**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**QUARTERLY REPORT**

 

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

 

**For the Quarter Ended December 31, 2005**

 

**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 tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months, and (2) has been subject to suchfiling requirements for the past 90 days.

 

Yes  ý    No  o

 

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

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

 

As of January 31, 2006, Registrant had only one class of commonstock of which there were 26,719,845 shares outstanding (after deducting8,944,884 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)

 
| ** **                                    | ** ** | **Three Months Ended  December 31,** | ** ** |
|-----------------------------------------------|------------|--------------------------------------|------------|
| ** **                                    | ** ** | **2005**                             | ** ** | **2004** | ** ** |
|                                          |       |                                 |       |   |   |
| Sales                                         |       | $                                    | 195,041    |   | $ | 189,940 |   |
|                                          |       |                                 |       |   |   |
| Costs and expenses:                           |       |                                 |       |   |   |
| Cost of sales                                 |       | 162,160                              |       | 152,505 |   |
| Selling, general  and administrative expenses |       | 22,371                               |       | 28,215 |   |
| Research and  development                     |       | 1,944                                |       | 1,647 |   |
|                                          |       | 186,475                              |       | 182,367 |   |
| Operating income                              |       | 8,566                                |       | 7,573 |   |
|                                          |       |                                 |       |   |   |
| Other income (expenses):                      |       |                                 |       |   |   |
| Gain on sale of  investment real estate       |       | 7,237                                |       | — |   |
| Interest expense                              |       | (858                                 | )          | (1,329 | ) |
| Other income                                  |       | 906                                  |       | 1,509 |   |
| Minority  interest                            |       | 258                                  |       | — |   |
| Income before income taxes                    |       | 16,109                               |       | 7,753 |   |
|                                          |       |                                 |       |   |   |
| Income taxes                                  |       | 5,600                                |       | 2,500 |   |
|                                          |       |                                 |       |   |   |
| Net income                                    |       | $                                    | 10,509     |   | $ | 5,253 |   |
|                                          |       |                                 |       |   |   |
| Net income per share                          |       | $                                    | 0.39       |   | $ | 0.20 |   |
|                                          |       |                                 |       |   |   |
| Average shares of common stock outstanding    |       | 26,720                               |       | 26,720 |   |

 

*See accompanying notes.*

 

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## **CUBIC CORPORATION**

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

 
| ** **                                      | ** ** | **December 31,  2005** | ** ** | **September 30,  2005** | ** ** |
|-------------------------------------------------|------------|------------------------|------------|-------------------------|------------|
| ** **                                      | ** ** | **(Unaudited)**        | ** ** | **(See note below)**    | ** ** |
| **ASSETS**                                      |       |                   |       |                    |       |
| Current assets:                                 |       |                   |       |                    |       |
| Cash and cash  equivalents                      |       | $                      | 26,124     |                    | $          | 48,860 |   |
| Accounts  receivable                            |       | 304,207                |       | 310,771                 |       |
| Inventories                                     |       | 22,534                 |       | 21,530                  |       |
| Deferred income  taxes and other current assets |       | 38,871                 |       | 42,669                  |       |
| Total current assets                            |       | 391,736                |       | 423,830                 |       |
|                                            |       |                   |       |                    |       |
| Long-term contract receivables                  |       | 23,700                 |       | 22,900                  |       |
| Property, plant and equipment - net             |       | 51,221                 |       | 52,177                  |       |
| Goodwill                                        |       | 34,138                 |       | 34,473                  |       |
| Other assets                                    |       | 13,363                 |       | 13,900                  |       |
|                                            |       | $                      | 514,158    |                    | $          | 547,280 |   |
|                                            |       |                   |       |                    |       |
| **LIABILITIES AND SHAREHOLDERS' EQUITY**        |       |                   |       |                    |       |
| Current liabilities:                            |       |                   |       |                    |       |
| Short-term borrowings                           |       | $                      | 25,301     |                    | $          | 26,302 |   |
| Trade accounts  payable                         |       | 12,993                 |       | 30,256                  |       |
| Customer  advances                              |       | 35,275                 |       | 41,239                  |       |
| Other current  liabilities                      |       | 46,687                 |       | 63,871                  |       |
| Accrued pension  liability                      |       | 7,397                  |       | 7,953                   |       |
| Income taxes  payable                           |       | 11,304                 |       | 6,571                   |       |
| Current portion  of long-term debt              |       | 6,026                  |       | 6,040                   |       |
| Total current liabilities                       |       | 144,983                |       | 182,232                 |       |
|                                            |       |                   |       |                    |       |
| Long-term debt                                  |       | 38,014                 |       | 43,776                  |       |
| Accrued pension liability                       |       | 17,607                 |       | 16,179                  |       |
| Deferred compensation                           |       | 7,966                  |       | 7,584                   |       |
| Minority interest                               |       | 593                    |       | 351                     |       |
|                                            |       |                   |       |                    |       |
| Shareholders' equity:                           |       |                   |       |                    |       |
| Common stock                                    |       | 234                    |       | 234                     |       |
| Additional  paid-in capital                     |       | 12,123                 |       | 12,123                  |       |
| Retained  earnings                              |       | 329,709                |       | 319,200                 |       |
| Accumulated  other comprehensive income (loss)  |       | (1,005                 | )          | 1,667                   |       |
| Treasury stock  at cost                         |       | (36,066                | )          | (36,066                 | )          |
|                                            |       | 304,995                |       | 297,158                 |       |
|                                            |       | $                      | 514,158    |                    | $          | 547,280 |   |

