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

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

**QUARTERLY REPORT**

 

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

 

**Forthe Quarter Ended June 30, 2004**

 

**1-8931**

**CommissionFile Number**

 

##### **CUBIC CORPORATION**

Exact Name ofRegistrant as Specified in its Charter

 

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

 

**9333Balboa Avenue**

**SanDiego, 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 Actof 1934 during the preceding 12 months, and (2) has been subject to such filingrequirements for the past 90 days.

 

Yes ý  Noo

 

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

 

Yes ý  Noo

 

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

 

 

----

 

**PART I -FINANCIAL INFORMATION**

ITEM 1 -FINANCIAL STATEMENTS

 

### **CUBIC CORPORATION**

CONSOLIDATEDCONDENSED STATEMENTS OF INCOME (UNAUDITED)

(amounts in thousands, except per share data)

 
| ** **                                    | ** ** | **Nine Months Ended  June 30,** | ** ** | **Three Months Ended  June 30,** | ** ** |
|-----------------------------------------------|------------|--------------------------------------|------------|---------------------------------------|------------|
| ** **                                    | ** ** | **2004**                             | ** ** | **2003**                              | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                          |       |                                 |       |                                  |       |   |   |   |   |
| Sales                                         |       | $                                    | 537,045    |                                  | $          | 473,463 |   | $ | 190,829 |   | $ | 157,950 |   |
|                                          |       |                                 |       |                                  |       |   |   |   |   |
| Costs and expenses:                           |       |                                 |       |                                  |       |   |   |   |   |
| Cost of sales                                 |       | 417,615                              |       | 372,047                               |       | 147,703 |   | 121,973 |   |
| Selling, general and administrative  expenses |       | 76,432                               |       | 63,249                                |       | 26,821 |   | 21,869 |   |
| Research and development                      |       | 3,214                                |       | 3,852                                 |       | 1,306 |   | 818 |   |
|                                          |       | 497,261                              |       | 439,148                               |       | 175,830 |   | 144,660 |   |
| Operating income                              |       | 39,784                               |       | 34,315                                |       | 14,999 |   | 13,290 |   |
|                                          |       |                                 |       |                                  |       |   |   |   |   |
| Other income (expenses)                       |       |                                 |       |                                  |       |   |   |   |   |
| Gain on sale of real estate                   |       | —                               |       | 8,426                                 |       | — |   | 2,236 |   |
| Gain on sale of insurance policy              |       | 4,237                                |       | —                                |       | 4,237 |   | — |   |
| Interest expense                              |       | (3,347                               | )          | (2,775                                | )          | (1,115 | ) | (906 | ) |
| Other income                                  |       | 1,630                                |       | 1,879                                 |       | 297 |   | 409 |   |
| Income before income taxes                    |       | 42,304                               |       | 41,845                                |       | 18,418 |   | 15,029 |   |
|                                          |       |                                 |       |                                  |       |   |   |   |   |
| Income taxes                                  |       | 14,800                               |       | 13,800                                |       | 6,700 |   | 4,900 |   |
|                                          |       |                                 |       |                                  |       |   |   |   |   |
| Net income                                    |       | $                                    | 27,504     |                                  | $          | 28,045 |   | $ | 11,718 |   | $ | 10,129 |   |
|                                          |       |                                 |       |                                  |       |   |   |   |   |
| Net income per share                          |       | $                                    | 1.03       |                                  | $          | 1.05 |   | $ | 0.44 |   | $ | 0.38 |   |
|                                          |       |                                 |       |                                  |       |   |   |   |   |
| Dividends per common share                    |       | $                                    | 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 CONDENSEDBALANCE SHEETS

(in thousands)

