**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**QUARTERLY REPORT**

 

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

 

**For the Quarter Ended March 31,2006**

** **

**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**

 

Indicateby check mark whether the Registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months, and (2) has been subject to such filing requirements forthe past 90 days.

 

Yes ý  No o

 

Indicate by check mark whetherthe registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

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

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12-b-2 of theExchange Act).  Yes o  No ý

 

As of April 27, 2006,Registrant had only one class of common stock of which there were 26,719,845shares outstanding (after deducting 8,944,884 shares held as treasury stock).

 

 

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**PART I - FINANCIAL INFORMATION**

ITEM 1 - FINANCIAL STATEMENTS

 

### **CUBICCORPORATION**

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(amounts in thousands, except per share data)

 
| ** **                                     | ** ** | **Six  Months Ended**                              | ** ** | **Three  Months Ended** | ** ** |
|------------------------------------------------|------------|----------------------------------------------------|------------|-------------------------|------------|
| ** **                                     | ** ** | **March 31,**                                      | ** ** | **March  31,**          | ** ** |
| ** **                                     | ** ** | **2006**                                           | ** ** | **2005**                | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                     | ** ** | **(amounts  in thousands, except per share data)** | ** ** |
|                                           |       |                                               |       |                    |       |   |   |   |   |
| Net sales                                      |       |                                               |       |                    |       |   |   |   |   |
| Products                                       |       | $                                                  | 245,944    |                    | $          | 208,664 |   | $ | 119,578 |   | $ | 103,075 |   |
| Services                                       |       | 155,736                                            |       | 163,329                 |       | 87,061 |   | 78,978 |   |
|                                           |       | 401,680                                            |       | 371,993                 |       | 206,639 |   | 182,053 |   |
|                                           |       |                                               |       |                    |       |   |   |   |   |
| Cost and  expenses                             |       |                                               |       |                    |       |   |   |   |   |
| Products                                       |       | 213,224                                            |       | 170,446                 |       | 107,259 |   | 86,227 |   |
| Services                                       |       | 127,257                                            |       | 130,565                 |       | 71,062 |   | 62,279 |   |
| Selling, general  and administrative           |       | 46,962                                             |       | 58,509                  |       | 24,591 |   | 30,294 |   |
| Research and development                       |       | 4,146                                              |       | 3,378                   |       | 2,202 |   | 1,731 |   |
|                                           |       | 391,589                                            |       | 362,898                 |       | 205,114 |   | 180,531 |   |
|                                           |       |                                               |       |                    |       |   |   |   |   |
| Operating income                               |       | 10,091                                             |       | 9,095                   |       | 1,525 |   | 1,522 |   |
|                                           |       |                                               |       |                    |       |   |   |   |   |
| Other income  (expenses):                      |       |                                               |       |                    |       |   |   |   |   |
| Gain on sale of  investment real estate        |       | 7,237                                              |       | —                  |       | — |   | — |   |
| Interest and  dividends                        |       | 651                                                |       | 553                     |       | 405 |   | 203 |   |
| Interest expense                               |       | (2,216                                             | )          | (2,640                  | )          | (1,358 | ) | (1,311 | ) |
| Other income  (expense)                        |       | 619                                                |       | 1,559                   |       | (41 | ) | 400 |   |
| Minority  interest in loss of subsidiary       |       | 656                                                |       | 140                     |       | 398 |   | 140 |   |
|                                           |       |                                               |       |                    |       |   |   |   |   |
| Income before  income taxes                    |       | 17,038                                             |       | 8,707                   |       | 929 |   | 954 |   |
|                                           |       |                                               |       |                    |       |   |   |   |   |
| Income taxes                                   |       | 5,800                                              |       | 2,900                   |       | 200 |   | 400 |   |
|                                           |       |                                               |       |                    |       |   |   |   |   |
| Net income                                     |       | $                                                  | 11,238     |                    | $          | 5,807 |   | $ | 729 |   | $ | 554 |   |
|                                           |       |                                               |       |                    |       |   |   |   |   |
| Basic and  diluted net income per common share |       | $                                                  | 0.42       |                    | $          | 0.22 |   | $ | 0.03 |   | $ | 0.02 |   |
|                                           |       |                                               |       |                    |       |   |   |   |   |
| Dividends per  common share                    |       | $                                                  | 0.09       |                    | $          | 0.09 |   | $ | 0.09 |   | $ | 0.09 |   |
|                                           |       |                                               |       |                    |       |   |   |   |   |
| Average number  of common shares outstanding   |       | 26,720                                             |       | 26,720                  |       | 26,720 |   | 26,720 |   |

 

See accompanyingnotes.

