**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**QUARTERLYREPORT**

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

** **

**For the Quarter Ended December 31, 2009**

** **

**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 (858) 277-6780**

 

Indicate by check mark whether the Registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months, and (2) hasbeen subject to such filing requirements for the past 90 days. Yes x  No o

 

Indicate by check mark whether theregistrant has submitted electronically and posted on its corporate Web site,if any, every Interactive Data File required to be submitted and postedpursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)during the preceding 12 months (or for such shorter period that the registrantwas required to submit and post such files).  Yes o  No o

 

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2of the Exchange Act).

 
| Large accelerated filer o | Accelerated filer x       |
|---------------------------|---------------------------|
|                      |                      |
| Non-accelerated filer o   | Small Reporting Company o |

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12-b-2of the Exchange Act).  Yes o  No x

 

As of January 14,2010, registrant had only one class of common stock of which there were26,731,987 shares outstanding (after deducting 8,945,120 shares held astreasury stock).

 

 

 

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**PART I - FINANCIAL INFORMATION**

ITEM 1 - FINANCIAL STATEMENTS

 

### **CUBIC CORPORATION**

CONDENSED CONSOLIDATED STATEMENTS OF INCOME(UNAUDITED)

(amounts in thousands, except per share data)

 
| ** **                                     | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------|------------|------------------------|------------|
| ** **                                     | ** ** | **December 31,**  | ** ** |
| ** **                                     | ** ** | **2009**               | ** ** | **2008** | ** ** |
|                                           |       |                   |       |   |   |
| Net  sales:                                    |       |                   |       |   |   |
| Products                                       |       | $                      | 132,785    |   | $ | 123,077 |   |
| Services                                       |       | 117,899                |       | 121,774 |   |
|                                           |       | 250,684                |       | 244,851 |   |
|                                           |       |                   |       |   |   |
| Costs  and expenses:                           |       |                   |       |   |   |
| Products                                       |       | 94,855                 |       | 94,984 |   |
| Services                                       |       | 103,337                |       | 100,231 |   |
| Selling,  general and administrative           |       | 28,683                 |       | 25,206 |   |
| Research  and development                      |       | 1,737                  |       | 1,860 |   |
| Amortization  of purchased intangibles         |       | 1,698                  |       | 1,440 |   |
|                                           |       | 230,310                |       | 223,721 |   |
|                                           |       |                   |       |   |   |
| Operating  income                              |       | 20,374                 |       | 21,130 |   |
|                                           |       |                   |       |   |   |
| Other  income (expense):                       |       |                   |       |   |   |
| Interest  and dividends                        |       | 346                    |       | 570 |   |
| Interest  expense                              |       | (450                   | )          | (532 | ) |
| Other  income (expense)                        |       | 593                    |       | (85 | ) |
|                                           |       |                   |       |   |   |
| Income  before income taxes                    |       | 20,863                 |       | 21,083 |   |
|                                           |       |                   |       |   |   |
| Income  taxes                                  |       | 7,200                  |       | 6,900 |   |
|                                           |       |                   |       |   |   |
| Net  income                                    |       | $                      | 13,663     |   | $ | 14,183 |   |
|                                           |       |                   |       |   |   |
| Basic  and diluted net income per common share |       | $                      | 0.51       |   | $ | 0.53 |   |
|                                           |       |                   |       |   |   |
| Average  number of commonshares outstanding    |       | 26,732                 |       | 26,727 |   |

 

*See accompanying notes.*

 

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CUBIC CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

 
| ** **                                      | ** ** | **December 31,** | ** ** | **September 30,** | ** ** |
|-------------------------------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                                      | ** ** | **2009**              | ** ** | **2009**               | ** ** |
| ** **                                      | ** ** | **(Unaudited)**       | ** ** | **(See note below)**   | ** ** |
| **ASSETS**                                      |       |                  |       |                   |       |
| Current  assets:                                |       |                  |       |                   |       |
| Cash  and cash equivalents                      |       | $                     | 234,132    |                   | $          | 244,074 |   |
| Short-term  investments                         |       | 24,070                |       | 8,127                  |       |
| Accounts  receivable - net                      |       | 206,333               |       | 231,461                |       |
| Inventories  - net                              |       | 54,510                |       | 49,107                 |       |
| Deferred  income taxes and other current assets |       | 46,569                |       | 52,089                 |       |
| Total  current assets                           |       | 565,614               |       | 584,858                |       |
|                                            |       |                  |       |                   |       |
| Long-term  contract receivables                 |       | 9,300                 |       | 13,400                 |       |
| Property,  plant and equipment - net            |       | 48,327                |       | 48,895                 |       |
| Goodwill                                        |       | 59,529                |       | 59,433                 |       |
| Purchased  intangibles                          |       | 26,952                |       | 28,618                 |       |
| Other  assets                                   |       | 20,680                |       | 21,111                 |       |
|                                            |       | $                     | 730,402    |                   | $          | 756,315 |   |
|                                            |       |                  |       |                   |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**   |       |                  |       |                   |       |
| Current  liabilities:                           |       |                  |       |                   |       |
| Trade  accounts payable                         |       | $                     | 19,476     |                   | $          | 28,626 |   |
| Customer  advances                              |       | 121,197               |       | 123,458                |       |
| Other  current liabilities                      |       | 84,423                |       | 109,536                |       |
| Income  taxes payable                           |       | 3,053                 |       | 3,491                  |       |
| Current  portion of long-term debt              |       | 4,561                 |       | 4,554                  |       |
| Total  current liabilities                      |       | 232,710               |       | 269,665                |       |
|                                            |       |                  |       |                   |       |
| Long-term  debt                                 |       | 16,409                |       | 20,570                 |       |
| Other  long-term liabilities                    |       | 46,048                |       | 45,235                 |       |
|                                            |       |                  |       |                   |       |
| Shareholders’  equity:                     |       |                  |       |                   |       |
| Common  stock                                   |       | 12,530                |       | 12,530                 |       |
| Retained  earnings                              |       | 469,406               |       | 455,743                |       |
| Accumulated  other comprehensive income (loss)  |       | (10,630               | )          | (11,357                | )          |
| Treasury  stock at cost                         |       | (36,071               | )          | (36,071                | )          |
|                                            |       | 435,235               |       | 420,845                |       |
|                                            |       | $                     | 730,402    |                   | $          | 756,315 |   |

