<PAGE>
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
For the Quarter Ended December 31, 1998
1-8931
------
Commission File Number
CUBIC CORPORATION
Exact Name of Registrant as Specified in its Charter
DELAWARE 95-1678055
State of Incorporation IRS Employer Identification No.
9333 Balboa Avenue
San Diego, California 92123
Telephone (619) 277-6780
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(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 /X/ No / /
As of February 1, 1998, Registrant had only one class of common stock of
which there were 8,907,004 shares outstanding (after deducting 2,981,239
shares held as treasury stock).
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CUBIC CORPORATION
CONSOLIDATED CONDENSED STATEMENT OF INCOME (UNAUDITED)
(amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
December 31
1998 1997
-------- --------
<S> <C> <C>
Revenues:
Sales $ 98,758 $ 91,752
Other income 789 1,394
-------- --------
99,547 93,146
-------- --------
Costs and expenses:
Cost of sales 77,078 68,805
Selling, general and
administrative expenses 16,039 17,994
Research and development 1,586 1,702
Interest 779 503
-------- --------
95,482 89,004
-------- --------
Income before income taxes 4,065 4,142
Income taxes 1,400 1,500
-------- --------
Net income $ 2,665 $ 2,642
-------- --------
-------- --------
Net income per share $ .30 $ .30
-------- --------
-------- --------
Average shares of common stock outstanding 8,907 8,943
-------- --------
-------- --------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
2
<PAGE>
CUBIC CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEET
(thousands of dollars)
<TABLE>
<CAPTION>
December 31 September 30
1998 1998
(Unaudited) (See note below)
-------------- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 12,111 $ 3,500
Marketable securities, available-for-sale 2,086 2,086
Accounts receivable 159,661 149,640
Inventories -- Note 3 53,774 39,623
Deferred income taxes and other current assets 13,514 15,296
-------------- ----------------
Total current assets 241,146 210,145
-------------- ----------------
Property, plant and equipment - net 40,838 40,400
Cost in excess of net tangible assets of
purchased businesses, less amortization 24,959 25,788
Deferred income taxes and other assets 16,833 17,658
-------------- ----------------
$ 323,776 $ 293,991
-------------- ----------------
-------------- ----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 20,921 $ 30,321
Trade accounts payable 8,495 14,534
Customer advances 25,867 27,157
Other current liabilities 23,226 31,344
Income taxes payable 4,358 1,305
Current portion of long-term debt 5,000 5,000
-------------- ----------------
Total current liabilities 87,867 109,661
-------------- ----------------
Long-term debt 55,000 5,000
Deferred income taxes and other liabilities 5,853 5,778
Shareholders' equity:
Common stock 234 234
Additional paid-in capital 12,123 12,123
Retained earnings 198,389 195,724
Accumulated other comprehensive income 366 1,527
Treasury stock at cost (36,056) (36,056)
-------------- ----------------
175,056 173,552
-------------- ----------------
$ 323,776 $ 293,991
-------------- ----------------
-------------- ----------------
</TABLE>
NOTE: THE BALANCE SHEET AT SEPTEMBER 30, 1998 HAS BEEN DERIVED FROM THE AUDITED
FINANCIAL STATEMENTS AT THAT DATE.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
3
<PAGE>
CUBIC CORPORATION
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
(thousands of dollars)
<TABLE>
<CAPTION>
Three Months Ended
December 31
1998 1997
--------- ---------
<S> <C> <C>
Operating Activities:
Net income $ 2,665 $ 2,642
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 2,514 2,493
Changes in operating assets and liabilities (34,490) 8,970
--------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES (29,311) 14,105
--------- ---------
Investing Activities:
Net additions to property, plant and equipment (2,586) (1,537)
Other items - net (378) 84
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (2,964) (1,453)
--------- ---------
Financing Activities:
Change in short-term borrowings (9,081) 1,097
Change in long-term borrowings 50,000 -
Purchases of treasury stock - (561)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 40,919 536
--------- ---------
Effect of exchange rates on cash (33) (86)
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 8,611 13,102
