** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-Q**

**QUARTERLY REPORT**

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

**Forthe Quarter Ended December 31, 2006**

**1-8931**

**CommissionFile Number**

**CUBIC CORPORATION**

Exact Name of Registrant asSpecified in its Charter

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

 

**9333 BalboaAvenueSan Diego, California 92123Telephone (858) 277-6780**

Indicate by checkmark whether the Registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months, and (2) has been subject to such filing requirements for the past 90days.

Yes x   No o

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, or a non-accelerated filer (as defined in Rule12b-2 of the Exchange Act).

Large accelerated filer  o                                  Acceleratedfiler  x                                      Non-acceleratedfiler  o

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

Asof January 26, 2007, registrant had only one class of common stock of whichthere were 26,719,663 shares outstanding (after deducting 8,945,066 shares heldas treasury stock).

 

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**PART I - FINANCIALINFORMATION**ITEM 1 - FINANCIALSTATEMENTS

### **CUBIC CORPORATION**CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)(amounts in thousands, except per sharedata)

| ** **                                     | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------|------------|----------------------------------|------------|
| ** **                                     | ** ** | **December 31,**            | ** ** |
| ** **                                     | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| Net sales:                                     |       |                             |       |   |   |
| Products                                       |       | $                                | 120,959    |   | $ | 124,590 |   |
| Services                                       |       | 81,976                           |       | 70,451 |   |
|                                           |       | 202,935                          |       | 195,041 |   |
|                                           |       |                             |       |   |   |
| Costs and expenses:                            |       |                             |       |   |   |
| Products                                       |       | 99,089                           |       | 104,189 |   |
| Services                                       |       | 68,164                           |       | 57,971 |   |
| Selling, general  and administrative           |       | 23,210                           |       | 22,371 |   |
| Research and  development                      |       | 781                              |       | 1,944 |   |
|                                           |       | 191,244                          |       | 186,475 |   |
|                                           |       |                             |       |   |   |
| Operating income                               |       | 11,691                           |       | 8,566 |   |
|                                           |       |                             |       |   |   |
| Other income (expense):                        |       |                             |       |   |   |
| Gain on sale of  investment real estate        |       | —                           |       | 7,237 |   |
| Interest and  dividends                        |       | 434                              |       | 246 |   |
| Interest expense                               |       | (744                             | )          | (858 | ) |
| Other income                                   |       | 482                              |       | 660 |   |
| Minority interest  in loss of subsidiary       |       | 262                              |       | 258 |   |
|                                           |       |                             |       |   |   |
| Income before income  taxes                    |       | 12,125                           |       | 16,109 |   |
|                                           |       |                             |       |   |   |
| Income taxes                                   |       | 3,800                            |       | 5,600 |   |
|                                           |       |                             |       |   |   |
| Net income                                     |       | $                                | 8,325      |   | $ | 10,509 |   |
|                                           |       |                             |       |   |   |
| Basic and diluted net  income per common share |       | $                                | 0.31       |   | $ | 0.39 |   |
|                                           |       |                             |       |   |   |
| Average number of common shares outstanding    |       | 26,720                           |       | 26,720 |   |

 

See accompanying notes.

 

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## **CUBIC CORPORATION**CONDENSED CONSOLIDATED BALANCE SHEETS(in thousands)

