**UNITED STATES****SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

**QUARTERLY REPORT**

 

**Pursuant to Section 13 or 15(d) of the Securities ExchangeAct of 1934**

 

**For the Quarter EndedMarch 31, 2004**

 

**1-8931Commission File Number**

 

##### **CUBIC CORPORATION**

Exact Name of Registrant as Specified in itsCharter

 

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

 

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

 

Indicate by check mark whetherthe Registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months,and (2) has been subject to such filing requirements for the past 90 days.

 

Yes  ý   No  o

 

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

 

Yes  ý   No  o

 

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

 

 

----

 

**PARTI - FINANCIAL INFORMATION**

ITEM 1 - FINANCIAL STATEMENTS

 

**CUBIC CORPORATION**

CONSOLIDATED CONDENSED STATEMENTS OF INCOME(UNAUDITED)(amounts in thousands, except per sharedata)

 
|                                          |   | **Six Months  Ended  March 31,** |    | **Three  Months Ended  March 31,** |   |
|-----------------------------------------------|--------|----------------------------------|---------|------------------------------------|--------|
|                                          |   | **2004**                         |    | **2003**                           |   | **2004** |   | **2003** |   |
|                                          |   |                             |    |                               |   |   |   |   |   |
| Sales                                         |   | $                                | 346,216 |                               | $      | 315,513 |   | $ | 175,184 |   | $ | 167,157 |   |
|                                          |   |                             |    |                               |   |   |   |   |   |
| Costs and expenses:                           |   |                             |    |                               |   |   |   |   |   |
| Cost of sales                                 |   | 269,912                          |    | 250,074                            |   | 134,865 |   | 133,703 |   |
| Selling, general and administrative  expenses |   | 49,611                           |    | 41,380                             |   | 26,080 |   | 20,971 |   |
| Research and development                      |   | 1,908                            |    | 3,034                              |   | 1,048 |   | 1,623 |   |
|                                          |   | 321,431                          |    | 294,488                            |   | 161,993 |   | 156,297 |   |
| Operating income                              |   | 24,785                           |    | 21,025                             |   | 13,191 |   | 10,860 |   |
|                                          |   |                             |    |                               |   |   |   |   |   |
| Other income (expenses)                       |   |                             |    |                               |   |   |   |   |   |
| Gain on sale of real estate                   |   | —                           |    | 6,190                              |   | — |   | 6,190 |   |
| Interest expense                              |   | (2,232                           | )       | (1,869                             | )      | (1,179 | ) | (998 | ) |
| Other income                                  |   | 1,333                            |    | 1,470                              |   | 508 |   | 794 |   |
| Income before income taxes                    |   | 23,886                           |    | 26,816                             |   | 12,520 |   | 16,846 |   |
|                                          |   |                             |    |                               |   |   |   |   |   |
| Income taxes                                  |   | 8,100                            |    | 8,900                              |   | 4,200 |   | 5,600 |   |
|                                          |   |                             |    |                               |   |   |   |   |   |
| Net income                                    |   | $                                | 15,786  |                               | $      | 17,916 |   | $ | 8,320 |   | $ | 11,246 |   |
|                                          |   |                             |    |                               |   |   |   |   |   |
| Net income per share                          |   | $                                | 0.59    |                               | $      | 0.67 |   | $ | 0.31 |   | $ | 0.42 |   |
|                                          |   |                             |    |                               |   |   |   |   |   |
| Dividends per common share                    |   | $                                | 0.07    |                               | $      | 0.07 |   | $ | 0.07 |   | $ | 0.07 |   |
|                                          |   |                             |    |                               |   |   |   |   |   |
| Average shares of common stock outstanding    |   | 26,720                           |    | 26,720                             |   | 26,720 |   | 26,720 |   |

 

*See accompanying notes.*

 

2

----

 

**CUBIC CORPORATION**

CONSOLIDATED CONDENSED BALANCE SHEETS(in thousands)