 

*Note: Thebalance sheet at September 30, 2009 has been derived from the auditedfinancial statements at that date.*

# *See accompanying notes.*

 

3

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**CUBIC CORPORATION**

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED)

(in thousands)

 
| ** **                                                                        | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                        | ** ** | **December 31,**  | ** ** |
| ** **                                                                        | ** ** | **2009**               | ** ** | **2008** | ** ** |
| Operating  Activities:                                                            |       |                   |       |   |   |
| Net  income                                                                       |       | $                      | 13,663     |   | $ | 14,183 |   |
| Adjustments  to reconcile net income to net cashprovided by operating activities: |       |                   |       |   |   |
| Depreciation  and amortization                                                    |       | 3,562                  |       | 3,460 |   |
| Changes  in operating assets and liabilities                                      |       | (5,881                 | )          | (13,151 | ) |
| NET  CASH PROVIDED BYOPERATING ACTIVITIES                                         |       | 11,344                 |       | 4,492 |   |
|                                                                              |       |                   |       |   |   |
| Investing  Activities:                                                            |       |                   |       |   |   |
| Acquisitions,  net of cash acquired                                               |       | (850                   | )          | (6,100 | ) |
| Net  additions to property, plant and equipment                                   |       | (1,171                 | )          | (1,448 | ) |
| Proceeds from sales of short-term investments                                     |       | 76                     |       | — |   |
| Purchases of short-term investments                                               |       | (16,019                | )          | — |   |
| NET  CASH USED ININVESTING ACTIVITIES                                             |       | (17,964                | )          | (7,548 | ) |
|                                                                              |       |                   |       |   |   |
| Financing  Activities:                                                            |       |                   |       |   |   |
| Principal  payments on long-term borrowings                                       |       | (4,214                 | )          | (5,568 | ) |
| NET  CASH USED INFINANCING ACTIVITIES                                             |       | (4,214                 | )          | (5,568 | ) |
|                                                                              |       |                   |       |   |   |
| Effect  of exchange rates on cash                                                 |       | 892                    |       | (12,796 | ) |
|                                                                              |       |                   |       |   |   |
| NET  DECREASE IN CASHAND CASH EQUIVALENTS                                         |       | (9,942                 | )          | (21,420 | ) |
|                                                                              |       |                   |       |   |   |
| Cash  and cash equivalents at thebeginning of the period                          |       | 244,074                |       | 112,696 |   |
|                                                                              |       |                   |       |   |   |
| CASH  AND CASH EQUIVALENTS ATTHE END OF THE PERIOD                                |       | $                      | 234,132    |   | $ | 91,276 |   |

 

# *See accompanying notes.*

 

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# ***CUBIC CORPORATION***

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

December 31, 2009

 

**Note 1 — Basis forPresentation**

** **

We have preparedthe accompanying unaudited consolidated condensed financial statements inaccordance with generally accepted accounting principles for interim financialinformation and with the instructions to Form 10-Q and Article 10 ofRegulation S-X. Accordingly, they do not include all information and footnotesrequired by accounting principles generally accepted in the United States forcomplete financial statements.

 

In our opinion,all adjustments necessary for a fair presentation of these financial statementshave been included. Operating results for the three month period ended December 31,2009 are not necessarily indicative of the results that may be expected for theyear ending September 30, 2010. For further information, refer to theconsolidated financial statements and footnotes thereto included in our annualreport on Form 10-K for the year ended September 30, 2009.

 

The preparation ofthe financial statements in conformity with U. S. generally accepted accountingprinciples requires us to make estimates and assumptions that affect thereported amounts of assets and liabilities and disclosure of contingent assetsand 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 components ofaccounts receivable are as follows (in thousands):

 
| ** **                                | ** ** | **December 31,** | ** ** | **September 30,** | ** ** |
|-------------------------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                                | ** ** | **2009**              | ** ** | **2009**               | ** ** |
| ** **                                | ** ** | **(unaudited)**       | ** ** | ** **             | ** ** |
| Trade  and other receivables              |       | $                     | 12,142     |                   | $          | 12,833 |   |
| Long-term  contracts:                     |       |                  |       |                   |       |
| Billed                                    |       | 76,214                |       | 103,639                |       |
| Unbilled                                  |       | 132,543               |       | 132,947                |       |
| Allowance  for doubtful accounts          |       | (5,266                | )          | (4,558                 | )          |
| Total  accounts receivable                |       | 215,633               |       | 244,861                |       |
| Less  estimated amounts not currently due |       | (9,300                | )          | (13,400                | )          |
| Current  accounts receivable              |       | $                     | 206,333    |                   | $          | 231,461 |   |

 

The amount classified asnot currently due is an estimate of the amount of long-term contract accountsreceivable that will not be collected within one year from December 31,2009 under transportation systems contracts in the U.S., Australia and theU.K., and a defense contract in Canada. The non-current balance at September 30,2009 represented non-current amounts due from customers in the same countries.