| ** **                                      | ** ** | **December 31,** | ** ** | **September 30,**         | ** ** |
|-------------------------------------------------|------------|-----------------------|------------|--------------------------------|------------|
| ** **                                      | ** ** | **2006**              | ** ** | **2006**                       | ** ** |
| ** **                                      | ** ** | **(Unaudited)**       | ** ** | **(See note below)** | ** ** |
| **ASSETS**                                      | ** ** | ** **            | ** ** | ** **                     | ** ** |
| Current assets:                                 |       |                  |       |                           |       |
| Cash and cash  equivalents                      |       | $                     | 29,763     |                           | $          | 42,380 |   |
| Short-term  investments                         |       | —                |       | 8,874                          |       |
| Accounts  receivable — net                 |       | 325,206               |       | 330,447                        |       |
| Inventories                                     |       | 22,659                |       | 20,209                         |       |
| Deferred income  taxes and other current assets |       | 32,401                |       | 36,159                         |       |
| Total current assets                            |       | 410,029               |       | 438,069                        |       |
|                                            |       |                  |       |                           |       |
| Long-term contract  receivables                 |       | 11,600                |       | 2,200                          |       |
| Property, plant and  equipment — net       |       | 55,022                |       | 54,564                         |       |
| Goodwill                                        |       | 35,367                |       | 34,750                         |       |
| Other assets                                    |       | 17,963                |       | 18,488                         |       |
|                                            |       | $                     | 529,981    |                           | $          | 548,071 |   |
|                                            |       |                  |       |                           |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**   | ** ** | ** **            | ** ** | ** **                     | ** ** |
| Current liabilities:                            |       |                  |       |                           |       |
| Short-term  borrowings                          |       | $                     | —     |                           | $          | 10,000 |   |
| Trade accounts  payable                         |       | 13,946                |       | 23,240                         |       |
| Customer  advances                              |       | 45,284                |       | 43,752                         |       |
| Other current  liabilities                      |       | 55,882                |       | 64,095                         |       |
| Accrued pension  liability                      |       | 6,429                 |       | 6,283                          |       |
| Income taxes payable                            |       | 7,279                 |       | 7,099                          |       |
| Current portion  of long-term debt              |       | 6,108                 |       | 6,078                          |       |
| Total current  liabilities                      |       | 134,928               |       | 160,547                        |       |
|                                            |       |                  |       |                           |       |
| Long-term debt                                  |       | 32,894                |       | 38,159                         |       |
| Accrued pension  liability                      |       | 18,420                |       | 18,208                         |       |
| Deferred compensation                           |       | 7,953                 |       | 7,565                          |       |
| Minority interest                               |       | 104                   |       | 366                            |       |
|                                            |       |                  |       |                           |       |
| Shareholders’ equity:                      |       |                  |       |                           |       |
| Common stock                                    |       | 234                   |       | 234                            |       |
| Additional  paid-in capital                     |       | 12,123                |       | 12,123                         |       |
| Retained  earnings                              |       | 346,848               |       | 338,523                        |       |
| Accumulated  other comprehensive income         |       | 12,546                |       | 8,415                          |       |
| Treasury stock  at cost                         |       | (36,069               | )          | (36,069                        | )          |
|                                            |       | 335,682               |       | 323,226                        |       |
|                                            |       | $                     | 529,981    |                           | $          | 548,071 |   |

 

*Note: Thebalance sheet at September 30, 2006 has been derived from the audited financialstatements at that date.See accompanying notes.*

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**CUBICCORPORATION**CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS (UNAUDITED)(in thousands)
| ** **                                                                     | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                     | ** ** | **December 31,**            | ** ** |
| ** **                                                                     | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| Operating  Activities:                                                         |       |                             |       |   |   |
| Net income                                                                     |       | $                                | 8,325      |   | $ | 10,509 |   |
| Adjustments to reconcile net income to net cash used  in operating activities: |       |                             |       |   |   |
| Depreciation and amortization                                                  |       | 2,341                            |       | 2,318 |   |
| Gain on sale of investment real estate                                         |       | —                           |       | (7,237 | ) |
| Changes in operating assets and liabilities                                    |       | (15,322                          | )          | (26,847 | ) |
| NET CASH USED IN  OPERATING ACTIVITIES                                         |       | (4,656                           | )          | (21,257 | ) |
|                                                                           |       |                             |       |   |   |
| Investing  Activities:                                                         |       |                             |       |   |   |
| Net additions to property, plant and equipment                                 |       | (1,856                           | )          | (2,378 | ) |
| Proceeds from sale of investment real estate                                   |       | —                           |       | 8,028 |   |
| Proceeds from sale of short-term investments                                   |       | 8,874                            |       | — |   |
| NET CASH  PROVIDED BY INVESTING ACTIVITIES                                     |       | 7,018                            |       | 5,650 |   |
|                                                                           |       |                             |       |   |   |
| Financing  Activities:                                                         |       |                             |       |   |   |
| Change in short-term borrowings, net                                           |       | (10,000                          | )          | (1,001 | ) |
| Principal payments on long-term borrowings                                     |       | (5,596                           | )          | (5,428 | ) |
| NET CASH USED IN  FINANCING ACTIVITIES                                         |       | (15,596                          | )          | (6,429 | ) |
|                                                                           |       |                             |       |   |   |
| Effect of  exchange rates on cash                                              |       | 617                              |       | (700 | ) |
|                                                                           |       |                             |       |   |   |
| NET DECREASE IN  CASH AND CASH EQUIVALENTS                                     |       | (12,617                          | )          | (22,736 | ) |
|                                                                           |       |                             |       |   |   |
| Cash and cash  equivalents at the beginning of the period                      |       | 42,380                           |       | 48,860 |   |
|                                                                           |       |                             |       |   |   |
| CASH AND CASH  EQUIVALENTS AT THE END OF THE PERIOD                            |       | $                           | 29,763     |   | $  | 26,124 |   |

 

# *See accompanying notes.*

 

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# **CUBIC CORPORATION**

NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS

(UNAUDITED)

December 31, 2006

**Note1 – Basis for Presentation**

The accompanying unaudited consolidated condensed financial statementshave been prepared in accordance with generally accepted accounting principlesfor interim financial information and with the instructions to Form 10-Q andArticle 10 of Regulation S-X. Accordingly, they do not include all informationand footnotes required by accounting principles generally accepted in theUnited States for complete financial statements.