 

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

*See accompanying notes.*

 

3

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**CUBIC CORPORATION**

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

 
| ** **                                                                                   | ** ** | **Three Months Ended  December 31,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                   | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| Operating Activities:                                                                        |       |                                 |       |   |   |
| Net income                                                                                   |       | $                                    | 10,509     |   | $ | 5,253 |   |
| Adjustments to  reconcile net income to net cash provided by (used in) operating activities: |       |                                 |       |   |   |
| Depreciation and  amortization                                                               |       | 2,318                                |       | 2,085 |   |
| Gain on sale of  investment real estate                                                      |       | (7,237                               | )          | — |   |
| Changes in  operating assets and liabilities                                                 |       | (26,847                              | )          | (17,884 | ) |
| NET CASH USED IN OPERATING ACTIVITIES                                                        |       | (21,257                              | )          | (10,546 | ) |
|                                                                                         |       |                                 |       |   |   |
| Investing Activities:                                                                        |       |                                 |       |   |   |
| Net additions to  property, plant and equipment                                              |       | (2,378                               | )          | (1,786 | ) |
| Proceeds from  sale of investment real estate                                                |       | 8,028                                |       | — |   |
| Proceeds from  sale of marketable securities                                                 |       | —                               |       | 6,200 |   |
| NET CASH PROVIDED BY INVESTING ACTIVITIES                                                    |       | 5,650                                |       | 4,414 |   |
|                                                                                         |       |                                 |       |   |   |
| Financing Activities:                                                                        |       |                                 |       |   |   |
| Change in  short-term borrowings, net                                                        |       | (1,001                               | )          | 17,135 |   |
| Principal  payments on long-term borrowings                                                  |       | (5,428                               | )          | (5,592 | ) |
| NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES                                          |       | (6,429                               | )          | 11,543 |   |
|                                                                                         |       |                                 |       |   |   |
| Effect of exchange rates on cash                                                             |       | (700                                 | )          | 331 |   |
|                                                                                         |       |                                 |       |   |   |
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                         |       | (22,736                              | )          | 5,742 |   |
|                                                                                         |       |                                 |       |   |   |
| Cash and cash equivalents at the beginning of the  period                                    |       | 48,860                               |       | 10,622 |   |
|                                                                                         |       |                                 |       |   |   |
| CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD                                           |       | $                                    | 26,124     |   | $ | 16,364 |   |

 

# *See accompanying notes.*

 

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# ***CUBICCORPORATION***

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

December 31, 2005

 

**Note 1 – Basis forPresentation**

** **

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-Qand Article 10 of Regulation S-X. Accordingly, they do not include allinformation and footnotes required by accounting principles generally acceptedin the United 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, 2005 arenot necessarily indicative of the results that may be expected for the yearending September 30, 2006. For further information, refer to theconsolidated financial statements and footnotes thereto included in the Company’sannual report on Form 10-K for the year ended September 30, 2005.