 

5

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### **Note 2 — Balance Sheet Details -Continued**

 

Inventoriesconsist of the following (in thousands):

 
| ** **                                                      | ** ** | **December 31,** | ** ** | **September 30,** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                                                      | ** ** | **2009**              | ** ** | **2009**               | ** ** |
| ** **                                                      | ** ** | **(unaudited)**       | ** ** | ** **             | ** ** |
| Finished  products                                              |       | $                     | 54         |                   | $          | 55 |   |
| Work  in process and inventoriedcosts under long-term contracts |       | 98,864                |       | 96,962                 |       |
| Customer  advances                                              |       | (49,438               | )          | (49,734                | )          |
| Raw  material and purchased parts                               |       | 5,030                 |       | 1,824                  |       |
| Net  inventories                                                |       | $                     | 54,510     |                   | $          | 49,107 |   |

 

At December 31,2009, work in process and inventoried costs under long-term contracts includesapproximately $1.0 million in costs incurred in advance of contract award oroutside the scope of work on several contracts in the defense segment, comparedto $0.9 million as of September 30, 2009. We believe it is probable thatthese costs, plus appropriate profit margin, will be recovered under contractchange orders or upon the award of new contracts within the next year.

 

###### **Note 3 — Comprehensive Income**

 

Comprehensiveincome is as follows (in thousands):

 
| ** **                                        | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------|------------|------------------------|------------|
| ** **                                        | ** ** | **December 31,**  | ** ** |
| ** **                                        | ** ** | **2009**               | ** ** | **2008** | ** ** |
|                                              |       |                   |       |   |   |
| Net  income                                       |       | $                      | 13,663     |   | $ | 14,183 |   |
| Foreign  currency translation adjustments         |       | 718                    |       | (13,545 | ) |
| Net  unrealized gain (loss) from cash flow hedges |       | 9                      |       | (74 | ) |
| Comprehensive  income                             |       | $                      | 14,390     |   | $ | 564 |   |

 

###### **Note 4 — Fair Value of Financial Instruments**

###### ** **

We carryfinancial instruments, including cash equivalents, accounts receivable,accounts payable and accrued liabilities at cost, which we believe approximatesfair value because of the short-term maturity of these instruments.  The fair value of long-term debt is basedupon quoted market prices for the same or similar debt instruments and approximatesthe carrying value of the debt. Receivables consist primarily of amounts due from U.S. and foreigngovernments for defense products and local government agencies fortransportation systems.  Due to the natureof our customers, we generally do not require collateral.  We have limited exposure to credit risk as wehave historically collected substantially all of our receivables fromgovernment agencies.  We generallyrequire no allowance for doubtful accounts for these customers unless specificcontractual circumstances warrant it.

 

6

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Thevaluation techniques required for fair value accounting are based uponobservable and unobservable inputs. Observable inputs reflect market dataobtained from independent sources, while unobservable inputs reflect internalmarket assumptions. The two types of inputs create the following fair valuehierarchy:

 

·                  Level 1 - Quoted prices foridentical instruments in active markets.

·                  Level 2 - Quoted prices forsimilar instruments in active markets; quoted prices for identical or similarinstruments in markets that are not active; and model-derived valuations whoseinputs are observable or whose significant value drivers are observable.

·                  Level 3 - Significant inputsto the valuation model are unobservable.

 

Thefollowing table presents assets and liabilities measured and recorded at fairvalue on our Balance Sheet on a recurring basis (in thousands). All arecategorized as Level 2.

### ** **

| ** **              | ** ** | **December**    | ** ** | **September 30,** | ** ** |
|-------------------------|------------|-----------------|------------|------------------------|------------|
| ** **              | ** ** | **2009**        | ** ** | **2009**               | ** ** |
| ** **              | ** ** | **(unaudited)** | ** ** | ** **             | ** ** |
| Assets                  |       |            |       |                   |       |
| Short-term  investments |       | $               | 24,070     |                   | $          | 8,217 |   |
| Derivative  assets      |       | 16,878          |       | 18,106                 |       |
| Total  assets           |       | 40,948          |       | 26,323                 |       |
| Liabilities             |       |            |       |                   |       |
| Derivative  liabilities |       | 16,691          |       | 17,933                 |       |
| Net  assets             |       | $               | 24,257     |                   | $          | 8,390 |   |

 

### **Note 5 — Financing Arrangements**

### ** **

Wehave a new committed three-year revolving credit agreement with a group offinancial institutions in the amount of $150 million, expiring in December 2012.As of December 31, 2009, there were no borrowings under this agreement;however, there were letters of credit outstanding under the agreement totaling$41.6 million.

 

### **Note 6 — Segment Information**

### ** **

AtSeptember 30, 2009, we reevaluated our segment reporting in light ofchanges to our management structure, internal performance reporting andincentive compensation plans that became effective during 2009. As a result weare now reporting results for two defense segments, Defense Systems and MissionSupport Services. The Transportation Systems segment continues to be consideredone reporting segment. We have reclassified prior period amounts to reflectthis organizational change.

