**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

**QUARTERLY REPORT**

 

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

 

**For the Quarter Ended June 30,2006**

 

**1-8931**

Commission File Number

 

##### **CUBICCORPORATION**

Exact Name of Registrant asSpecified in its Charter

 

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

 

**9333Balboa Avenue**

**San Diego,California 92123**

**Telephone(858) 277-6780**

 

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

 

Yes ý    No o

 

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

 

Large accelerated filer  o           Accelerated filer ý                Non-accelerated filer o

 

Indicate by check mark whether the registrantis a shell company (as defined in Rule 12-b-2 of the Exchange Act).  Yeso  No ý

 

As of July 27, 2006, registrant had only oneclass of common stock of which there were 26,719,663 shares outstanding (afterdeducting 8,945,066 shares held as treasury stock).

 

 

----

 

**PART I -FINANCIAL INFORMATION**

ITEM 1 - FINANCIAL STATEMENTS

 

### **CUBICCORPORATION**

CONDENSED CONSOLIDATEDSTATEMENTS OF INCOME (UNAUDITED)

(amounts in thousands, exceptper share data)

 
| ** **                                     | ** ** | **Nine Months Ended**                                                 | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                     | ** ** | **June 30,**                                                               | ** ** | **June 30,**                | ** ** |
| ** **                                     | ** ** | **2006**                                                                        | ** ** | **2005**                         | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                     | ** ** | **(amounts in thousands, except per share data)** | ** ** |
|                                           |       |                                                                            |       |                             |       |   |   |   |   |
| Net sales                                      |       |                                                                            |       |                             |       |   |   |   |   |
| Products                                       |       | $                                                                               | 371,230    |                             | $          | 328,560 |   | $ | 125,286 |   | $ | 119,896 |   |
| Services                                       |       | 245,404                                                                         |       | 257,223                          |       | 89,668 |   | 93,894 |   |
|                                           |       | 616,634                                                                         |       | 585,783                          |       | 214,954 |   | 213,790 |   |
|                                           |       |                                                                            |       |                             |       |   |   |   |   |
| Cost and expenses                              |       |                                                                            |       |                             |       |   |   |   |   |
| Products                                       |       | 317,987                                                                         |       | 276,481                          |       | 104,763 |   | 106,035 |   |
| Services                                       |       | 202,680                                                                         |       | 210,511                          |       | 75,423 |   | 79,946 |   |
| Selling, general and administrative            |       | 70,420                                                                          |       | 83,464                           |       | 23,458 |   | 24,955 |   |
| Research and development                       |       | 5,137                                                                           |       | 4,614                            |       | 991 |   | 1,236 |   |
|                                           |       | 596,224                                                                         |       | 575,070                          |       | 204,635 |   | 212,172 |   |
|                                           |       |                                                                            |       |                             |       |   |   |   |   |
| Operating income                               |       | 20,410                                                                          |       | 10,713                           |       | 10,319 |   | 1,618 |   |
|                                           |       |                                                                            |       |                             |       |   |   |   |   |
| Other income (expenses):                       |       |                                                                            |       |                             |       |   |   |   |   |
| Gain on sale of investment real estate         |       | 7,237                                                                           |       | —                           |       | — |   | — |   |
| Interest and dividends                         |       | 1,321                                                                           |       | 689                              |       | 670 |   | 136 |   |
| Interest expense                               |       | (3,534                                                                          | )          | (3,842                           | )          | (1,318 | ) | (1,202 | ) |
| Other income (expense)                         |       | 172                                                                             |       | 1,773                            |       | (447 | ) | 214 |   |
| Minority interest in loss of subsidiary        |       | 808                                                                             |       | 196                              |       | 152 |   | 56 |   |
|                                           |       |                                                                            |       |                             |       |   |   |   |   |
| Income before income taxes                     |       | 26,414                                                                          |       | 9,529                            |       | 9,376 |   | 822 |   |
|                                           |       |                                                                            |       |                             |       |   |   |   |   |
| Income taxes                                   |       | 9,200                                                                           |       | 2,900                            |       | 3,400 |   | — |   |
|                                           |       |                                                                            |       |                             |       |   |   |   |   |
| Net income                                     |       | $                                                                               | 17,214     |                             | $          | 6,629 |   | $ | 5,976 |   | $ | 822 |   |
|                                           |       |                                                                            |       |                             |       |   |   |   |   |
| Basic and diluted net income per common  share |       | $                                                                               | 0.64       |                             | $          | 0.25 |   | $ | 0.22 |   | $ | 0.03 |   |
|                                           |       |                                                                            |       |                             |       |   |   |   |   |
| Dividends per common share                     |       | $                                                                               | 0.09       |                             | $          | 0.09 |   | $ | — |   | $ | — |   |
|                                           |       |                                                                            |       |                             |       |   |   |   |   |
| Average number of common shares outstanding    |       | 26,720                                                                          |       | 26,720                           |       | 26,720 |   | 26,720 |   |

 

See accompanying notes.