In the opinion of management, all adjustments (consisting of normalrecurring accruals) considered necessary for a fair presentation have beenincluded. Operating results for the quarter ended December 31, 2006 are notnecessarily indicative of the results that may be expected for the year endingSeptember 30, 2007. For further information, refer to the consolidatedfinancial statements and footnotes thereto included in the Company’s annualreport on Form 10-K for the year ended September 30, 2006.

The preparation of the financial statements in conformity with U. S.generally accepted accounting principles requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. Actual results could differ from those estimates.

### **Note 2 – Balance Sheet Details**

The components ofaccounts receivable are as follows (in thousands):
| ** **                                | ** ** | **December 31,**     | ** ** | **September 30,** | ** ** |
|-------------------------------------------|------------|---------------------------|------------|------------------------|------------|
| ** **                                | ** ** | **2006 (unaudited)** | ** ** | **2006**               | ** ** |
| Trade and other  receivables              |       | $                         | 11,018     |                   | $          | 15,686 |   |
| Long-term contracts:                      |       |                      |       |                   |       |
| Billed                                    |       | 93,101                    |       | 71,215                 |       |
| Unbilled                                  |       | 237,882                   |       | 250,832                |       |
| Allowance for doubtful  accounts          |       | (5,195                    | )          | (5,086                 | )          |
| Total accounts  receivable                |       | 336,806                   |       | 332,647                |       |
| Less estimated amounts  not currently due |       | (11,600                   | )          | (2,200                 | )          |
| Current accounts  receivable              |       | $                         | 325,206    |                   | $          | 330,447 |   |

 

The amount classified asnot currently due is an estimate of the amount of long-term contract accountsreceivable that will not be collected within one year from December 31, 2006under transportation systems contracts in Australia, the U.K. and Sweden. Thenon-current balance at September 30, 2006 represented non-current amounts duefrom one contract in the U.K.

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Inventories consists ofthe following (in thousands):
| ** **                                                       | ** ** | **December 31,**     | ** ** | **September 30,** | ** ** |
|------------------------------------------------------------------|------------|---------------------------|------------|------------------------|------------|
| ** **                                                       | ** ** | **2006 (unaudited)** | ** ** | **2006**               | ** ** |
| Finished  products                                               |       | $                         | 639        |                   | $          | 563 |   |
| Work in process  and inventoried costs under long-term contracts |       | 17,880                    |       | 16,194                 |       |
| Raw material and  purchased parts                                |       | 4,140                     |       | 3,452                  |       |
| Total  inventories                                               |       | $                         | 22,659     |                   | $          | 20,209 |   |

 

At December 31, 2006,work in process and inventoried costs under long-term contracts includesapproximately $7.9 million in costs incurred in advance of contract award oroutside the scope of work on several contracts, primarily in the defensesegment. Such costs were $7.7 million as of September 30, 2006.  Management believes it is probable that thesecosts, plus appropriate profit margin, will be recovered under contract changeorders or upon the award of new contracts within the next year.

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

Comprehensive income isas follows (in thousands):
| ** **                                 | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|
| ** **                                 | ** ** | **December 31,**            | ** ** |
| ** **                                 | ** ** | **2006**                         | ** ** | **2005** | ** ** |
|                                       |       |                             |       |   |   |
| Net income                                 |       | $                                | 8,325      |   | $ | 10,509 |   |
| Foreign currency  translation adjustments  |       | 4,120                            |       | (2,745 | ) |
| Net unrealized  gain from cash flow hedges |       | 11                               |       | 5 |   |
| Comprehensive  income                      |       | $                                | 12,456     |   | $ | 7,769 |   |

 

### **Note 4 — Legal Matter**

In June 2005, a company that Cubic had an alleged agreement with topotentially bid on a portion of automated fare collection contracts filed acourt claim for breach of contract, fraud, negligent misrepresentation, theftof trade secrets, and other related allegations. The claim seeks $15.0 millionin compensatory damages, punitive damages, disgorgement of profits and apermanent injunction. In accordance with the underlying contract arbitrationclause, in July 2005 Cubic filed a claim with the American ArbitrationAssociation and requested the court case be stayed or dismissed. The lowercourt denied the Company’s motion to transfer the case to arbitration and theCompany appealed that decision. In January 2007 the California Court of Appealsreversed the lower court decision and ordered that an arbitrator be selected bythe parties or the court. Based on information currently available, managementbelieves there is no merit to the claim and that it will prevail in thismatter. Therefore, no liability has been recorded as of December 31, 2006.