Cash and cash equivalents at the
beginning of the period 3,500 53,257
--------- ---------
CASH AND CASH EQUIVALENTS AT
THE END OF THE PERIOD $ 12,111 $ 66,359
--------- ---------
--------- ---------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
4
<PAGE>
CUBIC CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
(thousands of dollars)
<TABLE>
<CAPTION>
Accumulated
Other Additional
Comprehensive Retained Comprehensive Treasury Paid-in Common
Income Earnings Income Stock Capital Stock
------------- ---------- ------------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
September 30, 1998 $ 195,724 $ 1,527 $ (36,056) $ 12,123 $ 234
Comprehensive income:
Net income $ 2,665 2,665
Foreign currency
translation adjustment (1,161) (1,161)
------------
Comprehensive income $ 1,504
------------
------------
----------- ----------- ----------- --------- -------
December 31, 1998 $ 198,389 $ 366 $ (36,056) $ 12,123 $ 234
----------- ----------- ----------- --------- -------
----------- ----------- ----------- --------- -------
<CAPTION>
Accumulated
Other Additional
Comprehensive Retained Comprehensive Treasury Paid-in Common
Income Earnings Income Stock Capital Stock
------------- ---------- ------------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
September 30, 1997 $ 198,213 $ (557) $ (34,693) $ 12,123 $ 234
Comprehensive income:
Net income $ 2,642 2,642
Foreign currency
translation adjustment 132 132
------------
Comprehensive income $ 2,774
------------
------------
Treasury stock purchases (561)
----------- ----------- ----------- --------- -------
December 31, 1997 $ 200,855 $ (425) $ (35,254) $ 12,123 $ 234
----------- ----------- ----------- --------- -------
----------- ----------- ----------- --------- -------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
5
<PAGE>
CUBIC CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
December 31, 1998
NOTE 1 -- BASIS FOR PRESENTATION
The accompanying unaudited consolidated condensed financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all
information and footnotes required by generally accepted accounting
principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the quarter are not necessarily indicative of the
results that may be expected for the year ended September 30, 1999. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for
the year ended September 30, 1998.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NOTE 2 -- PER SHARE AMOUNTS
Per share amounts are based upon the weighted average number of shares of
common stock outstanding.
NOTE 3 -- INVENTORIES
<TABLE>
<CAPTION>
December 31 September 30
1998 1998
----------- -------------
<S> <C> <C>
Inventories consist of the following:
Finished products $ 2,150 $ 2,615
Work in process 40,210 27,172
Raw material and purchased parts 11,414 9,836
----------- -------------
$ 53,774 $ 39,623
----------- -------------
----------- -------------
</TABLE>
Work in process inventories increased from September 30, 1998 to December 31,
1998 primarily as a result of additional gates being built during the period
for use in automatic fare collection systems. Virtually all of these gates
were built to meet requirements under existing contracts, the most
significant of which is the PRESTIGE contract. It is expected that inventory
levels will decrease in future quarters as these gates are installed and the
costs are charged to contracts.
6
<PAGE>
CUBIC CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)--continued
December 31, 1998
NOTE 4 - ADOPTION OF NEW ACCOUNTING PRONOUNCEMENT
As of October 1, 1998, the Company adopted FASB Statement No. 130, "Reporting
Comprehensive Income." This pronouncement establishes standards for reporting
and displaying comprehensive income, which includes all components of the
change in Shareholders' Equity during a given period, except those resulting
from investment by or distribution to shareholders. As a result of adopting
this statement, the Company began displaying a Consolidated Statement of
Changes in Shareholders' Equity, which reconciles the beginning and ending
balances of each component of Shareholders' Equity, and provides a Statement
of Comprehensive Income.
NOTE 5 -- REVIEW BY INDEPENDENT ACCOUNTANTS
A review of the data presented was made by Ernst & Young LLP, independent
accountants, in accordance with established professional standards and
procedures, and their report is included herein.