 

2

----

 

## **CUBIC CORPORATION**

CONDENSED CONSOLIDATED BALANCESHEETS

(in thousands)

 
| ** **                                      | ** ** | **June 30,** | ** ** | **September 30,**         | ** ** |
|-------------------------------------------------|------------|-------------------|------------|--------------------------------|------------|
| ** **                                      | ** ** | **2006**          | ** ** | **2005**                       | ** ** |
| ** **                                      | ** ** | **(Unaudited)**   | ** ** | **(See note below)** | ** ** |
| **ASSETS**                                      |       |              |       |                           |       |
| Current assets:                                 |       |              |       |                           |       |
| Cash and cash equivalents                       |       | $                 | 47,484     |                           | $          | 48,860 |   |
| Accounts receivable, net                        |       | 341,646           |       | 310,771                        |       |
| Inventories                                     |       | 24,223            |       | 21,530                         |       |
| Deferred income taxes and other current  assets |       | 36,823            |       | 42,669                         |       |
| Total current assets                            |       | 450,176           |       | 423,830                        |       |
|                                            |       |              |       |                           |       |
| Long-term contract receivables                  |       | 9,600             |       | 22,900                         |       |
| Property, plant and equipment - net             |       | 53,591            |       | 52,177                         |       |
| Goodwill                                        |       | 34,347            |       | 34,473                         |       |
| Other assets                                    |       | 13,969            |       | 13,900                         |       |
|                                            |       | $                 | 561,683    |                           | $          | 547,280 |   |
|                                            |       |              |       |                           |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**   |       |              |       |                           |       |
| Current liabilities:                            |       |              |       |                           |       |
| Short-term borrowings                           |       | $                 | 35,200     |                           | $          | 26,302 |   |
| Trade accounts payable                          |       | 21,159            |       | 30,256                         |       |
| Customer advances                               |       | 45,612            |       | 41,239                         |       |
| Other current liabilities                       |       | 60,612            |       | 63,871                         |       |
| Accrued pension liability                       |       | 5,490             |       | 7,953                          |       |
| Income taxes payable                            |       | 9,718             |       | 6,571                          |       |
| Current portion of long-term debt               |       | 6,071             |       | 6,040                          |       |
| Total current liabilities                       |       | 183,862           |       | 182,232                        |       |
|                                            |       |              |       |                           |       |
| Long-term debt                                  |       | 38,230            |       | 43,776                         |       |
| Accrued pension liability                       |       | 17,562            |       | 16,179                         |       |
| Deferred compensation                           |       | 7,632             |       | 7,584                          |       |
| Minority interest                               |       | 543               |       | 351                            |       |
|                                            |       |              |       |                           |       |
| Shareholders’ equity:                      |       |              |       |                           |       |
| Common stock                                    |       | 234               |       | 234                            |       |
| Additional paid-in capital                      |       | 12,123            |       | 12,123                         |       |
| Retained earnings                               |       | 334,009           |       | 319,200                        |       |
| Accumulated other comprehensive income          |       | 3,557             |       | 1,667                          |       |
| Treasury stock at cost                          |       | (36,069           | )          | (36,066                        | )          |
|                                            |       | 313,854           |       | 297,158                        |       |
|                                            |       | $                 | 561,683    |                           | $          | 547,280 |   |

 

*Note: The balance sheet at September 30, 2005has been derived from the audited financial statements at that date.*

*Seeaccompanying notes.*

 

3

----

 

**CUBICCORPORATION**

CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

 
| ** **                                                                                   | ** ** | **Nine Months Ended** | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------------------------------------------------|------------|---------------------------------|------------|----------------------------------|------------|
| ** **                                                                                   | ** ** | **June 30,**               | ** ** | **June 30,**                | ** ** |
| ** **                                                                                   | ** ** | **2006**                        | ** ** | **2005**                         | ** ** | **2006** | ** ** | **2005** | ** ** |
| Operating Activities:                                                                        |       |                            |       |                             |       |   |   |   |   |
| Net income                                                                                   |       | $                               | 17,214     |                             | $          | 6,629 |   | $ | 5,976 |   | $ | 822 |   |
| Adjustments to reconcile net income to net  cash provided by (used in) operating activities: |       |                            |       |                             |       |   |   |   |   |
| Depreciation and amortization                                                                |       | 6,819                           |       | 6,358                            |       | 2,219 |   | 1,941 |   |
| Gain on sale of investment real estate                                                       |       | (7,237                          | )          | —                           |       | — |   | — |   |
| Changes in operating assets and liabilities                                                  |       | (18,610                         | )          | (4,105                           | )          | (4,339 | ) | 8,676 |   |
| NET CASH PROVIDED BY (USED IN) OPERATING  ACTIVITIES                                         |       | (1,814                          | )          | 8,882                            |       | 3,856 |   | 11,439 |   |
|                                                                                         |       |                            |       |                             |       |   |   |   |   |
| Investing Activities:                                                                        |       |                            |       |                             |       |   |   |   |   |
| Net additions to property, plant and  equipment                                              |       | (8,082                          | )          | (5,509                           | )          | (2,452 | ) | (806 | ) |
| Proceeds from sale of investment real  estate                                                |       | 8,028                           |       | —                           |       | — |   | — |   |
| Proceeds from sale of marketable securities                                                  |       | —                          |       | 6,200                            |       | — |   | — |   |
| NET CASH PROVIDED BY (USED IN) INVESTING  ACTIVITIES                                         |       | (54                             | )          | 691                              |       | (2,452 | ) | (806 | ) |
|                                                                                         |       |                            |       |                             |       |   |   |   |   |
| Financing Activities:                                                                        |       |                            |       |                             |       |   |   |   |   |
| Change in short-term borrowings, net                                                         |       | 8,898                           |       | 17,919                           |       | 200 |   | (629 | ) |
| Principal payments on long-term borrowings                                                   |       | (5,428                          | )          | (5,913                           | )          | — |   | (321 | ) |
| Purchases of treasury stock                                                                  |       | (3                              | )          | —                           |       | (3 | ) | — |   |
| Dividends paid                                                                               |       | (2,405                          | )          | (2,405                           | )          | (2,405 | ) | — |   |
| NET CASH PROVIDED BY (USED IN) FINANCING  ACTIVITIES                                         |       | 1,062                           |       | 9,601                            |       | (2,208 | ) | (950 | ) |
|                                                                                         |       |                            |       |                             |       |   |   |   |   |
| Effect of exchange rates on cash                                                             |       | (570                            | )          | (625                             | )          | 992 |   | (146 | ) |
|                                                                                         |       |                            |       |                             |       |   |   |   |   |
| NET INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS                                        |       | (1,376                          | )          | 18,549                           |       | 188 |   | 9,537 |   |
|                                                                                         |       |                            |       |                             |       |   |   |   |   |
| Cash and cash equivalents at the beginning  of the period                                    |       | 48,860                          |       | 10,622                           |       | 47,296 |   | 19,634 |   |
|                                                                                         |       |                            |       |                             |       |   |   |   |   |
| CASH AND CASH EQUIVALENTS AT THE END OF THE  PERIOD                                          |       | $                               | 47,484     |                             | $          | 29,171 |   | $ | 47,484 |   | $ | 29,171 |   |