 
|                                            |   | **March 31,  2004** |    | **September  30,  2003** |   |
|-------------------------------------------------|--------|---------------------|---------|--------------------------|--------|
|                                            |   | **(Unaudited)**     |    | **(See note  below)**    |   |
| **ASSETS**                                      |   |                |    |                     |   |
| Current assets:                                 |   |                |    |                     |   |
| Cash and cash equivalents                       |   | $                   | 17,560  |                     | $      | 22,370 |   |
| Marketable securities, available-for-sale       |   | —              |    | 2,994                    |   |
| Accounts receivable                             |   | 297,887             |    | 251,021                  |   |
| Inventories                                     |   | 29,801              |    | 24,922                   |   |
| Deferred income taxes and other current  assets |   | 26,262              |    | 26,963                   |   |
| Total current assets                            |   | 371,510             |    | 328,270                  |   |
|                                            |   |                |    |                     |   |
| Long-term contract receivables                  |   | 41,700              |    | 29,200                   |   |
| Property, plant and equipment – net        |   | 52,978              |    | 52,272                   |   |
| Goodwill                                        |   | 34,380              |    | 33,311                   |   |
| Other assets                                    |   | 18,056              |    | 17,173                   |   |
|                                            |   | $                   | 518,624 |                     | $      | 460,226 |   |
|                                            |   |                |    |                     |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**   |   |                |    |                     |   |
| Current liabilities:                            |   |                |    |                     |   |
| Short-term borrowings                           |   | $                   | 41,552  |                     | $      | 6,254 |   |
| Trade accounts payable                          |   | 16,187              |    | 25,222                   |   |
| Customer advances                               |   | 50,205              |    | 40,422                   |   |
| Other current liabilities                       |   | 43,835              |    | 49,594                   |   |
| Accrued pension liability                       |   | 23,522              |    | 22,669                   |   |
| Income taxes payable                            |   | 2,657               |    | 6,064                    |   |
| Current portion of long-term debt               |   | 5,743               |    | 1,429                    |   |
| Total current liabilities                       |   | 183,701             |    | 151,654                  |   |
|                                            |   |                |    |                     |   |
| Long-term debt                                  |   | 50,679              |    | 47,142                   |   |
| Deferred compensation                           |   | 6,064               |    | 6,138                    |   |
|                                            |   |                |    |                     |   |
| Shareholders’ equity:                      |   |                |    |                     |   |
| Common stock                                    |   | 234                 |    | 234                      |   |
| Additional paid-in capital                      |   | 12,123              |    | 12,123                   |   |
| Retained earnings                               |   | 293,661             |    | 279,746                  |   |
| Accumulated other comprehensive income  (loss)  |   | 8,228               |    | (745                     | )      |
| Treasury stock at cost                          |   | (36,066             | )       | (36,066                  | )      |
|                                            |   | 278,180             |    | 255,292                  |   |
|                                            |   | $                   | 518,624 |                     | $      | 460,226 |   |

 

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

*See accompanying notes.*

 

3

----

 

**CUBIC CORPORATION**

CONSOLIDATED CONDENSED STATEMENTS OF CASHFLOWS (UNAUDITED)(in thousands)

 
|                                                                                         |   | **Six Months  Ended  March 31,** |   | **Three  Months Ended  March 31,** |   |
|----------------------------------------------------------------------------------------------|--------|----------------------------------|--------|------------------------------------|--------|
|                                                                                         |   | **2004**                         |   | **2003**                           |   | **2004** |   | **2003** |   |
| Operating Activities:                                                                        |   |                             |   |                               |   |   |   |   |   |
| Net income                                                                                   |   | $                                | 15,786 |                               | $      | 17,916 |   | $ | 8,320 |   | $ | 11,246 |   |
| Adjustments to reconcile net income to net  cash provided by (used in) operating activities: |   |                             |   |                               |   |   |   |   |   |
| Depreciation and amortization                                                                |   | 4,118                            |   | 3,246                              |   | 2,216 |   | 1,632 |   |
| Gain on sale of real estate                                                                  |   | —                           |   | (6,190                             | )      | — |   | (6,190 | ) |
| Changes in operating assets and liabilities                                                  |   | (59,995                          | )      | (53,659                            | )      | (28,197 | ) | (1,806 | ) |
| NET CASH PROVIDED BY (USED IN) OPERATING  ACTIVITIES                                         |   | (40,091                          | )      | (38,687                            | )      | (17,661 | ) | 4,882 |   |
|                                                                                         |   |                             |   |                               |   |   |   |   |   |
| Investing Activities:                                                                        |   |                             |   |                               |   |   |   |   |   |
| Net additions to property, plant and  equipment                                              |   | (3,349                           | )      | (5,917                             | )      | (1,733 | ) | (3,715 | ) |
| Proceeds from sale of real estate                                                            |   | —                           |   | 7,008                              |   | — |   | 7,008 |   |
| Acquisitions net of cash acquired                                                            |   | (4,934                           | )      | —                             |   | — |   | — |   |
| Proceeds from sale of marketable securities                                                  |   | 3,021                            |   | —                             |   | — |   | — |   |
| Other items - net                                                                            |   | —                           |   | (1                                 | )      | — |   | 1 |   |
| NET CASH PROVIDED BY (USED IN) INVESTING  ACTIVITIES                                         |   | (5,262                           | )      | 1,090                              |   | (1,733 | ) | 3,294 |   |
|                                                                                         |   |                             |   |                               |   |   |   |   |   |
| Financing Activities:                                                                        |   |                             |   |                               |   |   |   |   |   |
| Change in short-term borrowings, net                                                         |   | 34,651                           |   | 5,142                              |   | 22,282 |   | (1,833 | ) |
| Long-term borrowings                                                                         |   | 9,026                            |   | —                             |   | 120 |   | — |   |
| Principal payment on long-term borrowings                                                    |   | (1,428                           | )      | (1,429                             | )      | — |   | — |   |
| Dividends paid                                                                               |   | (1,871                           | )      | (1,871                             | )      | (1,871 | ) | (1,871 | ) |
| NET CASH PROVIDED BY (USED IN) FINANCING  ACTIVITIES                                         |   | 40,378                           |   | 1,842                              |   | 20,531 |   | (3,704 | ) |
|                                                                                         |   |                             |   |                               |   |   |   |   |   |
| Effect of exchange rates on cash                                                             |   | 165                              |   | 828                                |   | (109 | ) | 707 |   |
|                                                                                         |   |                             |   |                               |   |   |   |   |   |
| NET INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS                                        |   | (4,810                           | )      | (34,927                            | )      | 1,028 |   | 5,179 |   |
|                                                                                         |   |                             |   |                               |   |   |   |   |   |
| Cash and cash equivalents at the beginning  of the period                                    |   | 22,370                           |   | 78,656                             |   | 16,532 |   | 38,550 |   |
|                                                                                         |   |                             |   |                               |   |   |   |   |   |
| CASH AND CASH EQUIVALENTS AT THE END OF THE  PERIOD                                          |   | $                                | 17,560 |                               | $      | 43,729 |   | $ | 17,560 |   | $ | 43,729 |   |