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### **Note 5 — Segment Information**

Business segment financial data is as follows (in millions):

 
| ** **                    | ** ** | **Three Months Ended** | ** ** |
|-------------------------------|------------|----------------------------------|------------|
| ** **                    | ** ** | **December 31,**            | ** ** |
| ** **                    | ** ** | **2006**                         | ** ** | **2005** | ** ** |
|                          |       |                             |       |   |   |
| **Sales:**                    |       |                             |       |   |   |
| Defense                       |       | $                                | 143.3      |   | $ | 127.5 |   |
| Transportation  systems       |       | 56.0                             |       | 63.7 |   |
| Corporate and other           |       | 3.6                              |       | 3.8 |   |
| Total sales                   |       | $                                | 202.9      |   | $ | 195.0 |   |
|                          |       |                             |       |   |   |
| **Operating  income (loss):** |       |                             |       |   |   |
| Defense                       |       | $                                | 9.5        |   | $ | 5.9 |   |
| Transportation  systems       |       | 2.3                              |       | 3.2 |   |
| Corporate and  other          |       | (0.1                             | )          | (0.5 | ) |
| Total operating  income       |       | $                                | 11.7       |   | $ | 8.6 |   |

 

### **Note 6 — Financing Arrangements**

TheCompany has a committed five-year revolving credit agreement with a group offinancial institutions in the amount of $150 million, expiring in March 2010.As of December 31, 2006, there were no borrowings under this agreement;however, there were letters of credit outstanding under the agreement totaling$11.3 million.

### **Note 7 — Pension Plans**

The components of netperiodic pension benefits costs are as follows (in thousands):
| ** **                      | ** ** | **Three Months Ended** | ** ** |
|---------------------------------|------------|----------------------------------|------------|
| ** **                      | ** ** | **December 31,**            | ** ** |
| ** **                      | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| Service cost                    |       | $                                | 2,254      |   | $ | 2,055 |   |
| Interest cost                   |       | 2,406                            |       | 2,177 |   |
| Expected return  on plan assets |       | (2,844                           | )          | (2,396 | ) |
| Amortization of:                |       |                             |       |   |   |
| Prior service cost              |       | 3                                |       | 8 |   |
| Actuarial loss                  |       | 118                              |       | 539 |   |
| Administrative  expenses        |       | 25                               |       | 25 |   |
| Net pension cost                |       | $                                | 1,962      |   | $ | 2,408 |   |

 

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### **Note 8 — New Accounting Pronouncements**

In July 2006, the Financial Accounting Standards Board issuedInterpretation No. 48, *Accounting forUncertainty in Income Taxes*(FIN 48), which is effective for fiscalyears beginning after December 31, 2006. The purpose of FIN 48 is to clarifyand set forth consistent rules for accounting for uncertain tax positions inaccordance with FAS 109, *Accounting forIncome Taxes*. The cumulative effect of applying the provisions ofthis interpretation is required to be reported separately as an adjustment tothe opening balance of retained earnings in the year of adoption. Management isin the process of reviewing and evaluating FIN 48, and therefore the ultimateimpact of its adoption is not yet known.