 

The preparation of the financial statements in conformity with U. S. generallyaccepted accounting principles requires management to make estimates andassumptions 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 of accounts receivable are as follows (in thousands):

 
| ** **                               | ** ** | **December 31,  2005** | ** ** | **September 30,  2005** | ** ** |
|------------------------------------------|------------|------------------------|------------|-------------------------|------------|
| ** **                               | ** ** | **(unaudited)**        | ** ** | ** **              | ** ** |
| Trade and other receivables              |       | $                      | 16,777     |                    | $          | 11,085 |   |
| Long-term contracts:                     |       |                   |       |                    |       |
| Billed                                   |       | 70,955                 |       | 69,618                  |       |
| Unbilled                                 |       | 244,994                |       | 257,970                 |       |
| Allowance for doubtful accounts          |       | (4,819                 | )          | (5,002                  | )          |
| Total accounts  receivable               |       | 327,907                |       | 333,671                 |       |
| Less estimated amounts not currently due |       | (23,700                | )          | (22,900                 | )          |
| Current accounts  receivable             |       | $                      | 304,207    |                    | $          | 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 December 31,2005. Of this amount, approximately $20 million relates to the Prestigecontract in the United Kingdom, which is a transportation systems contract.

 

Inventories consist ofthe following (in thousands):

 
| ** **                                                       | ** ** | **December 31,  2005** | ** ** | **September 30,  2005** | ** ** |
|------------------------------------------------------------------|------------|------------------------|------------|-------------------------|------------|
| ** **                                                       | ** ** | **(unaudited)**        | ** ** | ** **              | ** ** |
| Finished products                                                |       | $                      | 551        |                    | $          | 471 |   |
| Work in process and inventoried costs under  long-term contracts |       | 16,559                 |       | 17,113                  |       |
| Raw material and purchased parts                                 |       | 5,424                  |       | 3,946                   |       |
| Total  inventories                                               |       | $                      | 22,534     |                    | $          | 21,530 |   |

 

At December 31,2005, work in process and inventoried costs under long-term contracts includesapproximately $5.5 million in costs incurred outside the scope of work on severalcontracts, primarily in the defense segment. Such costs were $5.8 million as ofSeptember 30, 2005.  Managementbelieves it is probable these costs, plus appropriate profit margin, will berecovered under contract change orders within the next year.

 

**Note 3 – Comprehensive Income**

 

Comprehensive income (loss) is as follows (in thousands): 

 
| ** **                                       | ** ** | **Three Months Ended  December 31,** | ** ** |
|--------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                       | ** ** | **2005**                             | ** ** | **2004** | ** ** |
|                                             |       |                                 |       |   |   |
| Net income                                       |       | $                                    | 10,509     |   | $ | 5,253 |   |
| Foreign currency translation adjustments         |       | (2,745                               | )          | 4,957 |   |
| Net unrealized gain (loss) from cash flow hedges |       | 5                                    |       | (637 | ) |
| Comprehensive income                             |       | $                                    | 7,769      |   | $ | 9,573 |   |

 

6

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### **Note 4– Segment Information**

 

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

 
| ** **                   | ** ** | **Three Months Ended  December 31,** | ** ** |
|------------------------------|------------|--------------------------------------|------------|
| ** **                   | ** ** | **2005**                             | ** ** | **2004** | ** ** |
|                         |       |                                 |       |   |   |
| **Sales:**                   | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Defense                      |       | $                                    | 127.5      |   | $ | 122.0 |   |
| Transportation systems       |       | 63.7                                 |       | 63.9 |   |
| Corporate and other          |       | 3.8                                  |       | 4.1 |   |
| Total sales                  |       | $                                    | 195.0      |   | $ | 190.0 |   |
|                         |       |                                 |       |   |   |
| **Operating income (loss):** |       |                                 |       |   |   |
| Defense                      |       | $                                    | 5.9        |   | $ | 6.6 |   |
| Transportation systems       |       | 3.2                                  |       | 1.9 |   |
| Corporate and other          |       | (0.5                                 | )          | (0.9 | ) |
| Total operating  income      |       | $                                    | 8.6        |   | $ | 7.6 |   |

 

### **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. Asof December 31, 2005, $21 million was outstanding under this agreement ata rate of 5.2% and is included in current liabilities because it is management’sintent to repay the borrowing within one year.