 
| ** **                                      | ** ** | **June 30,  2004** | ** ** | **September 30,  2003** | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|------------------------------|------------|
| ** **                                      | ** ** | **(Unaudited)**         | ** ** | **(See note below)**         | ** ** |
| **ASSETS**                                      |       |                    |       |                         |       |
| Current assets:                                 |       |                    |       |                         |       |
| Cash and cash equivalents                       |       | $                       | 30,091     |                         | $          | 22,370 |   |
| Marketable securities, available-for-sale       |       | —                  |       | 2,994                        |       |
| Accounts receivable                             |       | 277,005                 |       | 251,021                      |       |
| Inventories                                     |       | 27,596                  |       | 24,922                       |       |
| Deferred income taxes and other current  assets |       | 26,179                  |       | 26,963                       |       |
| Total current assets                            |       | 360,871                 |       | 328,270                      |       |
|                                            |       |                    |       |                         |       |
| Long-term contract receivables                  |       | 47,900                  |       | 29,200                       |       |
| Property, plant and equipment - net             |       | 52,998                  |       | 52,272                       |       |
| Goodwill                                        |       | 35,472                  |       | 33,311                       |       |
| Other assets                                    |       | 8,684                   |       | 17,173                       |       |
|                                            |       | $                       | 505,925    |                         | $          | 460,226 |   |
|                                            |       |                    |       |                         |       |
| **LIABILITIES AND  SHAREHOLDERS’ EQUITY**  |       |                    |       |                         |       |
| Current liabilities:                            |       |                    |       |                         |       |
| Short-term borrowings                           |       | $                       | 9,277      |                         | $          | 6,254 |   |
| Trade accounts payable                          |       | 24,814                  |       | 25,222                       |       |
| Customer advances                               |       | 46,087                  |       | 40,422                       |       |
| Other current liabilities                       |       | 44,325                  |       | 49,594                       |       |
| Accrued pension liability                       |       | 20,366                  |       | 22,669                       |       |
| Income taxes payable                            |       | 7,872                   |       | 6,064                        |       |
| Current portion of long-term debt               |       | 6,062                   |       | 1,429                        |       |
| Total current liabilities                       |       | 158,803                 |       | 151,654                      |       |
|                                            |       |                    |       |                         |       |
| Long-term debt                                  |       | 50,257                  |       | 47,142                       |       |
| Deferred compensation                           |       | 6,205                   |       | 6,138                        |       |
|                                            |       |                    |       |                         |       |
| Shareholders’ equity:                      |       |                    |       |                         |       |
| Common stock                                    |       | 234                     |       | 234                          |       |
| Additional paid-in capital                      |       | 12,123                  |       | 12,123                       |       |
| Retained earnings                               |       | 305,379                 |       | 279,746                      |       |
| Accumulated other comprehensive income  (loss)  |       | 8,990                   |       | (745                         | )          |
| Treasury stock at cost                          |       | (36,066                 | )          | (36,066                      | )          |
|                                            |       | 290,660                 |       | 255,292                      |       |
|                                            |       | $                       | 505,925    |                         | $          | 460,226 |   |

 

*Note: The balance sheet at September 30,2003 has been derived from the audited financial statements at that date.*

# *See accompanying notes.*

 

3

----

 

**CUBICCORPORATION**

CONSOLIDATEDCONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

 
| ** **                                                                                   | ** ** | **Nine Months Ended  June 30,** | ** ** | **Three Months Ended  June 30,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                   | ** ** | **2004**                             | ** ** | **2003**                              | ** ** | **2004** | ** ** | **2003** | ** ** |
| Operating Activities:                                                                        |       |                                 |       |                                  |       |   |   |   |   |
| Net income                                                                                   |       | $                                    | 27,504     |                                  | $          | 28,045 |   | $ | 11,718 |   | $ | 10,129 |   |
| Adjustments to reconcile net income to net  cash provided by (used in) operating activities: |       |                                 |       |                                  |       |   |   |   |   |
| Depreciation and amortization                                                                |       | 6,191                                |       | 5,025                                 |       | 2,073 |   | 1,779 |   |
| Gain on sale of insurance policy / real  estate                                              |       | (4,237                               | )          | (8,426                                | )          | (4,237 | ) | (2,236 | ) |
| Changes in operating assets and liabilities                                                  |       | (37,070                              | )          | (32,320                               | )          | 22,925 |   | 21,339 |   |
| NET CASH PROVIDED BY (USED IN) OPERATING  ACTIVITIES                                         |       | (7,612                               | )          | (7,676                                | )          | 32,479 |   | 31,011 |   |
|                                                                                         |       |                                 |       |                                  |       |   |   |   |   |
| Investing Activities:                                                                        |       |                                 |       |                                  |       |   |   |   |   |
| Net additions to property, plant and  equipment                                              |       | (5,258                               | )          | (7,288                                | )          | (1,909 | ) | (1,371 | ) |
| Proceeds from sale of insurance policy /  real estate                                        |       | 13,337                               |       | 11,998                                |       | 13,337 |   | 4,990 |   |
| Acquisition net of cash acquired                                                             |       | (4,934                               | )          | —                                |       | — |   | — |   |
| Proceeds from sale of marketable securities                                                  |       | 3,021                                |       | —                                |       | — |   | — |   |
| Other items - net                                                                            |       | —                               |       | (15                                   | )          | — |   | (14 | ) |
| NET CASH PROVIDED BY INVESTING ACTIVITIES                                                    |       | 6,166                                |       | 4,695                                 |       | 11,428 |   | 3,605 |   |
|                                                                                         |       |                                 |       |                                  |       |   |   |   |   |
| Financing Activities:                                                                        |       |                                 |       |                                  |       |   |   |   |   |
| Change in short-term borrowings, net                                                         |       | 2,644                                |       | —                                |       | (32,007 | ) | (5,142 | ) |
| Long-term borrowings                                                                         |       | 9,026                                |       | —                                |       | — |   | — |   |
| Principal payment on long-term borrowings                                                    |       | (1,745                               | )          | (1,429                                | )          | (317 | ) | — |   |
| Dividends paid                                                                               |       | (1,871                               | )          | (1,871                                | )          | — |   | — |   |
| NET CASH PROVIDED BY (USED IN) FINANCING  ACTIVITIES                                         |       | 8,054                                |       | (3,300                                | )          | (32,324 | ) | (5,142 | ) |
|                                                                                         |       |                                 |       |                                  |       |   |   |   |   |
| Effect of exchange rates on cash                                                             |       | 1,113                                |       | 1,053                                 |       | 948 |   | 225 |   |
|                                                                                         |       |                                 |       |                                  |       |   |   |   |   |
| NET INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS                                        |       | 7,721                                |       | (5,228                                | )          | 12,531 |   | 29,699 |   |
|                                                                                         |       |                                 |       |                                  |       |   |   |   |   |
| Cash and cash equivalents at the beginning  of the period                                    |       | 22,370                               |       | 78,656                                |       | 17,560 |   | 43,729 |   |
|                                                                                         |       |                                 |       |                                  |       |   |   |   |   |
| CASH AND CASH EQUIVALENTS AT THE END OF THE  PERIOD                                          |       | $                                    | 30,091     |                                  | $          | 73,428 |   | $ | 30,091 |   | $ | 73,428 |   |

