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

Cubic Transportation Systems (CTS) is the leading delivery, integration and IT service provider of automated fare collection systems and turnkey services for public transit authorities worldwide. We provide hardware, software and multiagency, multimodal transportation integration technologies and a full scope of operational services that allow the agencies to efficiently collect fares, manage their operations, reduce shrinkage and make using public transit a more convenient and attractive option for commuters.

Cubic Defense Systems (CDS) is focused on two primary lines of business:
Training Systems and Communications. The segment is a diversified supplier of live and virtual military training systems, and communication systems and products to the U.S. Department of Defense, other government agencies and allied nations. We design instrumented range systems for fighter aircraft, armored vehicles and infantry force-on-force live training; weapons effects simulations; laser-based tactical and communication systems; and precision gunnery solutions. Our virtual training systems are aimed at marksmanship, armored vehicle, and tactical missile systems. Our communications products are aimed at intelligence, surveillance, and search and rescue markets. Other product lines include multi-band communication tracking devices, and cross domain hardware solutions to address multi-level security requirements.

Mission Support Services (MSS) is a leading provider of highly specialized support services including live, virtual, and constructive training; real-world mission rehearsal exercises; professional military education; information technology, information assurance and related cyber support; development of military doctrine; consequence management, infrastructure protection, and force protection; risk mitigation services, and subject matter and operational expertise for national agency and homeland security clients; as well as support to field operations, force deployment and redeployment, and logistics.

Consolidated Overview

Sales for the quarter ended March 31, 2012 increased 2% to $341.0 million from $334.0 million last year. For the first six months of the fiscal year, sales increased to $659.7 million compared to $618.4 million last year, an increase of 7%. The largest sales increase for both the quarter and the six-month period came from CTS. MSS sales increased slightly for the six-month period but were down for the quarter. CDS sales decreased for the quarter and the six-month period. The acquisition of Abraxas added $36.2 million to MSS sales for the six-month period compared to $15.5 million last year. See the segment discussions following for further analysis of segment sales.

Operating income was $33.7 million in the quarter compared to $28.0 million in the second quarter of last year, an increase of 20%. For the quarter, CTS operating income increased while CDS and MSS operating income decreased. Unallowable corporate and other expenses for the second quarter were $2.9 million in 2012 compared to $1.4 million in 2011. The 2012 unallowable corporate expenses include a loss of $1.5 million for which we will file an insurance claim. However, any potential recovery is treated as a contingent gain and not recorded until we receive the insurance proceeds.

Operating income for the six-month period increased 12% to $61.9 million from $55.2 million last year. CTS operating income increased compared to the first half of last year, while both CDS and MSS operating income decreased. Unallowable corporate and other expenses for the first half of the fiscal year were $3.9 million for 2012 and $2.7 million for 2011. See the segment discussions following for further analysis of segment operating income.

Net income attributable to Cubic for the second quarter of fiscal 2012 increased to $24.3 million, or 91 cents per share, compared to $19.9 million, or 75 cents per share last year. For the first six months of the year, net income increased to $45.7 million, or $1.71 per share, from $39.9 million, or $1.49 per share last year. Net income increased for the quarter and first six months primarily due to the increase in operating income. Other income (expense) included a net foreign currency exchange gain of $2.2 million for the first six months of the year compared to a loss of $0.3 million last year, before applicable income taxes. The impact of the increases in operating income and other income on net income were partially offset by the increase in income tax expense described below.

Our gross margin percentage on product sales decreased to 30% in the first six months of fiscal 2012 compared to 33% in 2011. The decrease in our gross margin percentage on product sales is primarily due to the growth in sales on new CTS design and build contracts that are in an early stage of development and are realizing lower margins than our other, more mature, CTS contracts. Our gross margin percentage on service sales increased to 19% in the six-month period ended March 31, 2012 compared to 16% in 2011 due to higher profit margins on CTS service contracts and improved gross margins from the global asset tracking business in the CDS segment.