 

7

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Business segmentfinancial data is as follows (in millions):

 
| ** **                               | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------|------------|------------------------|------------|
| ** **                               | ** ** | **December 31,**  | ** ** |
| ** **                               | ** ** | **2009**               | ** ** | **2008** | ** ** |
|                                     |       |                   |       |   |   |
| **Sales:**                               | ** ** | ** **             | ** ** | ** ** | ** ** |
| Transportation  Systems                  |       | $                      | 74.3       |   | $ | 74.4 |   |
| Defense  Systems                         |       | 75.6                   |       | 66.0 |   |
| Mission  Support Services                |       | 100.2                  |       | 103.8 |   |
| Other                                    |       | 0.6                    |       | 0.7 |   |
| Total  sales                             |       | $                      | 250.7      |   | $ | 244.9 |   |
|                                     |       |                   |       |   |   |
| **Operating income (loss):**             |       |                   |       |   |   |
| Transportation  Systems                  |       | $                      | 11.0       |   | $ | 10.0 |   |
| Defense  Systems                         |       | 6.7                    |       | 5.2 |   |
| Mission  Support Services                |       | 4.0                    |       | 7.5 |   |
| Unallocated  corporate expense and other |       | (1.3                   | )          | (1.6 | ) |
| Total  operating income                  |       | $                      | 20.4       |   | $ | 21.1 |   |

### ** **

### **Note 7 — Pension Plans**

### ** **

The components of netperiodic pension benefits costs are as follows (in thousands):

 
| ** **                      | ** ** | **Three Months Ended** | ** ** |
|---------------------------------|------------|------------------------|------------|
| ** **                      | ** ** | **December 31,**  | ** ** |
| ** **                      | ** ** | **2009**               | ** ** | **2008** | ** ** |
| Service  cost                   |       | $                      | 947        |   | $ | 594 |   |
| Interest  cost                  |       | 2,304                  |       | 2,550 |   |
| Expected  return on plan assets |       | (2,367                 | )          | (2,455 | ) |
| Amortization  of actuarial loss |       | 216                    |       | 105 |   |
| Administrative  expenses        |       | 23                     |       | 44 |   |
| Net  pension cost               |       | $                      | 1,123      |   | $ | 838 |   |

 

### **Note 8 — New AccountingPronouncements**

### ** **

InDecember 2007, the FASB issued an accounting standard that applies to all business combinations orother events in which an entity obtains control of one or more businesses. Thisstandard applies to all business entities, including mutual entities thatpreviously used the pooling-of-interests method of accounting for some businesscombinations.  We adopted this standardas of October 1, 2009, and it will apply to any acquisitions made fromthat point forward. The impact of this standard will depend on the sizeand structure of future acquisitions, and did not have a material impact on thecurrent quarter.

 

8

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InDecember 2009, the FASB issued revised guidance to the accounting standardpreviously issued in December 2007 that requires all entities to report noncontrolling (minority)interests in subsidiaries as equity in the consolidated financial statements.We adopted this standard as of October 1, 2009, and it will apply to anyacquisitions resulting in controlling interests in subsidiaries that are notwholly owned. The impact of this standard will depend on the size and structureof future acquisitions, and had no material impact on the current quarter.

 

InDecember 2008, the FASB issued a standard which expands the disclosurerequirements about plan assets for defined benefit pension plans andpostretirement plans.  This standard is effective for annualfinancial statements issued for fiscal years ending after December 15,2009, which for us is this fiscal year. The adoption of this standard will nothave a material impact on our results of operations, financial position or cashflows.

 

InJune 2009, the FASB issued a standard which changes the approach in determiningwhether an entity is a variable interest entity, and modifies the methodsallowed for determining the primary beneficiary of a variable interestentity.  In addition, this standard requires ongoing reassessments ofwhether an enterprise is the primary beneficiary of a variable interest entityand enhanced disclosures related to an enterprise’s involvement in a variableinterest entity.  We are currently evaluating the impact that the adoptionof this standard will have on our results of operations, financial position orcash flows. This standard is effective for the first annual reporting periodthat begins after November 15, 2009, which for us will be the fiscal yearbeginning October 1, 2010.

 

InOctober 2009, the FASB issued revised accounting guidance, which can beapplied prospectively or retrospectively. This guidance modifies the objective-and-reliable-evidence-of-fair-valuecriterion from the separation criteria used to determine whether an arrangementinvolving multiple deliverables contains more than one unit of accounting,replaces references to “fair value” with “selling price” to distinguish fromthe fair value measurement required under the “Fair Value Measurements andDisclosures” guidance, provides a hierarchy that entities must use to estimatethe selling price, eliminates the use of the residual method for allocation,and expands the ongoing disclosure requirements. We are currently evaluatingthe effect that adoption of this update will have, if any, on our consolidatedfinancial position, results of operations, or cash flows. This revised guidanceis effective for new or materially modified arrangements in fiscal yearsbeginning on or after June 15, 2010, and we expect to adopt it in thefiscal year beginning October 1, 2010, although early adoption is allowed.

 

### **Note 9 —Income Taxes**

### ** **

The amount of unrecognized tax benefits was $4.8 million at December 31,2009 and September 30, 2009, exclusive of interest. The total amount ofunrecognized tax benefits that, if recognized, would favorably impact theeffective tax rate is $4.8 million at December 31, 2009.

 

As of December 31, 2009, our open tax years in significantjurisdictions include 2006-2009 in both the U.S. and the U.K. We believeappropriate provisions for all outstanding issues have been made for alljurisdictions and all open years.