 

# *See accompanying notes.*

 

4

----

 

**CUBIC CORPORATION**

NOTES TO CONSOLIDATED CONDENSED FINANCIALSTATEMENTS

(UNAUDITED)

 

June 30,2004

 

**Note 1 – Basis for Presentation**

 

The accompanying unaudited consolidatedcondensed financial statements have been prepared in accordance with generallyaccepted accounting principles for interim financial information and with theinstructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,they do not include all information and footnotes required by U.S. generallyaccepted accounting principles for complete financial statements.

 

In the opinion of management, all adjustments(consisting of normal recurring accruals) considered necessary for a fairpresentation have been included. Operating results for the quarter endedJune 30, 2004 are not necessarily indicative of the results that may beexpected for the year ending September 30, 2004. For further information,refer to the consolidated financial statements and notes thereto included inthe Company’s annual report on Form 10-K for the year ended September 30,2003.

 

The preparation of the financial statementsin conformity with U.S. generally accepted accounting principles requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period. Actual results could differ fromthose estimates.

 

### **Note 2 – Balance Sheet Details**

 

The components of accounts receivable are as follows (in thousands):

 
| ** **                              | ** ** | **June 30,  2004** | ** ** | **September 30,  2003** | ** ** |
|-----------------------------------------|------------|-------------------------|------------|------------------------------|------------|
| Trade and other receivables             |       | $                       | 7,568      |                         | $          | 11,476 |   |
| Long-term contracts:                    |       |                    |       |                         |       |
| Billed                                  |       | 68,759                  |       | 67,785                       |       |
| Unbilled                                |       | 249,399                 |       | 202,013                      |       |
| Allowance for doubtful accounts         |       | (821                    | )          | (1,053                       | )          |
| Total accounts receivable               |       | 324,905                 |       | 280,221                      |       |
| Less estimated amount not currently due |       | (47,900                 | )          | (29,200                      | )          |
| Current accounts receivable             |       | $                       | 277,005    |                         | $          | 251,021 |   |

 

The amount classified as not currently due isan estimate of the amount of long-term contract accounts receivable that willnot be collected within one year from June 30, 2004. This amount relatesprimarily to the PRESTIGE contract in the United Kingdom.

 

Inventories consist of the following (in thousands):

 
| ** **                       | ** ** | **June 30,  2004** | ** ** | **September 30,  2003** | ** ** |
|----------------------------------|------------|-------------------------|------------|------------------------------|------------|
| Finished products                |       | $                       | 565        |                         | $          | 593 |   |
| Work in process                  |       | 18,946                  |       | 12,300                       |       |
| Raw material and purchased parts |       | 8,085                   |       | 12,029                       |       |
| Total inventories                |       | $                       | 27,596     |                         | $          | 24,922 |   |

 

5

----

 

The changes in the carrying amount of goodwill for the nine-monthperiod ended June 30, 2004 are as follows:

 
| ** **                                                 | ** ** | **Transportation  Segment** | ** ** | **Defense  Segment** | ** ** | **Total** | ** ** |
|------------------------------------------------------------|------------|-----------------------------|------------|----------------------|------------|-----------|------------|
| ** **                                                 | ** ** | **(in thousands)**          | ** ** |
|                                                       |       |                        |       |                 |       |      |       |
| Balances October 1, 2003                              |       | $                           | 7,144      |                 | $          | 26,167    |       | $ | 33,311 |   |
| Foreign currency exchange rate changes                     |       | 695                         |       | 100                  |       | 795       |       |
| Purchase price allocation adjustments for  ECC acquisition |       | —                      |       | 1,366                |       | 1,366     |       |
|                                                       |       |                        |       |                 |       |      |       |
| Balances June 30, 2004                                |       | $                           | 7,839      |                 | $          | 27,633    |       | $ | 35,472 |   |

 

**Note 3 – Comprehensive Income**

 