 

As of December 31, 2005,including the amount above, the Company had a total of $25.3 millionoutstanding under its various unsecured short-term borrowing arrangements inthe U.S., UK, Canada and New Zealand at an average rate of 5.0%.

 

7

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### **Note 6– Pension Plans**

 

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

 
| ** **                     | ** ** | **Three Months Ended  December 31,** | ** ** |
|--------------------------------|------------|--------------------------------------|------------|
| ** **                     | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| Service cost                   |       | $                                    | 2,055      |   | $ | 1,877 |   |
| Interest cost                  |       | 2,177                                |       | 1,997 |   |
| Expected return on plan assets |       | (2,396                               | )          | (2,061 | ) |
| Amortization of:               |       |                                 |       |   |   |
| Prior service  cost            |       | 8                                    |       | 8 |   |
| Actuarial loss                 |       | 539                                  |       | 413 |   |
| Administrative expenses        |       | 25                                   |       | 25 |   |
| Net pension cost               |       | $                                    | 2,408      |   | $ | 2,259 |   |

 

8

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### **CUBICCORPORATION**

ITEM 2 - MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OFOPERATIONS

 

December 31, 2005

 

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 authoritiesworldwide.  We provide hardware, softwareand multi-agency, multimodal transportation integration technologies andservices that allow the agencies to efficiently collect fares, manage theiroperations, reduce shrinkage and make using public transit a more convenientand attractive option for commuters.

 

**ConsolidatedOverview**

Salesfor the quarter ended December 31, 2005 increased to $195.0 million from$190.0 million in the first fiscal quarter last year, an increase of approximately3%.The increase all came from the defense segment, which increased to $127.5million from $122.0 million, while transportation sales in the first quarterthis year were nearly the same as last year at $63.7 million, compared to $63.9million. See the segment discussions following for further analysis of segmentsales.

 

Operating income alsoincreased in the first fiscal quarter from $7.6 million last year to $8.6 millionthis year. The increase in operating income was due to improvement intransportation systems operating income from $1.9 million last year to $3.2million this year, while defense operating income decreased from $6.6 millionin the first quarter of 2005 to $5.9 million in the first quarter of fiscal2006. See the segmentdiscussions following for further analysis of operating income by segment.

 

Net income in the firstquarter increased to $10.5 million this year (39 cents per share) from $5.3million last year (20 cents per share), due primarily to a gain from the saleof investment real estate in San Diego County, in addition to the increase inoperating income.  The gain from the saleof the investment real estate was approximately $4.3 million, after applicableincome taxes, or about 16 cents per share.

 

9

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Cost of sales as apercentage of sales increased from 80.3% in the first quarter last year to83.2% this year. This reflects lower profit margins from air and ground combattraining systems and tacticallaser engagement systems in the defense training systems business unitand low profit margins in the transportation systems segment due to cost growthin previous periods.

 

Selling, general andadministrative (SG&A) expenses decreased by $5.8 million from last year’sfirst quarter and decreased from 14.8% to 11.5% of sales, with the decreasecoming equally from both segments. During the first quarter last year thedefense segment had incurred significantly higher than normal selling expensesrelated to contract proposals, while such activities returned to a more normallevel in the first quarter this year. Transportation systems SG&A expenseswere lower in the first quarter this year for several reasons. In the firstquarter last year, higher legal expenses were incurred related to a dispute,that was settled, with a former subcontractor. In addition, staffing reductionsand lower contract proposal costs this year contributed to the decrease inSG&A in transportation systems.