 

2

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## **CUBIC CORPORATION**

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

 
| ** **                                      | ** ** | **March 31,  2006** | ** ** | **September 30,  2005** | ** ** |
|-------------------------------------------------|------------|---------------------|------------|-------------------------|------------|
| ** **                                      | ** ** | **(Unaudited)**     | ** ** | **(See note below)**    | ** ** |
| **ASSETS**                                      | ** ** | ** **          | ** ** | ** **              | ** ** |
| Current assets:                                 |       |                |       |                    |       |
| Cash and cash  equivalents                      |       | $                   | 47,296     |                    | $          | 48,860 |   |
| Accounts receivable,  net                       |       | 316,905             |       | 310,771                 |       |
| Inventories                                     |       | 26,133              |       | 21,530                  |       |
| Deferred income  taxes and other current assets |       | 40,852              |       | 42,669                  |       |
| Total current  assets                           |       | 431,186             |       | 423,830                 |       |
|                                            |       |                |       |                    |       |
| Long-term  contract receivables                 |       | 24,500              |       | 22,900                  |       |
| Property, plant  and equipment - net            |       | 52,388              |       | 52,177                  |       |
| Goodwill                                        |       | 33,894              |       | 34,473                  |       |
| Other assets                                    |       | 14,239              |       | 13,900                  |       |
|                                            |       | $                   | 556,207    |                    | $          | 547,280 |   |
|                                            |       |                |       |                    |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**  | ** ** | ** **          | ** ** | ** **              | ** ** |
| Current  liabilities:                           |       |                |       |                    |       |
| Short-term  borrowings                          |       | $                   | 35,000     |                    | $          | 26,302 |   |
| Trade accounts  payable                         |       | 25,809              |       | 30,256                  |       |
| Customer  advances                              |       | 48,530              |       | 41,239                  |       |
| Other current  liabilities                      |       | 59,409              |       | 63,871                  |       |
| Accrued pension  liability                      |       | 7,426               |       | 7,953                   |       |
| Income taxes  payable                           |       | 7,094               |       | 6,571                   |       |
| Current portion  of long-term debt              |       | 6,032               |       | 6,040                   |       |
| Total current  liabilities                      |       | 189,300             |       | 182,232                 |       |
|                                            |       |                |       |                    |       |
| Long-term debt                                  |       | 37,930              |       | 43,776                  |       |
| Accrued pension  liability                      |       | 17,838              |       | 16,179                  |       |
| Deferred  compensation                          |       | 7,467               |       | 7,584                   |       |
| Minority  interest                              |       | 695                 |       | 351                     |       |
|                                            |       |                |       |                    |       |
| Shareholders’  equity:                     |       |                |       |                    |       |
| Common stock                                    |       | 234                 |       | 234                     |       |
| Additional  paid-in capital                     |       | 12,123              |       | 12,123                  |       |
| Retained  earnings                              |       | 328,033             |       | 319,200                 |       |
| Accumulated  other comprehensive income (loss)  |       | (1,347              | )          | 1,667                   |       |
| Treasury stock  at cost                         |       | (36,066             | )          | (36,066                 | )          |
|                                            |       | 302,977             |       | 297,158                 |       |
|                                            |       | $                   | 556,207    |                    | $          | 547,280 |   |

 

*Note: Thebalance sheet at September 30, 2005 has been derived from the audited financialstatements at that date.*

# *See accompanying notes.*

 

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**CUBIC CORPORATION**

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

 
| ** **                                                                                   | ** ** | **Six Months Ended  March 31,** | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|---------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                   | ** ** | **2006**                        | ** ** | **2005**                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| Operating  Activities:                                                                       |       |                            |       |                              |       |   |   |   |   |
| Net income                                                                                   |       | $                               | 11,238     |                              | $          | 5,807 |   | $ | 729 |   | $ | 554 |   |
| Adjustments to  reconcile net income to net cash provided by (used in) operating activities: |       |                            |       |                              |       |   |   |   |   |
| Depreciation and  amortization                                                               |       | 4,600                           |       | 4,417                             |       | 2,282 |   | 2,332 |   |
| Gain on sale of  investment real estate                                                      |       | (7,237                          | )          | —                            |       | — |   | — |   |
| Changes in  operating assets and liabilities                                                 |       | (14,271                         | )          | (12,781                           | )          | 12,576 |   | 5,103 |   |
| NET CASH  PROVIDED BY (USED IN) OPERATING ACTIVITIES                                         |       | (5,670                          | )          | (2,557                            | )          | 15,587 |   | 7,989 |   |
|                                                                                         |       |                            |       |                              |       |   |   |   |   |
| Investing  Activities:                                                                       |       |                            |       |                              |       |   |   |   |   |
| Net additions to  property, plant and equipment                                              |       | (5,630                          | )          | (4,703                            | )          | (3,252 | ) | (2,917 | ) |
| Proceeds from  sale of investment real estate                                                |       | 8,028                           |       | —                            |       | — |   | — |   |
| Proceeds from  sale of marketable securities                                                 |       | —                          |       | 6,200                             |       | — |   | — |   |
| NET CASH  PROVIDED BY (USED IN) INVESTING ACTIVITIES                                         |       | 2,398                           |       | 1,497                             |       | (3,252 | ) | (2,917 | ) |
|                                                                                         |       |                            |       |                              |       |   |   |   |   |
| Financing  Activities:                                                                       |       |                            |       |                              |       |   |   |   |   |
| Change in  short-term borrowings, net                                                        |       | 8,698                           |       | 18,548                            |       | 9,699 |   | 1,413 |   |
| Principal  payments on long-term borrowings                                                  |       | (5,428                          | )          | (5,592                            | )          | — |   | — |   |
| Dividends paid                                                                               |       | —                          |       | (2,405                            | )          | — |   | (2,405 | ) |
| NET CASH  PROVIDED BY (USED IN) FINANCING ACTIVITIES                                         |       | 3,270                           |       | 10,551                            |       | 9,699 |   | (992 | ) |
|                                                                                         |       |                            |       |                              |       |   |   |   |   |
| Effect of  exchange rates on cash                                                            |       | (1,562                          | )          | (479                              | )          | (862 | ) | (810 | ) |
|                                                                                         |       |                            |       |                              |       |   |   |   |   |
| NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS                                        |       | (1,564                          | )          | 9,012                             |       | 21,172 |   | 3,270 |   |
|                                                                                         |       |                            |       |                              |       |   |   |   |   |
| Cash and cash  equivalents at the beginning of the period                                    |       | 48,860                          |       | 10,622                            |       | 26,124 |   | 16,364 |   |
|                                                                                         |       |                            |       |                              |       |   |   |   |   |
| CASH AND CASH  EQUIVALENTS AT THE END OF THE PERIOD                                          |       | $                               | 47,296     |                              | $          | 19,634 |   | $ | 47,296 |   | $ | 19,634 |   |