 

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Wereport income tax-related interest income or expense and penalties in incometax expense in the Condensed Consolidated Statement of Income. The amount ofnet interest and penalties we recognized as a component of income tax expenseduring the three-month period ended December 31, 2009 was notmaterial.  Interest and penalties accruedat December 31, 2009 amounted to $0.4 million.

 

**Note 10 — Legal Matter**

 

InDecember 2008, we were named in a class action lawsuit allegingmisclassification of Training Analysts as exempt from overtime, seeking damagesfor overtime pay and back wages, as well as damages for various violations ofCalifornia and federal wage and hour laws. Mediation was conducted in August 2009and we settled the matter for $1.7 million, less a contribution of 0.3 millionfrom our insurance carrier. Preliminary court approval of the settlement wasentered in December, 2009. We recorded a liability for the settlement amountless the insurance carrier contribution in the fourth quarter of fiscal 2009.

 

**Note 11 — Derivative Instrumentsand Hedging Activities**

 

Weutilize derivative and nonderivative financial instruments, such as foreigncurrency forwards, foreign currency debt obligations and foreign currency cashbalances, to manage our exposure to fluctuations in foreign currency exchangerates. We do not use any derivative financial instruments for trading or otherspeculative purposes. At December 31, 2009, we had foreign exchangecontracts with a notional value of $176.8 million outstanding.

 

Allderivatives are recorded at fair value, however, the classification of gains and losses resultingfrom changes in the fair values of derivatives are dependent on the intendeduse of the derivative and its resulting designation. If a derivativeis designated as a fair value hedge, then a change in the fair value of thederivative is offset against the change in the fair value of the underlyinghedged item and only the ineffective portion of the hedge, if any, is recognized in earnings. If a derivativeis designated as a cash flow hedge, then the effective portion of a change inthe fair value of the derivative is recognized as a component of AccumulatedOther Comprehensive Income until the underlying hedged item is recognized inearnings, or the forecasted transaction is no longer probable of occurring. Ifa derivative does not qualify as a highly effective hedge, any change infair value is immediately recognized in earnings. We formally document allhedging relationships for all derivative hedges and the underlying hedgeditems, as well as the risk management objectives and strategies for undertakingthe hedge transactions.

 

Weclassify the fair value of all derivative contracts as either current assets orliabilities, depending on the realized and unrealized gain or loss position ofthe hedged contract at the balance sheet date. The cash flows from derivativestreated as hedges are classified in the Consolidated Statements of Cash Flowsin the same category as the item being hedged.

 

Forthe three months ended December 31, 2009, the amount of gains and lossesfrom hedges classified as not highly effective was not significant. Inaddition, a foreign currency forward has been excluded from the assessment ofhedge effectiveness as it is marked to market on a quarterly basis. There areno significant credit risks related to contingent features in our derivativeagreements. Finally, the amount of estimated unrealized net gains or lossesfrom cash flow hedges which are expected to be reclassified to earnings in thenext twelve months is not significant.

 

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**Note 12 — Subsequent Events**

 

Wehave completed an evaluation of all subsequent events through February 8,2010, which is the issuance date of these consolidated financial statements andconcluded no subsequent events have occurred that require recognition ordisclosure.

 

11

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**CUBIC CORPORATION**

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL

CONDITION AND RESULTS OF OPERATIONS

 

December 31, 2009

 

Our three 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.

 

AtSeptember 30, 2009, we reevaluated our segment reporting in light ofchanges to our management structure, internal performance reporting andincentive compensation plans that became effective in 2009. We are nowreporting results for two defense segments, Defense Systems and Mission SupportServices. The Transportation Systems segment continues to be considered onereporting segment. We have reclassified prior period amounts to reflect thisorganizational change.

 

Cubic Transportation Systems(CTS) develops and delivers innovative fare collection systems for publictransit authorities worldwide.  Weprovide hardware, software and multiagency, multimodal transportationintegration technologies and a full scope of operational services that allowthe agencies to efficiently collect fares, manage their operations, reduceshrinkage and make using public transit a more convenient and attractive optionfor commuters.

 

Mission Support Services(MSS) operates constructive military training systems, provides live trainingmission support, distributed interactive simulation, development of militarytraining doctrine, force modernization services for NATO entrants and fieldoperations and maintenance.

 

Cubic Defense Systems (CDS)is focused on two primary lines of business: Training Systems andCommunications.  The segment is adiversified supplier of live and virtual military training systems, andcommunication systems and products to the U.S. Department of Defense, othergovernment agencies and allied nations. We design instrumented range systemsfor fighter aircraft, armored vehicles and infantry force-on-force livetraining; weapons effects simulations; laser-based tactical and communicationsystems; and precision gunnery solutions. Our communications products are aimedat intelligence, surveillance, and search and rescue markets.

 

**Consolidated Overview**

 

Salesfor the quarter ended December 31, 2009 increased to $250.7 million from$244.9 million last year, an increase of 2%. CDS sales increased 15% comparedto the first quarter of last year while CTS and MSS sales decreased slightly.See the segment discussions following for further analysis of segment sales.

 

Operatingincome decreased 3% to $20.4 million in the quarter compared to $21.1 millionin the first quarter of last year. CDS operating income increased 29% over thefirst quarter of last year due to improvement in the communications businesswhile CTS operating income increased 10% and MSS operating income decreased 47%from last year, primarily because of a provision of $2.0 million we made duringthe quarter for a contract dispute. Corporate and other costs for the quarterwere $1.3 million this year, compared to $1.6 million in the first quarter oflast year. See the segment discussions following for further analysis ofsegment operating income.

