**UNITEDSTATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**QUARTERLY REPORT**

 

**Pursuant to Section 13 or 15(d) ofthe Securities Exchange Act of 1934**

 

**For the Quarter Ended March 31, 2010**

 

**001-08931**

**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 theRegistrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months, and (2) has been subject to such filing requirements for the past90 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 April 12,2010, registrant had only one class of common stock of which there were26,736,406 shares outstanding (after deducting 8,945,201 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)

 
| ** **                                     | ** ** | **Six Months Ended** | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------|------------|----------------------|------------|------------------------|------------|
| ** **                                     | ** ** | **March 31,**   | ** ** | **March 31,**     | ** ** |
| ** **                                     | ** ** | **2010**             | ** ** | **2009**               | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                           |       |                 |       |                   |       |   |   |   |   |
| Net  sales:                                    |       |                 |       |                   |       |   |   |   |   |
| Products                                       |       | $                    | 267,038    |                   | $          | 246,727 |   | $ | 134,253 |   | $ | 123,650 |   |
| Services                                       |       | 248,205              |       | 240,997                |       | 130,306 |   | 119,223 |   |
|                                           |       | 515,243              |       | 487,724                |       | 264,559 |   | 242,873 |   |
|                                           |       |                 |       |                   |       |   |   |   |   |
| Costs  and expenses:                           |       |                 |       |                   |       |   |   |   |   |
| Products                                       |       | 187,594              |       | 181,715                |       | 92,739 |   | 86,731 |   |
| Services                                       |       | 216,476              |       | 203,493                |       | 113,139 |   | 103,262 |   |
| Selling,  general and administrative           |       | 55,911               |       | 53,086                 |       | 27,228 |   | 27,880 |   |
| Research  and development                      |       | 5,348                |       | 3,514                  |       | 3,611 |   | 1,654 |   |
| Amortization  of purchased intangibles         |       | 3,408                |       | 2,977                  |       | 1,710 |   | 1,537 |   |
|                                           |       | 468,737              |       | 444,785                |       | 238,427 |   | 221,064 |   |
|                                           |       |                 |       |                   |       |   |   |   |   |
| Operating  income                              |       | 46,506               |       | 42,939                 |       | 26,132 |   | 21,809 |   |
|                                           |       |                 |       |                   |       |   |   |   |   |
| Other  income (expense):                       |       |                 |       |                   |       |   |   |   |   |
| Interest  and dividends                        |       | 897                  |       | 858                    |       | 551 |   | 288 |   |
| Interest  expense                              |       | (868                 | )          | (1,027                 | )          | (418 | ) | (495 | ) |
| Other  income                                  |       | 719                  |       | 530                    |       | 126 |   | 615 |   |
|                                           |       |                 |       |                   |       |   |   |   |   |
| Income  before income taxes                    |       | 47,254               |       | 43,300                 |       | 26,391 |   | 22,217 |   |
|                                           |       |                 |       |                   |       |   |   |   |   |
| Income  taxes                                  |       | 16,200               |       | 14,900                 |       | 9,000 |   | 8,000 |   |
|                                           |       |                 |       |                   |       |   |   |   |   |
| Net  income                                    |       | $                    | 31,054     |                   | $          | 28,400 |   | $ | 17,391 |   | $ | 14,217 |   |
|                                           |       |                 |       |                   |       |   |   |   |   |
| Basic  and diluted net income per common share |       | $                    | 1.16       |                   | $          | 1.06 |   | $ | 0.65 |   | $ | 0.53 |   |
|                                           |       |                 |       |                   |       |   |   |   |   |
| Dividends  per common share                    |       | $                    | 0.09       |                   | $          | 0.09 |   | $ | 0.09 |   | $ | 0.09 |   |
|                                           |       |                 |       |                   |       |   |   |   |   |
| Average  number of common shares outstanding   |       | 26,734               |       | 26,730                 |       | 26,736 |   | 26,732 |   |

 

*Seeaccompanying notes.*

 

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CUBIC CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

 
| ** **                                           | ** ** | **March 31,** | ** **    | **September 30,** | ** ** |
|------------------------------------------------------|------------|--------------------|---------------|------------------------|------------|
| ** **                                           | ** ** | **2010**           | ** **    | **2009**               | ** ** |
| ** **                                           | ** ** | **(Unaudited)**    | ** **    | **(See note below)**   | ** ** |
| **ASSETS**                                           |       |               |          |                   |       |
| Current  assets:                                     |       |               |          |                   |       |
| Cash  and cash equivalents                           |       | $                  | 259,122       |                   | $          | 244,074 |   |
| Short-term  investments                              |       | 68,912             |          | 8,127                  |       |
| Accounts  receivable - net                           |       | 218,962            |          | 231,461                |       |
| Inventories  - net                                   |       | 50,066             |          | 49,107                 |       |
| Deferred  income taxes and other current assets      |       | 45,152             |          | 52,089                 |       |
| Total  current assets                                |       | 642,214            |          | 584,858                |       |
|                                                 |       |               |          |                   |       |
| Long-term  contract receivables                      |       | 17,000             |          | 13,400                 |       |
| Property,  plant and equipment - net                 |       | 47,190             |          | 48,895                 |       |
| Goodwill                                             |       | 59,092             |          | 59,433                 |       |
| Purchased  intangibles                               |       | 25,274             |          | 28,618                 |       |
| Other  assets                                        |       | 20,457             |          | 21,111                 |       |
|                                                 |       | $                  |  811,227 |                   | $          | 756,315 |   |
|                                                 |       |               |          |                   |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**        |       |               |          |                   |       |
| Current  liabilities:                                |       |               |          |                   |       |
| Trade  accounts payable                              |       | $                  | 36,742        |                   | $          | 28,626 |   |
| Customer  advances                                   |       | 119,404            |          | 123,458                |       |
| Other  current liabilities                           |       | 121,264            |          | 109,536                |       |
| Income  taxes payable                                |       | 18,293             |          | 3,491                  |       |
| Current  portion of long-term debt                   |       | 4,527              |          | 4,554                  |       |
| Total  current liabilities                           |       | 300,230            |          | 269,665                |       |
|                                                 |       |               |          |                   |       |
| Long-term  debt                                      |       | 16,077             |          | 20,570                 |       |
| Other  long-term liabilities                         |       | 45,199             |          | 45,235                 |       |
|                                                 |       |               |          |                   |       |
| Shareholders’  equity:                          |       |               |          |                   |       |
| Common  stock                                        |       | 12,574             |          | 12,530                 |       |
| Retained  earnings                                   |       | 484,392            |          | 455,743                |       |
| Accumulated  other comprehensive loss                |       | (10,625            | )             | (11,357                | )          |
| Treasury  stock at cost                              |       | (36,074            | )             | (36,071                | )          |
| Shareholders’  equity related to Cubic          |       | 450,267            |          | 420,845                |       |
| Noncontrolling  interest in variable interest entity |       | (546               | )             | —                 |       |
| Total  Shareholders’ equity                     |       | 449,721            |          | 420,845                |       |
|                                                 |       | $                  |  811,227 |                   | $          | 756,315 |   |