Comprehensive income is as follows (in thousands):

 
| ** **                                                                                    | ** ** | **Nine Months Ended  June 30,** | ** ** | **Three Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                    | ** ** | **2004**                             | ** ** | **2003**                              | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                                          |       |                                 |       |                                  |       |   |   |   |   |
| Net income                                                                                    |       | $                                    | 27,504     |                                  | $          | 28,045 |   | $ | 11,718 |   | $ | 10,129 |   |
| Foreign currency translation adjustments                                                      |       | 9,224                                |       | 6,082                                 |       | 189 |   | 3,997 |   |
| Reclassification adjustment for gain on  sale of marketable securities included in net income |       | (160                                 | )          | —                                |       | — |   | — |   |
| Unrealized holding gain on marketable securities  during the period                           |       | —                               |       | 27                                    |       | — |   | 25 |   |
| Net unrealized gains from cash flow hedges                                                    |       | 670                                  |       | —                                |       | 572 |   | — |   |
| Comprehensive income                                                                          |       | $                                    | 37,238     |                                  | $          | 34,154 |   | $ | 12,479 |   | $ | 14,151 |   |

 

### **Note 4 – Segment Information**

 

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

 
| ** **                    | ** ** | **Nine Months Ended  June 30,** | ** ** | **Three Months Ended  June 30,** | ** ** |
|-------------------------------|------------|--------------------------------------|------------|---------------------------------------|------------|
| ** **                    | ** ** | **2004**                             | ** ** | **2003**                              | ** ** | **2004** | ** ** | **2003** | ** ** |
|                          |       |                                 |       |                                  |       |   |   |   |   |
| **Sales:**                    |       |                                 |       |                                  |       |   |   |   |   |
| Defense                       |       | $                                    | 325.1      |                                  | $          | 267.9 |   | $ | 112.7 |   | $ | 93.9 |   |
| Transportation systems        |       | 200.4                                |       | 194.1                                 |       | 74.2 |   | 60.3 |   |
| Corporate and other           |       | 11.5                                 |       | 11.5                                  |       | 3.9 |   | 3.8 |   |
| Total sales                   |       | $                                    | 537.0      |                                  | $          | 473.5 |   | $ | 190.8 |   | $ | 158.0 |   |
|                          |       |                                 |       |                                  |       |   |   |   |   |
| **Operating income  (loss):** |       |                                 |       |                                  |       |   |   |   |   |
| Defense                       |       | $                                    | 26.2       |                                  | $          | 15.5 |   | $ | 8.9 |   | $ | 6.2 |   |
| Transportation systems        |       | 15.8                                 |       | 19.6                                  |       | 6.8 |   | 7.2 |   |
| Corporate and other           |       | (2.2                                 | )          | (0.8                                  | )          | (0.7 | ) | (0.1 | ) |
| Total operating income        |       | $                                    | 39.8       |                                  | $          | 34.3 |   | $ | 15.0 |   | $ | 13.3 |   |

 

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

 

In February 2004, the Company entered into a one-year $60 millionrevolving line of credit arrangement with a group of U. S. banks.  As of June 30, 2004, the Company hadrepaid all amounts under this borrowing arrangement and under its short-termborrowing arrangement in the U.K. At June 30, 2004, the Company had $9.3million outstanding under a short-term borrowing arrangement in New Zealand,which is payable on demand, at a rate of 6.9%.

 

6

----

 

**Note 6 – Pension Plans**

 

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

 
| ** **                     | ** ** | **Nine Months Ended  June 30,** | ** ** | **Three Months Ended  June 30,** | ** ** |
|--------------------------------|------------|--------------------------------------|------------|---------------------------------------|------------|
| ** **                     | ** ** | **2004**                             | ** ** | **2003**                              | ** ** | **2004** | ** ** | **2003** | ** ** |
| Service cost                   |       | $                                    | 5,038      |                                  | $          | 4,307 |   | $ | 1,694 |   | $ | 1,436 |   |
| Interest cost                  |       | 4,825                                |       | 4,556                                 |       | 1,614 |   | 1,519 |   |
| Expected return on plan assets |       | (4,518                               | )          | (3,743                                | )          | (1,511 | ) | (1,248 | ) |
| Amortization of:               |       | —                               |       | —                                |       |   |   |   |   |
| Prior service cost             |       | 3                                    |       | 3                                     |       | 1 |   | 1 |   |
| Actuarial (gain) loss          |       | 1,302                                |       | 1,679                                 |       | 200 |   | 560 |   |
| Administrative expenses        |       | 50                                   |       | 62                                    |       | 17 |   | 21 |   |
| Net pension cost               |       | $                                    | 6,700      |                                  | $          | 6,864 |   | $ | 2,015 |   | $ | 2,289 |   |

 

### **Note 7 – Related Party Transaction**

 

In 1992, the Company and a trust establishedby Walter J. Zable, CEO of the Company, and Mrs. Zable agreed that the Companywould make advances of premiums payable on a split-dollar life insurance policypurchased by the trust on the life of Mrs. Zable. In December 2003, theagreement was terminated and the Company became the sole owner and beneficiaryof the policy. The Company agreed to reimburse the trust for premiums it paidon the policy if the policy should be sold by the Company for more than thecash value of the policy and to share with the trust any gain on the sale inproportion to premiums paid by each party. During the quarter endedJune 30, 2004, the Company sold the policy to two unrelated parties forapproximately $14.5 million, net of broker commissions. Of this amount $1.2million was paid to the Zable family trust as reimbursement for premiums paidand its proportional share of the gain on the sale. The remainder of theproceeds, totaling $13.3 million was retained by the Company, generating a gainon the sale of $4.2 million, before applicable income taxes. Due to a differenttax basis in the policy than book basis, applicable income taxes are estimatedto be approximately $2.1 million, yielding a net gain after taxes of $2.1million.