 

# *See accompanying notes.*

 

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# ***CUBICCORPORATION***

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

March 31, 2006

 

**Note 1 – Basis forPresentation**

** **

The accompanyingunaudited consolidated condensed financial statements have been prepared inaccordance with generally accepted accounting principles for interim financialinformation and with the instructions to Form 10-Q and Article 10 of RegulationS-X. Accordingly, they do not include all information and footnotes required byaccounting principles generally accepted in the United States for completefinancial statements.

 

In the opinion ofmanagement, all adjustments (consisting of normal recurring accruals)considered necessary for a fair presentation have been included. Operatingresults for the quarter ended March 31, 2006 are not necessarily indicative ofthe results that may be expected for the year ending September 30, 2006. Forfurther information, refer to the consolidated financial statements andfootnotes thereto included in the Company’s annual report on Form 10-K for theyear ended September 30, 2005.

 

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

 

### **Note 2– Balance Sheet Details**

 

Thecomponents of accounts receivable are as follows (in thousands):

 
| ** **                                | ** ** | **March 31,  2006** | ** ** | **September 30,  2005** | ** ** |
|-------------------------------------------|------------|---------------------|------------|-------------------------|------------|
| ** **                                | ** ** | **(unaudited)**     | ** ** | ** **              | ** ** |
| Trade and other  receivables              |       | $                   | 21,091     |                    | $          | 11,085 |   |
| Long-term  contracts:                     |       |                |       |                    |       |
| Billed                                    |       | 71,490              |       | 69,618                  |       |
| Unbilled                                  |       | 253,634             |       | 257,970                 |       |
| Allowance for  doubtful accounts          |       | (4,810              | )          | (5,002                  | )          |
| Total accounts  receivable                |       | 341,405             |       | 333,671                 |       |
| Less estimated  amounts not currently due |       | (24,500             | )          | (22,900                 | )          |
| Current accounts  receivable              |       | $                   | 316,905    |                    | $          | 310,771 |   |

 

5

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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, 2006. Of thisamount, approximately $17.5 million relates to the Prestige contract in theUnited Kingdom and the balance to other transportation systems contracts in theU.S.

 

Inventoriesconsist of the following (in thousands):

 
| ** **                                                       | ** ** | **March 31,  2006** | ** ** | **September 30,  2005** | ** ** |
|------------------------------------------------------------------|------------|---------------------|------------|-------------------------|------------|
| ** **                                                       | ** ** | **(unaudited)**     | ** ** | ** **              | ** ** |
| Finished  products                                               |       | $                   | 538        |                    | $          | 471 |   |
| Work in process  and inventoried costs under long-term contracts |       | 20,720              |       | 17,113                  |       |
| Raw material and  purchased parts                                |       | 4,875               |       | 3,946                   |       |
| Total  inventories                                               |       | $                   | 26,133     |                    | $          | 21,530 |   |

 

At March 31, 2006, workin process and inventoried costs under long-term contracts includesapproximately $6.6 million in costs incurred in advance of contract award or outsidethe scope of work on several contracts, primarily in the defense segment. Suchcosts were $5.8 million as of September 30, 2005. Management believes it isprobable these costs, plus appropriate profit margin, will be recovered undercontract change orders or upon the award of new contracts within the next year.

 

**Note 3 – Comprehensive Income**

 

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

 
| ** **                                        | ** ** | **Six Months Ended  March 31,** | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------------------|------------|---------------------------------|------------|-----------------------------------|------------|
| ** **                                        | ** ** | **2006**                        | ** ** | **2005**                          | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                              |       |                            |       |                              |       |   |   |   |   |
| Net income                                        |       | $                               | 11,238     |                              | $          | 5,807 |   | $ | 729 |   | $ | 554 |   |
| Foreign currency  translation adjustments         |       | (3,006                          | )          | 2,237                             |       | (261 | ) | (2,720 | ) |
| Net unrealized  gain (loss) from cash flow hedges |       | (8                              | )          | (77                               | )          | (13 | ) | 560 |   |
| Comprehensive  income (loss)                      |       | $                               | 8,224      |                              | $          | 7,967 |   | $ | 455 |   | $ | (1,606 | ) |

 

6

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### **Note 4– Segment Information**

 