 

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

# *See accompanying notes.*

 

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**CUBIC CORPORATION**

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED)

(in thousands)

 
| ** **                                                                         | ** ** | **Six Months Ended** | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------|------------|------------------------|------------|
| ** **                                                                         | ** ** | **March 31,**   | ** ** | **March 31,**     | ** ** |
| ** **                                                                         | ** ** | **2010**             | ** ** | **2009**               | ** ** | **2010** | ** ** | **2009** | ** ** |
| Operating  Activities:                                                             |       |                 |       |                   |       |   |   |   |   |
| Net  income                                                                        |       | $                    | 31,054     |                   | $          | 28,400 |   | $ | 17,391 |   | $ | 14,217 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |       |                 |       |                   |       |   |   |   |   |
| Depreciation  and amortization                                                     |       | 7,294                |       | 6,848                  |       | 3,732 |   | 3,388 |   |
| Changes  in operating assets and liabilities                                       |       | 7,863                |       | 49,815                 |       | 13,744 |   | 62,966 |   |
| NET  CASH PROVIDED BY OPERATING ACTIVITIES                                         |       | 46,211               |       | 85,063                 |       | 34,867 |   | 80,571 |   |
|                                                                               |       |                 |       |                   |       |   |   |   |   |
| Investing  Activities:                                                             |       |                 |       |                   |       |   |   |   |   |
| Acquisitions,  net of cash acquired                                                |       | (850                 | )          | (7,886                 | )          | — |   | (1,786 | ) |
| Consolidation  of variable interest entity                                         |       | 38,266               |       | —                 |       | 38,266 |   | — |   |
| Net  additions to property, plant and equipment                                    |       | (2,703               | )          | (2,610                 | )          | (1,532 | ) | (1,162 | ) |
| Proceeds  from sales of short-term investments                                     |       | 3,224                |       | —                 |       | 3,148 |   | — |   |
| Purchases  of short-term investments                                               |       | (64,009              | )          | —                 |       | (47,990 | ) | — |   |
| NET  CASH USED IN INVESTING ACTIVITIES                                             |       | (26,072              | )          | (10,496                | )          | (8,108 | ) | (2,948 | ) |
|                                                                               |       |                 |       |                   |       |   |   |   |   |
| Financing  Activities:                                                             |       |                 |       |                   |       |   |   |   |   |
| Principal  payments on long-term borrowings                                        |       | (4,275               | )          | (5,694                 | )          | (61 | ) | (126 | ) |
| Purchases  of treasury stock                                                       |       | (3                   | )          | —                 |       | (3 | ) | — |   |
| Other                                                                              |       | 44                   |       | 45                     |       | 44 |   | 45 |   |
| NET  CASH USED IN FINANCING ACTIVITIES                                             |       | (4,234               | )          | (5,649                 | )          | (20 | ) | (81 | ) |
|                                                                               |       |                 |       |                   |       |   |   |   |   |
| Effect  of exchange rates on cash                                                  |       | (857                 | )          | (14,473                | )          | (1,749 | ) | (1,677 | ) |
|                                                                               |       |                 |       |                   |       |   |   |   |   |
| NET  INCREASE IN CASH AND CASH EQUIVALENTS                                         |       | 15,048               |       | 54,445                 |       | 24,990 |   | 75,865 |   |
|                                                                               |       |                 |       |                   |       |   |   |   |   |
| Cash  and cash equivalents at the beginning of the period                          |       | 244,074              |       | 112,696                |       | 234,132 |   | 91,276 |   |
|                                                                               |       |                 |       |                   |       |   |   |   |   |
| CASH  AND CASH EQUIVALENTS AT THE END OF THE PERIOD                                |       | $                    | 259,122    |                   | $          | 167,141 |   | $ | 259,122 |   | $ | 167,141 |   |

 

# *See accompanying notes.*

 

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# ***CUBIC CORPORATION***

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

March 31, 2010

 

**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 and six month periods endedMarch 31, 2010 are not necessarily indicative of the results that may beexpected for the year ending September 30, 2010. For further information,refer to the consolidated financial statements and footnotes thereto includedin our annual report 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):

 
| ** **                                | ** ** | **March 31,** | ** ** | **September 30,** | ** ** |
|-------------------------------------------|------------|--------------------|------------|------------------------|------------|
| ** **                                | ** ** | **2010**           | ** ** | **2009**               | ** ** |
| ** **                                | ** ** | **(unaudited)**    | ** ** | ** **             | ** ** |
| Trade  and other receivables              |       | $                  | 16,777     |                   | $          | 12,833 |   |
| Long-term  contracts:                     |       |               |       |                   |       |
| Billed                                    |       | 98,752             |       | 103,639                |       |
| Unbilled                                  |       | 123,786            |       | 132,947                |       |
| Allowance  for doubtful accounts          |       | (3,353             | )          | (4,558                 | )          |
| Total  accounts receivable                |       | 235,962            |       | 244,861                |       |
| Less  estimated amounts not currently due |       | (17,000            | )          | (13,400                | )          |
| Current  accounts receivable              |       | $                  | 218,962    |                   | $          | 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 March 31, 2010under transportation systems contracts in the U.S., Australia and the U.K., anda 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**

 
| ** **                                                       | ** ** | **March 31,** | ** ** | **September 30,** | ** ** |
|------------------------------------------------------------------|------------|--------------------|------------|------------------------|------------|
| ** **                                                       | ** ** | **2010**           | ** ** | **2009**               | ** ** |
| ** **                                                       | ** ** | **(unaudited)**    | ** ** | ** **             | ** ** |
| Finished  products                                               |       | $                  | 714        |                   | $          | 55 |   |
| Work  in process and inventoried costs under long-term contracts |       | 103,435            |       | 96,962                 |       |
| Customer  advances                                               |       | (57,695            | )          | (49,734                | )          |
| Raw  material and purchased parts                                |       | 3,612              |       | 1,824                  |       |
| Net  inventories                                                 |       | $                  | 50,066     |                   | $          | 49,107 |   |

