Cubic Corporation

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Cubic Corporation

9333 Balboa Avenue
P.O. Box 85587
San Diego, California 92186
U.S.A.
(619) 277-6780
Fax: (619) 505-1523

Public Company
Incorporated: 1951 as Cubic Corporation
Employees: 3,300
Sales: $407.6 million (1996)
Stock Exchanges: American
SICs: 3663 Radio & T.V. Communications Equipment; 3581 Automatic Vending Machines; 3827 Optical Instruments & Lenses

A leader in its two diverse businesses, Cubic Corporation is the parent company of two major business segments: Cubic Automatic Revenue Collection Group and Cubic Defense Group. Cubic began as a small electronics enterprise housed in a garage before developing into a sophisticated manufacturer of defense electronics systems. From there, the company moved into the freight and passenger elevator business by acquiring U.S. Elevator Corporation in 1969 and into the production of automatic fare collections systems three years later. Cubic exited the elevator manufacturing business in 1993, leaving it with its defense electronics and automatic fare collection businesses as the primary money earners for the company. During the late 1990s, Cubic’s defense electronics subsidiary manufactured a wide range of instrumented training systems for the U.S. Army, Air Force, and Navy. The company’s automatic fare collection subsidiaries designed and manufactured systems for mass transit projects throughout the world. A smaller component of the company’s operations was its industrial operations segment, comprising Consolidated Converting Co., a corrugated-paper converting company, and businesses that manufactured emergency highway call boxes and optical tooling instruments.

1950s Origins

Cubic was founded in 1951 by Walter J. Zable, a retired professional football player and professional engineer. The company founded by Zable would later rise to prominence in three distinct business areas, evolving into a leading manufacturer of defense electronics systems, electronic freight and passenger elevators, and automatic fare collection equipment for mass transit systems, but in 1951 Zable’s business interests were less ambitious and not nearly as wide-ranging. Zable started Cubic in a garage, where he assembled digital voltmeters. Quickly, however, Zable’s business took the steps toward progress that led to the sophisticated and multifaceted Cubic Corporation of the 1990s.

In a decade’s time, Cubic’s business evolved remarkably. From its unpretentious beginnings in Zable’s garage, the company quickly matured; it was engineering the downrange tracking system for the Mercury space program ten years later. This was an enormous leap for the company to make, placing it in a business arena that would serve as the chief revenue-generating engine for decades to come. Cubic, in the years ahead, would be known primarily for its talents in the defense electronics systems industry, but Zable was not content with his achievements during his inaugural decade of business. A little more than a decade after securing a contract to supply downrange tracking systems for the Mercury space program, Zable steered Cubic in other directions, acquiring two companies that provided entry into two different business areas.

Diversification Begins in the 1960s

As his military equipment business was growing during the 1960s, Zable looked to broaden Cubic’s business interests and establish a presence in a market not subjected to the unpredictable forces directing national defense spending. Accordingly, in 1969 Zable acquired U.S. Elevator Corporation, then a $2-million-in-sales maker of freight and passenger elevators. Zable, through acquisitions and internal development, shaped U.S. Elevator into an industry leader, making it the first elevator company in the United States to manufacture programmable computerized controls in its passenger elevators.

As Cubic was developing a solid presence in the elevator market and attending to its mainstay defense electronics business, another opportunity for the growing company was emerging. During the 1960s, metropolitan mass transit systems were becoming the rage of the decade, attracting federal spending and some of the largest corporations, who were intent on grabbing a piece of the burgeoning business. Litton Industries was an early competitor in the business, followed by the arrival of Control Data, General Electric, and IBM, all in pursuit of the vast sums to be spent on subway and rail transit systems. Before long, however, the well-financed contenders for the mass transit market became disenchanted with the business, opting to abandon their involvement when their growth projections did not immediately materialize. For Zable, the flight of the large corporations represented an opportunity with two benefits. By entering into the mass transit market, he could further lessen Cubic’s dependence on military spending and jump into a business that could garner the company appreciable market share. Zable demonstrated his commitment with the 1972 purchase of Los Angeles-based Western Data Products, Inc., a floundering maker of rail transit fare collections systems that was staffed by former Litton Industries engineers.