 

7

----

 

### **CUBIC CORPORATION**

ITEM 2 -MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION ANDRESULTS OF OPERATIONS

 

June 30,2004

 

Our two primary businesses are in the defense and transportationindustries. These are high technology businesses that design, manufacture andintegrate complex systems and provide essential services to meet the needs ofvarious federal and regional government agencies in the U.S. and other nationsaround the world.

 

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

 

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

 

**Consolidated Overview**

 

Since our operating cycle is long-term and involves many types ofdevelopment and production contracts with varying delivery schedules andservice contracts with varying levels of effort, the results of operations fora particular quarter, or quarter-to-quarter comparisons of recorded sales andprofits, may not be indicative of future operating results. The followingdiscussions of comparative results should be viewed in this context.

 

Sales for the third quarter of fiscal 2004 were $191 million, anincrease of 21% over the third quarter of 2003, when sales were $158 million.For the first nine months of fiscal 2004, sales were $537 million compared to$474 million last year, an increase of 13%. The sales increases for the quarterand the nine-month period came from both the defense and transportation segments,with the majority coming from defense. See the segment discussions followingfor further details.

 

Operating income for the third quarter was$15.0 million this year compared to $13.3 million last year, an increase of13%. Operating income for the first nine months of the year was up by 16% overlast year to $39.8 million, compared to $34.3 million. Defense operating incomewas significantly higher in the third quarter and for the first nine monthsthis year. Transportation systems operating income declined from last year forthe quarter and the first nine months because of legal and consulting costs of$1.9 million and $4.7 million incurred this year in the third quarter andnine-month period, respectively. These costs were incurred in preparation for anarbitration hearing scheduled for later this year, related to a dispute with aformer subcontractor on the PRESTIGE contract. See the segment discussionsfollowing for further details.

 

Net income in the third quarter was $11.7million this year, or 44 cents per share, compared to $10.1 million last year,or 38 cents per share. Net income for the first nine months of this year was$27.5 million, or $1.03 per share, compared to $28.0 million, or $1.05 pershare, last year. Net income in the third quarter this year included a gainfrom the sale of a life insurance policy of approximately $2.1 million, afterapplicable income taxes, which amounted to 8 cents per share. Gains on the saleof real estate in both the second and third quarters last year added approximately$5.3 million, or 20 cents per share, to earnings in the first nine months, and$1.6 million, or 6 cents per share, in the third quarter

 

Selling, general and administrative(SG&A) expenses were higher than last year for the first nine months by $13.2million and increased from 13.3% of sales last year to 14.2% this year. HigherSG&A expenses in the defense segment came primarily from the SimulationSystems Division (SSD), formerly ECC International, the business acquired inSeptember 2003 and due to an

 

8

----

 

increase inselling expenses incurred in pursuit of new business opportunities. In thetransportation systems segment the SG&A expense increase came primarilyfrom the legal and consulting costs of $4.7 million mentioned above. Withoutthese additional legal and consulting costs, SG&A as a percentage of saleswould have been 13.4% for the first nine months of fiscal 2004.

 

Our projected effective tax rate for fiscal 2004 is 35% of pretaxincome and is reflected in the provision recorded for the first nine months ofthe year, compared to a provision of 33% recorded for the same period lastyear. The increase in the projected rate for fiscal 2004 resulted primarilyfrom the gain on the sale of the insurance policy mentioned above, because thegain for tax purposes is higher than the book gain. This effective rate couldbe affected by, among other factors, the mix of business between the U.S. andforeign jurisdictions, our ability to take advantage of available tax creditsand audits of our records by taxing authorities.