 

At March 31, 2010,work in process and inventoried costs under long-term contracts includesapproximately $1.1 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):

 
| ** **                                 | ** ** | **Six Months Ended** | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------|------------|----------------------|------------|------------------------|------------|
| ** **                                 | ** ** | **March 31,**   | ** ** | **March 31,**     | ** ** |
| ** **                                 | ** ** | **2010**             | ** ** | **2009**               | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                       |       |                 |       |                   |       |   |   |   |   |
| Net  income                                |       | $                    | 31,054     |                   | $          | 28,400 |   | $ | 17,391 |   | $ | 14,217 |   |
| Foreign  currency translation adjustments  |       | 809                  |       | (15,615                | )          | 91 |   | (2,070 | ) |
| Net  unrealized loss from cash flow hedges |       | (77                  | )          | (76                    | )          | (86 | ) | (2 | ) |
| Comprehensive  income                      |       | $                    | 31,786     |                   | $          | 12,709 |   | $ | 17,396 |   | $ | 12,145 |   |

 

###### **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 andapproximates the 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 thenature of 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.

 

Thevaluation techniques required for fair value accounting are based uponobservable and unobservable inputs. Observable inputs reflect market data obtainedfrom independent sources,

 

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whileunobservable inputs reflect internal market assumptions. The two types of inputscreate the following fair value hierarchy:

 

·                  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). The fair valueof cash equivalents and short term investments approximates their cost. Thematurity of the debt securities range between 1 to 25 years, however, the majorityhave callable options within one year. Cash equivalents and short terminvestments are categorized as Level 1 and derivatives are categorized as Level2.

### ** **

| ** **                               | ** ** | **March 31,** | ** ** | **September 30,** | ** ** |
|------------------------------------------|------------|--------------------|------------|------------------------|------------|
| ** **                               | ** ** | **2010**           | ** ** | **2009**               | ** ** |
| ** **                               | ** ** | **(unaudited)**    | ** ** | ** **             | ** ** |
| Assets                                   |       |               |       |                   |       |
| Cash  equivalents - money market funds   |       | $                  | 152,823    |                   | $          | 178,893 |   |
| Short-term  investment - debt securities |       | 68,912             |       | 8,217                  |       |
| Derivative  assets                       |       | 16,887             |       | 18,106                 |       |
| Total  assets                            |       | 238,622            |       | 205,216                |       |
| Liabilities                              |       |               |       |                   |       |
| Derivative  liabilities                  |       | 16,765             |       | 17,933                 |       |
| Net  assets                              |       | $                  | 221,857    |                   | $          | 187,283 |   |

 

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

### ** **

Wehave a committed three-year revolving credit agreement with a group offinancial institutions in the amount of $150 million, expiring in December 2012.As of March 31, 2010, there were no borrowings under this agreement;however, there were letters of credit outstanding under the agreement totaling$39.8 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.

 

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Business segmentfinancial data is as follows (in millions):

 
| ** **                               | ** ** | **Six Months Ended** | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------|------------|----------------------|------------|------------------------|------------|
| ** **                               | ** ** | **March 31,**   | ** ** | **March 31,**     | ** ** |
| ** **                               | ** ** | **2010**             | ** ** | **2009**               | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                     |       |                 |       |                   |       |   |   |   |   |
| **Sales:**                               |       |                 |       |                   |       |   |   |   |   |
| Transportation  Systems                  |       | $165.5               |       | $143.0                 |       | $91.2 |   | $68.6 |   |
| Defense  Systems                         |       | 139.0                |       | 134.9                  |       | 63.4 |   | 68.9 |   |
| Mission  Support Services                |       | 209.6                |       | 208.6                  |       | 109.4 |   | 104.8 |   |
| Other                                    |       | 1.1                  |       | 1.2                    |       | 0.5 |   | 0.5 |   |
| Total  sales                             |       | $515.2               |       | $487.7                 |       | $264.5 |   | $242.8 |   |
|                                     |       |                 |       |                   |       |   |   |   |   |
| **Operating income (loss):**             |       |                 |       |                   |       |   |   |   |   |
| Transportation  Systems                  |       | $26.1                |       | $22.5                  |       | $15.1 |   | $12.5 |   |
| Defense  Systems                         |       | 12.0                 |       | 10.2                   |       | 5.3 |   | 5.0 |   |
| Mission  Support Services                |       | 11.1                 |       | 13.8                   |       | 7.1 |   | 6.3 |   |
| Unallocated  corporate expense and other |       | (2.7                 | )          | (3.6                   | )          | (1.4 | ) | (2.0 | ) |
| Total  operating income                  |       | $46.5                |       | $42.9                  |       | $26.1 |   | $21.8 |   |

 

### **Note 7 — Pension Plans**

### ** **

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

 
| ** **                      | ** ** | **Six Months Ended** | ** ** | **Three Months Ended** | ** ** |
|---------------------------------|------------|----------------------|------------|------------------------|------------|
| ** **                      | ** ** | **March 31,**   | ** ** | **March 31,**     | ** ** |
| ** **                      | ** ** | **2010**             | ** ** | **2009**               | ** ** | **2010** | ** ** | **2009** | ** ** |
| Service  cost                   |       | $                    | 1,868      |                   | $          | 1,155 |   | $ | 921 |   | $ | 561 |   |
| Interest  cost                  |       | 4,581                |       | 5,051                  |       | 2,277 |   | 2,501 |   |
| Expected  return on plan assets |       | (4,707               | )          | (4,864                 | )          | (2,340 | ) | (2,409 | ) |
| Amortization  of actuarial loss |       | 430                  |       | 210                    |       | 214 |   | 105 |   |
| Administrative  expenses        |       | 46                   |       | 88                     |       | 23 |   | 44 |   |
| Net  pension cost               |       | $                    | 2,218      |                   | $          | 1,640 |   | $ | 1,095 |   | $ | 802 |   |

 

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

### ** **

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 indetermining whether an entity is a variable interest entity, and modifies themethods allowed for determining the primary

 

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beneficiaryof a variable interest entity.  In addition, this standard requiresongoing reassessments of whether an enterprise is the primary beneficiary of avariable interest entity and enhanced disclosures related to an enterprise’sinvolvement in a variable interest entity. This standard is effective forthe first annual reporting period that begins after November 15, 2009,which for us will be the fiscal year beginning October 1, 2010. We arecurrently evaluating the impact, if any, that the adoption of this standardwill have on our results of operations, financial position or cash flows.