The decision to buy Western Data Products added the third leg that would support Cubic in the decades ahead. The company was heavily involved in supplying military training systems to the armed forces, was a manufacturer of freight and passenger elevators, and by 1972 was a manufacturer of the machines that opened gates when coins were dropped into a box or encoded cards were inserted into a slot. In this new business, Zable would enjoy as much success as he was registering in the production of elevators, shrewdly shaping his automatic fare collection business into the nation’s largest competitor as larger contenders looked elsewhere for profitable ventures. One of those companies to turn away from the mass transit business was IBM, and Zable took advantage of the behemoth corporation’s decision to cut short its plans by acquiring IBM’s fare collection technology and engineering drawing at bargain basement prices. This transaction, which the business press hailed as a shrewd move on Zable’s part, further enriched Cubic’s capabilities in the automatic fare collection business and set the stage for a number of lucrative contracts that would be awarded to the company.

Filing a void made vacant by the large corporations, Cubic was able to win the contract to complete the second phase of San Francisco’s BART mass transit system, a project IBM had declined to finish. Other large-scale projects followed, as Zable outmaneuvered rivals. Cubic was awarded the final $53 million contract for Washington, D.C.’s Metro mass transit system in 1975 and three years later won the contract to supply Atlanta, Georgia’s rapid rail system. It was an encouraging start for the new business, adding volume and stability to Cubic’s annual revenue and profit totals. Soon, the company would stand as the only major domestic manufacturer of automatic fare collection equipment and hold sway over a market worth hundreds of millions of dollars. Elsewhere in Cubic’s operations, business was advancing admirably; the company’s elevator business was solidly positioned in its markets and defense electronics systems continued to underpin operating profits and sales. The 1970s had proven to be a decade of achievement for Cubic, but the progress did not segue into commensurate success during the 1980s. The difficulties began with the company’s flourishing automatic fare collection business.

1980s Downturn

Large-scale contracts had been awarded to Cubic’s automatic fare collection group–marketing masterstrokes, to be sure–but in the engineering side of the business Cubic recorded several distressing failures. Fare cards jammed in the gates at Washington, D.C.’s Metro system and vending machines broke down at an alarming rate. The problems with Cubic’s equipment prompted Washington, D.C.’s Metro Board chairman to denounce the company’s equipment as a “$50 million disaster” and led local officials to push for scrapping Cubic’s fare collection system altogether. Cubic eventually spent $10 million to improve the operating efficiency of its equipment in Washington, but the company’s problems did not end there. Similar ire was raised in Atlanta, where Cubic’s fare collection gates failed at least once in less than 1,000 transactions, far more frequently than the failure rate specified in the contract of no more than one failure in every 34,000 transactions.

The rampant equipment failure in major metropolitan markets exposed Cubic to a spate of bad press, coverage that helped to give room and business to competing firms, particularly foreign manufacturers of automatic fare collection equipment. The debacle with the contracts in Washington and Atlanta set a bad tone for Cubic’s performance during the 1980s, as sales and profit growth nearly came to a halt. By 1987, the prognostications were bleak. During the previous five years sales had increased only 15 percent, while profits during the same period stagnated. The biggest plunge occurred in 1986 when profits plummeted from $14.7 million to a paltry $1.1 million, as the company suffered from dismal performances by each of its three major business segments. Cubic’s electronic defense systems subsidiary, which was focused mainly on producing flight training and simulation gear, fell victim to costly software changes on B1-B bomber and AW ACS simulators. The adjustments nearly erased all of the subsidiary’s operation profits for the year. Cubic’s electronic freight and passenger elevator business, which was conducted through the company’s U.S. Elevator subsidiary, lost half of its projected earnings to escalating insurance and construction costs. Last, the company’s automatic fare collection business, which had been on the mend since the early problems in Washington and Atlanta, suffered from new product development costs, rounding out the wide-ranging problems that afflicted Cubic during the year.