Businesssegment financial data is as follows (in millions):

 
| ** **                    | ** ** | **Six Months Ended  March 31,** | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------|------------|---------------------------------|------------|-----------------------------------|------------|
| ** **                    | ** ** | **2006**                        | ** ** | **2005**                          | ** ** | **2006** | ** ** | **2005** | ** ** |
|                          |       |                            |       |                              |       |   |   |   |   |
| **Sales:**                    | ** ** | ** **                      | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Defense                       |       | $                               | 272.7      |                              | $          | 242.2 |   | $ | 145.2 |   | $ | 120.2 |   |
| Transportation  systems       |       | 121.5                           |       | 122.3                             |       | 57.8 |   | 58.4 |   |
| Corporate and  other          |       | 7.5                             |       | 7.5                               |       | 3.7 |   | 3.4 |   |
| Total sales                   |       | $                               | 401.7      |                              | $          | 372.0 |   | $ | 206.7 |   | $ | 182.0 |   |
|                          |       |                            |       |                              |       |   |   |   |   |
| **Operating  income (loss):** | ** ** | ** **                      | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Defense                       |       | $                               | 11.1       |                              | $          | 14.2 |   | $ | 5.2 |   | $ | 7.6 |   |
| Transportation  systems       |       | 0.4                             |       | (3.7                              | )          | (2.8 | ) | (5.6 | ) |
| Corporate and  other          |       | (1.4                            | )          | (1.4                              | )          | (0.9 | ) | (0.5 | ) |
| Total operating  income       |       | $                               | 10.1       |                              | $          | 9.1 |   | $ | 1.5 |   | $ | 1.5 |   |

 

### **Note 5– Financing Arrangements**

### ** **

TheCompany has a committed five-year revolving credit agreement with a group offinancial institutions in the amount of $150 million until March 2010. As of March31, 2006, $35 million was outstanding under this agreement at a rate of 5.7%and is included in current liabilities because it is management’s intent torepay the borrowing within one year.

 

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### **Note 6– Pension Plans**

 

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

 
| ** **                      | ** ** | **Six Months Ended  March 31,** | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------|------------|---------------------------------|------------|-----------------------------------|------------|
| ** **                      | ** ** | **2006**                        | ** ** | **2005**                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| Service cost                    |       | $                               | 4,128      |                              | $          | 3,766 |   | $ | 2,073 |   | $ | 1,889 |   |
| Interest cost                   |       | 4,366                           |       | 4,002                             |       | 2,189 |   | 2,005 |   |
| Expected return  on plan assets |       | (4,804                          | )          | (4,129                            | )          | (2,408 | ) | (2,068 | ) |
| Amortization of:                |       |                            |       |                              |       |   |   |   |   |
| Prior service  cost             |       | 15                              |       | 15                                |       | 7 |   | 7 |   |
| Actuarial loss                  |       | 1,081                           |       | 827                               |       | 542 |   | 414 |   |
| Administrative  expenses        |       | 50                              |       | 50                                |       | 25 |   | 25 |   |
| Net pension cost                |       | $                               | 4,836      |                              | $          | 4,531 |   | $ | 2,428 |   | $ | 2,272 |   |

 

**Note 7 – Dividend**

 

On February 21, 2006, theBoard of Directors declared a 9 cents per common share dividend payable onApril 21, 2006, to shareholders of record at the close of business on March 31,2006. The $2.4 million dividend payable is included in other currentliabilities as of March 31, 2006.

 

8

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### **CUBICCORPORATION**

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

 

March 31, 2006

 

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

 

Cubic Defense Applications is a diversified supplierof constructive, live and virtual military training systems, services 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 engagement andvirtual simulation systems; and precision gunnery solutions. Our services arefocused on training mission support, computer simulation training, distributedinteractive simulation, development of military training doctrine, forcemodernization services for NATO entrants and field operations and maintenance.Our communications products are aimed at intelligence, surveillance, and searchand rescue markets.

 

Cubic Transportation Systems develops and deliversinnovative fare collection systems for public transit authorities worldwide. Weprovide hardware, software and multi-agency, multimodal transportationintegration technologies and services that allow the agencies to efficientlycollect fares, manage their operations, reduce shrinkage and make using publictransit a more convenient and attractive option for commuters.

 

**ConsolidatedOverview**

** **

Salesfor the quarter ended March 31, 2006 increased to $206.6 million compared to $182.0million in the second fiscal quarter last year, an increase of 14%.The increasecame from the defense segment, which grew to $145.2 million from $120.2million, while transportation systems sales were down slightly from last yearat $57.8 million, compared to $58.4 million.

 

Forthe first six months of the fiscal year, sales increased to $401.7 million in2006, from $372.0 million last year, an increase of 8%. All of the salesincrease came from the defense segment, which grew from $242.2 million in thefirst half of 2005 to $272.7 million this year, an increase of 13%.Transportation systems sales for the first six months were $121.5 million thisyear compared to $122.3 million last year. See the segment discussionsfollowing for further analysis of segment sales.

 

Operating income in the secondfiscal quarter was $1.5 million in both 2006 and 2005. The transportationsystems segment incurred an operating loss of $2.8 million for the quartercompared to a loss of $5.6 million in the second quarter last year, whiledefense operating income decreased from $7.6 million in the second quarter of2005 to $5.2 million in the second quarter this year.

 

Operatingincome for the first six months of the fiscal year increased from $9.1 millionin 2005 to $10.1 million this year due to the transportation systems segmentgenerating a profit of $400

 

9

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thousandthis year compared to a loss of $3.7 million in the first six months last year.Defense systems operating income decreased from $14.2 million in the first halfof last year to $11.1 million for the same period this year. See the segmentdiscussions following for further analysis of operating income by segment.