 

*See accompanying notes.*

 

4

----

 

**CUBIC CORPORATION**

NOTES TO CONSOLIDATED CONDENSED FINANCIALSTATEMENTS(UNAUDITED)

 

March 31, 2004

 

**Note 1 – Basis for Presentation**

 

Theaccompanying unaudited consolidated condensed financial statements have beenprepared in accordance with generally accepted accounting principles forinterim 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 theopinion of management, all adjustments (consisting of normal recurringaccruals) considered necessary for a fair presentation have been included.Operating results for the quarter ended March 31, 2004 are not necessarilyindicative of the results that may be expected for the year ending September30, 2004. For further information, refer to the consolidated financialstatements and notes thereto included in the Company’s annual report on Form10-K for the year ended September 30, 2003.

 

The preparation of the financial statementsin conformity with accounting principles generally accepted in the UnitedStates requires management to make estimates and assumptions that affect thereported amounts of assets and liabilities and disclosure of contingent assetsand liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period. Actual resultscould differ from those estimates.

 

**Note2 – Balance Sheet Details**

 
|                                    |   | **March 31,  2004** |    | **September  30,  2003** |   |
|-----------------------------------------|--------|---------------------|---------|--------------------------|--------|
| Trade and other receivables             |   | $                   | 6,622   |                     | $      | 11,476 |   |
| Long-term contracts:                    |   |                |    |                     |   |
| Billed                                  |   | 93,207              |    | 67,785                   |   |
| Unbilled                                |   | 240,627             |    | 202,013                  |   |
| Allowance for doubtful accounts         |   | (869                | )       | (1,053                   | )      |
| Total accounts receivable               |   | 339,587             |    | 280,221                  |   |
| Less estimated amount not currently due |   | (41,700             | )       | (29,200                  | )      |
| Current accounts receivable             |   | $                   | 297,887 |                     | $      | 251,021 |   |

 

The amount classified as notcurrently due is an estimate of the amount of long-term contract accountsreceivable that will not be collected within one year from March 31, 2004. Thisamount relates primarily to the PRESTIGE contract in the United Kingdom.

 

5

----

 

Inventories consist of thefollowing (in thousands):

 
|                             |   | **March 31,  2004** |   | **September  30,  2003** |   |
|----------------------------------|--------|---------------------|--------|--------------------------|--------|
| Finished products                |   | $                   | 580    |                     | $      | 593 |   |
| Work in process                  |   | 21,022              |   | 12,300                   |   |
| Raw material and purchased parts |   | 8,199               |   | 12,029                   |   |
| Total inventories                |   | $                   | 29,801 |                     | $      | 24,922 |   |

 

**Note 3 – New AccountingPronouncements**

 

Revised FASB Interpretation No. 46 (FIN46-R), “*Consolidation of Variable InterestEntities*,” was issued in December 2003 and became effective in thequarter ended March 31, 2004. To date, the Company has not invested in anyvariable interest entities for which the Company is the primary beneficiaryand, therefore, management has concluded that the adoption of FIN 46-R had noimpact on its financial position or results of operations.

 

**Note 4 – Comprehensive Income**

 

Comprehensive income is as follows (in thousands):

 
|                                                                                          |   | **Six Months  Ended  March 31,** |   | **Three  Months Ended  March 31,** |   |
|-----------------------------------------------------------------------------------------------|--------|----------------------------------|--------|------------------------------------|--------|
|                                                                                          |   | **2004**                         |   | **2003**                           |   | **2004** |   | **2003** |   |
|                                                                                          |   |                             |   |                               |   |   |   |   |   |
| Net income                                                                                    |   | $                                | 15,786 |                               | $      | 17,916 |   | $ | 8,320 |   | $ | 11,246 |   |
| Foreign currency translation adjustments                                                      |   | 9,035                            |   | 2,085                              |   | 2,297 |   | 175 |   |
| Reclassification adjustment for gain on  sale of marketable securities included in net income |   | (160                             | )      | —                             |   | — |   | — |   |
| Unrealized holding gain on marketable  securities during the period                           |   | —                           |   | 2                                  |   | — |   | — |   |
| Net unrealized gains fromcash flow hedges                                                     |   | 98                               |   | —                             |   | (280 | ) | — |   |
| Comprehensive income                                                                          |   | $                                | 24,759 |                               | $      | 20,003 |   | $ | 10,337 |   | $ | 11,421 |   |

 

6

----

 

**Note5 – Segment Information**

 