Selling, general and administrative (SG&A) expenses increased in the second quarter this year to $43.0 million compared to $37.4 million last year. For the six-month period, SG&A increased to $77.7 million compared to $74.4 million last year. The primary reason for these increases was a $2.9 million provision made for a legal claim in the transportation segment during the second quarter of this year. As a percentage of sales, SG&A expenses were 12.6% for the second quarter compared to 11.2% last year, and 11.8% for the first half of fiscal 2012 compared to 12.0% in fiscal 2011. Company funded research and development expenditures, which relate to new transportation and defense technologies we are developing, increased to $8.1 million for the second quarter compared to $5.3 million last year and $13.0 million for the six-month period this year compared to $11.5 million last year. Amortization of purchased intangibles increased for the six-month period this year to $7.7 million compared to $6.4 million last year due to the acquisition of Abraxas in December 2010.

Our projected effective tax rate for fiscal 2012 is 29.2% and is reflected in the tax provision for the six months ended March 31, 2012. The projected effective rate for fiscal 2012 is higher than last year's effective rate of 27.7% primarily due to the expiration of the U.S. federal research and development (R&D) credit on December 31, 2011. In addition, our fiscal 2011 effective income tax rate was decreased by the retroactive reinstatement of the federal R&D credit in the quarter ended December 31, 2010, which had expired in December 2009.

Because the reinstatement was retroactive, in addition to the benefit for the 2011 R&D credit our fiscal 2011 provision also benefitted by $1.5 million for the additional credit that we realized in our fiscal 2010 tax return. The effective rate for fiscal 2012 could be affected by, among other factors, the mix of business between the U.S. and foreign jurisdictions, our ability to take advantage of available tax credits and audits of our records by taxing authorities.

Transportation Systems Segment (CTS)



                                        Six Months Ended             Three Months Ended
                                            March 31,                    March 31,
                                       2012           2011          2012           2011
                                                         (in millions)
Transportation Systems Segment
Sales                               $     255.4    $    186.2    $     131.4    $      96.8

Transportation Systems Segment
Operating Income                    $      38.4    $     28.3    $      23.0    $      13.2

CTS sales increased 36% in the second quarter to $131.4 million compared to $96.8 million last year, and increased 37% for the six-month period to $255.4 million from $186.2 million last year. Sales for the quarter and the six-month period ended March 31, 2012 were higher from work on contracts in Australia, a contract in Canada, and our contracts in the U.K. Partially offsetting these increases were lower sales from design and build projects in the U.S. compared to the second quarter and six-month period last year. The average exchange rates between the prevailing currency in our foreign operations and the U.S. Dollar resulted in an increase in sales of $1.0 million for the second quarter and $1.7 million for the six-month period, compared to the same periods last year.

Operating income from CTS increased 74% in the second quarter to $23.0 million compared to $13.2 million last year, and increased 36% for the six-month period to $38.4 million from $28.3 million last year. Higher sales from contracts in Canada and the U.K. contributed to the increase, in addition to improved margins from a service contract in North America for both the quarter and the six-month period. Profit margins in the second quarter also improved on a contract in the U.K. due to a decrease in the estimated total costs to be incurred to complete the contract, based upon revised estimates that added $7.9 million to operating income. Partially offsetting these increases was a $2.9 million provision made for a legal claim in the second quarter of this year and cost growth related to a contract in the U.S. In addition, the growth in sales came largely from new contracts that are at an early stage of development, realizing lower profit margins than our other, more mature, contracts. The average exchange rates between the prevailing currency in our foreign operations and the U.S. Dollar reduced operating income by $0.1 million for both the quarter and the six-month period, compared to the same periods last year.