 

*Seeaccompanying notes.*

 

4

----

 

**CUBIC CORPORATION**

NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS

(UNAUDITED)

 

June 30, 2006

 

**Note 1 –Basis for Presentation**

 

The accompanying unauditedconsolidated condensed financial statements have been prepared in accordancewith generally accepted accounting principles for interim financial informationand with the instructions to Form 10-Q and Article 10 of Regulation S-X.Accordingly, they do not include all information and footnotes required byaccounting principles generally accepted in the United States for completefinancial statements.

 

In the opinion of management,all adjustments (consisting of normal recurring accruals) considered necessaryfor a fair presentation have been included. Operating results for the quarterended June 30, 2006 are not necessarily indicative of the results that may beexpected for the year ending September 30, 2006. For further information, referto the consolidated financial statements and footnotes thereto included in theCompany’s annual report on Form 10-K for the year ended September 30, 2005.

 

The preparation of thefinancial statements in conformity with U. S. generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period. Actual resultscould differ from those estimates.

 

**Note 2 –Balance Sheet Details**

 

The componentsof accounts receivable are as follows (in thousands):

 
| ** **                               | ** ** | ** **      | ** ** | **September 30,** | ** ** |
|------------------------------------------|------------|-----------------|------------|------------------------|------------|
| ** **                               | ** ** | **2006**        | ** ** | **2005**               | ** ** |
| ** **                               | ** ** | **(unaudited)** | ** ** | ** **             | ** ** |
| Trade and other receivables              |       | $               | 15,264     |                   | $          | 11,085 |   |
| Long-term contracts:                     |       |            |       |                   |       |
| Billed                                   |       | 92,746          |       | 69,618                 |       |
| Unbilled                                 |       | 248,273         |       | 257,970                |       |
| Allowance for doubtful accounts          |       | (5,037          | )          | (5,002                 | )          |
| Total accounts receivable                |       | 351,246         |       | 333,671                |       |
| Less estimated amounts not currently due |       | (9,600          | )          | (22,900                | )          |
| Current accounts receivable              |       | $               | 341,646    |                   | $          | 310,771 |   |

 

5

----

 

The amount classified as not currently due is an estimate of the amountof long-term contract accounts receivable that will not be collected within oneyear from June 30, 2006.

 

Inventories consist of thefollowing (in thousands):

 
| ** **                                                       | ** ** | **June 30,  2006** | ** ** | **September 30,  2005** | ** ** |
|------------------------------------------------------------------|------------|--------------------|------------|-------------------------|------------|
| ** **                                                       | ** ** | **(unaudited)**    | ** ** | ** **              | ** ** |
| Finished  products                                               |       | $                  | 590        |                    | $          | 471 |   |
| Work in process and inventoried costs under  long-term contracts |       | 18,764             |       | 17,113                  |       |
| Raw material  and purchased parts                                |       | 4,869              |       | 3,946                   |       |
| Total inventories                                                |       | $                  | 24,223     |                    | $          | 21,530 |   |

 

At June 30, 2006, work in process and inventoried costs under long-termcontracts includes approximately $5.6 million in costs incurred in advance ofcontract award or outside the scope of work on several contracts, primarily inthe defense segment. Such costs were $5.8 million as of September 30, 2005. Managementbelieves it is probable these costs, plus appropriate profit margin, will berecovered under contract change orders or upon the award of new contractswithin the next year.

 

**Note 3 –Comprehensive Income**

 

Comprehensiveincome (loss) is as follows (in thousands):

 
| ** **                                        | ** ** | **Nine Months Ended** | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------|------------|---------------------------------|------------|----------------------------------|------------|
| ** **                                        | ** ** | **June 30,**               | ** ** | **June 30,**                | ** ** |
| ** **                                        | ** ** | **2006**                        | ** ** | **2005**                         | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                              |       |                            |       |                             |       |   |   |   |   |
| Net income                                        |       | $                               | 17,214     |                             | $          | 6,629 |   | $ | 5,976 |   | $ | 822 |   |
| Foreign currency translation adjustments          |       | 2,315                           |       | (671                             | )          | 5,321 |   | (2,908 | ) |
| Net unrealized gain (loss) from cash flow  hedges |       | (425                            | )          | 1,117                            |       | (417 | ) | 1,194 |   |
| Comprehensive income (loss)                       |       | $                               | 19,104     |                             | $          | 7,075 |   | $ | 10,880 |   | $ | (892 | ) |

 

6

----

 

**Note 4 –Segment Information**

 