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

 
|                         |   | **Six Months  Ended  March 31,** |   | **Three  Months Ended  March 31,** |   |
|------------------------------|--------|----------------------------------|--------|------------------------------------|--------|
|                         |   | **2004**                         |   | **2003**                           |   | **2004** |   | **2003** |   |
|                         |   |                             |   |                               |   |   |   |   |   |
| **Sales:**                   |   |                             |   |                               |   |   |   |   |   |
| Defense                      |   | $                                | 212.4  |                               | $      | 174.0 |   | $ | 108.4 |   | $ | 91.8 |   |
| Transportation systems       |   | 126.2                            |   | 133.8                              |   | 63.1 |   | 71.6 |   |
| Corporate and other          |   | 7.6                              |   | 7.7                                |   | 3.7 |   | 3.8 |   |
| Total sales                  |   | $                                | 346.2  |                               | $      | 315.5 |   | $ | 175.2 |   | $ | 167.2 |   |
|                         |   |                             |   |                               |   |   |   |   |   |
| **Operating income (loss):** |   |                             |   |                               |   |   |   |   |   |
| Defense                      |   | $                                | 17.3   |                               | $      | 9.3 |   | $ | 8.7 |   | $ | 4.8 |   |
| Transportation systems       |   | 9.0                              |   | 12.4                               |   | 5.0 |   | 6.5 |   |
| Corporate and other          |   | (1.5                             | )      | (0.7                               | )      | (0.5 | ) | (0.4 | ) |
| Total operating income       |   | $                                | 24.8   |                               | $      | 21.0 |   | $ | 13.2 |   | $ | 10.9 |   |

 

**Note6 – Financing Arrangements**

 

In February 2004, the Companyentered into a one-year $60 million revolving line of credit arrangement with agroup of U. S. banks.  As of March 31,2004, the Company had $28 million outstanding under its committed line ofcredit in the U.S. at an interest rate of 2.0 percent. In addition, the Companyhad $13.6 million outstanding under short-term borrowing arrangements in theU.K. and New Zealand, which are payable on demand, at an average rate of 5.8percent.

 

**Note 7 – Pension Plans**

 

The components of net periodic pension benefits costs are as follows(in thousands):

 
|                           |   | **Six Months  Ended  March 31,** |   | **Three  Months Ended  March 31,** |   |
|--------------------------------|--------|----------------------------------|--------|------------------------------------|--------|
|                           |   | **2004**                         |   | **2003**                           |   | **2004** |   | **2003** |   |
| Service cost                   |   | $                                | 3,344  |                               | $      | 2,871 |   | $ | 1,646 |   | $ | 1,438 |   |
| Interest cost                  |   | 3,211                            |   | 3,037                              |   | 1,595 |   | 1,519 |   |
| Expected return on plan assets |   | (3,007                           | )      | (2,495                             | )      | (1,493 | ) | (1,248 | ) |
| Amortization of:               |   | —                           |   | —                             |   |   |   |   |   |
| Prior service cost             |   | 2                                |   | 2                                  |   | 1 |   | 1 |   |
| Actuarial (gain) loss          |   | 1,102                            |   | 1,119                              |   | 547 |   | 560 |   |
| Administrative expenses        |   | 33                               |   | 41                                 |   | 17 |   | 21 |   |
| Net pension cost               |   | $                                | 4,685  |                               | $      | 4,575 |   | $ | 2,313 |   | $ | 2,291 |   |

 

7

----

 

**Note8 – Related Party Transaction**

 

In 1992,the Company and a trust established by Walter J. Zable, CEO of the Company, andMrs. Zable agreed that the Company would make advances of premiums payable on asplit-dollar life insurance policy purchased by the trust on the life of Mrs.Zable. In December 2003, the agreement was terminated and the Company becamethe sole owner and beneficiary of the policy. The Company agreed to reimbursethe trust for premiums it paid on the policy if the policy should be sold bythe Company for more than the cash value of the policy and to share with thetrust any gain on the sale in proportion to premiums paid by each party. InApril 2004, the Company reached substantial agreement to sell the policy to twounrelated parties. The net proceeds from the sale are expected to exceed $14million, with more than 90 percent of the proceeds being retained by theCompany and the remainder being returned to the trust as reimbursement forpremiums paid and its share of the gain. The Company’s share of the gain on thesale is expected to be approximately $2 million after applicable income taxesand will be recorded in the quarter ending June 30, 2004.

 

8

----

 

**CUBIC CORPORATION**

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIALCONDITION AND RESULTS OF OPERATIONS

 

March 31, 2004

 

Our two primary businesses arein the defense and transportation industries. These are high technologybusinesses that design, manufacture and integrate complex systems and provideessential services to meet the needs of various federal and regional governmentagencies in the U.S. and other nations around the world.

 

Cubic Defense Applications is a diversifiedsupplier of constructive, live and virtual military training systems, servicesand communication products to the U.S. Department of Defense, other governmentagencies and allied nations. We design instrumented range systems for fighteraircraft, armored vehicles and infantry force-on-force live training; weaponseffects simulations; laser-based tactical engagement and virtual simulationsystems; and precision gunnery solutions. Our services are focused on trainingmission support, computer simulation training, distributed interactivesimulation, development of military training doctrine, forcemodernization services for NATO entrants andfield operations and maintenance. Our communications products are aimedat intelligence, surveillance, and search and rescue markets.

 

Cubic Transportation Systems develops anddelivers innovative fare collection systems for public transit authoritiesworldwide.  We provide hardware,software and multi-agency, multimodal transportation integration technologiesand services that allow the agencies to efficiently collect fares, manage theiroperations, reduce shrinkage and make using public transit a more convenientand attractive option for commuters.