In September 2006, the Financial AccountingStandards Board published FASB Statement of Financial Accounting Standards(SFAS) No. 158 (SFAS 158), **Employers’ Accounting for Defined Benefit Pension andOther Postretirement Plans,**to require an employer to fullyrecognize the obligations associated with single-employer defined benefitpension, retiree healthcare, and other postretirement plans in their financialstatements. The new standard will be effective for the Company as of the end ofthe current fiscal year ending September 30, 2007. Under SFAS 158 , the Companywill recognize in its balance sheet an asset for each plan’s overfunded statusor a liability for each plan’s underfunded status and recognize, as a componentof other comprehensive income, the changes in the funded status of the plans thatarise during the year but are not recognized as components of net periodicbenefit cost. The measurement date provisions of SFAS 158 will have no impacton the Company’s financial statements because the Company already uses thebalance sheet date as the measurement date for its defined benefit pensionplans. Adoption of the statement will also have no impact on the Company’sConsolidated Statements of Income. It is not possible at this time to determinewhat impact adoption of the statement will have on the Consolidated BalanceSheet and on Other Comprehensive Income as of, and for the year ending,September 30, 2007. However, adoption of the statement would have had thefollowing incremental effects on the Consolidated Balance Sheet as of September30, 2006 (in thousands):
| ** **                                      | ** ** | **Before**   | ** ** | **Effect of** | ** ** | **After**    | ** ** |
|-------------------------------------------------|------------|--------------|------------|--------------------|------------|--------------|------------|
| ** **                                      | ** ** | **Adoption** | ** ** | **Adoption**       | ** ** | **Adoption** | ** ** |
| Balance Sheet  Line Item at September 30, 2006: |       |         |       |               |       |         |       |
| OTHER ASSETS  (non-current)                     |       |         |       |               |       |         |       |
| Deferred income taxes                           |       | $            | 7,360      |               | 2,682      |         | 10,042     |   |
| OTHER CURRENT  LIABILITIES                      |       |         |       |               |       |         |       |
| Accrued Pension Liability                       |       | 6,283        |       | —             |       | 6,283        |       |
| OTHER  LIABILITIES (non-current)                |       |         |       |               |       |         |       |
| Accrued Pension Liability                       |       | 18,208       |       | 7,664              |       | 25,872       |       |
| SHAREHOLDER’S  EQUITY                      |       |         |       |               |       |         |       |
| Accumulated  other comprehensive income         |       | 8,415        |       | (4,982             | )          | 3,433        |       |
|                                                 |            |              |            |                    |            |              |            |  |

 

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### **CUBIC CORPORATION**

ITEM2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS

December31, 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, distributed interactive simulation, developmentof military training doctrine, force modernization services for NATOentrants and field operations andmaintenance. Our communications products are aimed at intelligence,surveillance, and search and rescue markets.

Cubic Transportation Systems develops and deliversinnovative fare collection systems for public transit authoritiesworldwide.  We provide hardware, softwareand multi-agency, multimodal transportation integration technologies and servicesthat allow the agencies to efficiently collect fares, manage their operations,reduce shrinkage and make using public transit a more convenient and attractiveoption for commuters.

**Consolidated Overview**

Sales for the quarter ended December 31, 2006 increased 4% to $202.9million compared to $195.0 million in the quarter ended December 31, 2005. Thesales growth came from our defense segment, primarily from the mission supportservices business unit, while transportation systems sales decreased in thefirst quarter of this fiscal year. Operating income increased 36% in the firstquarter of fiscal 2007 to $11.7 million compared to $8.6 million in the samequarter last year. All of the increase came from the defense segment, with eachof the defense business units contributing to the improvement. See the segmentdiscussions following for further analysis of segment sales and operatingincome.

Net income in the first quarter of fiscal 2007 was $8.3 million, or 31cents per share, compared to $10.5 million, or 39 cents per share, last year.Approximately $4.3 million, after applicable income taxes, (16 cents per share)of the net income in the first quarter last year was from a gain on the sale ofreal estate that had been held for investment purposes for many years, but wassold in the first quarter. In December 2006, the U.S. Congress reinstated theResearch and Experimentation (R&E) credit retroactive to January 1, 2006.As a result, we recorded a tax benefit of approximately $0.5 million (2 centsper share) in the first quarter of fiscal 2007 that represents the expectedR&E credit for the nine-month period ended September 30, 2006, which wasnot previously reflected in our operating results.

Selling, general and administrative (SG&A) expenses in the firstquarter were consistent with last

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year, increasing slightly from $22.4 million in the first quarter lastyear to $23.2 million this year, while decreasing as a percentage of sales from11.5% to 11.4%. SG&A expenses increased in the defense segment anddecreased in the transportation systems segment, consistent with the change insales volume for each segment. Research and development expense decreased inthe first quarter this year compared to last year due primarily to thecompletion of a project at the end of fiscal 2006 for the development of newweapons simulations systems for the small arms training systems product line.

Our projected effective tax rate for fiscal 2007 is 35.5%; however, asmentioned above, the retroactive reinstatement of the U.S. R&E creditreduced the first quarter provision by about $0.5 million, thereby reducing thefirst quarter tax rate. The projected effective rate for fiscal 2007 is higherthan last year’s first quarter effective rate of 34.8% because we are nowproviding taxes on earnings in the U.K. at the higher U.S. rate as we do notconsider the earnings to be permanently reinvested; however, this increase ispartially offset by the estimated R&E credit we expect to realize in fiscal2007. The effective rate for fiscal 2007 could be affected by, among other factors,the mix of business between the U.S. and foreign jurisdictions, our ability totake advantage of available tax credits and audits of our records by taxingauthorities.