7
<PAGE>
CUBIC CORPORATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
December 31, 1998
RESULTS OF OPERATIONS
Sales for the first quarter of fiscal 1999 were 8% higher than the first
quarter of fiscal 1998, as the result of higher sales in the defense segment.
The higher sales were from the MILES 2000 product line and from the contract
to produce a ground combat training system for the British military, known as
Area Weapons Effect Simulator (AWES), which was awarded in the fourth
quarter of fiscal 1998. Sales in the transportation systems segment for the
first quarter of fiscal 1999 were comparable to the first quarter of fiscal
1998. It is expected that this segment will generate higher sales volume in
the remaining quarters of the year, as work on the PRESTIGE contract
escalates.
Operating profits in the defense segment were somewhat higher in the quarter
ended December 31, 1998 than in the first quarter of the previous year, but
did not increase in proportion to the sales increase. The AWES contract is at
an early stage of completion and has not yet generated operating profits,
while the profit margins in the MILES 2000 product line continue to be
minimal due to cost growth incurred in previous years. In late January of
1999, it was determined that there may be additional cost growth in the MILES
2000 contract with the U.S. Department of Defense, which may result in
somewhat reduced profits in the defense segment during the second quarter of
the fiscal year.
Operating profits in the transportation systems segment were higher in the
first quarter of fiscal 1999 than in the same period last year, due primarily
to a reduction in selling, general and administrative expenses. This was the
result of lower contract proposal costs and the organizational restructuring
which began in the third quarter of fiscal 1998. As mentioned above, sales in
this segment should increase in the remaining quarters of the year and are
expected to result in higher profits from this segment.
The Company continued the marketing and development of its video email
product during the first quarter while the Company sought out a partner or
new owner of this business. The additional investment amounted to nearly $1
million before income taxes, which was comparable to the first quarter of
fiscal 1998. Costs for this product line have been reduced and product orders
have increased in recent months, therefore, it is expected that further
losses will be minimal until the future of this business is determined.
For the three-month period, selling, general and administrative expenses
decreased, both nominally and as a percentage of sales, from the level in
fiscal 1998. This decrease resulted primarily from lower selling costs in
both the defense and transportation systems segments and the organizational
restructuring mentioned above.
8
<PAGE>
CUBIC CORPORATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - continued
December 31, 1998
Cash available for investment was significantly lower in the quarter ended
December 31, 1998 than in the same quarter of the previous year, resulting in
lower investment income. In addition, interest expense was moderately higher
in the current year due to a higher level of both short- and long-term
borrowing. Consequently, while operating profits in the first quarter were
higher in each segment, net income was comparable to the first quarter of the
previous year.
LIQUIDITY AND CAPITAL RESOURCES
During the three month period ended December 31, 1998, operating activities
used $29.3 million, primarily as a result of growth in inventories and
accounts receivable. The increase in inventories resulted primarily from
additional gates being built for use in automatic fare collection systems.
Virtually all of these gates were built to meet requirements under existing
contracts, the most significant of which is the PRESTIGE contract. It is
expected that inventory levels will decrease in future quarters as these
gates are installed and the costs are charged to contracts. The increase in
accounts receivable was primarily related to U. S. Government contracts. This
situation has begun to improve subsequent to the end of the quarter, as large
payments have been received.
In November 1998, the Company completed a private placement of $50 million in
senior unsecured notes with an average duration of approximately 10 years, at
an average coupon rate of 6.27%. The first principal payment of $1.4 million
is due in November of 2002, with interest due semi-annually, beginning in May
1999. Proceeds of this borrowing were used to reduce short-term borrowings
from U.S. banks and to provide working capital. The Company expects that cash
on hand and its available debt capacity will be adequate to meet its
short-term working capital requirements.
The Company's financial condition remains strong with working capital of $153
million and a current ratio of 2.7 to 1 at December 31, 1998. The backlog of
orders at December 31, 1998 was $966 million compared to $972 million at
September 30, 1998 and $380 million at December 31, 1997. The increase from
December 31, 1997 to December 31, 1998, was the result of major contracts
awarded in the fourth quarter of fiscal 1998, primarily the AWES and PRESTIGE
contracts.