 

**ConsolidatedOverview**

 

Sales growth continued in thesecond quarter of the fiscal year, although at a slower pace than in the firstquarter. Sales for the quarter ended March 31, 2004 were $175 million, anincrease of 5 percent over sales of $167 million for the quarter ended March31, 2003. Defense sales for the quarter increased over last year by 17 percent to $108 million from $92 million inthe same quarter last year. Of this increase, approximately $7 million was fromthe Simulation Systems Division (SSD), formerly ECC International,thebusiness acquired in September 2003. Transportation systems sales were $63million for the quarter compared to $72 million in the second quarter lastyear, a decrease of 12 percent, as discussed in the transportation systemssegment section following.

 

Sales forthe first six months of the fiscal year were up by 10 percent over last year to$346 million, compared to $316 million. Defense segment sales increased by 22percent to $212 million for the first half of fiscal 2004, compared to $174million in 2003. Of this increase $14 million was from the new SimulationSystems Division. Transportation systems sales were $126 million, down from$134 million in the first half of last year, a decrease of 6 percent, as aresult of the decrease in second quarter sales mentioned above.

 

Operating income for the secondquarter was $13.2 million this year compared to $10.9 million last year, anincrease of 21 percent. Defense operating income was much higher in the secondquarter this year, while transportation systems operating income declined fromlast year primarily because of legal and other consulting costs of $1.5 millionincurred in the second quarter this

 

9

----

 

year in preparation for anarbitration hearing scheduled for later this year related to a dispute with aformer subcontractor on the PRESTIGE contract. Net income in the second quarterwas $8.3 million this year, or 31 cents per share, compared to $11.2 millionlast year, or 42 cents per share. Net income in the second quarter last yearincluded a gain from the sale of real estate of approximately $3.7 million,after applicable income taxes, which amounted to 14 cents per share. Excluding thisreal estate gain, net income increased 11 percent over the comparable quarterlast year.

 

Operating income for the firsthalf of the year was up by 18 percent over last year to $24.8 million, comparedto $21.0 million. Again, this increase was due to substantial improvement indefense operating income which was $17.3 million this year, up from $9.3million in the first half of last year. Transportation operating income was$9.0 million this year, down from $12.4 million in the first half of last year,primarily due to legal and other consulting costs of $2.7 million incurred thisyear in preparation for the arbitration hearing mentioned above. Net income forthe first half of the year was somewhat lower this year than last year due tothe real estate gain realized last year. As described above, the real estategain added 14 cents per share last year to the first half earnings. Excludingthis gain, net income per share for the first half would have been 53 centslast year, compared to 59 cents this year, representing an 11 percent increase.

 

Selling, general andadministrative (SG&A) expenses were higher than last year in the secondquarter by $5.1 million and for the first half by $8.2 million. SG&Aexpenses for the first six months increased from 13.1 percent of sales lastyear to 14.3 percent this year. Higher SG&A expenses in the defense segmentcame primarily from SSD, which beganto be consolidated with Cubic in the first quarter of fiscal 2004 and due to anincrease in selling expenses incurred in pursuit of new business opportunities. In the transportation systems segment theSG&A expense increase came primarily from legal and other consulting costsof $2.7 million mentioned above.

 

Ourprojected effective tax rate for fiscal 2004 is 34 percent of pretax income andis reflected in the provision recorded for the first half of the year, comparedto a provision of 33 percent recorded in the first half last year. Thisincrease reflects the fact that more of our income in fiscal 2004 is expectedto come from our U.S. businesses rather than from the U.K., where the corporateincome tax rate is lower. This effective rate could be affected by, among otherfactors, the mix of business between the U.S. and foreign jurisdictions, ourability to take advantage of available tax credits and audits of our records bytaxing authorities.

 

**Defense Segment**

 

As shownin the following table, defense segment sales increased to $108 million in thesecond fiscal quarter this year from $92 million in the comparable quarter lastyear. About $7 million of the increase resulted from the acquisition of SSD,with the remainder of the growth coming from our previously owned businesses.The communications and electronics business unit generated sales growth of 23percent over the second quarter of last year due primarily to a contract we wonlast year to develop a common data link (CDL) for the U.S. Navy. During thequarter we successfully completed a design performance test andcritical design review and received a $21million production order under this contract. Training systems sales were down by almost $11 million during thequarter compared to last year due to a decline in both air combat and laserengagement (MILES) system sales. Although we won a large new air combattraining contract last year, activity on the contract has just begun while workon previous air combat training contracts has been winding down. We believethis is a short-term situation and that air combat training sales should

 

10

----

 

increaseover the next several quarters. Government services sales increased by nearly$25 million in the quarter compared to last year. The biggest single cause ofthis growth was a significant increase in training activity at the Joint ReadinessTraining Center in Louisiana related to the conflict in Iraq.