 

Our projected effectivetax rate for fiscal 2006 is 34.8% of pretax income, which is reflected in theprovision recorded in the first quarter, compared to a rate of 32.2% used inlast year’s first quarter. The projected rate is higher this year because theU.S. research and development credit expired on December 31, 2005 and hasnot yet been extended by Congress. If a similar credit were reinstatedretroactively later this year, our effective tax rate for 2006 could be closerto 32%. The effective rate for fiscal 2006 could also be affected by, amongother factors, the mix of business between the U.S. and foreign jurisdictions,our ability to take advantage of available tax credits and audits of ourrecords by taxing authorities.

 

**Defense Segment**

 
| ** **                           | ** ** | **Three Months Ended  December 31,** | ** ** |
|--------------------------------------|------------|--------------------------------------|------------|
| ** **                           | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| ** **                           | ** ** | **(millions)**                       | ** ** |
| **Defense Segment Sales**            |       |                                 |       |   |   |
| Communications and electronics       |       | $                                    | 15.8       |   | $ | 13.3 |   |
| Training systems                     |       | 57.5                                 |       | 47.3 |   |
| Government services                  |       | 52.4                                 |       | 60.7 |   |
| Tactical systems and other           |       | 1.8                                  |       | 0.7 |   |
|                                 |       | $                                    | 127.5      |   | $ | 122.0 |   |
|                                 |       |                                 |       |   |   |
| **Defense Segment Operating Income** |       |                                 |       |   |   |
| Communications and electronics       |       | $                                    | 0.3        |   | $ | 0.1 |   |
| Training systems                     |       | 1.9                                  |       | 3.3 |   |
| Government services                  |       | 4.2                                  |       | 3.4 |   |
| Tactical systems and other           |       | (0.5                                 | )          | (0.2 | ) |
|                                 |       | $                                    | 5.9        |   | $ | 6.6 |   |

 

Defensesegment sales increased to $127.5 million in the first fiscal quarter this yearfrom $122.0 million in the first quarter of fiscal 2005, a 5% increase. Increasesof 22% and 19% in training systems and communications sales, respectively, morethan offset a decrease in government services sales. New orders won last yearfor tactical laser engagement systems, mobile combat training systems and smallarms training systems added to training sales for the first fiscal quartercompared to last year. A new contract for the supply of data links for unmannedaerial vehicles

 

10

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(UAV) in the United Kingdom, called Watchkeeper, added tocommunications and electronics sales for the quarter. These sales increases morethan offset a decrease of about $11 million in sales from a contract at theJoint Readiness Training Center (JRTC) in Fort Polk, LA., due to a decrease incombat training exercises at the facility during the quarter. The primaryreason for the decline in training activity was that National Guard units whichusually would have been training at the facility were diverted to hurricanerelief efforts. This drop in sales resulted in a decrease of $8.3 million ingovernment services sales for the quarter compared to last year. All othergovernment services contracts together posted a $3 million increase over thefirst quarter last year.

 

Operating incomein the defense segment declined in the first quarter this year to $5.9 millioncompared to $6.6 million in the first quarter last year. Operating income inthe communications and electronics business improved slightly over last year,from $100 thousand to $300 thousand. The communication products division hadincurred a loss of $900 thousand in last year’s first quarter, but was able toessentially break even in the first quarter this year, helping to improveoperating income. Cost growth of approximately $500 thousand on a certaincommunications contract partially offset this profit improvement. The WatchkeeperUAV project mentioned above has not yet generated operating income, as it is inthe early stages of completion. Training systems operating income was down inthe first quarter this year compared to last year. Lower margins from air andground combat training systems and tactical laser engagement systems were contributing factors. Inaddition, operating income from smallarms training systems was lower, as we are currently developing new weapons simulationssystems for this product line in an effort to become more competitive.Government services operating income increased in the quarter, despite thedecrease in sales. Improved performance from the operations andmaintenance business and a battlefield simulation contract helped to enhancegovernment services operating profits. In addition, approximately $200 thousandof the government services operating income for the quarter came from a contractmodification received, related to a contract completed several years ago, whichhad not previously been anticipated in contract value calculations. Included inthe caption “Tactical systems and other” are expenses of more than $500thousand incurred during the first quarter (compared to zero last year) relatedto the 50% owned joint venture with a foreign company. The joint venture hasbeen awarded one contract, but has not yet generated any sales.

