Advances received from customers, a decrease in inventories and otherchanges in working capital contributed to these positive results. Theimprovement in operating cash flows in the third quarter came from both segments,with the larger portion coming from defense.

 

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Cash flows for the firstnine months have been positive from the defense segment, while thetransportation segment has experienced negative cash flows due to the Prestigecontract situation. Of the $72 million total increase in accounts receivableduring the first nine months of the year, approximately $45 million was fromthe Prestige project. The payment terms on this contract were established nearlyfive years ago and the customer is making payments in accordance with thoseterms. However, due to the termination of the subcontractor described above, wehave incurred substantial costs during the nine months ended June 30, 2003 thatwere not originally planned and are included in our claim against thesubcontractor. We expect to recover these costs late next fiscal year throughthe adjudication process; however, the timing cannot be predicted with anycertainty and may take longer. If we are not able to recover our costs from thesubcontractor, it may take several years for cash flows from this contract torecover the additional costs expended this year. As described in the operatingsection above, all of these costs have been taken into consideration in ourprofit recognition for this contract.

 

Cash received from thesale of real estate of $7 million in the second quarter and $5 million in thethird quarter resulted in positive cash flows from investing activities forboth the third quarter and year-to-date. During the first nine months of thefiscal year cash was used to purchase fixed assets, including the outfitting ofour new European transportation systems headquarters located south of London.In addition, we made a scheduled debt payment and paid a semi-annual dividendto shareholders. During the third quarter, short-term borrowings which had beenmade earlier in the year under our borrowing arrangement in the United Kingdomwere repaid.

 

Accumulated Other Comprehensive Income (Loss)improved by $6.1 million for the first nine months of fiscal 2003 because offavorable foreign currency translation adjustments. This leaves a negativebalance of $4.0 million in Accumulated Other Comprehensive Income (Loss) as ofJune 30, 2003. Pension plan accounting generated an accumulated charge inprevious years of $11.2 million, which is partially offset by accumulatedpositive adjustments of $7.2 million, mostly relating to foreign currencytranslation. Based on current stock market and interest rate conditions, wecontinue to believe we will be required to record an additional charge toAccumulated Other Comprehensive Income (Loss) at the end of fiscal 2003 becauseof the under funded position of our pension plans. The amount cannot bedetermined at this time because it depends primarily on conditions as ofSeptember 30, 2003. We do not believe that this potential adjustment will havea material impact on the Company’s financial condition as of that date.

 

The under funded pension situation has alsoresulted in an increase to our pension expense and minimum funding requirementsfor fiscal 2003. Pension expense will increase from $6 million in fiscal 2002to approximately $9 million in fiscal 2003. This higher level of expenseaccrual is reflected in the results for the nine-month period ended June 30,2003. Company contributions to the plans have been approximately $5.2 millionthrough the first nine months of the year compared to $3.1 million during thefirst nine months of last year and minimum funding requirements for the fourthquarter of 2003 will be approximately $1.4 million, compared to $1.0 millioncontributed during the fourth quarter last year.

 

TheCompany’s financial condition remains strong with working capital of $196million, a current ratio of 2.5 to 1 at June 30, 2003 and cash levelssignificantly higher than total debt. We expect that cash on hand and ourability to access the debt markets will be adequate to meet our workingcapital requirements for the foreseeable future.

 

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**CriticalAccounting Policies, Estimates and Judgments**

The Company’s financial statements areprepared in accordance with accounting principles that are generally acceptedin the United States. The preparation of these financial statements requiresmanagement to make estimates and judgments that affect the reported amounts ofassets and liabilities and disclosure of contingent assets and liabilities atthe date of the financial statements and the reported amounts of revenues and expensesduring the reporting period. Management continually evaluates its estimates andjudgments, the most critical of which are those related to revenue recognition,costs to complete contracts, pension costs, valuation of goodwill and incometaxes. Management bases its estimates and judgments on historical experienceand other factors that are believed to be reasonable under the circumstances.Eventual results may differ from these estimates.

 

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ITEM 4 - STATEMENTON DISCLOSURE CONTROLS AND PROCEDURES.

 

Under the supervision and with theparticipation of the Company’s management, including the Chief ExecutiveOfficer and Chief Financial Officer, an evaluation was performed of theeffectiveness of the design and operation of the Company’s disclosure controlsand procedures at June 30, 2003. Based on that evaluation, the Company’smanagement, including the Chief Executive Officer and Chief Financial Officer,concluded that, as of the evaluation date, the Company’s disclosure controlsand procedures were effective in ensuring that all material informationrelating to the Company and its consolidated subsidiaries is made known to themby others within those entities, particularly during the period in which thisquarterly report was prepared. There were no significant changes in theCompany’s internal controls or in other factors that could significantly affectinternal controls subsequent to the date of their evaluation.

 

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**CUBIC CORPORATION**

 

**PART II - OTHER INFORMATION**

 

ITEM 1 - LEGALPROCEEDINGS

 

During the quarter endedMarch 31, 2003, a former subcontractor to the Company on the Prestige projectin London filed a claim against the Company under arbitration provisions of thesubcontract, alleging wrongful termination, in an amount yet to be determined.The Company had previously notified the subcontractor of its intention to filea claim against the subcontractor for failure to perform and in July 2003 the Companyfiled its defense and counterclaim with the arbitrator. The Company believesthat the subcontractor’s claim is without merit and will vigorously pursue itsdefense and counterclaim. The Company believes it will ultimately be able torecover some or all of the damages it has incurred due to the subcontractor’sfailure to perform, but has not anticipated recovery in its calculation ofprofits under its contract with Transys because the conditions required byaccounting principles generally accepted in the United States have not yet beenachieved.

 

 

ITEM 6 - EXHIBITSAND REPORTS ON FORM 8-K

 

(a) The followingexhibits are included herein:

 
| Exhibit No. |   | Description                                 |
|-------------|--------|---------------------------------------------|
| 15 —   |   | Independent Accountants’ Review Report |
| 31.1 — |   | Certification of CEO                        |
| 31.2 — |   | Certification of CFO                        |
| 32.1 — |   | CEO and CFO Certification                   |

 

 

(b) No reports on Form8-K were filed during the quarter.

 

 

SIGNATURES

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|   |           |   | CUBIC CORPORATION |
|--------|----------------|--------|-------------------|
|   |           |   |              |
|   |           |   |              |
| Date   | August 1, 2003 |   |              |   | /S/ W. W.  Boyle |   |
|   |           |   |              |   | W. W. Boyle |
|   |           |   |              |   |   Vice President and CFO |
|   |           |   |              |   |   |
|   |           |   |              |   |   |
| Date   | August 1, 2003 |   |              |   | /S/ T. A. Baz |   |
|   |           |   |              |   | T. A. Baz |
|   |           |   |              |   |  Vice President and Controller |

 

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