 

For the first six months of thefiscal year, defense sales were higher than last year by $38 million or 22percent with $14 million of this increase coming from the newly acquired SSD division.Communications and electronics sales were up by nearly 27 percent andgovernment services sales were up by 42 percent compared to the first sixmonths of last year for the reasons identified above. Training systems saleswere up only slightly for the six month period due to lower air combat trainingand MILES sales. MILES sales decreased inthe first half from $25 million last year to $15 million this year. New orderstotaling $24 million received late in the second quarter should help to boostMILES sales over the next few quarters. Overall training systems backlog increasedfrom $267 million on September 30, 2003 to almost $312 million at March 31,2004, which we expect to result in higher training systems sales in the secondhalf of the fiscal year.

 
|                                 |   | **Six Months  Ended  March 31,** |   | **Three  Months Ended  March 31,** |   |
|--------------------------------------|--------|----------------------------------|--------|------------------------------------|--------|
|                                 |   | **2004**                         |   | **2003**                           |   | **2004** |   | **2003** |   |
|                                 |   |                             |   | **(millions)**                     |   |   |   |   |   |
| **Defense Segment Sales**            |   |                             |   |                               |   |   |   |   |   |
| Communications and electronics       |   | $                                | 32.5   |                               | $      | 25.6 |   | $ | 17.0 |   | $ | 13.8 |   |
| Training systems                     |   | 78.4                             |   | 77.0                               |   | 31.9 |   | 42.7 |   |
| Government services                  |   | 101.5                            |   | 71.4                               |   | 59.5 |   | 35.3 |   |
|                                 |   | $                                | 212.4  |                               | $      | 174.0 |   | $ | 108.4 |   | $ | 91.8 |   |
|                                 |   |                             |   |                               |   |   |   |   |   |
| **Defense Segment Operating Income** |   |                             |   |                               |   |   |   |   |   |
| Communications and electronics       |   | $                                | 4.7    |                               | $      | 0.2 |   | $ | 2.5 |   | $ | (1.6 | ) |
| Training systems                     |   | 7.7                              |   | 5.1                                |   | 2.5 |   | 4.4 |   |
| Government services                  |   | 4.9                              |   | 4.0                                |   | 3.7 |   | 2.0 |   |
|                                 |   | $                                | 17.3   |                               | $      | 9.3 |   | $ | 8.7 |   | $ | 4.8 |   |

 

Operating income in the defensesegment for the second quarter was up this year by more than 80 percent overthe second quarter of fiscal 2003, to $8.7 million from $4.8 million. Higheroperating income came from the communications and electronics business unit andthe government services business unit. Communications and electronics operatingincome in 2003 had been impacted by a loss provision of $3 million recorded inthe second quarter related to our investment in new communications technologyfor the Navy CDL contract mentioned above. In addition, communications andelectronics operating income in the second quarter this year was bolstered byperformance on another data link contract with a foreign customer. Governmentservices operating income was higher for the second quarter this year becauseof the higher sales volume mentioned above. Training Systems operating incomewas lower in the second quarter this year than last year primarily because ofthe decrease in sales volume.

 

Operating income was higherthan last year for the first six months in all three defense business units.Communications and electronics and government services operating income was higherfor

 

11

----

 

the same reasons identifiedabove related to second quarter performance. Government services operatingincome for the six month period did not increase in proportion to the salesincrease because of a customer’s exercise of a six-month contract extensionoption that was unfavorable to us. This contract has now been completed and nofurther losses are expected from it. Training systems operating income washigher for the first six months this year because of the completion in thefirst quarter of certain air combat training contracts with good profit marginsand because of the addition of the SSD division.

 

**TransportationSystems Segment**

 

Transportationsystems sales were down for the second quarter, compared to last year, from $72million to $63 million. Sales from the PRESTIGE contract in London declined bynearly $20 million for the quarter compared to last year, as several majormilestones on the project were completed in accordance with the plan for thisprogram. Partially offsetting the decline in sales from this one contract washigher sales from other contracts in the U.S., the U.K. and Australia. We viewthis decrease in reliance on a single customer as a positive trend for thetransportation segment. In addition, we anticipate additional orders from thePRESTIGE contract this year and for the next several years related to therollout of the OysterTM card and other system enhancementopportunities. The long-term prospects for growth in the U.K. market remainvery strong as well as for the European continent, North America and the FarEast. Within the next nine months we plan to bid on well over $1 billion intransportation system opportunities in these regions.

 

For the first six months of thefiscal year transportation systems sales decreased 6 percent, from $134 millionto $126 million. Sales from the PRESTIGE project were down nearly $30 millionfor the six month period for the reason mentioned above. All but $8 million ofthis expected decrease in PRESTIGE sales was replaced by higher sales fromprojects in the U.S., the U.K. andAustralia.

 

Operating income in thetransportation systems segment decreased to $5.0 million in the second quarterof fiscal 2004 from $6.5 million last year. This decrease can be attributed tolegal and other consulting fees of $1.5 million incurred during the quarter inpreparation for the arbitration hearing related to the subcontract disputementioned above. We expect these legal fees to continue through the end of thecalendar year. Lower sales volume from the PRESTIGE project resulted incomparably lower operating profits, however, this was offset by higher salesvolume and corresponding profits from U.K. service contracts and profits from acontract in the Far East, which is now completed.

 

Transportationsystems operating income for the fist six months was $9.0 million this yearcompared to $12.4 million last year. Legal and consulting fees related to thearbitration hearing accounted for $2.7 million of the decrease.With sales from the PRESTIGE project down, operating profits were comparablylower, but as mentioned above, this was mostly offset by higher servicecontract profits and the completed contract in the Far East. Profit margins oncertain contracts in North America have been unfavorably affected by ourinvestment in the development of new software technologies for common farecollection solutions. These costs are being incurred in the performance of thecontracts, but have exceeded our original estimates, thereby reducing theestimated profit margins on these contracts. Although the impact of thissituation is not dramatic, it may continue to limit profit margins on thesecontracts for several quarters.