 

Net income in the secondquarter was $729 thousand, or 3 cents per share, this year compared to $554 thousand,or 2 cents per share, last year. A decrease in operating income from thedefense segment was offset by a reduction in operating loss from transportationsystems.

 

For the first six monthsof the year, net income increased from $5.8 million, or 22 cents per share, in2005 to $11.2 million, or 42 cents per share this year. The increase cameprimarily from a gain on the sale of real estate that had been held forinvestment purposes for many years, but was sold in the quarter ended December31, 2005. The gain from the sale of the investment real estate wasapproximately $4.3 million, after applicable income taxes, or about 16 centsper share.

 

Product cost of sales asa percentage of product sales increased from 83.7% in the second quarter lastyear to 89.7% this year due primarily to cost increases on contracts in bothsegments, as described in the segment discussions following. As a result ofthis cost growth in the second quarter, for the first half of the fiscal year costof product sales grew from 81.7% of sales in 2005 to 86.7% in 2006.

 

Service cost of sales asa percentage of service sales increased from 78.9% in the second quarter of2005 to 81.6% this year. This increase was due to lower sales from atransportation systems service contract in Europe that has a high profit margin,as described in the segment discussion following. This same contract causedservice cost of sales as a percentage of sales to increase from 79.9% in thefirst half of 2005 to 81.7% in 2006.

 

Selling, general andadministrative (SG&A) expenses decreased by $5.7 million from last year’ssecond quarter and decreased from 16.6% to 11.9% of sales, with the decreasecoming primarily from the transportation systems segment. SG&A was higherthan normal in the second quarter last year because the transportation systemssegment had recorded an allowance for doubtful accounts provision of $4.2million related to a contract in dispute. For the first six months of thefiscal year, SG&A expenses decreased $11.5 million, from 15.7% to 11.7% ofsales, with the decrease coming from both segments. In the first half lastyear, the defense segment had incurred higher than normal selling expensesrelated to contract proposals, while such activities returned to a more normallevel in the first half this year. Transportation systems SG&A expenseswere lower for several reasons. In addition to the allowance for doubtfulaccounts provision mentioned above, higher legal expenses were incurred lastyear related to a dispute, that was settled, with a former subcontractor. Inaddition, staffing reductions and lower contract proposal costs this yearcontributed to the decrease in SG&A in transportation systems.

 

Our projected effectivetax rate for fiscal 2006 is 34.0% of pretax income, which is reflected in theprovision recorded for the first six months of the year, compared to a rate of33.3% used in last year’s first half. The projected rate is higher this yearbecause the U.S. research and development credit expired on December 31, 2005and has not been extended by Congress. The effective rate for fiscal 2006 couldbe affected by, among other factors, the mix of business between the U.S. andforeign jurisdictions, our ability to take advantage of available tax creditsand audits of our records by taxing authorities.

 

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**Defense Segment**

 
| ** **                           | ** ** | **Six  Months Ended  March 31,** | ** ** | **Three  Months Ended  March 31,** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|------------------------------------|------------|
| ** **                           | ** ** | **2006**                         | ** ** | **2005**                           | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                           | ** ** | **(millions)**                   | ** ** |
| **Defense Segment Sales**            | ** ** | ** **                       | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Communications and electronics       |       | $                                | 32.9       |                               | $          | 24.6 |   | $ | 17.1 |   | $ | 11.3 |   |
| Training systems                     |       | 112.9                            |       | 98.3                               |       | 55.4 |   | 51.0 |   |
| Government services                  |       | 123.4                            |       | 117.9                              |       | 71.0 |   | 57.2 |   |
| Tactical systems and other           |       | 3.5                              |       | 1.4                                |       | 1.7 |   | 0.7 |   |
|                                 |       | $                                | 272.7      |                               | $          | 242.2 |   | $ | 145.2 |   | $ | 120.2 |   |
|                                 |       |                             |       |                               |       |   |   |   |   |
| **Defense Segment Operating Income** | ** ** | ** **                       | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Communications and electronics       |       | $                                | 2.1        |                               | $          | 0.2 |   | $ | 1.8 |   | $ | 0.1 |   |
| Training systems                     |       | (0.3                             | )          | 6.9                                |       | (2.2 | ) | 3.6 |   |
| Government services                  |       | 10.7                             |       | 7.3                                |       | 6.5 |   | 3.9 |   |
| Tactical systems and other           |       | (1.4                             | )          | (0.2                               | )          | (0.9 | ) | — |   |
|                                 |       | $                                | 11.1       |                               | $          | 14.2 |   | $ | 5.2 |   | $ | 7.6 |   |

 

Defensesegment sales increased to $145.2 million in the quarter ended March 31, 2006,from $120.2 million in the second quarter of fiscal 2005, a 21% increase. Communicationsand electronics sales increased more than 50%, from $11.3 million in the secondquarter of 2005 to $17.1 million in the second quarter this year. New contractsfor the supply of data links for unmanned aerial vehicles (UAV) in the U.S. andU. K. added to communications and electronics sales for the quarter, as well asincreased sales of personnel locator systems and communications products.Training Systems sales increased from $51.0 million in the second quarter lastyear to $55.4 million this year, a 9% increase. Increased sales of tacticallaser engagement systems and new task orders for development of the nextgeneration air combat training system more than offset slightly lower salesfrom ground combat and small arms training systems. Government services salesincreased 24%, from $57.2 million in the second fiscal quarter of 2005 to $71.0million this year. After having decreased significantly in the first quarterthis year, sales from the key contract at the Joint Readiness Training Center(JRTC) in Fort Polk, LA returned to a level consistent with the previous year, whilesales from all other significant sectors of this business unit increased overlast year.