Defense Systems Segment (CDS)



                                             Six Months Ended        Three Months Ended
                                                March 31,                March 31,
                                              2012       2011       2012          2011
                                                            (in millions)
Defense Systems Segment Sales
Training systems                           $    140.5   $ 173.4   $    71.8    $      91.4
Communications                                   22.4      22.1         8.3           10.3
Other                                             5.8       4.0         2.2            2.0
                                           $    168.7   $ 199.5   $    82.3    $     103.7

Defense Systems Segment Operating Income
Training systems                           $     19.8   $  23.7   $    11.6    $      13.9
Communications                                    4.0       2.4         0.9            1.6
Other                                            (5.5 )    (6.7 )      (3.5 )         (4.4 )
                                           $     18.3   $  19.4   $     9.0    $      11.1

Training Systems

Training systems sales decreased 21% in the second quarter this year to $71.8 million compared to $91.4 million last year, and decreased 19% for the six-month period to $140.5 million compared to $173.4 million last year. Operating income was also down 17% for the quarter from $13.9 million last year to $11.6 million this year, and down 16% for the six-month period from $23.7 million last year to $19.8 million this year. A delivery of air combat training systems to a U.S. government customer last year resulted in significant sales and operating income for the quarter and six-month period. In addition, ground combat training sales and operating income in the U.S. and the Far East were lower this year for the quarter and the six-month period. Partially offsetting these decreases in the current quarter and six-month period were higher sales from new ground combat training systems contracts. Sales and operating income were also higher for the six-month period from air combat training system sales to a customer in the Far East. The average exchange rates between the prevailing currency in our foreign operations and the U.S. Dollar resulted in an increase in sales and operating income of $1.0 million and $0.3 million, respectively, for the second quarter and $1.2 million and $0.3 million, respectively, for the six-month period, compared to the same periods last year.

Communications

Communications sales decreased 19% in the second quarter to $8.3 million compared to $10.3 million last year. Lower sales from personnel locater systems for the quarter were partially offset by higher sales from data links and power amplifiers. Operating income decreased 44% in the second quarter, from $1.6 million last year to $0.9 million this year. Lower profit margins from data link sales and lower personnel locater system sales contributed to the decrease for the quarter. Partially offsetting the decrease in communications operating income for the quarter were improved profit margins on higher power amplifier sales.

Communications sales increased 1% for the six-month period ended March 31, 2012 to $22.4 million from $22.1 million in the comparable period last year. Sales were higher for the six-month period this year from power amplifiers, but were lower from personnel locater systems and data links. Operating income increased 67% to $4.0 million this year from $2.4 million last year.

Higher power amplifier sales and improved profit margins from all three product lines for the six-month period contributed to the increase.

Other

The "Other" category of the defense systems segment includes businesses that are developing cross domain and global asset tracking products. In the first six months we continued to invest in the development and marketing of these products, resulting in an operating loss for the quarter and six-month period. However, increased gross margins on increased sales of these products reduced the operating losses for the second quarter and six-month period compared to last year.

Mission Support Services Segment (MSS)



                                        Six Months Ended             Three Months Ended
                                            March 31,                    March 31,
                                       2012           2011          2012           2011
                                                         (in millions)
Mission Support Services Segment
Sales                               $     235.0    $    231.9    $     126.9    $     133.1

Mission Support Services Segment
Operating Income                    $       9.1    $     10.2    $       4.6    $       5.1

Sales from MSS decreased 5% to $126.9 million in the second quarter this year, from $133.1 million last year, and increased 1% for the six-month period to $235.0 million from $231.9 million last year. Sales growth for the six-month period was driven by the acquisition of Abraxas in December 2010, which added $36.2 million to sales for the six-month period compared to $15.5 million last year. Abraxas sales for the second quarter this year were $2.8 million higher than last year. Sales decreased for the quarter and six-month period from training and education contracts due to the migration of certain contracts to small businesses where we are now in a subcontractor role. In addition, earlier in the year we lost a contract in a competitive bid situation, for support of simulation trainers that we had performed for several years.