 

12

----

 

**Backlog**

 

Asreflected in the table below, funded and total backlog increased during thefirst half of the year with the increases coming from both segments. Newcontract awards pushed backlog up to a new all-time high for Cubic. Due to thenumerous opportunities available in our markets at this time, we believe thatthe trend of increased backlog should continue through our fiscal year end andbeyond.

 
|                           |   | **March 31,  2004** |    | **September  30,  2003** |   |
|--------------------------------|--------|---------------------|---------|--------------------------|--------|
|                           |   | **(in  millions)**  |    |
| **Total backlog**              |   |                |    |                     |   |
| Transportation systems         |   | $                   | 809.5   |                     | $      | 761.9 |   |
| Defense                        |   |                |    |                     |   |
| Communications and electronics |   | 74.6                |    | 68.8                     |   |
| Training systems               |   | 311.6               |    | 267.3                    |   |
| Government services            |   | 394.4               |    | 406.9                    |   |
| Total defense                  |   | 780.6               |    | 743.0                    |   |
| Total                          |   | $                   | 1,590.1 |                     | $      | 1,504.9 |   |
|                           |   |                |    |                     |   |
| **Funded backlog**             |   |                |    |                     |   |
| Transportation systems         |   | $                   | 809.5   |                     | $      | 620.2 |   |
| Defense                        |   |                |    |                     |   |
| Communications and electronics |   | 74.6                |    | 68.8                     |   |
| Training systems               |   | 311.6               |    | 267.3                    |   |
| Government services            |   | 82.2                |    | 52.0                     |   |
| Total defense                  |   | 468.4               |    | 388.1                    |   |
| Total                          |   | $                   | 1,277.9 |                     | $      | 1,008.3 |   |
|                                |        |                     |         |                          |        |  |  |  |  |  |  |  |

 

Due tothe completion during the quarter ended March 31, 2004 of all major PRESTIGEmilestones related to the initial system installation phase of the contract,the final five years of the seventeen year contract were reclassified fromunfunded to funded backlog. This change had no impact on total backlog. Optionsfor the purchase of additional systems or equipment are not included in backloguntil exercised.

 

Indefense, the difference between total backlog and funded backlog representsoptions under multiyear service contracts. Funding for these contracts comesfrom annual operating budgets of the U.S. government and the options arenormally exercised annually. Options for the purchase of additional systems orequipment are not included in backlog until exercised nor are indefinitedelivery, indefinite quantity (IDIQ) contracts until an order is received.

 

**New AccountingPronouncements**

 

Revised FASB Interpretation No. 46 (FIN46-R), “*Consolidation of Variable InterestEntities*,” was issued in December 2003 and became effective in thequarter ended March 31, 2004. To date, we have not invested in any variableinterest entities for which the Company is the primary beneficiary and,therefore, we have concluded that the adoption of FIN 46-R had no impact on ourfinancial position or results of operations.

 

13

----

 

**Liquidityand Capital Resources**

 

Cash flows from operations werenegative for the quarter by $18 million due primarily to growth in accountsreceivable. One cause of this growth was a defense customer payment ofapproximately $12 million that was due to be paid in March but was delayed foradministrative reasons until early April, when it was paid.

 

Transportation systems accountsreceivable grew during the quarter, resulting in negative cash flows, becauseof delays in meeting payment milestones on several North American contracts. Weexpect this situation to improve in the remaining two quarters of fiscal 2004as we reach certain payment milestones which should trigger payments from thecustomers this year. If these payments are received when anticipated, positivecash flows from the transportation segment in the second half should exceed thenegative cash flows experienced in the first half of the year. Foreign currencytranslation also caused accounts receivable to grow by $2 million in the secondquarter and $9 million for the first half of the year. Although theseadjustments impacted the accounts receivable balance, they had no impact oncash flows.

 

During the second quarterinvesting activities consisted of $1.7 million of capital expenditures.Financing activities included borrowing a net $22.3 million for the quarter ona short-term basis for working capital needs and a dividend payment of $1.9million.

 

During the second quarter wefinalized arrangements for a committed short-term credit facility for workingcapital needs from a group of financial institutions, aggregating $60 million.As of March 31, 2004, $28 million of this amount was used, leaving $32 millionavailable. Subsequent to March 31, 2004 through the date of this report, cashflows from operations have been positive, enabling us to repay $15 million ofthe short-term borrowings in the U.S. and $6 million in the U.K.

 

Accumulated Other ComprehensiveIncome (Loss) improved by $2 million in the second quarter primarily because offavorable foreign currency translation adjustments. This brings the balance ofAccumulated Other Comprehensive Income up to $8 million as of March 31, 2004.

 

Ourfinancial condition remains strong with working capital of $188 million and acurrent ratio of 2.0 to 1 at March 31, 2004. We expect that cash on hand andour ability to access the debt markets will be adequate to meet our workingcapital requirements for the foreseeable future.