Businesssegment financial data is as follows (in millions):

 
| ** **                   | ** ** | **Nine Months Ended** | ** ** | **Three Months Ended** | ** ** |
|------------------------------|------------|---------------------------------|------------|----------------------------------|------------|
| ** **                   | ** ** | **June 30,**               | ** ** | **June 30,**                | ** ** |
| ** **                   | ** ** | **2006**                        | ** ** | **2005**                         | ** ** | **2006** | ** ** | **2005** | ** ** |
|                         |       |                            |       |                             |       |   |   |   |   |
| **Sales:**                   | ** ** | ** **                      | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Defense                      |       | $                               | 422.1      |                             | $          | 395.0 |   | $ | 149.4 |   | $ | 152.8 |   |
| Transportation systems       |       | 183.3                           |       | 179.5                            |       | 61.8 |   | 57.2 |   |
| Corporate and other          |       | 11.2                            |       | 11.3                             |       | 3.7 |   | 3.8 |   |
| Total sales                  |       | $                               | 616.6      |                             | $          | 585.8 |   | $ | 214.9 |   | $ | 213.8 |   |
|                         |       |                            |       |                             |       |   |   |   |   |
| **Operating income (loss):** |       |                            |       |                             |       |   |   |   |   |
| Defense                      |       | $                               | 20.7       |                             | $          | 21.8 |   | $ | 9.6 |   | $ | 7.6 |   |
| Transportation systems       |       | 1.5                             |       | (8.9                             | )          | 1.1 |   | (5.2 | ) |
| Corporate and other          |       | (1.8                            | )          | (2.2                             | )          | (0.4 | ) | (0.8 | ) |
| Total operating income       |       | $                               | 20.4       |                             | $          | 10.7 |   | $ | 10.3 |   | $ | 1.6 |   |

 

**Note 5 –Financing Arrangements**

 

The Company has a committed five-year revolving credit agreement with agroup of financial institutions in the amount of $150 million until March 2010.As of June 30, 2006, $35.2 million was outstanding under this agreement at arate of 6.2% and is included in current liabilities because it is management’sintent to repay the borrowing within one year.

 

7

----

 

**Note 6 –Pension Plans**

 

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

 
| ** **                     | ** ** | **Nine Months Ended** | ** ** | **Three Months Ended** | ** ** |
|--------------------------------|------------|---------------------------------|------------|----------------------------------|------------|
| ** **                     | ** ** | **June 30,**               | ** ** | **June 30,**                | ** ** |
| ** **                     | ** ** | **2006**                        | ** ** | **2005**                         | ** ** | **2006** | ** ** | **2005** | ** ** |
| Service cost                   |       | $                               | 6,261      |                             | $          | 5,718 |   | $ | 2,133 |   | $ | 1,952 |   |
| Interest cost                  |       | 6,594                           |       | 5,963                            |       | 2,228 |   | 1,961 |   |
| Expected return on plan assets |       | (7,253                          | )          | (6,192                           | )          | (2,449 | ) | (2,063 | ) |
| Amortization of:               |       |                            |       |                             |       |   |   |   |   |
| Prior service cost             |       | 23                              |       | 20                               |       | 8 |   | 5 |   |
| Actuarial loss                 |       | 1,629                           |       | 1,178                            |       | 548 |   | 351 |   |
| Administrative expenses        |       | 75                              |       | 75                               |       | 25 |   | 25 |   |
| Net pension cost               |       | $                               | 7,329      |                             | $          | 6,762 |   | $ | 2,493 |   | $ | 2,231 |   |

 

**Note 7 –New Accounting Pronouncement**

 

On July 13,2006, the Financial Accounting Standards Board issued Interpretation No. (FIN)48, *Accounting for Uncertainty in IncomeTaxes*, which is effective for fiscal years beginning after December31, 2006. The purpose of FIN 48 is to clarify and set forth consistent rulesfor accounting for uncertain tax positions in accordance with FAS 109, *Accounting for Income Taxes*. Thecumulative effect of applying the provisions of this interpretation arerequired to be reported separately as an adjustment to the opening balance ofretained earnings in the year of adoption. We are in the process of reviewingand evaluating FIN 48, and therefore the ultimate impact of its adoption is notyet known.

 

8

----

 

**CUBIC CORPORATION**

ITEM 2 - MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OFOPERATIONS

 

June 30, 2006

 

Our two primary businesses are in the defense and transportation industries. These are high technology businesses that design, manufacture and integrate complex systems and provide essential services to meet the needs of various federal and regional government agencies in the U.S. and other nations around the world.

 

Cubic DefenseApplications is a diversified supplier of constructive, live and virtualmilitary training systems, services and communication systems and products tothe U.S. Department of Defense, other government agencies and allied nations.We design instrumented range systems for fighter aircraft, armored vehicles andinfantry force-on-force live training; weapons effects simulations; laser-basedtactical engagement and virtual simulation systems; and precision gunnerysolutions. Our services are focused on training mission support, computersimulation training, distributed interactive simulation, development ofmilitary training doctrine, force modernization services for NATO entrants andfield operations and maintenance. Our communications products are aimed atintelligence, surveillance, and search and rescue markets.

 

CubicTransportation Systems develops and delivers innovative fare collection systemsfor public transit authorities worldwide. We provide hardware, software andmulti-agency, multimodal transportation integration technologies and servicesthat allow the agencies to efficiently collect fares, manage their operations,reduce shrinkage and make using public transit a more convenient and attractiveoption for commuters.

 

**ConsolidatedOverview**

 

Sales for the quarter ended June 30, 2006 increased to $214.9 millioncompared to $213.8 million in the third quarter last year, an increase of 1%.Defense segment sales were down 2% from $152.8 million in the third quarter offiscal 2005 to $149.4 million in the third quarter this year. Transportationsystems sales increased 8% from $57.2 million last year to $61.8 million in thethird quarter this year.