 

Defensesegment sales for the first six months of the fiscal year increased to $272.7million in 2006 from $242.2 million last year, a 13% increase. Communicationsand electronics sales were higher by 34%, having increased from $24.6 millionto $32.9 million for the six month period. The increase for the six monthperiod resulted from the same factors as in the second quarter. Trainingsystems sales increased from $98.3 million in the first six months of 2005 to$112.9 million this year, a 15% increase. This resulted from increased sales oftactical laser engagement systems and small arms training systems and new taskorders for development of the next generation air combat training system. Salesfrom ground combat training systems were slightly lower for the six-monthperiod. Government services sales increased from $117.9 million in the firsthalf of 2005 to $123.4 million this year, a 5% increase. Sales from forcemodernization contracts in Eastern Europe were down slightly for the period,but were higher from all other significant sectors of this business unit exceptfor the JRTC. Sales from the JRTC contract had decreased by $11 million duringthe first quarter due to a decrease in combat training exercises at thefacility during the quarter. The primary

 

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reasonfor the decline in training activity was that National Guard units whichusually would have been training at the facility were diverted to hurricanerelief efforts. As mentioned above, sales in the second quarter from thiscontract returned to a level consistent with 2005.

 

Operating incomein the defense segment declined in the second quarter this year to $5.2 millionfrom $7.6 million in the second quarter of fiscal 2005. Operating income fromthe communications and electronics business improved over last year, from $100thousand to $1.8 million. The primary reason for the improvement is that the communicationproducts division had incurred a loss of $700 thousand in last year’s secondquarter, but turned that around into a $400 thousand profit this year. Inaddition, the profit margin from the data link product line improved during thequarter due to better than previously expected profits on a contract that isnow completed. Training systems incurred an operating loss during the quarterof $2.2 million compared to operating income of $3.6 million in the secondquarter of 2005. The primary cause of the operating loss was cost growth of $3.8million on a contract for the development of a ground combat training systemfor a foreign customer. In addition, operating income from small arms training systems was lower, due toplanned development costs of $900 thousand for new weapons simulations systemsfor this product line in an effort to become more competitive. Training systemsalso incurred costs in the second quarter of 2006 that were $600 thousandhigher than planned for the development of a new training system for the U.S.Army. Government services operating income increased in the quarter due tohigher sales volume and improved profit margins on operations and maintenance andcomputer simulation training contracts. Included in tactical systems and other are expenses of $1.0million incurred during the second quarter, compared to $300 thousand last year,related to the 50% owned joint venture with a foreign company. The jointventure has been awarded one contract, but has not yet generated any sales.

 

For the first halfof the year defense segment operating income was $11.1 million, compared to$14.2 million for the same period last year. Communications and electronicsoperating income improved from $200 thousand in the first half of 2005 to $2.1million in the same period of 2006. The primary reason for this is that thecommunications products division improved from a $1.6 million loss last year toa $300 thousand profit this year. Training systems operating profits fell from$6.9 million in the first six months of 2005 to a loss of $300 thousand thisyear. The primary reason for this is the cost growth in the second quarter onthe development contract mentioned above, in addition to $1.8 million spent on theweapons simulationssystems development for small arms trainers, also mentioned above. Operatingincome from the government services business unit improved from $7.3 million inthe first half of 2005 to $10.7 million this year for the same reasonsidentified above. Tactical systems and other includes $1.5 million of expenses in2006 related to the foreign joint venture, compared to $300 thousand last year.

 

**Transportation Systems Segment**

 

Transportation segmentsales decreased slightly from $58.4 million in the second quarter of 2005 to$57.8 million this year. For the first six months of the year, sales decreasedfrom $122.3 million in 2005 to $121.5 million this year. Activity related tothe Prestige contract in London decreased in both the second quarter andsix-month periods compared to last year. In addition, sales were lower from Europeanservice contracts. Higher sales from system installation contracts in Sweden andNorth America nearly offset this decrease in both the quarter and six-monthperiods. Lower service sales in Europe were due primarily to one contract thathas been scaled back from its previous

 

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requirements, as the customeris phasing out the old equipment and replacing it with new equipment of moderndesign which does not require the same support from us. We are competing forthe contracts to provide the new equipment and have been successful in winninga portion of the work awarded thus far. In addition, a contract for themaintenance of communications equipment in London was completed at the end offiscal 2005, and was not renewed, further impacting service sales for thequarter and first half of the year.

 

Transportationsystems incurred an operating loss of $2.8 million in the second quarter thisyear compared to a loss of $5.6 million in the second quarter of 2005. Costgrowth on contracts in North America and Australia resulted in the loss in thesecond quarter, as we continued to work toward completion of these contracts. Thedesign and manufacturing activity on all but one of these contracts issubstantially complete, however, the current challenge is in completing theinstallation and system integration. We believe that customer directed workoutside the scope of the contracts and customer delay of progress toward completionof these contracts has resulted in a portion of the cost growth in this quarterand for several previous quarters. We are currently assessing the contractualbasis for claims on these contracts and measuring the cost impact related tothese customer required changes to the scope of work. While we believe we areentitled to recover the additional costs we have incurred due to these customerchanges, the process is a long one and the amount of recovery from claimscannot be determined at this time. Therefore, all related costs have beenexpensed and no revenues from these claims have been recorded to-date.