In the wake of Cubic’s less-than-spectacular 1986, speculation abounded concerning the company’s future. Some Wall Street analysts were recommending that Zable break up the company into separate businesses to arrest the enterprise’s financial slide. Zable, on the other hand, had other ideas. He resolved to rebuild the company, and he began making sweeping changes. Zable terminated those responsible for the software mishap and restructured the $150-million-in-sales defense electronic subsidiary. Shortly thereafter, in August 1987, Cubic was awarded a $100 million contract for five new combat jet training systems for the Navy, the type seen in the film “Top Gun,” designed to plot and track up to 36 aircraft in mock aerial dogfights. To cure U.S. Elevator’s ills, Zable moved 65 percent of the subsidiary’s production south to Mexicali, Mexico and acquired New York City-based Central Elevator Co., a deal that extended Cubic’s presence into the Northeast (the nation’s largest elevator market) and strengthened the maintenance side of the subsidiary’s business. The company’s automatic fare collection business was invigorated by placing a greater emphasis on retrofitting existing fare collection systems, which helped compensate for the dwindling number of new mass transit systems being built. Zable also steered the company into other markets for automatic fare collection systems, such as the August 1987 purchase of New York-based Automatic Toll Systems, a leading, $20-million-in-sales manufacturer of toll road automatic coin collection equipment.

Sales and net income rose strongly after the changes, reaching record highs of $349 million in sales and $21 million in net income by the end of the 1980s. With its early problems in the fare collection business long put to rest, Cubic entered the 1990s as a vibrant company poised for growth. To Zable’s chagrin, however, the nation’s economy during the early years of the decade did not provide a fertile climate for businesses to grow. Recessive economic conditions during the early 1990s stifled financial growth for a wide spectrum of businesses, Cubic included. To make matters worse, defense spending was on the decline during the early 1990s and the elevator industry was suffering from overcapacity, developments that had a decided influence on Cubic’s bottom line. Sales dropped from $352.7 million in 1990 to $307.7 million in 1991 and net income plunged from more than $23 million to $14 million; the one bright spot for the company was the progress made by its revenue collection group.

Comprising eight companies, Cubic’s revenue collection group represented the only company in the world capable of designing, building, installing, and maintaining automatic fare collection systems covering all phases of computerized revenue collection. Not surprisingly, this dominant position had enabled Cubic to expand its business overseas during the latter half of the 1980s, and as the 1990s began the automatic revenue collection group was grabbing the lion’s share of the worldwide market for automatic fare collection systems. In 1991, as its two other business segments were struggling, Cubic secured several new contracts both at home and abroad, including one in New York for the city’s subways and buses and another for CitiRail in New South Wales, Sydney, Australia. Cubic’s automatic revenue collection group also was awarded a contract for a statewide toll system in Florida and a contract for 523 new fare card machines for Washington’s Metro subway system, evidence of the new confidence in Cubic’s technological abilities. In addition to these contracts, Cubic also received follow-up orders from several large international clients, including Singapore-based Mass Rapid Transit Corp., Hong Kong Mass Transit Railway Corp., and the London Underground.

Despite the steady flow of work directed toward its revenue collection group, Cubic, as a whole, did not break free from its downward financial spiral until 1994, a recovery made after the company sold its U.S. Elevator subsidiary for $40 million in 1993. The divestiture, which ended nearly a quarter of a century of elevator production, left Cubic with two major business segments: its defense electronics systems subsidiary and its automatic revenue collection group. Sales in 1994 reached $260 million, then recorded two substantial leaps, swelling to $370 million in 1995 and $407 million in 1996.

Entering the late 1990s, Cubic could draw on the promise of several developments in 1996 to fuel confidence for the future. During the year, the company eliminated the losses recorded by the toll road component of its fare collection business by selling the business it had acquired nine years earlier. Cubic registered a profit on the deal and moved forward with two other deals that pointed toward further growth for its revenue collection business. In September, Cubic acquired complete ownership of a joint venture company it had co-owned previously, called Westinghouse Cubic Ltd. The decision to acquire full control of Westinghouse was indicative of Cubic’s goal to win the con-tract for the privatization of the ticketing and fare collection for London Transport, including the London Underground and London-area buses. The following month, October 1996, Cubic was awarded a $27.9 million contract to design and install automatic fare collection equipment in Shanghai, China. It was the second time China had accepted bids for new fare collection systems, and Cubic had won the first contract, a project in Guangzhou, China. On the heels of these two moves, Cubic prepared for the beginning of the 21st century and the completion of its first half century of business, its prospects for future growth as strong as its leading market positions in defense electronic systems and automatic fare collection systems.

Principal Subsidiaries

Consolidated Conversion Co.; Cubic Applications, Inc.; New York Revenue Automation, Inc.; Southern Cubic Pty. Ltd.; Cubic Communications, Inc.; Cubic Defense Systems, Inc.; Westinghouse Cubic Ltd.; Cubic Worldwide Technical Services.