 

For the first nine months of the fiscal year, sales increased to $616.6million in 2006, from $585.8 million last year, an increase of 5%. The sales increasecame from both segments, with the biggest increase coming from defense. Defensesegment sales grew from $395.0 million in the first nine months of 2005 to$422.1 million this year, an increase of 7%. Transportation systems sales forthe first nine months were $183.3 million this year compared to $179.5 millionlast year, an increase of 2%. See the segment discussions following for furtheranalysis of segment sales.

 

Operating income in the third fiscal quarter increased to $10.3 millionin 2006 compared to $1.6 million in 2005. Defense segment operating incomeimproved to $9.6 million for the quarter, from $7.6 million in the thirdquarter last year. The transportation systems segment generated operatingincome of $1.1 million for the third quarter this year compared to an operatingloss of $5.2 million in the same quarter last year.

 

9

----

 

Operating income for the first nine months of the fiscal year increasedfrom $10.7 million in 2005 to $20.4 million this year due to the transportationsystems segment generating a profit of $1.5 million this year compared to aloss of $8.9 million in the first nine months last year. Defense systemsoperating income decreased from $21.8 million in the first nine months of lastyear to $20.7 million for the same period this year. See the segmentdiscussions following for further analysis of operating income by segment.

 

Net income in the third quarter was $6.0 million, or 22 cents pershare, this year compared to $822 thousand, or 3 cents per share, last year.The increase in operating income from the defense segment and improvement inthe transportation systems segment from a loss to a small profit resulted inthis improvement in net income compared to last year.

 

For the first nine months of the year, net income increased from $6.6million, or 25 cents per share, in 2005 to $17.2 million, or 64 cents per sharethis year. The increase came from better operating results in thetransportation systems segment and a gain on the sale of real estate that hadbeen held for investment purposes for many years, but was sold in the firstquarter of the fiscal year. The gain from the sale of the investment realestate was approximately $4.3 million, after applicable income taxes, or about16 cents per share.

 

Selling, general and administrative (SG&A) expenses decreased by$13.0 million for the first nine months of the fiscal year, from 14.2% to 11.4%of sales, with the decrease coming from both segments. In the first nine monthslast year, the defense segment had incurred higher than normal selling expensesrelated to contract proposals, while such activities returned to a more normallevel in the first nine months this year. Lower transportation systems sellingexpenses and staffing reductions also contributed to reduced SG&A expensesin that segment. In addition, an allowance for doubtful accounts provision ofmore than $4 million had contributed to higher SG&A expenses intransportation systems in the first nine months of 2005.

 

In December 2004, Financial Accounting Standards Board Position109-2 was issued and established standards for how an issuer accounts for aspecial one-time dividends received deduction on the repatriation of certainforeign earnings to a U.S. taxpayer pursuant to the American Jobs Creation Actof 2004 (the Act). The Financial Accounting Standards Board (FASB) staffbelieves that the lack of clarification of certain provisions within the Actand the timing of the enactment necessitated a practical exception to theStatement of Financial Accounting Standards No. 109, *Accounting for Income Taxes*(SFASNo. 109), requirement to reflect in the period of enactment the effect ofa new tax law. Accordingly, an enterprise was allowed time beyond the financialreporting period of enactment to evaluate the effect of the Act on its plan forreinvestment or repatriation of foreign earnings for purposes of applying SFASNo. 109. The Company determined during its third fiscal quarter of 2006that it had sufficient information to make an informed decision on the impactof the Act on the Company’s repatriation plans. Based on that decision, theCompany plans to repatriate approximately $48.0 million in extraordinarydividends, as defined by the Act, during the fourth quarter of 2006 and,accordingly, has recorded a $1.5 million tax liability as of June 30,2006. The Company was also able to reverse approximately $900 thousand in taxreserves during the quarter ended June 30, 2006, which management believes areno longer required.

 

Other than the above third quarter tax provision adjustments, ourprojected effective tax rate for fiscal 2006 is 32.6% of pretax income, whichis reflected in the provision recorded for the first nine

 

10

----

 

months of the year, compared to a rate of 30.4% used in last year’snine-month period. The 2005 effective rate was lower primarily because more ofthe operating income in 2005 came from the UK, where rates are lower than inthe U.S. In addition, the U.S. research and development credit expired onDecember 31, 2005 and has not been extended by Congress, increasing theprojected effective rate this year. The effective rate for fiscal 2006 could beaffected 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** | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------|------------|---------------------------------|------------|----------------------------------|------------|
| ** **                           | ** ** | **June 30,**               | ** ** | **June 30,**                | ** ** |
| ** **                           | ** ** | **2006**                        | ** ** | **2005**                         | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                           | ** ** | **(millions)**                  | ** ** |
| **Defense Segment Sales**            |       |                            |       |                             |       |   |   |   |   |
| Communications and electronics       |       | $                               | 48.4       |                             | $          | 40.3 |   | $ | 15.5 |   | $ | 15.7 |   |
| Training systems                     |       | 172.4                           |       | 161.5                            |       | 59.5 |   | 63.2 |   |
| Government services                  |       | 195.4                           |       | 190.1                            |       | 72.0 |   | 72.2 |   |
| Tactical systems and other           |       | 5.9                             |       | 3.1                              |       | 2.4 |   | 1.7 |   |
|                                 |       | $                               | 422.1      |                             | $          | 395.0 |   | $ | 149.4 |   | $ | 152.8 |   |
|                                 |       |                            |       |                             |       |   |   |   |   |
| **Defense Segment Operating Income** |       |                            |       |                             |       |   |   |   |   |
| Communications and electronics       |       | $                               | 2.8        |                             | $          | (0.8 | ) | $ | 0.7 |   | $ | (1.0 | ) |
| Training systems                     |       | 4.1                             |       | 11.0                             |       | 4.4 |   | 4.1 |   |
| Government services                  |       | 15.6                            |       | 12.8                             |       | 4.9 |   | 5.5 |   |
| Tactical systems and other           |       | (1.8                            | )          | (1.2                             | )          | (0.4 | ) | (1.0 | ) |
|                                 |       | $                               | 20.7       |                             | $          | 21.8 |   | $ | 9.6 |   | $ | 7.6 |   |