 

**Defense Segment**

 
| ** **                            | ** ** | **Nine Months Ended  June 30,** | ** ** | **Three Months Ended  June 30,** | ** ** |
|---------------------------------------|------------|--------------------------------------|------------|---------------------------------------|------------|
| ** **                            | ** ** | **2004**                             | ** ** | **2003**                              | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                            | ** ** | **(millions)**                       | ** ** |
| **Defense Segment  Sales**            |       |                                 |       |                                  |       |   |   |   |   |
| Communications and electronics        |       | $                                    | 47.0       |                                  | $          | 38.1 |   | $ | 14.5 |   | $ | 12.5 |   |
| Training systems                      |       | 127.2                                |       | 120.1                                 |       | 48.8 |   | 43.1 |   |
| Government services                   |       | 150.9                                |       | 109.7                                 |       | 49.4 |   | 38.3 |   |
|                                  |       | $                                    | 325.1      |                                  | $          | 267.9 |   | $ | 112.7 |   | $ | 93.9 |   |
|                                  |       |                                 |       |                                  |       |   |   |   |   |
| **Defense Segment  Operating Income** |       |                                 |       |                                  |       |   |   |   |   |
| Communications and electronics        |       | $                                    | 5.8        |                                  | $          | 1.5 |   | $ | 1.1 |   | $ | 1.3 |   |
| Training systems                      |       | 11.5                                 |       | 8.4                                   |       | 3.8 |   | 3.3 |   |
| Government services                   |       | 8.9                                  |       | 5.6                                   |       | 4.0 |   | 1.6 |   |
|                                  |       | $                                    | 26.2       |                                  | $          | 15.5 |   | $ | 8.9 |   | $ | 6.2 |   |

 

As shown in the foregoing table, defense segment sales increased to$113 million in the third fiscal quarter this year from $94 million in thecomparable quarter last year, a 20% increase. Nearly $14 million of theincrease came from the Simulation Systems Division (SSD), formerly ECCInternational, the business acquired in September 2003. The remainder ofthe growth came from our previously owned businesses. Communications andelectronics business unit sales were higher in the third quarter because of acontract we won last year to develop a common data link (CDL) for the U.S. Navy.Training systems sales were higher during the third quarter compared to lastyear because of the addition of SSD. Although air combat training salesincreased modestly from the second quarter of this year, they continued to belower than last year as activity on the major new air combat training contractwon last year is still in the early stages. MILES (Multiple Integrated LaserEngagement System) sales for the quarter were also lower than last year, butincreased over the second quarter of this year. Government services salesincreased by approximately $11 million in the quarter compared to last year.This growth came from several service contracts which were either added withinthe past year or generated a higher level of sales this year because of an increasein the scope of work.

 

For the first ninemonths of the fiscal year, defense sales were higher than last year by $57million or 21% with nearly $28 million of this increase coming from the newlyacquired SSD. Communications and electronics sales were up by 24% andgovernment services sales were up by 37% compared to the first nine months oflast year for the reasons identified above. One particular service contract atthe Joint Readiness Training Center in Louisiana, generated $27 million of the$41 million growth in government services sales for the first nine months ofthe year, related to the conflict in Iraq. The sales volume from this contactreturned to a more normal level in the third quarter after having reached apeak in the second quarter. Future sales volume from this contract will dependon customer requirements which are yet to be determined. Training systems saleswere up by 6% for the nine-month period due to the SSD acquisition. However,lower air combat training and MILES sales limited the growth of this businessunit in the short term. MILES sales decreased in the first nine months of theyear from $39 million last year to $25 million this year.

 

Operating incomein the defense segment for the third quarter was $8.9 million compared to $6.2

 

9

----

 

million last year, an increase of 44%. Higheroperating income came from the training systems business unit and thegovernment services business unit. Training systems operating profits increasedproportional to the increase in sales volume, with the increase comingprimarily from the Simulation Systems Division. Government services operatingincome was higher for the third quarter this year because of the higher salesvolume and because of a loss recorded in the third quarter last year on oneoperations and maintenance (O&M) contract. Communications and electronicsoperating income was down slightly from last year on higher sales volumebecause the sales growth came from the CDL contract which was bid with noprofit margin during the development and early production phases of thecontract.

 

Operating incomewas higher than last year for the first nine months in all three defensebusiness units. Communications and electronics operating income in 2003 hadbeen impacted by a loss provision of $3 million recorded in the second quarterrelated to our investment in new communications technology for the Navy CDLcontract. In addition, communications and electronics operating income in thesecond quarter this year was bolstered by performance on another data linkcontract with a foreign customer. Government services operating income for thenine-month period increased in proportion to the sales increase and was alsohelped by better performance from the O&M business in the third quarter, asmentioned above. Training systems operating income was higher for the firstnine months this year because of the completion in the first quarter of certainforeign combat training contracts with good profit margins and because of theaddition of SSD.

 

**Transportation Systems Segment**

 

Transportation systems sales were up in the third quarter to $74million compared to $60 million last year, an increase of 23%. This was despitesales from the PRESTIGE contract in London that were $5 million lower for thequarter than last year, as activity on the project has declined in accordancewith the plan for this program. We continue to anticipate additional ordersfrom the PRESTIGE contract this year and for the next several years related tothe rollout of the OysterTM card and other system enhancementopportunities. More than offsetting the decline in sales from this contractwere higher sales from other contracts in the U.S., the U.K. and Australia. Thelong-term prospects for growth in our transportation business continue to begood. We have bid or plan to bid in the near term on well over $1 billion intransportation system opportunities in North America, the European continent,and the Far East. The outlook for transportation systems in the next year willbe impacted by the timing and outcome of these new contract awards.