 

InOctober 2009, the FASB issued revised accounting guidance relating tomultiple-deliverable revenue arrangements, which can be applied prospectivelyor retrospectively. This guidance modifies theobjective-and-reliable-evidence-of-fair-value criterion from the separationcriteria used to determine whether an arrangement involving multipledeliverables contains more than one unit of accounting, replaces references to “fairvalue” with “selling price” to distinguish from the fair value measurementrequired under the “Fair Value Measurements and Disclosures” guidance, providesa hierarchy that entities must use to estimate the selling price, eliminatesthe use of the residual method for allocation, and expands the ongoingdisclosure requirements. This revised guidance is effective for new ormaterially modified arrangements in fiscal years beginning on or after June 15,2010, and we expect to adopt it in the fiscal year beginning October 1,2010, although early adoption is allowed. We are currently evaluating theeffect, if any, that adoption of this update will have on our consolidatedfinancial position, results of operations, or cash flows.

 

### **Note 9 —Investment in Variable Interest Entity**

### ** **

Priorto March 5, 2010, we owned 37.5% of the common stock of TransactionSystems Limited (TranSys), a U.K. company formed in 1998 to bid on a contractcalled “PRESTIGE” (Procurement of Revenue Services, Ticketing, Information,Gates and Electronics), which outsourced most of the functions of the Transportfor London (TfL) fare collection system for a period of twelve years beginningin August 1998. We did not previously consolidate TranSys because we werenot the primary beneficiary of this variable interest entity (VIE). We haveparticipated in the PRESTIGE contract solely through subcontracts from TranSys.All of the work performed by TranSys is subcontracted to us and the other 37.5%shareholder and the arrangement provides for the pass-through of virtually allrevenues from TfL to the two shareholders until August 2010. Beginning in August 2010,the services formerly provided by TranSys will be provided by Cubic under a newcontract.

 

OnFebruary 26, 2010, TfL made an early contractual payment to TranSys whichwas required to be paid no later than August 2010. This caused TranSys tomake early payment of the loan balance to the syndicate of banks which hadprovided financing for the project. At the same time, TfL agreed not to withholdany funds from its payment to TranSys for possible asset remediation and waivedthe requirement for further engineering studies and reports on the state of thefare collection system assets. Our obligation to keep the assets in goodworking condition carries over to the successor contract, but the “PerformanceTests” and possible cash withholding from TranSys under the PRESTIGE contractwill not be required. In recent years the fare collection system hasconsistently exceeded the contractual performance levels and we believe thatsufficient costs have been included in our estimated costs to complete thecontract to continue this level of performance for the remainder of thePRESTIGE project and the follow-on contract.

 

OnMarch 5, 2010, the two 37.5% shareholders of TranSys each acquired half ofthe shares in TranSys previously held by the minority shareholders forapproximately $0.1 million, bringing our share ownership up to 50%. TranSyscontinues to be considered a VIE because it has not demonstrated the ability tofinance its activities without additional subordinated financial support fromits equity investors and because its underlying risks do not coincide with thevoting interests.

 

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Asa result of the ownership transfer and the early payment by TfL, we conducted anew evaluation of the primary beneficiary of TranSys. This evaluationdetermined that Cubic is now the primary beneficiary and is, therefore,required to consolidate TranSys as of March 5, 2010.

 

Inconcluding that Cubic is the primary beneficiary of the TranSys VIE, we createda model of the expected outcome from the remaining activities of TranSys andits related subcontracts with its shareholders. We identified several alternateoutcomes which considered possible upside and downside scenarios. We used ourjudgment to assign probabilities to the alternate outcomes and the relatedvariability of the cash flows. From this we established the enterprise valueand the variability of the possible outcomes from this value. The evaluationresulted in greater variability for Cubic than for the other shareholderincluding a greater probability of residual losses and returns. Therefore, weconcluded that Cubic is the primary beneficiary of TranSys.

 

Asa result of becoming the primary beneficiary of TranSys, the consolidation ofTranSys was treated as an acquisition in our financial statements. The fairvalue of the enterprise was virtually the same as fair value of the assets andliabilities acquired, therefore, no gain or loss was recorded from thetransaction. The fair value of assets and liabilities acquired at March 5,2010 were as follows (in millions):

 
| Cash  and cash equivalents         |   | $     | 38.3   |   |
|------------------------------------|--------|-------|--------|--------|
| Other  current assets              |   | 16.9  |   |
| Purchased  intangibles             |   | 0.2   |   |
| Income  taxes payable              |   | (20.7 | )      |
| Other  current liabilities         |   | (35.8 | )      |
| Fair  value of net assets acquired |   | $     | (1.1   | )      |

 

Weare in the process of finalizing the determination of the fair value of theassets and liabilities assumed and the preliminary purchase price will besubject to further adjustments as we finalize our review and analysis of theseamounts.

 

### **Note 10 —Income Taxes**

### ** **

The amount of unrecognized tax benefits was $4.9 million at March 31,2010 and $4.8 million at September 30, 2009, exclusive of interest. Thetotal amount of unrecognized tax benefits that, if recognized, would favorablyimpact the effective tax rate is $4.9 million at March 31, 2010.

 

As of March 31, 2010, 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.

 

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 and six month periods ended March 31, 2010 was notmaterial.  Interest and penalties accruedat March 31, 2010 amounted to $0.4 million.