**Defense Segment**
| ** **                             | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------|------------|----------------------------------|------------|
| ** **                             | ** ** | **December 31,**            | ** ** |
| ** **                             | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| ** **                             | ** ** | **(in millions)**           | ** ** |
| **Defense  Segment Sales**             |       |                             |       |   |   |
| Communications  and electronics (CEBU) |       | $                                | 14.8       |   | $ | 15.8 |   |
| Training systems  (TSBU)               |       | 59.0                             |       | 57.5 |   |
| Mission support  services (MSBU)       |       | 67.1                             |       | 52.4 |   |
| Tactical systems  and other            |       | 2.4                              |       | 1.8 |   |
|                                   |       | $                                | 143.3      |   | $ | 127.5 |   |
|                                   |       |                             |       |   |   |
| **Defense  Segment Operating Income**  |       |                             |       |   |   |
| Communications  and electronics (CEBU) |       | $                                | 1.0        |   | $ | 0.3 |   |
| Training systems  (TSBU)               |       | 4.0                              |       | 2.0 |   |
| Mission support  services (MSBU)       |       | 5.0                              |       | 4.0 |   |
| Tactical systems  and other            |       | (0.5                             | )          | (0.4 | ) |
|                                   |       | $                                | 9.5        |   | $ | 5.9 |   |

 

Defense segment sales increased 12%, from $127.5 millionin the first quarter of fiscal 2006 to $143.3 million in the first quarter thisyear. Most of the growth came from MSBU, while CEBU sales decreased whencomparing the quarters. The caption “Tactical systems and other” in the tableabove includes operating results of our 50% owned joint venture company as wellas advanced programs for the development of new defense technologies.

Operating income in thedefense segment improved in the first quarter to $9.5 million compared to $5.9million in the first quarter of fiscal 2006, a 61% improvement. Each of thethree primary business units showed improvement, with the biggest increase inoperating income coming from TSBU. The tactical systems joint venture company incurred operating losses ofapproximately $0.6 million in the first quarter of each year. Operating incomeamounts in the

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abovetable for the quarter ended December 31, 2005 have been revised from previousreports to conform to the current method of allocating corporate costs to thebusiness units.

**Communicationsand Electronics (CEBU)**

Sales from CEBU were $14.8 million in the first quarterof 2007 compared to $15.8 million in the same quarter last year, a 6% decrease.Sales increased from contracts for the supply of data links for unmanned aerialvehicles in the U.S. and U. K., however, other data link sales decreased forthe quarter.

Operating income fromCEBU improved over last year from $0.3 million to $1.0 million. The reason forthe improvement is that the communication products division, which sells poweramplifiers and receivers, had incurred a loss of $0.1 million in last year’sfirst quarter, but turned that around to a $0.7 million profit this year.

**TrainingSystems (TSBU)**

TSBU sales increased from $57.5 million in the firstquarter last year to $59.0 million this year, a 3% increase. New task ordersfor development of the next generation air combat training system resulted inhigher air combat training sales, while ground combat training sales decreasedslightly due to lower sales of tactical laser engagement systems. Delayed U.S.government funding for small arms training systems in 2006 also resulted inlower sales from that product line in the first quarter this year. We expectsales from the small arms training product line to increase in subsequentquarters this year as new orders for these systems have recently been received.

Training systemsoperating income doubled from $2.0 million in the first quarter last year to$4.0 million this year due to higher profits from both air and ground combattraining systems. New task orders and resulting higher sales this year from aircombat training contracts has helped improve the profit margin from thisproduct line.  In addition, operatingincome from small arms training systems was lower last year due to development costsincurred for new weapons simulations systems.

**MissionSupport Services (MSBU)**

MSBU sales increased 28% to $67.0 million in the firstquarter this year, compared to $52.4 million last year. Higher sales frombattlefield simulation support activities, contracts for modeling the effectsof weapons of mass destruction and from other mission support activitiescontributed to the increase in sales.

Mission support services operating income increasedfrom $4.0 million in the first quarter last year to $5.0 million this year dueprimarily to the increase in sales volume. In addition, a minor dispute with a vendorwas resolved, boosting the profit margin on one contract by approximately $0.5million; however, this was partially offset by cost growth of approximately$0.3 million on an operations and maintenance contract due to required staffinglevels that were higher than originally planned.