 

For the first nine months of the fiscal yeartransportation systems sales increased 3%, from $194 million to $200 million.Sales from the PRESTIGE project were down by $35 million for the nine monthperiod, as mentioned above. This expected decrease in PRESTIGE sales was morethan offset by higher sales from projects in the U.S., the U.K. and Australia.

 

Operating income in the transportationsystems segment decreased to $6.8 million in the third quarter of fiscal 2004from $7.2 million in the comparable period last year. Included in the 2004third quarter operating results were legal and other consulting fees of $1.9million incurred in preparation for the arbitration hearing related to thesubcontract dispute mentioned above. We expect these legal fees to continuethrough at least the end of the calendar year. Lower sales volume from thePRESTIGE project during the quarter resulted in comparably lower operating incomefrom this contract. In addition, profit margins on certain contracts in NorthAmerica were unfavorably affected by our investment in the development of newsoftware technologies for common fare collection solutions and the difficultiesinherent in the integration of these new technologies into actual farecollection systems. Although no further growth in these costs is anticipated,profit margins on these contracts will continue to be low. Contracts in Europeand the Far East generated higher operating income in the quarter which morethan offset the lower operating income from PRESTIGE and the North Americancontracts.

 

Transportation systems operating income forthe first nine months was $15.8 million this year compared to $19.6 millionlast year. These operating results include legal and consulting fees related tothe arbitration hearing of $4.7 million incurred this year. In addition, withsales from the PRESTIGE project down, operating profits from this contract werealso lower than last year. Just as in the third quarter, profit margins in thefirst nine months of the fiscal year have been lower in North America buthigher in Europe and the Far East than for the comparable period last year.

 

10

----

 

**Backlog**

 

As reflected in the table below, fundedbacklog increased during the first nine months of the year in both segmentswhile total backlog remained essentially the same. We believe backlog shouldincrease as a result of the numerous opportunities available in our markets atthis time, but this will depend on the timing and outcome of contract awards.

 
| ** **                     | ** ** | **June 30,  2004** | ** ** | **September 30,  2003** | ** ** |
|--------------------------------|------------|-------------------------|------------|------------------------------|------------|
| ** **                     | ** ** | **(in millions)**       | ** ** |
| **Total backlog**              |       |                    |       |                         |       |
| Transportation systems         |       | $                       | 760.5      |                         | $          | 761.9 |   |
| Defense                        |       |                    |       |                         |       |
| Communications and electronics |       | 66.5                    |       | 68.8                         |       |
| Training systems               |       | 294.4                   |       | 267.3                        |       |
| Government services            |       | 369.4                   |       | 406.9                        |       |
| Total defense                  |       | 730.3                   |       | 743.0                        |       |
| Total                          |       | $                       | 1,490.8    |                         | $          | 1,504.9 |   |
|                           |       |                    |       |                         |       |
| **Funded backlog**             |       |                    |       |                         |       |
| Transportation systems         |       | $                       | 760.5      |                         | $          | 620.2 |   |
| Defense                        |       |                    |       |                         |       |
| Communications and electronics |       | 66.5                    |       | 68.8                         |       |
| Training systems               |       | 294.4                   |       | 267.3                        |       |
| Government services            |       | 78.4                    |       | 52.0                         |       |
| Total defense                  |       | 439.3                   |       | 388.1                        |       |
| Total                          |       | $                       | 1,199.8    |                         | $          | 1,008.3 |   |

 

The difference between total backlog andfunded backlog represents options under multiyear defense service contracts.Funding for these contracts comes from annual operating budgets of the U.S.government and the options are normally exercised annually. Options for thepurchase of additional systems or equipment are not included in backlog untilexercised, nor are indefinite delivery, indefinite quantity (IDIQ) contractsuntil an order is received.

 

###### **Liquidity andCapital Resources**

 

During the fiscal third quarter, we generated positive cash flows of$32 million from operations in addition to $13 million from the sale of a lifeinsurance policy.

 

The positive cash flows from operations for the quarter were nearlyevenly divided between the defense and transportation segments and weregenerated by our earnings, adjusted for non-cash items such as depreciation andamortization, and a $15 million reduction in accounts receivable. Year-to-datecash flows from the defense segment were positive while transportation systemsoperating cash flows were negative, primarily due to delays in meeting contractpayment milestones. We expect cash flows from the transportation segment tocontinue to be positive in the fourth quarter as we reach certain paymentmilestones which should trigger payments from the customers this year.

 

Foreign currency translation caused accounts receivable to grow by $10million in the first nine months of the year. Although these adjustmentsimpacted the accounts receivable balance, they had no impact on cash flows.

 

As mentioned previously, we sold an insurancepolicy and received proceeds of $13.3 million during the third quarter. Thisamount is included in investing activities on the cash flow statement.Investing activities during the quarter also included $1.9 million of capitalexpenditures. Cash generated by operating activities during the quarter wasprimarily used to repay short-term borrowings, which is reflected in thefinancing section of the Statement of Cash Flows.