 

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**Note 11 — 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. Final court approval of the settlement was enteredin April 2010 and payment is expected to be made in May 2010. Werecorded a liability for the settlement amount less the insurance carriercontribution in the fourth quarter of fiscal 2009.

 

**Note 12 — 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 March 31, 2010, we had foreign exchange contractswith a notional value of $178.6 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 of thehedged 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 and six months ended March 31, 2010, the amount of gains andlosses from hedges classified as not highly effective was not significant.There are no significant credit risks related to contingent features in ourderivative agreements and 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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**CUBIC CORPORATION**

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL

CONDITION AND RESULTS OF OPERATIONS

 

March 31, 2010

 

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 and incentivecompensation plans that became effective in 2009. We are now reporting resultsfor two defense segments, Defense Systems and Mission Support Services. TheTransportation Systems segment continues to be considered one reportingsegment. 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 March 31, 2010 increased to $264.5 million from$242.8 million last year, an increase of 9%. Sales increased for the quarter inboth the CTS and MSS segments, with the biggest increase coming from CTS, whilesales from CDS decreased for the quarter.

 

Forthe first six months of the fiscal year, sales increased to $515.2 millioncompared to $487.7 million for the first six months of last year, an increaseof 6%.  The majority of the salesincrease came from CTS, which increased 16% compared to the first six months of2009.  CDS sales increased 3%, while MSSsales increased only slightly compared to the first six months of last year.See the segment discussions following for further analysis of segment sales.

 

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Operatingincome increased 20% to $26.1 million for the quarter compared to $21.8 millionin the second quarter of last year. CTS operating income increased 21% over thesecond quarter of last year, while CDS increased 6% and MSS increased 13%.Corporate and other costs for the quarter were $1.4 million this year, comparedto $2.0 million in the second quarter of last year. Last year these costs inthe second quarter included $1.2 million for the development and marketing ofnew security related technologies compared to $0.5 million in the secondquarter this year.

 

Operatingincome for the six-month period increased 8% to $46.5 million from $42.9million last year. CTS operating income increased 16% over the first half oflast year and CDS increased 18%. MSS operating income decreased 20% from lastyear, primarily because of a provision of $2.0 million we made during the firstquarter for a contract dispute. Corporate and other costs for the first half ofthe fiscal year were $2.7 million this year, compared to $3.6 million last year.See the segment discussions following for further analysis of segment operatingincome.

 

Netincome for the second quarter of fiscal 2010 increased to $17.4 million, or$0.65 per share, compared to $14.2 million, or $0.53 per share last year.Higher operating income from all three segments contributed to the improvement.For the first six months of the year, net income increased to $31.1 million, or$1.16 per share, from $28.4 million, or $1.06 per share last year.

 

Selling, generaland administrative (SG&A) expenses decreased slightly in the second quarterthis year to $27.2 million compared to $27.9 million last year.As a percentage of sales, SG&Aexpenses were 10.3% for the second quarter compared to 11.5% last year. In lastyear’s second quarter, CDS made a provision of $3.1 million for a receivablethat is doubtful of collection, This year, a portion of that amount wasrecovered, as described in the CDS section below. SG&A expenses were higherfor the first half of this year at CTS primarily due to an increase in sellingexpenses associated with Sydney, Australia and other transit system proposals.Company funded research and development expenditures were higher for the secondquarter and first half this year due to an increase in spending for new defenserelated technologies.

 

Our projectedeffective tax rate for fiscal 2010 is 34.0% and is reflected in the taxprovision for the first six months. 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 half oflast year had benefited from the retroactive reinstatement of the U.S. researchand experimentation credit, which reduced the provision by $0.8 million lastyear. The effective rate for fiscal 2010 could be affected by, among otherfactors, the mix of business between the U.S. and foreign jurisdictions, ourability to take advantage of available tax credits and audits of our records bytaxing authorities.

 

**Consolidationof Variable Interest Entity**

Priorto March 5, 2010, we owned 37.5% of the common stock of TransactionSystems Limited (TranSys), a U.K. company formed in 1998 to bid on a contractcalled “PRESTIGE” (Procurement of Revenue Services, Ticketing, Information,Gates and Electronics), which outsourced most of the functions of the Transportfor London (TfL) fare collection system for a period of twelve years beginningin August 1998. We did not previously consolidate TranSys because we werenot the primary beneficiary of this variable interest entity (VIE). We haveparticipated in the PRESTIGE contract solely through subcontracts from TranSys.All of the work performed by TranSys is subcontracted to us and the other 37.5%shareholder and the arrangement provides for the pass-

 

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throughof virtually all revenues from TfL to the two shareholders until August 2010.Beginning in August 2010, the services formerly provided by TranSys willbe provided by Cubic under a new contract.

 

OnFebruary 26, 2010, TfL made an early contractual payment to TranSys whichwas required to be paid no later than August 2010. This caused TranSys tomake early payment of the loan balance to the syndicate of banks which hadprovided financing for the project. At the same time, TfL agreed not towithhold any funds from its payment to TranSys for possible asset remediationand waived the requirement for further engineering studies and reports on thestate of the fare collection system assets. Our obligation to keep the assetsin good working condition carries over to the successor contract, but the “PerformanceTests” and possible cash withholding from TranSys under the PRESTIGE contractwill not be required. In recent years the fare collection system hasconsistently exceeded the contractual performance levels and we believe thatsufficient costs have been included in our estimated costs to complete thecontract to continue this level of performance for the remainder of thePRESTIGE project and the follow-on contract.

 

OnMarch 5, 2010, the two 37.5% shareholders of TranSys each acquired half ofthe shares in TranSys previously held by the minority shareholders forapproximately $0.1 million, bringing our share ownership up to 50%. TranSyscontinues to be considered a VIE because it has not demonstrated the ability tofinance its activities without additional subordinated financial support fromits equity investors and because its underlying risks do not coincide with thevoting interests. As a result of the ownership transfer and the early paymentby TfL, we conducted a new evaluation of the primary beneficiary of TranSys.This evaluation determined that Cubic is now the primary beneficiary and is,therefore, required to consolidate TranSys as of March 5, 2010.