 

**TransportationSystems Segment**

Transportation segmentsales remained essentially unchanged, at $63.7 million for the first quarterthis year compared to $63.9 million in the first quarter last year. Sales from Europeanservice contracts declined by more than $6 million from last year’s firstquarter, but this decrease was offset by higher sales from system installation contractsin Europe, Australia and North America. Lower service sales in Europe were dueprimarily to one contract that has been scaled back from its previousrequirements, as the equipment is being replaced by new equipment which doesnot require the same support from us. In addition, a contract for the maintenanceof communications equipment in London was completed at the end of fiscal 2005,and the new contract was awarded to a competitor, further impacting servicesales for the quarter.

 

Operatingincome in transportation systems increased to $3.2 million in the first quarterthis year from $1.9 million in the first quarter last year. The contracts thathad generated operating losses last year were essentially break-even in thefirst quarter this year, improving operating income for the quarter. All of theoperating income for the quarter came from ongoing service contracts in NorthAmerica and Europe, although operating income from European service contractswas

 

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lower than last year due primarily to the decrease in sales volumedescribed above. A decrease in legal costs helped improve operating income by$800 thousand in the first quarter this year, however, the parking business inCanada incurred a loss of $1.2 million in the first quarter. Of this amount,approximately $100 thousand represented costs incurred related to workforcereductions, while the remainder was due primarily to insufficient sales volumeto cover overhead costs. We expect to reduce overhead costs of this business goingforward.

 

**Backlog**

As reflected in the tablebelow, both total and funded backlog decreased about $2 million at December 31,2005 compared to September 30, 2005. Defense backlog increased about $27million during the quarter while transportation systems backlog decreased about$29 million.

 

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.

 
| ** **                      | ** ** | **December 31,  2005** | ** ** | **September 30,  2005** | ** ** |
|---------------------------------|------------|------------------------|------------|-------------------------|------------|
| ** **                      | ** ** | **(in millions)**      | ** ** |
| **Total backlog**               |       |                   |       |                    |       |
| Transportation  systems         |       | $                      | 704.7      |                    | $          | 733.3 |   |
| Defense:                        |       |                   |       |                    |       |
| Communications  and electronics |       | 107.8                  |       | 57.3                    |       |
| Training systems                |       | 286.9                  |       | 318.9                   |       |
| Government  services            |       | 349.5                  |       | 340.0                   |       |
| Tactical systems  and other     |       | 10.0                   |       | 11.5                    |       |
| Total defense                   |       | 754.2                  |       | 727.7                   |       |
| Total                           |       | $                      | 1,458.9    |                    | $          | 1,461.0 |   |
|                            |       |                   |       |                    |       |
| **Funded backlog**              |       |                   |       |                    |       |
| Transportation  systems         |       | $                      | 704.7      |                    | $          | 733.3 |   |
| Defense:                        |       |                   |       |                    |       |
| Communications  and electronics |       | 107.8                  |       | 57.3                    |       |
| Training systems                |       | 286.9                  |       | 318.9                   |       |
| Government  services            |       | 97.1                   |       | 87.9                    |       |
| Tactical systems  and other     |       | 10.0                   |       | 11.5                    |       |
| Total defense                   |       | 501.8                  |       | 475.6                   |       |
| Total                           |       | $                      | 1,206.5    |                    | $          | 1,208.9 |   |

 

**Liquidity and Capital Resources**

Operatingactivities used $21 million in cash for the quarter. This was due to areduction in accounts payable, customer advances and other current liabilitiesduring the quarter, partially offset by lower long-term contract receivables.The negative operating cash flows came nearly

 

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equally from both segments, in addition to payments of accrued interestand other corporate obligations.

 

Investingactivities for the three month period included $8.0 million in proceeds fromthe sale of the building mentioned previously and capital expenditures of $2.4million.

 

Duringthe first quarter of the fiscal year, we made a scheduled payment on long-termdebt of $5.4 million and repaid $1 million borrowed on a short-term basis.