 

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Netincome for the first quarter of fiscal 2010 decreased to $13.7 million, or 51cents per share, compared to $14.2 million, or 53 cents per share last year.Net income decreased for the quarter due to the decrease in operating incomefrom MSS. Other income included net foreign currency exchange gains of $0.4million in the first quarter of this year compared to a loss of $0.3 millionlast year.

 

Selling, generaland administrative (SG&A) expenses increased in the first quarter this yearto $28.7 million compared to $25.2 million last year.As a percentage of sales, SG&Aexpenses were 11.4% for the first quarter compared to 10.3% last year. Theincrease was due primarily to higher selling expenses in CDS and CTS. Companyfunded research and development expenditures were slightly lower for the firstquarter compared to last year. Lower spending for security related projects wasnearly offset by increased spending on new defense related technologies.

 

Our projectedeffective tax rate for fiscal 2010 is 34.0% and is reflected in the taxprovision for the first quarter. The projected rate for this year includeslower expected taxes on earnings from foreign jurisdictions that have lower taxrates than in the U.S., such as the U.K. and New Zealand, as we consider theseearnings to be indefinitely reinvested. The tax provision in the first quarterof last year had benefited from the retroactive reinstatement of the U.S.research and experimentation credit, which reduced the provision by $0.8million last year. The effective rate for fiscal 2010 could be affected by,among other factors, the mix of business between the U.S. and foreignjurisdictions, our ability to take advantage of available tax credits andaudits of our records by taxing authorities.

 

**Transportation Systems Segment(CTS)**

 
| ** **                                      | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------|------------|------------------------|------------|
| ** **                                      | ** ** | **December 31,**  | ** ** |
| ** **                                      | ** ** | **2009**               | ** ** | **2008** | ** ** |
| ** **                                      | ** ** | **(in millions)**      | ** ** |
|                                            |       |                   |       |   |   |
| Transportation Systems Segment Sales            |       | $                      | 74.3       |   | $ | 74.4 |   |
|                                            |       |                   |       |   |   |
| Transportation Systems Segment Operating Income |       | $                      | 11.0       |   | $ | 10.0 |   |

 

CTSsales were virtually the same in the first quarter of both years at $74.3million this year and $74.4 million last year, but the composition of the saleshas changed. Sales were higher from work on a contract in the San Francisco Bayarea and from the PRESTIGE contract in London. This was partially offset by a system installation contract in Floridawhich was completed in the quarter, resulting in lower sales this year thanlast year. Sales to train operating companies in the U.K. in this year’s firstquarter were also lower than last year. The average exchange rate between theBritish Pound and the U.S. Dollar was nearly the same this year as last year,resulting in no significant impact on sales.

 

Operatingincome from CTS increased 10% in the first quarter this year to $11.0 million,compared to $10.0 million last year. Higher sales from the PRESTIGE contractcontributed to the increase, in addition to higher operating income from thecontract in Florida mentioned above. Lower operating income on lower sales totrain operating companies partially offset these 

 

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improvements.In addition, the new San Francisco Bay area contract we acquired last yearincurred a small loss for the quarter. The first quarter of last year had alsoincluded two contract restructurings and a dispute resolution which added a net$1.6 million to operating income for the quarter. Operating income was notsignificantly impacted by the exchange rate between the British Pound and theU.S. Dollar in the first quarter this year.

 

**Defense Systems Segment (CDS)**

 
| ** **                                    | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------|------------|------------------------|------------|
| ** **                                    | ** ** | **December 31,**  | ** ** |
| ** **                                    | ** ** | **2009**               | ** ** | **2008** | ** ** |
| ** **                                    | ** ** | **(in millions)**      | ** ** |
| **Defense Systems Segment Sales**             |       |                   |       |   |   |
| Training Systems                              |       | $                      | 62.4       |   | $ | 53.8 |   |
| Communications                                |       | 12.3                   |       | 11.9 |   |
| Other                                         |       | 0.9                    |       | 0.3 |   |
|                                          |       | $                      | 75.6       |   | $ | 66.0 |   |
|                                          |       |                   |       |   |   |
| **Defense Systems Segment Operating  Income** |       |                   |       |   |   |
| Training Systems                              |       | $                      | 4.6        |   | $ | 5.2 |   |
| Communications                                |       | 2.0                    |       | — |   |
| Other                                         |       | 0.1                    |       | — |   |
|                                          |       | $                      | 6.7        |   | $ | 5.2 |   |

 

**TrainingSystems**

 

Trainingsystems sales increased 16% in the first quarter this year to $62.4 millioncompared to $53.8 million in the first quarter of last year. Shipment ofelectro-optic training systems increased in the quarter and activity on otherground combat training systems in the Middle East and Far East also increasedcompared to last year. These increases were partially offset by lower sales ofsmall arms training systems and a slight decrease in sales of air combattraining systems. Air combat training sales to customers in the Far East andfrom the U.S. government P5 contract were lower in the first quarter this year,while activity on the Joint Strike Fighter (JSF) contract increased.

 

Training systemsoperating income decreased to $4.6 million in the first quarter this year from$5.2 million last year. Higher sales of ground combat training systems andrelated electro-optic training systems and higher sales from the JSF contract resulted inhigher operatingincome from these contracts for the quarter. These improvements were offset primarily by lower operating income from small armstraining systems due to lower sales. In addition, last year’s first quarter hadincluded high margin sales of air combat training spare parts to a customer inthe Far East which added to operating income last year, but was not repeatedthis year.