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**TransportationSystems Segment**
| ** **                               | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|
| ** **                               | ** ** | **December 31,**            | ** ** |
| ** **                               | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| ** **                               | ** ** | **(in millions)**           | ** ** |
|                                     |       |                             |       |   |   |
| Transportation  Segment Sales            |       | $                                | 56.0       |   | $ | 63.7 |   |
|                                     |       |                             |       |   |   |
| Transportation Segment  Operating Income |       | $                                | 2.3        |   | $ | 3.2 |   |

 

Transportationsegment sales decreased 12% from $63.7 million in the quarter ended December31, 2005 to $56.0 million in the first quarter of this fiscal year. Asanticipated, this decrease resulted primarily from lower sales on systeminstallation contracts in North America and Australia. Sales from a contract inSweden were also lower during the quarter due to a delay in progress on theprogram during the period.

Theschedule slip on the Sweden program was due in part to late delivery ofinformation from the customer and resulted in cost growth on the contractduring the quarter. We estimated this cost growth to be approximately $3.9million and recorded a provision of that amount in the first quarter. It is notpossible to determine at this time if any of the cost growth may be recoveredfrom the customer; therefore, no estimated recovery has been recorded as ofDecember 31, 2006. Operating income from transportation systems was $2.3 million in the first quarter this yearcompared to $3.2 million last year, reflecting this loss provision recorded onthe Sweden contract, which more than offset improved profitability from othercontracts. Operating income from the Prestige contract in London improvedduring the quarter compared to last year as well as operating income from NorthAmerican based contracts. A settlement agreement was reached during this year’sfirst quarter with one customer that increased the contract value by $4.1million; however, this was partially offset by cost growth on the contract of$2.8 million due primarily to an extended schedule for completion. Thedifference of $1.3 million represents recovery of cost growth expensed in a previousperiod which increased operating income for the quarter by that amount.Discussions with this and other customers of possible additional contractchanges that may benefit the Company are continuing; however, the outcome ofthese discussions cannot be determined at this time.

**Backlog**

As reflected in the table below, total backlog increased approximately$107 million at December 31, 2006 compared to September 30, 2006.Transportation systems backlog increased $74 million, while defense backlogincreased $33 million for the quarter. Funded backlog increased by $147 millionduring the period, with transportation systems increasing $74 million anddefense funded backlog increasing by $73 million.

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| ** **                     | ** ** | **December 31,**  | ** ** | **September 30,** | ** ** |
|--------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                     | ** ** | **2006**               | ** ** | **2006**               | ** ** |
| ** **                     | ** ** | **(in millions)** | ** ** |
| **Total  backlog**             |       |                   |       |                   |       |
| Transportation systems         |       | $                      | 789.4      |                   | $          | 715.6 |   |
| Defense:                       |       |                   |       |                   |       |
| Communications and electronics |       | 69.7                   |       | 71.9                   |       |
| Training systems               |       | 356.3                  |       | 285.9                  |       |
| Mission support services       |       | 333.6                  |       | 366.4                  |       |
| Tactical systems and other     |       | 36.9                   |       | 38.8                   |       |
| Total defense                  |       | 796.5                  |       | 763.0                  |       |
| Total                          |       | $                      | 1,585.9    |                   | $          | 1,478.6 |   |
|                           |       |                   |       |                   |       |
| **Funded  backlog**            |       |                   |       |                   |       |
| Transportation systems         |       | $                      | 789.4      |                   | $          | 715.6 |   |
| Defense:                       |       |                   |       |                   |       |
| Communications and electronics |       | 69.7                   |       | 71.9                   |       |
| Training systems               |       | 356.3                  |       | 285.9                  |       |
| Mission support services       |       | 119.0                  |       | 112.2                  |       |
| Tactical systems and other     |       | 36.9                   |       | 38.8                   |       |
| Total defense                  |       | 581.9                  |       | 508.8                  |       |
| Total                          |       | $                      | 1,371.3    |                   | $          | 1,224.4 |   |

 

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

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

Operating activities used cash of $4.7 million forthe first quarter of the fiscal year. Positive operating cash flows from thetransportation systems segment were more than offset by negative cash flowsfrom the defense segment for the quarter. Negative cash flows resultedprimarily from a decrease in trade payables during the quarter and from thepayments of other current liabilities during the quarter, such as accruedemployee compensation.

Investing activities for the quarter included $8.9 million in proceedsfrom the sale of short-term investments, partially offset by normal capitalexpenditures of $1.9 million.