 

Our financial conditionremains strong with working capital of $247 million and a current ratio of 2.7to 1 at December 31, 2005. We expect that cash on hand and our unused linesof credit will be adequate to meet our working capital requirements for theforeseeable future.

 

**Critical Accounting Policies, Estimates and Judgments**

Our financial statements are prepared in accordance with accounting principles that are generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We continually evaluate our estimates and judgments, the most critical of which are those related to revenue recognition, income taxes, valuation of goodwill 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.

 

**CAUTIONARYSTATEMENT ABOUT FORWARD-LOOKING INFORMATION**

 

This report, including the documents that we incorporate by reference,contains forward-looking statements within the meaning of Section 21E ofthe Securities Exchange Act of 1934, as amended, that are subject to the “safeharbor” created by those sections. Any statements about our expectations,beliefs, plans, objectives, assumptions or future events or our futurefinancial and/or operating performance are not historical and may beforward-looking. These statements are often, but not always, made through the useof words or phrases such as “may,” “will,” “anticipate,” “estimate,” “plan,” “project,”“continuing,” “ongoing,” “expect,” “believe,” “intend,” “predict,” “potential,”“opportunity” and similar words or phrases or the negatives of

 

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these words or phrases.  Thesestatements involve estimates, assumptions and uncertainties, including thosediscussed in “Risk Factors” in the Company’s annual report on Form 10-Kfor the year ended September 30, 2005, and throughout this filing thatcould cause actual results to differ materially from those expressed in thesestatements.

 

Because the risk factors referred to above could cause actual resultsor outcomes to differ materially from those expressed in any forward-lookingstatements made by us or on our behalf, you should not place undue reliance onany forward-looking statements.  Inaddition, past financial and/or operating performance is not necessarily areliable indicator of future performance and you should not use our historicalperformance to anticipate results or future period trends.  Further, any forward-looking statement speaksonly as of the date on which it is made, and we undertake no obligation toupdate any forward-looking statement to reflect events or circumstances afterthe date on which the statement is made or to reflect the occurrence ofunanticipated events. New factors emerge from time to time, and it is notpossible for us to predict which factors will arise. In addition, we cannotassess the impact of each factor on our business or the extent to which anyfactor, or combination of factors, may cause actual results to differmaterially from those contained in any forward-looking statements.

 

ITEM 4 - STATEMENT ON DISCLOSURE CONTROLS AND PROCEDURES.

 

Withinthe 90 days prior to the date of filing this Quarterly Report on Form 10-Q,the Company carried out an evaluation, under the supervision and with theparticipation of the Company’s management, including the Chief ExecutiveOfficer and Chief Financial Officer, of the effectiveness of the design andoperation of the Company’s disclosure controls and procedures pursuant to theSecurities and Exchange Act of 1934 Rules 13a-15 and 15d-15. Based uponthat evaluation, the Chief Executive Officer and Chief Financial Officerconcluded that, as of the end of the three month period ended December 31, 2005, the Company’s disclosure controls andprocedures are effective in timely alerting them to material informationrelating to the Company (including its consolidated subsidiaries) required tobe included in the Company’s periodic SEC filings.

 

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**PART II - OTHER INFORMATION**

 

ITEM 6 - EXHIBITS

 

(a) The followingexhibits are 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                 |       | Certification of CEO                                                                                                                                                           |
| 31.2                 |       | Certification of CFO                                                                                                                                                           |
| 32.1                 |       | CEO and CFO Certification                                                                                                                                                      |

 

 

SIGNATURES

 

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

 
|   | CUBIC  CORPORATION                   |
|--------|--------------------------------------|
|   |                                 |
|   |                                 |
| Date   |   February 7, 2006    |   | /s/ W. W. Boyle |   |
|   |  W. W. Boyle                    |
|   |  Senior  Vice President and CFO |
|   |                                 |
| Date   |   February 7,  2006   |   | /s/ Mark A. Harrison |   |
|   | Mark A. Harrison                     |
|   | Vice President  and Controller       |
|        |                                      |  |  |  |  |

 

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