 

Inconcluding that Cubic is the primary beneficiary of the TranSys VIE, we createda model of the expected outcome from the remaining activities of TranSys andits related subcontracts with its shareholders. We identified several alternateoutcomes which considered possible upside and downside scenarios. We used ourjudgment to assign probabilities to the alternate outcomes and the relatedvariability of the cash flows. From this we established the enterprise valueand the variability of the possible outcomes from this value. The evaluationresulted in greater variability for Cubic than for the other shareholderincluding a greater probability of residual losses and returns. Therefore, weconcluded that Cubic is the primary beneficiary of TranSys.

 

Asa result of becoming the primary beneficiary of TranSys, the consolidation ofTranSys was treated as an acquisition in our financial statements. The fairvalue of the enterprise was virtually the same as fair value of the assets andliabilities acquired, therefore, no gain or loss was recorded from thetransaction. The fair value of assets and liabilities acquired at March 5,2010 were as follows (in millions):

 
| Cash  and cash equivalents         |   | $     | 38.3   |   |
|------------------------------------|--------|-------|--------|--------|
| Other  current assets              |   | 16.9  |   |
| Purchased  intangibles             |   | 0.2   |   |
| Income  taxes payable              |   | (20.7 | )      |
| Other  current liabilities         |   | (35.8 | )      |
| Fair  value of net assets acquired |   | $     | (1.1   | )      |

 

Weare in the process of finalizing the determination of the fair value of theassets and liabilities assumed and the preliminary purchase price will besubject to further adjustments as we finalize our review and analysis of theseamounts.

 

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The consolidation ofTranSys will not have a significant impact on our income from operations, butwill increase sales for the period March 2010 to August 2010, atwhich time most of the activities of TranSys will cease with the completion ofthe PRESTIGE project. The consolidation of TranSys added backlog of $33.2million at March 5, 2010, of which $4.9 million became revenue in themonth of March. Most of the remaining backlog will convert to revenue by August of2010, with a small portion spread over the ensuing five years. Since TranSyswas designed to break even, we do not expect it to generate significantoperating income prior to its final dissolution in August of 2015.

 

The consolidation ofTranSys added $38.3 million to our cash balance at the date of acquisition.This cash will all be used within the next nine months to pay tax liabilitiesremaining from the private financing activities of TranSys. These liabilitiesinclude $27.0 million in value added tax which is due to be paid in the quarterending June 30, 2010 and income taxes of $20.7 million, payable ininstallments over the next three quarters. These payments will be reflected asnegative cash flows from operations when paid. Although the remainingactivities of the PRESTIGE contract within TranSys will generate positiveoperating cash flows, these tax liabilities exceed the assets of TranSys and weexpect that the shareholders of TranSys will be required to support the companyby providing cash within the next year. The ultimate cash shortfall in TranSysis not expected to exceed $1.2 million and the shareholders will share equallyin providing this cash to TranSys.

 

**Transportation Systems Segment(CTS)**

 
| ** **                                      | ** ** | **Six Months Ended** | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------|------------|----------------------|------------|------------------------|------------|
| ** **                                      | ** ** | **March 31,**   | ** ** | **March 31,**     | ** ** |
| ** **                                      | ** ** | **2010**             | ** ** | **2009**               | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                      | ** ** | **(in millions)**    | ** ** |
|                                            |       |                 |       |                   |       |   |   |   |   |
| Transportation Systems Segment Sales            |       | $                    | 165.5      |                   | $          | 143.0 |   | $ | 91.2 |   | $ | 68.6 |   |
|                                            |       |                 |       |                   |       |   |   |   |   |
| Transportation Systems Segment Operating Income |       | $                    | 26.1       |                   | $          | 22.5 |   | $ | 15.1 |   | $ | 12.5 |   |

 

CTSsales increased 33% in the second quarter to $91.2 million compared to $68.6million last year and increased 16% for the six-month period to $165.5 millionfrom $143.0 million last year. Sales were higher from work on a contract in theSan Francisco Bay area, from the PRESTIGE contract in London and from theinstallation of a gating system in Southern California. These increases werepartially offset by lower sales from a system installation contract in Florida,which was completed in the first quarter of this year, and from train operatingcompanies in the U.K. A portion of the sales increase from the PRESTIGEcontract this year resulted from consolidation of the company’s 50% ownedsubsidiary, TranSys, beginning in March of this year, as discussed above.This newly consolidated subsidiary added $4.9 million to sales for the quarter.The average exchange rate between the British Pound and the U.S. Dollar wasslightly higher this year than last year, resulting in an increase in sales of$2.5 million for the second quarter and $3.2 million for the six-month period.

 

Operatingincome from CTS increased 21% in the second quarter from $12.5 million lastyear to $15.1 million this year. Higher sales from the contracts mentionedabove added to operating income for the quarter, in addition to spare partssales. Also, a contract modification received during the second quarterresolved a contingency on a contract in Europe for which we had

 

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reserved$1.6 million in a previous year. Since the uncertainty was resolved by thecontract modification, we were able to eliminate the reserve this quarter,adding that amount to operating income. Although higher sales from the PRESTIGEcontract added to operating income for the quarter, lower bonuses for PRESTIGEsystem usage essentially offset this increase. The additional sales fromTranSys mentioned above did not add to operating income, because TranSysoperates on a break-even basis, as it was designed to do. Last year’s secondquarter had also included a contract settlement that added $1.2 million tooperating income and a foreign currency exchange gain that added $1.4 million.The higher average exchange rate between the British Pound and the U.S. Dollaradded $0.6 million to operating income for the quarter.

 

Forthe first half of the year operating income increased to $26.1 million comparedto $22.5 million in the same period last year, a 16% increase. Higher salesfrom the contracts mentioned above, the European contract modification and acontract in Florida that was completed in the first quarter all added tooperating income for the six-month period. In addition, higher sales fromPRESTIGE added to operating income, partially offset by lower bonuses forsystem usage. Also partially offsetting the above increases was lower operatingincome on lower sales to train operating companies in the U.K. and higherselling costs related to a contract proposal in Sydney, Australia. As announcedin a press release in early April, our consortium was selected as the preferredprovider by the Sydney customer and we are currently in the process ofnegotiating a contract for this new system. The higher average exchange ratebetween the British Pound and the U.S. Dollar added $0.7 million to operatingincome for the first half.