 

Our financial condition remains strong with working capital of $202million and a current ratio of 2.3 to 1 at June 30, 2004. We expect thatcash on hand and our ability to access the debt markets will be adequate tomeet our working capital requirements for the foreseeable future.

 

11

----

 

**Critical Accounting Policies, Estimates and Judgments**

 

Our financial statements are prepared in accordance with U.S. generallyaccepted accounting principles. The preparation of these financial statementsrequires us 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 andexpenses during the reporting period. We continually evaluate our estimates andjudgments, the most critical of which are those related to revenue recognition,income taxes, valuation of goodwill and pension costs. We base our estimatesand judgments on historical experience and other factors that we believe to bereasonable under the circumstances. Materially different results can occur ascircumstances change and additional information becomes known.

 

Besides the estimates identified above that are considered critical, wemake many other accounting estimates in preparing our financial statements andrelated disclosures. All estimates, whether or not deemed critical affectreported amounts of assets, liabilities, revenues and expenses, as well asdisclosures of contingent assets and liabilities. These estimates and judgmentsare also based on historical experience and other factors that are believed tobe reasonable under the circumstances. Materially different results can occuras circumstances change and additional information becomes known, even forestimates and judgments that are not deemed critical.

 

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

 

**CAUTIONARY STATEMENT ABOUTFORWARD-LOOKING INFORMATION**

 

This report,including the documents that we incorporate by reference, containsforward-looking statements within the meaning of Section 21E of theSecurities Exchange Act of 1934, as amended, that aresubject to the “safe harbor” created by those sections. Any statements aboutour expectations, beliefs, plans, objectives, assumptions or future events orour future financial and/or operating performance are not historical and may beforward-looking. These statements are often, but not always, made through theuse of words or phrases such as “may,” “will,” “anticipate,” “estimate,”“plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,”“predict,” “potential,” “opportunity” and similar words or phrases or thenegatives of these words or phrases. These statements involve estimates, assumptions and uncertainties,including those discussed in “Risk Factors” in the Company’s annual report onForm 10-K for the year ended September 30, 2003, and throughout thisfiling that could cause actual results to differ materially from thoseexpressed in these statements.

 

Because the riskfactors referred to above could cause actual results or outcomes to differmaterially from those expressed in any forward-looking statements made by us oron our behalf, you should not place undue reliance on any forward-lookingstatements.  In addition, past financialand/or operating performance is not necessarily a reliable indicator of futureperformance and you should not use our historical performance to anticipate resultsor future period trends.  Further, anyforward-looking statement speaks only as of the date on which it is made, andwe undertake no obligation to update any forward-looking statement to reflectevents or circumstances after the date on which the statement is made or toreflect the occurrence of unanticipated events. New factors emerge from time totime, and it is not possible for us to predict which factors will arise. Inaddition, we cannot assess the impact of each factor on our business or the extentto which any factor, or combination of factors, may cause actual results todiffer materially from those contained in any forward-looking statements.

 

ITEM 4 - STATEMENTON DISCLOSURE CONTROLS AND PROCEDURES

 

We maintaindisclosure controls and procedures that are designed to ensure that informationrequired to be disclosed in our Exchange Act reports is recorded, processed,summarized and reported within the time periods specified in the SEC’s rulesand forms, and that such information is accumulated and communicated to ourmanagement, including our Chief Executive Officer and Chief Financial Officer,as appropriate, to allow timely decisions regarding required disclosure.Management necessarily applied its judgment in assessing the costs and benefitsof such controls and procedures which, by their nature, can provide onlyreasonable assurance regarding management’s control objectives.

 

12

----

 

We carried out anevaluation, under the supervision and with the participation of our management,including our Chief Executive Officer along with our Chief Financial Officer,on the effectiveness of the design and operation of our disclosure controls andprocedures pursuant to Exchange Act Rule 13a-15, as of the end of the fiscalperiod covered by this report on Form 10-Q. Based upon that evaluation, each ofour Chief Executive Officer and our Chief Financial Officer concluded that ourdisclosure controls and procedures are effective in timely alerting them tomaterial information relating to us (including our consolidated subsidiaries)required to be included in our Exchange Act reports. There have been nosignificant changes in our internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date we carried outour evaluation.

 

**PART II -OTHER INFORMATION**

 

ITEM 6 -EXHIBITS AND REPORTS ON FORM 8-K

 

(a) The following exhibits are includedherein:

 
| **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 duringthe quarter ended June 30, 2004.

 

SIGNATURES

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 
|                            |   | CUBIC CORPORATION             |
|---------------------------------|--------|-------------------------------|
|                            |   |                          |
|                            |   |                          |
| Date:  August 3, 2004 |   | /s/ W. W. Boyle               |   |
|                            |   | W. W. Boyle                   |
|                            |   | Vice President and CFO        |
|                            |   |                          |
| Date:  August 3, 2004 |   | /s/  T. A. Baz                |   |
|                            |   | T. A. Baz                     |
|                            |   | Vice President and Controller |
|                                 |        |                               |  |  |

 

13

----