9
<PAGE>
CUBIC CORPORATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - continued
December 31, 1998
YEAR 2000 ISSUE
The Year 2000 issue arises from the fact that many existing computer software
programs use only the last two digits to refer to a specific year, instead of
all four digits. As a result, computer programs that have date-sensitive
software, or operate with date-sensitive data, may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a
system failure or miscalculation causing disruptions in operations,
including, among other things, the temporary inability to process
transactions or engage in normal business activities.
General
The Company has assembled a Year 2000 Task Force, which includes personnel
from corporate and business unit management to ensure that the Company, as a
whole, is Year 2000 compliant by December 31, 1999. The objectives of this
task force are to: (1) identify non-compliant operating systems, software,
and data files, (2) assess, to the extent possible, the potential problems of
being non-compliant, (3) estimate both the amount and timing of costs to be
incurred to fix the potential problems of being non-compliant, and (4)
develop and execute a comprehensive strategy, including contingency plans, to
fix these problems.
Identification of Operating Systems, Software and Data Files
The Company recognizes that it must make remedial changes to its own
operating systems, software and data files, as well as assess the remedial
efforts undertaken by its suppliers and customers. In addition, the Company
may have potential exposure to make products previously delivered compliant,
depending on the terms and conditions of its existing contracts.
The Company is making appropriate modifications and updates to its internal
information systems, some of which have been or are being done in the
ordinary course of business. Final testing of all systems should be
completed by the third calendar quarter of 1999. The Company's goal is to
ensure, to the extent possible, that the transition from the year 1999 to the
year 2000 will not have a materially adverse impact on its engineering,
manufacturing or administrative capabilities.
The Company began contacting key suppliers and subcontractors in 1998. The
current plan is to obtain written certification of their compliance to the
Year 2000 issue. In cases where this cannot be obtained, the Company will
develop precautionary plans, on a case by case basis, to minimize disruptions
caused by their non-compliance. There is no possible way to ensure that all
suppliers and subcontractors will be Year 2000 compliant by December 31,
1999, and any such failure to be compliant could have a materially adverse
impact on the Company's business. Therefore, the Company's goal is to
minimize the potentially adverse impact by monitoring suppliers and
subcontractors' compliance efforts, and by identifying alternate suppliers
where possible.
10
<PAGE>
CUBIC CORPORATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - continued
December 31, 1998
The Company is in discussions with customers to diagnose and make compliant
delivered products and services. The Company has also identified contracts
that contained warranty provisions stipulating that the Company is
responsible for Year 2000 compliance of products previously delivered.
Current estimates indicate that the costs to make these products compliant
will be minimal. In certain cases, the Company has received contracts from
its customers to upgrade previously delivered products to be Year 2000
compliant.
The Company is aware of the potential that claims could be made against it
and other companies for damages arising from products and services that are
not Year 2000 compliant. The Company is not in a position to identify or to
avoid all possible scenarios that could lead to claims against it. However,
the Company will assess scenarios and take steps in 1999 to mitigate the
impact of various scenarios if they were to occur.
Potential Problems of Non-compliance
The potential problems of internal or external non-compliance include, but
are not limited to: (1) penalties caused by the inability of the Company to
receive supplies and subcontracted deliverables in a timely manner to meet
delivery schedules stipulated under existing contracts, (2) cash flow
restrictions caused by the failure of significant customers to make payments
in accordance with contract terms, and (3) productivity loss caused by
disruptions in engineering, manufacturing and administrative capabilities.
Costs to Address the Issue
Through December 31, 1998, the Company expensed approximately $200,000 of
incremental Year 2000 remedial costs. Based on current estimates, and
assuming there is not a material change in available resources, the Company
will incur another $200,000 to $400,000 through the fourth calendar quarter
of 1999. These costs consist primarily of in-house labor, outside services,
and computer hardware and software purchases and will be expensed as incurred.