 

Servicecontracts in North America and Europe continued to generate operating income inthe second quarter, although operating income from European service contractswas lower than last year due primarily to the decrease in sales volumedescribed above. The decrease in sales volume from the Prestige contract,mentioned above, also decreased operating income for the quarter.

 

Forthe first six months of the fiscal year, operating income was $400 thousandthis year, compared to an operating loss of $3.7 million last year. The NorthAmerican and Australian contracts mentioned above generated greater losses in2005 than in the first half of this year. However, lower sales from thePrestige contract and European service contracts decreased operating incomefrom these contracts in the current year compared to last year.

 

**Backlog**

 

As reflected in the tablebelow, total backlog decreased about $70 million at March 31, 2006 compared to September30, 2005. Transportation systems backlog decreased by $54 million, whiledefense backlog decreased about $16 million. Funded backlog decreased by $47million during the six-month period, with transportation systems decreasing by$54 million and defense funded backlog increasing by $7 million.

 

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| ** **                      | ** ** | **March 31,**     | ** ** | **September 30,** | ** ** |
|---------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                      | ** ** | **2006**          | ** ** | **2005**          | ** ** |
|                            |       | **(in millions)** |       |
| **Total  backlog**              | ** ** | ** **        | ** ** | ** **        | ** ** |
| Transportation  systems         |       | $                 | 679.8      |              | $          | 733.3 |   |
| Defense:                        |       |              |       |              |       |
| Communications  and electronics |       | 98.7              |       | 57.3              |       |
| Training systems                |       | 280.7             |       | 318.9             |       |
| Government  services            |       | 323.5             |       | 340.0             |       |
| Tactical systems  and other     |       | 8.2               |       | 11.5              |       |
| Total defense                   |       | 711.1             |       | 727.7             |       |
| Total                           |       | $                 | 1,390.9    |              | $          | 1,461.0 |   |
|                            |       |              |       |              |       |
| **Funded  backlog**             | ** ** | ** **        | ** ** | ** **        | ** ** |
| Transportation  systems         |       | $                 | 679.8      |              | $          | 733.3 |   |
| Defense:                        |       |              |       |              |       |
| Communications  and electronics |       | 98.7              |       | 57.3              |       |
| Training systems                |       | 280.7             |       | 318.9             |       |
| Government  services            |       | 94.1              |       | 87.9              |       |
| Tactical systems  and other     |       | 8.2               |       | 11.5              |       |
| Total defense                   |       | 481.7             |       | 475.6             |       |
| Total                           |       | $                 | 1,161.5    |              | $          | 1,208.9 |   |

 

In defense, thedifference between total backlog and funded backlog represents options undermultiyear service contracts. Funding for these contracts comes from annualoperating budgets of the U.S. government and the options are normally exercisedannually. Options for the purchase of additional systems or equipment are notincluded in backlog until exercised nor are indefinite delivery, indefinitequantity (IDIQ) contracts until an order is received.

 

**Liquidity and Capital Resources**

 

Operatingactivities generated cash of $15.6 million for the quarter, decreasing the useof cash from operating activities to $5.7 million for the first six months ofthe fiscal year. The primary reason for the positive cash flows from operationsfor the quarter was customer advances received on contracts during the quarter.An increase in accounts receivable during the quarter was offset by an increasein trade accounts payable. For the first six months of the year, negative cashflows came primarily from increased accounts receivable and inventories. Thenegative operating cash flows for the six-month period came primarily from thetransportation systems segment.

 

Investingactivities for the six month period included $8.0 million in proceeds from thesale of the building mentioned previously and capital expenditures of $5.6million.

 

Duringthe first half of the fiscal year, we made scheduled payments on long-term debtof $5.4 million and borrowed $8.7 million on a short-term basis.

 

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Our financial conditionremains strong with working capital of $242 million and a current ratio of 2.3to 1 at March 31, 2006. We expect that cash on hand and our unused lines ofcredit will be adequate to meet our liquidity requirements for the foreseeablefuture.

 

**Critical Accounting Policies, Estimates and Judgments**

 

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

 

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

 

For further information,refer to the consolidated financial statements and notes thereto included inthe Company’s annual report on Form 10-K for the year ended September 30, 2005.

 

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

 

Because the riskfactors referred to above could cause actual results or outcomes to differmaterially from those expressed in any forward-looking statements made by us oron our behalf, you should not place undue reliance on any forward-lookingstatements. In addition, past financial and/or operating performance is notnecessarily a reliable indicator of future

 

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performance andyou should not use our historical performance to anticipate results or futureperiod trends. Further, any forward-looking statement speaks only as of the dateon which it is made, and we undertake no obligation to update anyforward-looking statement to reflect events or circumstances after the date onwhich the statement is made or to reflect the occurrence of unanticipatedevents. New factors emerge from time to time, and it is not possible for us topredict which factors will arise. In addition, we cannot assess the impact ofeach factor on our business or the extent to which any factor, or combinationof factors, may cause actual results to differ materially from those containedin any forward-looking statements.