 

**Defense Systems Segment (CDS)**

 
| ** **                                    | ** ** | **Six Months Ended** | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------|------------|----------------------|------------|------------------------|------------|
| ** **                                    | ** ** | **March 31,**   | ** ** | **March 31,**     | ** ** |
| ** **                                    | ** ** | **2010**             | ** ** | **2009**               | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                    | ** ** | **(in millions)**    | ** ** |
| **Defense Systems Segment Sales**             |       |                 |       |                   |       |   |   |   |   |
| Training systems                              |       | $                    | 112.7      |                   | $          | 114.6 |   | $ | 50.3 |   | $ | 60.8 |   |
| Communications                                |       | 24.7                 |       | 19.3                   |       | 12.4 |   | 7.4 |   |
| Other                                         |       | 1.6                  |       | 1.0                    |       | 0.7 |   | 0.7 |   |
|                                          |       | $                    | 139.0      |                   | $          | 134.9 |   | $ | 63.4 |   | $ | 68.9 |   |
|                                          |       |                 |       |                   |       |   |   |   |   |
| **Defense Systems Segment Operating  Income** |       |                 |       |                   |       |   |   |   |   |
| Training systems                              |       | $                    | 8.9        |                   | $          | 8.8 |   | $ | 4.3 |   | $ | 3.6 |   |
| Communications                                |       | 3.0                  |       | 1.5                    |       | 1.0 |   | 1.5 |   |
| Other                                         |       | 0.1                  |       | (0.1                   | )          | — |   | (0.1 | ) |
|                                          |       | $                    | 12.0       |                   | $          | 10.2 |   | $ | 5.3 |   | $ | 5.0 |   |

 

**TrainingSystems**

Trainingsystems sales decreased 17% in the second quarter this year to $50.3 millioncompared to $60.8 million in the second quarter of last year, and were down 2%for the first six months of the fiscal year from $114.6 million to $112.7million. Air combat training sales to customers in the Far East and from theU.S. government P5 contract were lower in the second quarter and six-monthperiods this year. Activity on the Joint Strike Fighter (JSF) contract was alsolower in the second quarter but increased during the first half of the fiscalyear when compared to last year. In addition, shipments of small arms trainingsystems were down in the second quarter and for the first six

 

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monthsof the year. We expect shipments of these products to increase in the secondhalf of the fiscal year. Shipment of electro-optic training systems andactivity on other ground combat training systems increased compared to lastyear for both the quarter and first half, partially offsetting the decreasesdescribed above.

 

Training systemsoperating income increased 19% in the second quarter to $4.3 million from $3.6million last year, and increased slightly from $8.8 million in the first sixmonths last year to $8.9 million this year. In the second quarter last year wehad established a $3.1 million allowance for doubtful accounts receivablerelated to a company through which we sold training systems products to theU.S. government because they failed to pass on to us cash they collected fromthe government on our behalf. In the second quarter this year we collected $1.5million of the balance due from this company, which added to operating incomefor the quarter and first six months. In addition, higher sales of groundcombat training systems and related electro-optic trainingsystemsresulted inhigher operatingincome from these contracts for the quarter and six-month periods. However,these improvements were offset by lower operating income from small armstraining systems and air combat training systems due to lower sales. Inaddition, last year’s second quarter and first half had included high marginsales of air combat training spare parts to a customer in the Far East whichadded to operating income last year, but was not repeated this year.

 

**Communications**

Communicationssales increased 68% in the second quarter to $12.4 million from $7.4 millionlast year and 28% for the first six months to $24.7 million this year comparedto $19.3 million last year. Sales were higher for the second quarter from allproduct lines and for the six-month period were higher from personnel locatorsystems and power amplifiers. A settlement agreement reached in the firstquarter last year with the U.S. Navy on a data link development contract hadadded $3.3 million to sales in the first half last year. Otherwise, sales ofdata links in the first half this year were also higher than last year. We havedeveloped a new mini-common data link (mini-CDL) product which began generatingsales in the first half of this year, contributing to the increase in data linksales.

 

Communicationsoperating income for the second quarter was down 33% compared to last year to$1.0 million compared to $1.5 million last year, but for the six-month periodwas double the level of last year at $3.0 million compared to $1.5 million.Higher sales from all product lines contributed to higher operating income inthe second quarter this year; however, this was more than offset by developmentcosts for the mini-CDL, which totaled $1.3 million in the quarter. For thefirst half of the year, higher operating income was partially offset bymini-CDL development costs totaling $2.2 million. The settlement agreement withthe U.S. Navy referred to above had no significant impact on operating incomein last year’s first half.

 

**Mission Support Services Segment (MSS)**

** **
| ** **                                        | ** ** | **Six Months Ended** | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------|------------|----------------------|------------|------------------------|------------|
| ** **                                        | ** ** | **March 31,**   | ** ** | **March 31,**     | ** ** |
| ** **                                        | ** ** | **2010**             | ** ** | **2009**               | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                        | ** ** | **(in millions)**    | ** ** |
|                                              |       |                 |       |                   |       |   |   |   |   |
| Mission Support Services Segment Sales            |       | $                    | 209.6      |                   | $          | 208.6 |   | $ | 109.4 |   | $ | 104.8 |   |
|                                              |       |                 |       |                   |       |   |   |   |   |
| Mission Support Services Segment Operating Income |       | $                    | 11.1       |                   | $          | 13.8 |   | $ | 7.1 |   | $ | 6.3 |   |

 

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Salesfrom MSS increased 4% in the second quarter this year to $109.4 million from$104.8 million last year and for the first six months increased slightly from$208.6 million last year to $209.6 million this year. Activity at the JointReadiness Training Center (JRTC) in Fort Polk, LA. picked up in the second quarter,and was higher than last year for the quarter and the first half of the fiscalyear. In addition, higher sales from two contracts with the U.S. Marine Corp, acontract at the Joint Warfighting Center (JWFC) and a contract with theQuartermaster Center and School all generated higher sales for the secondquarter and six-month period. Partially offsetting these improvements werelower sales from a trainer maintenance contract that we lost to a smallbusiness competitor and from a contract for services performed in Iraq that hadadded approximately $5.7 million to sales last year, but was completed. We alsohave recently lost a number of individual positions on our contracts due toexpanded U.S. Department of Defense in-sourcing policies that did not impactthe second quarter significantly but may limit growth from MSS in the nearterm.