 

**Communications**

 

Communicationssales increased 3% to $12.3 million in the first quarter this year, from $11.9million in the same quarter last year. Sales were higher for the quarter frompersonnel locator systems and power amplifiers but were lower from data links.A settlement agreement reached in the first quarter last year with the U.S.Navy on a data link development contract had added $3.3 million to sales. Otherwise,sales of data links in the first quarter this year were only slightly less thanlast year.

 

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Communicationsoperating income for the first quarter was $2.0 million, compared to zero inthe first quarter of last year. Higher sales of personnel locator systems andpower amplifiers contributed to the higher operating income this year. In lastyear’s first quarter, operating income from the sale of power amplifiers wasoffset by cost growth from a data link development contract and a loss frompersonnel locator systems due to low sales volume. The settlement agreementwith the U.S. Navy referred to above had no significant impact on operatingincome in last year’s first quarter.

 

**Mission Support Services Segment (MSS)**

 
| ** **                                        | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------|------------|------------------------|------------|
| ** **                                        | ** ** | **December 31,**  | ** ** |
| ** **                                        | ** ** | **2009**               | ** ** | **2008** | ** ** |
| ** **                                        | ** ** | **(in millions)**      | ** ** |
|                                              |       |                   |       |   |   |
| Mission Support Services Segment Sales            |       | $                      | 100.2      |   | $ | 103.8 |   |
|                                              |       |                   |       |   |   |
| Mission Support Services Segment Operating Income |       | $                      | 4.0        |   | $ | 7.5 |   |

 

Salesfrom MSS decreased 3% to $100.2 million in the first quarter this year, from$103.8 million last year. Activity at the Joint Readiness Training Center(JRTC) in Fort Polk, LA. was less than last year, and a contract for servicesperformed in Iraq that had added approximately $5.7 million to sales last yearwas completed. Higher sales from two contracts with the U.S. Marine Corppartially offset these decreases for the quarter.

 

MSSoperating income decreased to $4.0 million in the first quarter this year from$7.5 million last year. Last year’s first quarter had included $1.2 millionfrom a contract settlement payment received in the quarter. In addition, thecontract in Iraq mentioned above had added approximately $2.0 million tooperating income last year. This year’s first quarter included a provision of$2.0 million for a dispute with a customer over contract terms. We arecontinuing to pursue alternatives for resolution that could lead to ultimaterecovery of the full amount. At this time, however, we cannot quantify or determinethe likelihood of recovery. Operating income for MSS is net of amortization ofintangible assets of $1.2 million in the first quarter of this year compared to$1.4 million in the first quarter of last year.

 

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**Backlog**

 
| ** **                      | ** ** | **December 31,** | ** ** | **September 30,** | ** ** |
|---------------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                      | ** ** | **2009**              | ** ** | **2009**               | ** ** |
| ** **                      | ** ** | **(in millions)**     | ** ** |
| **Total backlog**               |       |                  |       |                   |       |
| Transportation  Systems         |       | $                     | 813.3      |                   | $          | 772.2 |   |
| Mission  Support Services       |       | 816.2                 |       | 855.5                  |       |
| Defense  Systems:               |       |                  |       |                   |       |
| Training  systems               |       | 483.0                 |       | 484.4                  |       |
| Communications  and electronics |       | 60.0                  |       | 69.0                   |       |
| Other                           |       | 2.2                   |       | 2.3                    |       |
| Total  Defense Systems          |       | 545.2                 |       | 555.7                  |       |
| Total                           |       | $                     | 2,174.7    |                   | $          | 2,183.4 |   |
|                            |       |                  |       |                   |       |
| **Funded backlog**              |       |                  |       |                   |       |
| Transportation  Systems         |       | $                     | 813.3      |                   | $          | 772.2 |   |
| Mission  Support Services       |       | 185.7                 |       | 206.7                  |       |
| Defense  Systems:               |       |                  |       |                   |       |
| Training  systems               |       | 483.0                 |       | 484.4                  |       |
| Communications  and electronics |       | 60.0                  |       | 69.0                   |       |
| Other                           |       | 2.2                   |       | 2.3                    |       |
| Total  Defense Systems          |       | 545.2                 |       | 555.7                  |       |
| Total                           |       | $                     | 1,544.2    |                   | $          | 1,534.6 |   |

 

As reflected inthe table above, backlog did not change significantly between September 30,2009 and December 31, 2009. In MSS, the difference between total backlogand funded backlog represents options under multi-year service contracts.Funding for these contracts comes from annual operating budgets of the U.S.government and the options are normally exercised annually. We do not includeoptions for the purchase of additional systems or equipment in backlog untilexercised, nor do we include indefinite delivery, indefinite quantity contractsuntil an order is received.

 

###### **Liquidity and Capital Resources**

 

Operatingactivities provided cash of $11.3 million for the first quarter of the fiscalyear. In addition to net income for the period, reductions in accountsreceivable contributed to the positive cash flows. Positive operating cashflows came from both CTS and MSS, with the greater portion coming from CTS.

 

Investing activities for the three-month period consisted of capitalexpenditures of $1.2 million, an additional $0.9 million payment for the smalltransportation acquisition made in the fourth quarter of fiscal year 2009, andnet purchases of marketable securities of $15.9 million. Financing activitiesfor the three-month period consisted of scheduled payments on our long-termdebt of $4.2 million.

 

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Wehave a new committed three-year revolving credit agreement with a group offinancial institutions in the amount of $150 million, expiring in December 2012.As of December 31, 2009, there were no borrowings under this agreement;however, there were letters of credit outstanding under the agreement totaling$41.6 million. The fees associated with this new revolver will be $0.6 millionper year, compared to $0.3 million per year under the old agreement.