 

ITEM 4 - STATEMENT ON DISCLOSURE CONTROLS AND PROCEDURES.

 

Asof March 31, 2006, the Company carried out an evaluation, under the supervisionand with the participation of the Company’s management, including the ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of thedesign and operation of the Company’s disclosure controls and procedurespursuant to the Securities and Exchange Act of 1934 Rules 13a-15 and 15d-15.Based upon that evaluation, the Chief Executive Officer and Chief FinancialOfficer concluded that, as of the end of the three month period ended March31, 2006, the Company’sdisclosure controls and procedures are effective.

 

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**PART II - OTHER INFORMATION**

 

ITEM 4 – SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

The Company held itsannual meeting of shareholders on February 21, 2006. Matters voted upon were(1) election of directors, (2) approval of the 2005 Equity Incentive Plan, (3)approval of the Amended and Restated Certificate of Incorporation, and (4)ratification of the Board’s selection of Ernst & Young LLP as the Company’sindependent auditors for the fiscal year ending September 30, 2006.

 

The number of votes castfor, against or withheld, with respect to each matter are set out below.

 

1.Election of Directors

 
| **Director**             | ** ** | **For**    | ** ** | **Against** | ** ** | **Withheld** | ** ** |
|--------------------------|------------|------------|------------|-------------|------------|--------------|------------|
| Walter J. Zable          |       | 21,299,536 |       | —      |       | 2,987,973    |       |
| Walter C. Zable          |       | 21,527,265 |       | —      |       | 2,760,244    |       |
| Dr. Richard C.  Atkinson |       | 21,702,354 |       | —      |       | 2,585,155    |       |
| William W. Boyle         |       | 21,452,205 |       | —      |       | 2,835,304    |       |
| Raymond L.  deKozan      |       | 21,505,241 |       | —      |       | 2,782,268    |       |
| Robert T.  Monagan       |       | 21,111,893 |       | —      |       | 3,175,616    |       |
| Raymond E. Peet          |       | 21,176,468 |       | —      |       | 3,111,041    |       |
| Robert S.  Sullivan      |       | 21,229,374 |       | —      |       | 3,058,135    |       |
| Robert D. Weaver         |       | 21,741,407 |       | —      |       | 2,546,102    |       |

 
|                                                        | ** ** | **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|-------------------------------------------------------------|------------|------------|------------|-------------|------------|-------------|------------|
| 2.  2005 Equity Incentive Plan                         |       | 13,945,539 |       | 6,035,973   |       | 68,041      |       |
|                                                        |       |       |       |        |       |        |       |
| 3.  Amended and Restated Certificate of  Incorporation |       | 19,169,177 |       | 5,065,142   |       | 53,188      |       |
|                                                        |       |       |       |        |       |        |       |
| 4.  Ratification of Independent Auditors               |       | 24,109,376 |       | 135,808     |       | 43,325      |       |

 

Each matter submitted tothe shareholders was approved.

 

17

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ITEM 6 - EXHIBITS

 

(a) The following exhibitsare included herein:

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                                                         |
|------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1              |       | Certificate of  Incorporation. Incorporated by reference from Form 10-Q for the quarter ended  December 31, 2003, file No. 1-8931, Exhibit 3.           |
| 3.2              |       | Bylaws. Incorporated by  reference to Form 10-K filed for the fiscal year ended September 30, 2004,  file No. 1-8931, Exhibit 3.                   |
| 10.1             |       | 2005 Equity Incentive  Plan. Incorporated by reference to Form 10-K filed for the fiscal year ended  September 30, 2005, file No. 1-8931, Exhibit 10.1. |
| 10.2             |       | Transition Protection  Plan. Incorporated by reference to Form 10-K filed for the fiscal year ended  September 30, 2005, file No. 1-8931, Exhibit 10.2. |
| 10.3             |       | Credit Agreement dated  March 10, 2005. Incorporated by reference from Form 10-Q for the quarter  ended March 31, 2005, file No. 1-8931, Exhibit 10.    |
| 10.4             |       | Deferred Compensation Plan  Summary. Incorporated by reference from Form 8-K filed April 6, 2005, file  No. 1-8931, Exhibit 10.                         |
| 15               |       | Report of Independent  Registered Public Accounting Firm                                                                                                |
| 31.1             |       | Rule 13a-14(a) Certification  of W. J. Zable                                                                                                            |
| 31.2             |       | Rule 13a-14(a)  Certification of W. W. Boyle                                                                                                            |
| 32.1             |       | Certification Pursuant to  18 U. S. C. Section 1350 of W. J. Zable                                                                                      |
| 32.2             |       | Certification Pursuant to  18 U. S. C. Section 1350 of W. W. Boyle                                                                                      |

 

SIGNATURES

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

 
|   | CUBIC  CORPORATION                  |
|--------|-------------------------------------|
|   |                                |
| Date   | May 8, 2006                         |   | /s/ W. W. Boyle |   |
|   |  W. W. Boyle                   |
|   |  Senior Vice President and CFO |
|   |                                |
| Date   | May 8, 2006                         |   | /s/ Mark A. Harrison |   |
|   | Mark A. Harrison                    |
|   | Vice President  and Controller      |
|        |                                     |  |  |  |  |

 

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