 

MSSoperating income increased 13% in the second quarter this year to $7.1 millionfrom $6.3 million last year. Higher sales from the JRTC, U.S. Marine Corp, JWFCand Quartermaster Center and School contracts contributed to the increase inoperating income for the quarter, in addition to improved margins on two ofthese contracts as a result of the increased activity. A decrease in operatingincome from the trainer maintenance contract mentioned above partially offsetthe increase in operating income. Operating income for MSS for the secondquarter is net of amortization of intangible assets of $1.2 million this yearcompared to $1.4 million last year.

 

Forthe first six months of the year, MSS operating income decreased 20% from $13.8million last year to $11.1 million this year. Last year’s first half hadincluded $1.2 million from a contract settlement payment received and thecontract in Iraq mentioned above had added approximately $2.0 million tooperating income. In addition, during the first quarter this year we recorded aprovision of $2.0 million for a dispute with a customer over contract terms. Weare continuing to pursue alternatives for resolution that could lead toultimate recovery of the full amount.  Atthis time, however, we cannot quantify or determine the likelihood of recovery.Higher operating income on higher sales from the contracts mentioned abovepartially offset these decreases. Operating income for MSS is net ofamortization of intangible assets of $2.4 million in the first half of thisyear compared to $2.8 million in the first half of last year.

 

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**Backlog**

 
| ** **                      | ** ** | **March 31,** | ** ** | **September 30,** | ** ** |
|---------------------------------|------------|--------------------|------------|------------------------|------------|
| ** **                      | ** ** | **2010**           | ** ** | **2009**               | ** ** |
| ** **                      | ** ** | **(in millions)**  | ** ** |
| **Total backlog**               |       |               |       |                   |       |
| Transportation  Systems         |       | $                  | 819.9      |                   | $          | 772.2 |   |
| Mission  Support Services       |       | 796.7              |       | 855.5                  |       |
| Defense  Systems:               |       |               |       |                   |       |
| Training  systems               |       | 508.9              |       | 484.4                  |       |
| Communications  and electronics |       | 53.8               |       | 69.0                   |       |
| Other                           |       | 3.0                |       | 2.3                    |       |
| Total  Defense Systems          |       | 565.7              |       | 555.7                  |       |
| Total                           |       | $                  | 2,182.3    |                   | $          | 2,183.4 |   |
|                            |       |               |       |                   |       |
| **Funded backlog**              |       |               |       |                   |       |
| Transportation  Systems         |       | $                  | 819.9      |                   | $          | 772.2 |   |
| Mission  Support Services       |       | 185.8              |       | 206.7                  |       |
| Defense  Systems:               |       |               |       |                   |       |
| Training  systems               |       | 508.9              |       | 484.4                  |       |
| Communications  and electronics |       | 53.8               |       | 69.0                   |       |
| Other                           |       | 3.0                |       | 2.3                    |       |
| Total  Defense Systems          |       | 565.7              |       | 555.7                  |       |
| Total                           |       | $                  | 1,571.4    |                   | $          | 1,534.6 |   |

 

As reflected inthe table above, backlog did not change significantly between September 30,2009 and March 31, 2010. The consolidation of TranSys added $28.3 millionto transportation systems backlog at March 31, 2010.  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 $34.9 million for the second quarter of the fiscalyear and $46.2 million for the six-month period. In addition to net income,reductions in accounts receivable contributed to the positive cash flows.Positive operating cash flows came from all three segments, with the greaterportion coming from CTS.

 

Investing activities for the six-month period included capitalexpenditures of $2.7 million and net purchases of short-term investments of $60.8million. In addition, the consolidation of TranSys added $38.3 million to cash.Financing activities for the six-month period consisted primarily of scheduledpayments on our long-term debt of $4.3 million.

 

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Wehave a committed revolving credit agreement with a group of financialinstitutions in the amount of $150 million through December 2012. As of March 31,2010, there were no borrowings under this agreement; however, there wereletters of credit outstanding under the agreement totaling $39.8 million.

 

Our financial conditionremains strong with working capital of $342.0 million and a current ratio of2.1 to 1 at March 31, 2010. 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 which are designed to ensure thatinformation required to be disclosed in our periodic filings with the SEC isrecorded, processed, summarized and reported within the time periods specifiedin the SEC’s rules and forms. Our disclosure controls and procedures arealso designed to ensure that information is accumulated and communicated to ourmanagement, including our Chief Executive Officer (CEO) and Chief FinancialOfficer (CFO), as appropriate, to allow timely decisions regarding requireddisclosure. In designing and evaluating such controls and procedures, werecognize that any controls and procedures, no matter how well designed andoperated, can provide only reasonable assurance of achieving the desiredcontrol objectives, and management necessarily is required to use its judgmentin evaluating the cost-benefit relationship of possible controls andprocedures.

 

Weperformed an evaluation of the effectiveness of our disclosure controls andprocedures as of March 31, 2010. 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 March 31, 2010.

 

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.

 

Therewere no changes in our internal control over financial reporting during themost recently completed fiscal quarter that materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

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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. 001-08931, Exhibit 3.1.      |
| 3.2                  |       | Bylaws. Incorporated by reference to  Form 10-K filed for the fiscal year ended September 30, 2004, file  No. 001-08931, 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. 001-08931, 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. 001-08931, Exhibit 10.2.       |
| 10.3                 |       | Credit Agreement dated December 16, 2009.  Incorporated by reference to Form 10-Q filed for the quarter ended  December 31, 2009, file No. 001-08931, 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. 001-08931, Exhibit 10.4                      |
| 10.5                 |       | Compensatory Arrangements of Certain Officers.  Incorporated by reference to Form 8-K filed February 23, 2010, file  No. 001-08931                                            |
| 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   | May 5, 2010  |   | /s/ William W. Boyle |
|   |              |   | William W. Boyle |
|   |              |   | Senior Vice President  and CFO |
|   |              |   |   |
| Date   | May 5, 2010  |   | /s/ Mark A. Harrison |
|   |              |   | Mark A. Harrison |
|   |              |   | Vice President and  Corporate Controller |

 

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