Development and Execution of Comprehensive Strategy
With the assembly of the Year 2000 Task Force in 1998, the Company began the
development of a corporate-wide comprehensive strategy to address the problems
associated with the Year 2000 transition. It is expected that this strategy
will continually evolve as new issues arise and old ones disappear. While the
Company continues to believe that the Year 2000 matters discussed above will not
have a materially adverse impact on its business, financial condition or results
of operations, it is not possible to determine with certainty whether or to what
extent the Company may be affected.
11
<PAGE>
CUBIC CORPORATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - continued
December 31, 1998
FORWARD-LOOKING STATEMENTS
In addition to historical matters, this report contains forward-looking
statements. They can be identified by words such as MAY, LIKELY, ANTICIPATE,
HOPE, ESTIMATE, PLAN, POTENTIAL, FEEL, EXPECT, SHOULD, and CONFIDENT. These
forward- looking statements are made pursuant to the safe harbor provisions
of the Securities Litigation Reform Act of 1995. Investors are cautioned that
forward-looking statements involve risks and uncertainties which may affect
the Company's business and prospects. These include the effects of politics
on negotiations and business dealings with government entities, reductions in
defense budgets, economic conditions in the various countries in which the
Company does or hopes to do business, competition and technology changes in
the defense and transportation industries, and other competitive and
technological factors.
12
<PAGE>
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
15--Independent Accountants' Review Report
27--Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CUBIC CORPORATION
Date February 4, 1999 /s/ W. W. Boyle
---------------- -----------------------------------
W. W. Boyle
Vice President Finance and CFO
Date February 4, 1999 /s/ T. A. Baz
---------------- -----------------------------------
T. A. Baz
Vice President and Controller
13
<PAGE>
EXHIBIT 15 - INDEPENDENT ACCOUNTANTS' REVIEW REPORT
Board of Directors and Shareholders
Cubic Corporation
We have reviewed the accompanying consolidated condensed balance sheet of
Cubic Corporation as of December 31, 1998, and the related consolidated
condensed statements of income, cash flows, and changes in shareholders'
equity for the three-month periods ended December 31, 1998 and 1997. These
financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data, and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit in
accordance with generally accepted auditing standards, which will be
performed for the full year with the objective of expressing an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying consolidated condensed financial
statements referred to above for them to be in conformity with generally
accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Cubic Corporation as of
September 30, 1998 and the related consolidated statements of income,
retained earnings, and cash flows for the year then ended (not presented
herein) and in our report dated November 25, 1998, except for the second
paragraph of Note 11, as to which the date is December 7, 1998, we expressed
an unqualified opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying consolidated condensed
balance sheet at September 30, 1998, is fairly stated in all material
respects in relation to the consolidated balance sheet from which it has been
derived.
ERNST & YOUNG LLP
San Diego, California
February 4, 1999
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998 AND THE RELATED CONSOLIDATED
STATEMENT OF INCOME FOR THE YEAR THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 12,111
<SECURITIES> 2,086
<RECEIVABLES> 159,661
<ALLOWANCES> 0
<INVENTORY> 53,774
<CURRENT-ASSETS> 241,146
<PP&E> 40,838
<DEPRECIATION> 0
<TOTAL-ASSETS> 323,776
<CURRENT-LIABILITIES> 87,867
<BONDS> 0
234
0
<COMMON> 0
<OTHER-SE> 174,822
<TOTAL-LIABILITY-AND-EQUITY> 323,776
<SALES> 98,758
<TOTAL-REVENUES> 99,547
<CGS> 77,078
<TOTAL-COSTS> 77,078
<OTHER-EXPENSES> 17,625
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 779
<INCOME-PRETAX> 4,065
<INCOME-TAX> 1,400
<INCOME-CONTINUING> 2,665
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,665
<EPS-PRIMARY> .30
<EPS-DILUTED> 0
</TABLE>