 

Defense segment sales decreased 2%, from $152.8 million in the thirdquarter of fiscal 2005 to $149.4 million in the third quarter this year. Communicationsand electronics sales decreased slightly, from $15.7 million in the thirdquarter of 2005 to $15.5 million in the third quarter this year. Salesincreased from contracts for the supply of data links for unmanned aerialvehicles in the U.S. and U. K., while sales of communications productsdecreased for the quarter. Training Systems sales decreased from $63.2 millionin the third quarter last year to $59.5 million this year, a 6% decrease. Newtask orders for development of the next generation air combat training systemresulted in higher air combat training sales; however, sales of ground combattraining systems decreased. In addition, delayed U.S. government funding forsmall arms training systems in 2006 resulted in lower sales from this productline. Government services sales were nearly equal to last year’s third quarter,at $72.0 million this year, compared to $72.2 million last year. Higher salesfrom contracts for the modeling the effects of weapons of mass destruction wereoffset by lower sales from other mission support activities. This can beattributed in part to reduced U.S. government funding during the period forbattlefield simulation support activities.

 

Defense segment sales for the first nine months of the fiscal yearincreased to $422.1 million in 2006 from $395.0 million last year, a 7%increase. Communications and electronics sales increased 20% from $40.3 millionto $48.4 million for the nine-month period. Nearly all of the increase camefrom contracts for data link systems. Training systems sales increased from$161.5 million in the first nine months of 2005 to $172.4 million this year,primarily from increased sales of tactical laser

 

11

----

 

engagement systems and new task orders for development of the nextgeneration air combat training system. Sales from small arms training systemswere lower for the nine-month period due to the government funding issuementioned above. Government services sales increased from $190.1 million in thefirst nine months of 2005 to $195.4 million this year, with increased salesprimarily coming from contracts for the modeling the effects of weapons of massdestruction offsetting a decrease in sales from the Joint Readiness TrainingCenter (JRTC).

 

Operating income in thedefense segment improved in the third quarter to $9.6 million compared to $7.6million in the third quarter of fiscal 2005. Operating income from thecommunications and electronics business unit improved over last year, from aloss of $1.0 million to a profit of $700 thousand. The reason for theimprovement is that the communication products division had incurred a loss of$1.6 million in last year’s third quarter, but turned that around into a $100thousand profit this year. Training systems operating income increased from$4.1 million in the third quarter last year to $4.4 million this year due tohigher profits from air combat training systems and tactical laser engagementsystems. Higher profits from these product lines was partially offset by loweroperating income from smallarms training systems due primarily to lower sales volume. Government services operating incomedecreased from $5.4 million in the third quarter last year to $4.9 million thisyear. Lower profit margins on operations and maintenance contracts and lowersales from the JRTC contract contributed to this decrease. Included in tacticalsystems and other is an operating loss of $400 thousand incurred during thethird quarter, compared to $200 thousand last year, related to the 50% ownedjoint venture with a foreign company. The joint venture began work on its firstcontract during the quarter.

 

For the first nine monthsof the year defense segment operating income was $20.7 million, compared to$21.8 million for the same period last year. Communications and electronicsoperating income improved from a loss of $800 thousand in the first nine monthsof 2005 to a profit of $2.8 million this year. The communications productsdivision improved from a $3.2 million loss in the first three quarters lastyear to a $400 thousand profit this year, while operating income from datalinks and avionics was virtually the same in both years. Training systemsoperating income decreased from $11.0 million in the first nine months of 2005to $4.1 million this year. The primary reason for the decrease was cost growthof $3.8 million on a contract for the development of a ground combat trainingsystem for a foreign customer. In addition, operating income from small arms training systems was lower, due toplanned development costs of $2.0 million for new weapons simulations systemsfor this product line in an effort to become more competitive. This weaponsdevelopment effort is now substantially complete. Operating income from thegovernment services business unit improved from $12.8 million in the first ninemonths of fiscal 2005 to $15.6 million this year due to higher sales volume andimproved profit margins from contracts for computer simulation trainingand modeling the effects of weapons ofmass destruction. Tactical systems and other includes an operating loss of $1.9million in 2006 related to the joint venture mentioned above, compared to $500thousand last year.

 

**Transportation Systems Segment**

 

Transportation segment sales increased from $57.2 million in the thirdquarter of 2005 to $61.8 million this year. This increase came primarily fromsystem installations in North America and Sweden. For the first three quartersof the year, sales increased from $179.5 million in 2005 to $183.3 million thisyear. Higher sales from the contracts mentioned above were partially offset byan anticipated decrease in sales from the Prestige contract in London and fromEuropean service contracts. As discussed in previous reports, the Prestigesystem is in the operations and

 

12

----

 

maintenance phase, which generates lower sales than the system designand installation phase. Service sales were lower in Europe primarily because ofthe gradual phase-out of old ticket issuing equipment which is being replacedby modern equipment requiring less maintenance. We are competing for thecontracts to provide the new equipment and have been successful in winning aportion of the work awarded thus far. In addition, a contract for themaintenance of communications equipment in London was completed at the end offiscal 2005, and was not renewed in 2006, further impacting service sales forthe first nine months of the year. We anticipate lower sales from thetransportation systems segment in fiscal 2007 due to the expected completion ofseveral systems contracts in North America and a decrease in opportunities tosell new systems in the near term.