 

Our financial conditionremains strong with working capital of $332.9 million and a current ratio of2.4 to 1 at December 31, 2009. We expect that cash on hand and our unusedlines of credit will be adequate to meet our liquidity requirements for theforeseeable 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, purchased intangibles 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 furtherinformation, refer to the consolidated financial statements and notes theretoincluded in our annual report on Form 10-K for the year ended September 30,2009.

 

**CAUTIONARY STATEMENT ABOUTFORWARD-LOOKING INFORMATION**

 

This report,including the documents that we incorporate by reference, containsforward-looking statements within the meaning of Section 21E of theSecurities Exchange Act of 1934, as amended, that are subject to the “safeharbor” created by those sections. Any statements about our expectations,beliefs, plans, objectives, assumptions or future events or our futurefinancial and/or operating performance are not historical and may beforward-looking. These statements are often, but not always, made through theuse of words or phrases such as “may,” “will,” “anticipate,” “estimate,” “plan,”“project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “predict,” “potential,”“opportunity” and similar words or phrases or the negatives of these words orphrases.  These statements involveestimates, assumptions and uncertainties, including those discussed in “RiskFactors” in our annual report on Form 10-K for the year ended September 30,2009, and throughout this filing that could cause actual results to differmaterially from those expressed in these statements.

 

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Because the riskfactors referred to above could cause actual results or outcomes to differmaterially from those expressed in any forward-looking statements made by us oron our behalf, you should not place undue reliance on any forward-lookingstatements.  In addition, past financialand/or operating performance is not necessarily a reliable indicator of futureperformance and you should not use our historical performance to anticipateresults or future period trends. Further, any forward-looking statement speaks only as of the date onwhich it is made, and we undertake no obligation to update any forward-lookingstatement to reflect events or circumstances after the date on which thestatement is made or to reflect the occurrence of unanticipated events. Newfactors emerge from time to time, and it is not possible for us to predictwhich factors will arise. In addition, we cannot assess the impact of eachfactor on our business or the extent to which any factor, or combination offactors, may cause actual results to differ materially from those contained inany forward-looking statements.

 

ITEM 4 - STATEMENT ON DISCLOSURE CONTROLS ANDPROCEDURES.

 

Wemaintain disclosure controls and procedures, including internal control overfinancial reporting, which are designed to ensure that information required tobe disclosed in our periodic filings with the SEC is reported within the timeperiods specified in the SEC’s rules and forms, and to provide reasonableassurance that assets are safeguarded and transactions are properly executedand recorded. Our disclosure controls and procedures are also designed toensure 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.

 

Weroutinely review our system of internal control over financial reporting andmake changes to our processes and systems to improve controls and increaseefficiency, while ensuring that we maintain an effective internal controlenvironment. Changes may include such activities as implementing new, moreefficient systems and migrating certain processes from our operating units toour corporate shared service center. In addition, if we acquire new businesses,we will review the controls and procedures of the acquired business as part ofour integration activities.

 

Weperformed an evaluation of the effectiveness of our disclosure controls andprocedures as of December 31, 2009. The evaluation was performed with theparticipation of senior management of each business segment and key corporatefunctions, and under the supervision of the CEO and CFO. Based on ourevaluation, we concluded that our disclosure controls and procedures wereeffective as of December 31, 2009.

 

Wemade changes to our internal control over financial reporting in connectionwith a transition to a new accounting software system for the corporate officeduring the quarter ended December 31, 2009. We established additionaltemporary compensating controls to support our internal control over financialreporting while the transition to the new accounting software system was inprocess; however, we now consider the transition to be complete. We do notbelieve these changes in our internal control over financial reporting havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

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**PART II - OTHER INFORMATION**

 

ITEM 6 - EXHIBITS

 

(a) Thefollowing exhibits are included herein:

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                      |
|----------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                 |
|   3.1           |       | Amended and Restated Certificate of Incorporation.  Incorporated by reference to Form 10-Q filed for the quarter ended June,  30, 2006, file No. 1-8931, 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                 |       | Amended Transition Protection Plan. Incorporated  by reference to Form 10-K filed for the fiscal year ended  September 30, 2007, file No. 1-8931, Exhibit 10.2.  |
|                 |       |                                                                                                                                                                                 |
| 10.3                 |       | Credit Agreement dated December 16, 2009.  Attached hereto as Exhibit 10.3.                                                                                                |
|                 |       |                                                                                                                                                                                 |
| 10.4                 |       | Revised Deferred Compensation Plan. Incorporated  by reference to Form 10-Q for the quarter ended March 31, 2008,  file No. 1-8931, Exhibit 10.4                 |
|                 |       |                                                                                                                                                                                 |
| 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                                                                                                                                                                    |

 

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SIGNATURES

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 

|   |                               |                                     | CUBIC CORPORATION    |
|--------|------------------------------------|------------------------------------------|----------------------|
|   |                               |                                     |                 |
|   |                               |                                     |                 |
| Date   |   February 8,  2010 |                                     | /s/ William W. Boyle |
|   |                               | William W. Boyle                         |
|   |                               | Senior Vice President  and CFO           |
|   |                               |                                     |
|   |                               |                                     |
| Date   |   February 8,  2010 |                                     | /s/ Mark A. Harrison |
|   |                               | Mark A. Harrison                         |
|   |                               | Vice President and  Corporate Controller |

 

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