During the first quarter, we made scheduled payments on our long-termdebt of $5.6 million and repaid $10.0 million borrowed on a short-term basis.

Ourfinancial condition remains strong with working capital of $275 million and acurrent ratio of 3.0 to 1 at December 31, 2006. We expect that cash on hand andour unused lines of credit will be adequate to meet our liquidity requirementsfor the foreseeable future.

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**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 theconsolidated financial statements and notes thereto included in the Company’sannual report on Form 10-K for the year ended September 30, 2006.

**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.  These statements involve estimates,assumptions and uncertainties, including those discussed in “Risk Factors” in the Company’s annual report on Form 10-K forthe year ended September 30, 2006, and throughout this filing that couldcause actual results to differ materially from those expressed in thesestatements.

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

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business or theextent to which any factor, or combination of factors, may cause actual resultsto differ materially from those contained in any forward-looking statements.

ITEM4 - STATEMENT ON DISCLOSURE CONTROLS AND PROCEDURES.

We maintain disclosurecontrols and procedures, including internal control over financial reporting,which are designed to ensure that information required to be disclosed in ourperiodic filings with the SEC is reported within the time periods specified inthe SEC’s rules and forms, and to provide reasonable assurance that assets aresafeguarded and transactions are properly executed and recorded. Our disclosurecontrols and procedures are also designed to ensure that information isaccumulated and communicated to our management, including our Chief ExecutiveOfficer (CEO) and Chief Financial Officer (CFO), as appropriate, to allowtimely decisions regarding required disclosure. In designing and evaluatingsuch controls and procedures, we recognize that any controls and procedures, nomatter how well designed and operated, can provide only reasonable assurance ofachieving the desired control objectives, and management necessarily isrequired to use its judgment in evaluating the cost-benefit relationship ofpossible controls and procedures.

We routinely review our system of internalcontrol over financial reporting and make changes to our processes and systemsto improve controls and increase efficiency, while ensuring that we maintain aneffective internal control environment. Changes may include such activities asimplementing new, more efficient systems and migrating certain processes fromour operating units to our corporate shared service center. In addition, if weacquire new businesses, we will review the controls and procedures of theacquired business as part of our integration activities.

We performed an evaluation of theeffectiveness of our disclosure controls and procedures as of December 31,2006. The evaluation was performed with the participation of senior managementof each business segment and key corporate functions, and under the supervisionof the CEO and CFO. Based on our evaluation, we concluded that our disclosurecontrols and procedures were effective as of December 31, 2006.

There were no changes in our internal controlover financial reporting during the most recently completed fiscal quarter thatmaterially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

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**PART II -OTHER INFORMATION**

ITEM 6 - EXHIBITS

(a)The following exhibits are included herein:
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                       | ** ** | ** ** |
|-----------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| 3.1             |       | Amended and  restated Certificate of Incorporation. Incorporated by reference to Form 10-Q  filed for the quarter ended June, 30, 2006, file No. 1-8931, Exhibit 3.1. |
| 3.2             |       | Bylaws.  Incorporated by reference to Form 10-K filed for the fiscal year ended  September 30, 2004, file No. 1-8931, Exhibit 3.                                      |
| 10.1            |       | 2005 Equity  Incentive Plan. Incorporated by reference to Form 10-K filed for the fiscal  year ended September 30, 2005, file No. 1-8931, Exhibit 10.1.               |
| 10.2            |       | 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 to 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 to Form 8-K filed April  6, 2005, file No. 1-8931, Exhibit 10.                                         |
| 15              |       | Report of Independent Registered Public Accounting  Firm                                                                                                              |       |       |
| 31.1            |       | Certification of CEO                                                                                                                                                  |       |       |
| 31.2            |       | Certification of CFO                                                                                                                                                  |       |       |
| 32.1            |       | CEO Certification                                                                                                                                                     |       |       |
| 32.2            |       | CFO Certification                                                                                                                                                     |       |       |

 

SIGNATURES

Pursuant to the requirements ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned thereunto duly authorized.
|                       | CUBIC CORPORATION             |   |
|-----------------------|-------------------------------|--------|
|                  |                          |   |
| Date February 6, 2007 | /s/ W. W. Boyle               |   |
|                  | W. W. Boyle                   |   |
|                  | Senior Vice President and CFO |   |
|                  |                          |   |
| Date February 6, 2007 | /s/ Mark A. Harrison          |   |
|                  | Mark A. Harrison              |   |
|                  | Vice President and Controller |   |

 

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