 

Transportation systems generated a modest profit of $1.1 million in thethird quarter this year compared to a loss of $5.2 million in the third quarterof 2005. Cost growth of $4.8 million on certain systems contracts in NorthAmerica and Australia partially offset profits from service related contractsand European systems contracts. Improved operating performance on the Prestigecontract also contributed to the operating profit for the quarter.

 

The design, manufacture and a substantial portion of the installationof equipment on the North American and Australian contracts referred to aboveis complete. Nevertheless, there continues to be risk that we will not be ableto complete these contracts within our current estimates to complete. Theserisks include potential higher costs for software integration, customer-causeddelays in the installation of hardware and customer directed changes to systemconfiguration. We also believe that customer directed work outside the scope ofthe contracts and customer delay of progress toward completion of thesecontracts has resulted in a portion of the cost growth we have alreadyexperienced. We are continuing to assess the contractual basis for claims onthese contracts and measuring the cost impact related to these customerrequired changes to the scope of work. While we believe we are entitled torecover some of the additional costs we have incurred and costs we may incur inthe future due to customer delays or changes, the amount of recovery fromclaims cannot be determined at this time. Therefore, all related costs havebeen expensed and no revenues from these claims have been recorded to-date.

 

For the first three quarters of the fiscal year, operating income inthe transportation systems segment was $1.5 million, compared to an operatingloss of $8.9 million last year. Losses recorded on the North American andAustralian contracts mentioned above were lower in the first nine months of2006 than in 2005. However, lower sales from the Prestige contract and Europeanservice contracts resulted in decreased operating income from these contractsin the current year compared to last year.

 

**Backlog**

 

As reflected in the table below, total backlog decreased approximately$32 million at June 30, 2006 compared to September 30, 2005, but increased by$38 million during the third quarter. Transportation systems backlog decreasedby $24 million, while defense backlog decreased about $8 million for the firstnine months of the fiscal year. Funded backlog decreased by only $1 millionduring the nine-month period, with transportation systems decreasing by $24million and defense funded backlog increasing by $23 million. 

 

13

----

 
| ** **                     | ** ** | **June 30,**      | ** ** | **September 30,** | ** ** |
|--------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                     | ** ** | **2006**               | ** ** | **2005**               | ** ** |
| ** **                     | ** ** | **(in millions)** | ** ** |
| **Total backlog**              |       |                   |       |                   |       |
| Transportation systems         |       | $                      | 709.2      |                   | $          | 733.3 |   |
| Defense:                       |       |                   |       |                   |       |
| Communications and electronics |       | 86.3                   |       | 57.3                   |       |
| Training systems               |       | 291.8                  |       | 318.9                  |       |
| Government services            |       | 332.7                  |       | 340.0                  |       |
| Tactical systems and other     |       | 9.2                    |       | 11.5                   |       |
| Total defense                  |       | 720.0                  |       | 727.7                  |       |
| Total                          |       | $                      | 1,429.2    |                   | $          | 1,461.0 |   |
|                           |       |                   |       |                   |       |
| **Funded backlog**             |       |                   |       |                   |       |
| Transportation systems         |       | $                      | 709.2      |                   | $          | 733.3 |   |
| Defense:                       |       |                   |       |                   |       |
| Communications and electronics |       | 86.3                   |       | 57.3                   |       |
| Training systems               |       | 291.8                  |       | 318.9                  |       |
| Government services            |       | 111.3                  |       | 87.9                   |       |
| Tactical systems and other     |       | 9.2                    |       | 11.5                   |       |
| Total defense                  |       | 498.6                  |       | 475.6                  |       |
| Total                          |       | $                      | 1,207.8    |                   | $          | 1,208.9 |   |

 

In defense, the difference between total backlog and funded backlogrepresents options under multiyear service contracts. Funding for thesecontracts comes from annual operating budgets of the U.S. government and theoptions are normally exercised annually. Options for the purchase of additionalsystems or equipment are not included in backlog until exercised nor areindefinite delivery, indefinite quantity contracts until an order is received.

 

###### **Liquidityand Capital Resources**

 

Operating activities generated cash of $3.8 million for the quarter,decreasing the use of cash from operating activities to $1.8 million for thefirst nine months of the fiscal year. Positive operating cash flows came fromthe transportation systems segment, while the defense segment experiencedsomewhat negative cash flows for the quarter. For the first nine months of theyear, defense segment cash flows were modestly negative and transportationsystems modestly positive. Negative cash flows in defense resulted primarilyfrom increased accounts receivable and inventories, while positive cash flowsin transportation systems came primarily from customer advances.

 

Investing activities for the nine month period included $8.0 million inproceeds from the sale of the real estate mentioned previously, offset bycapital expenditures of $8.1 million.

 

During the first nine months of the fiscal year, we made scheduledpayments on long-term debt of $5.4 million, paid a dividend to shareholders of$2.4 million and borrowed $8.9 million on a short-term basis.

 

14

----

 

Our financial condition remains strong with working capital of $266million and a current ratio of 2.4 to 1 at June 30, 2006. We expect that cashon hand and our unused lines of credit will be adequate to meet our liquidityrequirements for the foreseeable future.

 

**Critical Accounting Policies, Estimates and Judgments**

 

Our financial statements are prepared in accordance with accounting principles that are generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments 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. We continually evaluate our estimates and judgments, the most critical of which are those related to revenue recognition, income taxes, valuation of goodwill and pension costs. We base our estimates and judgments on historical experience and other factors that we believe to be reasonable under the circumstances. Materially different results can occur as circumstances change and additional information becomes known.

