Cubic Profits in 4th Quarter of ‘Most Difficult Year’

Cubic Corp., which on June 30 suffered its first quarterly loss since 1974, on Monday announced a $2.6-million net profit and revenue that rose 7%, to $96.6 million, for the fourth quarter ended Sept. 30.

For the year, however, net income fell 91% to $1.1 million, and revenue increased just 1% to $337.8 million.

Cubic Chairman Walter Zable, who described the fiscal year as “the most difficult year in our 37-year history,” said his company has “turned the corner . . . and we expect to be back to a more normal profit performance” during 1987.

“Our backlog remains good at $224 million, and new business prospects in all three major business areas are very bright,” he said.

Despite that optimistic outlook, Zable probably will remember 1986 as the most disappointing year since he founded Cubic 37 years ago.

For starters, the $2.3 million in red ink that Cubic generated during the third quarter was only the second quarterly net loss in the company’s history.

In February, Zable hinted that “problems” in Cubic’s defense systems division would erode the company’s overall profitability.

Cubic later acknowledged that it had serious problems with a major, $11-million subcontract from Rockwell International to build four B-1B simulated training systems for use by U.S. Air Force technicians.

During recent months, Cubic also came under investigation from several federal agencies--including the FBI and the Defense Department’s Defense Criminal Investigative Service--for allegedly falsifying test results in connection with a $10-million U.S. Army contract to renovate mine detectors.

Cubic also has been sued for $5.75 million by a former employee who has accused Cubic of firing him after he brought alleged billing irregularities on another government contract to light.

The B-1B simulator overruns were caused by a “lack of communication” between Cubic and Rockwell, said Zable, who said Cubic had “one product with a big cost attached . . . the individual (in charge) didn’t use good business practices and, unfortunately, we caught it too late.”

Zable quickly insisted that Cubic has “cleaned up our house now and we’re on the tail of everyone” to employ good business practices.

However, the overruns last summer forced the resignation of simulation systems Vice President Ralph Davis, who was replaced by Robert Newmark, an industry veteran who most recently was a senior manager with St. Louis-based Emerson Electric Co.

Zable said the unprofitable third quarter taught him a “valuable lesson. . . . Don’t give any one man too much authority. All it takes is one bad apple to foul up the operation.”

Zable described Newmark, Davis’ successor, as “someone who is well-educated in good business practices and who’s watching the costs and contracts.”

With that “house-cleaning” complete, Zable predicted Cubic will “be back on track” toward improved profitability in 1987.

Despite the $1.1-million annual net profit announced Monday, two electronics industry analysts who are familiar with Cubic maintain that the company is unable to sustain growth in its three major divisions.

“With Cubic, it’s always next year,” complained a New York-based electronics industry analyst who recently stopped recommending Cubic to his investment firm’s clients. “I’ve been disappointed so often that I’ve had a ‘sell’ on them for years.”

Those concerns are borne out by Cubic’s operating profits, which dipped to $4.8 million in 1986 after hitting $37.8 million in 1983.

Though Cubic’s electronic defense systems division has enjoyed steadily rising revenue, operating profits have declined every year since 1983. Operating profits dropped from $14.7 million in 1985 to just $1.4 million in 1986.

Similarly, Cubic’s elevator operation also has reported stagnant operating profits since 1983.

Until 1986, operating profits had been increasing in Cubic’s varied industrial operations, which include the company’s growing fare collection business, an industrial gas distribution company and a paper products operation. However, operating profits dropped from $9.8 million to $800,000 during 1986.

Difficulties in all three segments have forced Cubic to cut back its predicted revenue growth.

Zable acknowledged last week that Cubic will not reach its previous target of $500 million in revenue by 1988. As recently as Cubic’s annual meeting in February, officials were predicting that the company could hit $500 million in revenue during 1988 and as much as $1 billion during the next decade.

“We’re going to retrench,” Zable said. “I could go for $1 billion in revenue, but I’d rather have profits.”

Last week, Zable blasted federal government procurement rules that have trimmed back profit allowances on military contracts.

Cubic is giving “serious thought” to reducing its military contract business because the government is “not allowing you to make an honest profit,” Zable said.

However, Cubic has not pushed itself back from a growing reliance on military contracts.

In 1982, military contracts generated 44% of the company’s revenue and 61% of the company’s operating profits. In 1985 military contracts generated about 48% of Cubic’s revenue.

CUBIC CORP. AT A GLANCE

Revenues (In millions) 1986 1985 1984 1983 Electronic Defense Systems $150.5 $159.4 $125.9 $122.2 Electronic Elevator Operations $103.2 $93.6 $86.7 $91.2 Industrial Operations $85.0 $78.6 $62.6 $59.8 Total: $338.7 $331.7 $275 $273

Operating Profits (In Millions) 1986 1985 1984 1983 Electronic Defense Systems $1.4 $14.7 $18.3 $23 Electronic Elevator Operations $2.6 $5.6 $6.1 $6.1 Industrial Operations $0.8 $9.8 $5.5 $8.6 Total: $4.8 $30 $29.9 $37.8

Net Income (In millions) $1.1 $14.7 $14 $17.3