 

**Critical Accounting Policies, Estimates andJudgments**

 

Our financial statements areprepared in accordance with accounting principles that are generally acceptedin the United States. The preparation of these financial statements requires usto make estimates and judgments that affect the reported amounts of assets and liabilities, and disclosure ofcontingent assets and liabilities at the date of the financial statements, andthe reported amounts of revenues and expenses during the reporting period. Wecontinually evaluate our estimates and judgments, the most critical of whichare those related to revenue recognition, income taxes, valuation of goodwilland pension costs. We base our estimates and judgments on historical experienceand other factors that we believe to be reasonable under the circumstances.Materially different results can occur as circumstances change and additionalinformation becomes known.

 

14

----

 

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

 

Forfurther information, refer to the consolidated financial statements and notesthereto included in the Company’s annual report on Form 10-K for the year endedSeptember 30, 2003.

 

 

**CAUTIONARY STATEMENTABOUT FORWARD-LOOKING INFORMATION**

 

This report, including thedocuments that we incorporate by reference, contains forward-looking statementswithin the meaning of Section 21E of the Securities Exchange Act of 1934, asamended, that are subject to the “safe harbor” created by those sections. Anystatements about our expectations, beliefs, plans, objectives, assumptions orfuture events or our future financial and/or operating performance are nothistorical and may be forward-looking. These statements are often, but notalways, made through the use of words or phrases such as “may,” “will,”“anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,”“believe,” “intend,” “predict,” “potential,” “opportunity” and similar words orphrases or the negatives of these words or phrases.  These statements involve estimates, assumptions anduncertainties, including those discussed in “Risk Factors” in the Company’s annual report on Form 10-K forthe year ended September 30, 2003, and throughout this filing that couldcause actual results to differ materially from those expressed in thesestatements.

 

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

 

ITEM 4 - STATEMENT ONDISCLOSURE CONTROLS AND PROCEDURES

 

Wemaintain disclosure controls and procedures that are designed to ensure thatinformation required to be disclosed in our Exchange Act reports is recorded,processed, summarized and reported within the time periods specified in theSEC’s rules and forms, and that such information is accumulated andcommunicated to our management, including our Chief Executive Officer and ChiefFinancial Officer, as appropriate, to allow timely decisions

 

15

----

 

regardingrequired disclosure. Management necessarily applied its judgment in assessingthe costs and benefits of such controls and procedures which, by their nature,can provide only reasonable assurance regarding management’s controlobjectives.

 

Wecarried out an evaluation, under the supervision and with the participation ofour management, including our Chief Executive Officer along with our ChiefFinancial Officer, on the effectiveness of the design and operation of ourdisclosure controls and procedures pursuant to Exchange Act Rule 13a-15, as ofthe end of the fiscal period covered by this report on Form 10-Q. Based uponthat evaluation, each of our Chief Executive Officer and our Chief FinancialOfficer concluded that our disclosure controls and procedures are effective intimely alerting them to material information relating to us (including ourconsolidated subsidiaries) required to be included in our Exchange Act reports.There have been no significant changes in our internal controls or in otherfactors that could significantly affect internal controls subsequent to thedate we carried out our evaluation.

 

16

----

 

**CUBIC CORPORATION**

 

**PARTII - OTHER INFORMATION**

 

ITEM 4 – SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS

 

TheCompany held its annual meeting of shareholders on February 10, 2004.  Matters voted upon were (1) election ofdirectors, and (2) the ratification of the Board’s selection of Ernst &Young LLP as the Company’s independent auditors for the fiscal year endingSeptember 30, 2004.

 

Thenumber of votes cast for, against or withheld, with respect to each matter areset out below.

 
| **Director**                            |   | **For**    |   | **Against** |   | **Withheld** |   |
|-----------------------------------------|--------|------------|--------|-------------|--------|--------------|--------|
| Walter J. Zable                         |   | 23,556,681 |   | —      |   | 2,029,086    |   |
| Walter C. Zable                         |   | 21,323,904 |   | —      |   | 4,261,863    |   |
| Dr. Richard C. Atkinson                 |   | 21,478,586 |   | —      |   | 4,107,181    |   |
| Robert T. Managan                       |   | 23,837,344 |   | —      |   | 1,748,423    |   |
| Raymond E. Peet                         |   | 23,839,582 |   | —      |   | 1,746,185    |   |
| William W. Boyle                        |   | 23,560,595 |   | —      |   | 2,025,172    |   |
| Raymond L. DeKozan                      |   | 23,809,213 |   | —      |   | 1,776,554    |   |
|                                    |   |       |   |        |   |         |   |
| 2. Ratification of Independent Auditors |   | 25,005,527 |   | 565,350     |   | 14,890       |   |

 

 

ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K

 

(a) Thefollowing exhibits 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 Form 8-K were filed during the quarterended March 31, 2004.

 

17

----

 

SIGNATURES

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|                    | CUBIC CORPORATION             |
|-------------------------|-------------------------------|
|                    |                          |
| Date:  May 5, 2004 | /s/  W. W. Boyle         |   |
|                    | W. W. Boyle                   |
|                    | Vice President and CFO        |
|                    |                          |
| Date:  May 5, 2004 | /s/ T. A. Baz                 |   |
|                    | T. A. Baz                     |
|                    | Vice President and Controller |
|                         |                               |  |  |

 

18

----