 

Besides the estimates identified above that are considered critical, we make many other accounting estimates in preparing our financial statements and related disclosures. All estimates, whether or not deemed critical affect reported amounts of assets, liabilities, revenues and expenses, as well as disclosures of contingent assets and liabilities. These estimates and judgments are also based on historical experience and other factors that are believed to be reasonable under the circumstances. Materially different results can occur as circumstances change and additional information becomes known, even for estimates 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, 2005.

 

**CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING INFORMATION**

 

This report,including the documents that we incorporate by reference, containsforward-looking statements within the meaning of Section 21E of the SecuritiesExchange Act of 1934, as amended, that are subject to the “safe harbor” createdby those sections. Any statements about our expectations, beliefs, plans,objectives, assumptions or future events or our future financial and/oroperating performance are not historical and may be forward-looking. Thesestatements are often, but not always, made through the use of words or phrasessuch as “may,” “will,” “anticipate,” “estimate,” “plan,” “project,” “continuing,”“ongoing,” “expect,” “believe,” “intend,” “predict,” “potential,” “opportunity”and similar words or phrases or the negatives of these words or phrases. Thesestatements involve estimates, assumptions and uncertainties, including thosediscussed in “Risk Factors” in the Company’s annual report on Form 10-K for theyear ended September 30, 2005, and throughout this filing that could causeactual results to differ materially from those expressed 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

 

15

----

 

financial and/oroperating performance is not necessarily a reliable indicator of futureperformance and you should not use our historical performance to anticipateresults or future period trends. Further, any forward-looking statement speaksonly as of the date on which it is made, and we undertake no obligation toupdate any forward-looking statement to reflect events or circumstances afterthe date on which the statement is made or to reflect the occurrence ofunanticipated events. New factors emerge from time to time, and it is notpossible for us to predict which factors will arise. In addition, we cannotassess the impact of each factor on our business or the extent to which anyfactor, or combination of factors, may cause actual results to differmaterially from those contained in any forward-looking statements.

 

ITEM 4 - STATEMENT ONDISCLOSURE CONTROLS AND PROCEDURES.

 

We maintain disclosure controls and procedures, including internalcontrol over financial reporting, which are designed to ensure that informationrequired to be disclosed in our periodic filings with the SEC is reportedwithin the time periods specified in the SEC’s rules and forms, and to providereasonable assurance that assets are safeguarded and transactions are properlyexecuted and recorded. Our disclosure controls and procedures are also designedto ensure that information is accumulated and communicated to our management,including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO),as appropriate, to allow timely decisions regarding required disclosure. Indesigning and evaluating such controls and procedures, we recognize that anycontrols and procedures, no matter how well designed and operated, can provideonly reasonable assurance of achieving the desired control objectives, andmanagement necessarily is required to use its judgment in evaluating thecost-benefit relationship of possible controls and procedures.

 

We routinely review our system of internal control over financialreporting and make changes to our processes and systems to improve controls andincrease efficiency, while ensuring that we maintain an effective internalcontrol environment. Changes may include such activities as implementing new,more efficient systems and migrating certain processes from our operating unitsto our corporate shared service center. In addition, if we acquire newbusinesses, we will review the controls and procedures of the acquired businessas part of our integration activities.

 

We performed an evaluation of the effectiveness of our disclosurecontrols and procedures as of June 30, 2006. The evaluation was performedwith the participation of senior management of each business segment and keycorporate functions, and under the supervision of the CEO and CFO. Based on ourevaluation, we concluded that our disclosure controls and procedures wereeffective as of June 30, 2006.

 

There were no changes in our internal control over financial reportingduring the most recently completed fiscal quarter that materially affected, orare reasonably likely to materially affect, our internal control over financialreporting.

 

16

----

 

**PART II -OTHER INFORMATION**

 

ITEM 6 - EXHIBITS

 

(a) The following exhibits are included herein:

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                         |
|-----------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1             |       | Amended and restated Certificate of  Incorporation, attached hereto as Exhibit 3.1                                                                      |
| 3.2             |       | Bylaws. Incorporated by reference to Form  10-K filed for the fiscal year ended September 30, 2004, file No. 1-8931,  Exhibit 3.                        |
| 10.1            |       | 2005 Equity Incentive Plan. Incorporated by  reference to Form 10-K filed for the fiscal year ended September 30, 2005,  file No. 1-8931, Exhibit 10.1. |
| 10.2            |       | Transition Protection Plan. Incorporated by  reference to Form 10-K filed for the fiscal year ended September 30, 2005,  file No. 1-8931, Exhibit 10.2. |
| 10.3            |       | Credit Agreement dated March 10, 2005.  Incorporated by reference from Form 10-Q for the quarter ended March 31,  2005, file No. 1-8931, Exhibit 10.    |
| 10.4            |       | Deferred Compensation Plan Summary.  Incorporated by reference from Form 8-K filed April 6, 2005, file No. 1-8931,  Exhibit 10.                         |
| 15              |       | Report of Independent Registered Public  Accounting Firm                                                                                                |
| 31.1            |       | Certification of CEO                                                                                                                                    |
| 31.2            |       | Certification of CFO                                                                                                                                    |
| 32.1            |       | CEO Certification                                                                                                                                       |
| 32.2            |       | CFO Certification                                                                                                                                       |

 

 

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 theundersigned thereunto duly authorized.

 
|   |                          |   | CUBIC  CORPORATION    |
|--------|-------------------------------|--------|-----------------------|
|   |                          |   |                  |   |
|   |                          |   |                  |   |
| Date   | August 2,  2006               |   | /s/ W. W. Boyle       |   |
|   | W. W. Boyle                   |
|   | Senior Vice President and CFO |
|   |                          |
| Date   | August 2, 2006                |   | /s/  Mark A. Harrison |   |
|   | Mark A. Harrison              |
|   | Vice President and Controller |
|        |                               |        |                       |  |  |

 

17

----