MSS operating income decreased 10% to $4.6 million in the second quarter this year from $5.1 million last year, and decreased 11% for the six-month period to $9.1 million this year compared to $10.2 million last year. Lower sales from certain higher margin training and education contracts contributed to the decrease in operating income for the quarter and six-month period this year. In addition, the current competitive environment in the government services industry is driving profit margins somewhat lower than in recent years. Abraxas incurred an operating loss of $0.6 million for the second quarter this year compared to an operating loss of $0.7 million last year. Abraxas' operating loss for the six-month period ended March 31, 2012 decreased to $1.4 million from $1.5 million last year.

Abraxas operating results included $2.3 million of amortization of intangible assets for the second quarter of this year compared to $2.6 million last year. Abraxas recorded $4.9 million of amortization for the six-month period ended March 31, 2012 while amortization and acquisition-related costs were $2.9 million and $0.7 million, respectively, in the comparable period last year.

Backlog



                           March 31,     September 30,
                              2012           2011
                                  (in millions)
Total backlog
Transportation Systems     $  1,775.2   $       1,368.5
Mission Support Services        845.1             932.2
Defense Systems:
Training systems                454.1             489.1
Communications                   24.2              36.0
Other                             5.6               9.7
Total Defense Systems           483.9             534.8
Other Operations                  0.7               1.3
Total                      $  3,104.9   $       2,836.8

Funded backlog
Transportation Systems     $  1,775.2   $       1,368.5
Mission Support Services        251.6             258.8
Defense Systems:
Training systems                454.1             489.1
Communications                   24.2              36.0
Other                             5.6               9.7
Total Defense Systems           483.9             534.8
Other Operations                  0.7               1.3
Total                      $  2,511.4   $       2,163.4

As reflected in the table above, total backlog increased $268.1 million and funded backlog increased $348.0 million from September 30, 2011 to March 31, 2012. The backlog increase at CTS was from a new contract awarded by the Chicago Transit Authority, which added $454 million. Changes in exchange rates between the prevailing currency in our foreign operations and the U.S. Dollar increased backlog at March 31, 2012 by approximately $48.8 million compared to September 30, 2011.

The difference between total backlog and funded backlog represents options under multiyear service contracts. Funding for these contracts comes from annual operating budgets of the U.S. government and the options are normally exercised annually. Options for the purchase of additional systems or equipment are not included in backlog until exercised. In addition to the amounts identified above, we have been selected as a participant in or, in some cases, the sole contractor for several substantial indefinite delivery/ indefinite quantity (IDIQ) contracts. IDIQ contracts are not included in backlog until an order is received. We also have several service contracts in our transportation business that include contingent revenue provisions tied to meeting certain performance criteria. These contingent revenues are also not included in the amounts identified above.

Liquidity and Capital Resources

Operating activities used cash of $39.9 million for the six-month period. Increases in accounts receivable and inventories and decreases in other current liabilities and customer advances contributed to the use of cash. Use of cash by our CTS and CDA segments was partially offset by positive cash flows from our MSS segment. A significant portion of the cash used was in the transportation segment for expenditures related to large contracts in Australia and Canada where we must meet certain milestones before being paid by the customer.

Investing activities for the six-month period included capital expenditures of $10.2 million and proceeds from maturities of marketable securities of $17.9 million. Financing activities for the six-month period consisted of scheduled payments on our long-term debt of $4.3 million, dividends paid to our shareholders of $3.2 million and the transfer of cash into a restricted account totaling $68.6 million, as described below.

We have a committed three-year revolving credit agreement with a group of financial institutions in the amount of $150 million, expiring in December 2012. We have begun discussions with our banks and intend to extend or replace this credit agreement with a facility having a maturity beyond 2012. As of March 31, 2012, there were no borrowings under this agreement; however, there were letters of credit outstanding under the agreement totaling $26.9 million, which reduce the available line of credit to $123.1 million.

On January 12, 2012 we entered into an additional secured letter of credit facility agreement with a bank which supports our issuance of letters of credit that guarantee our obligations to perform under contracts in all of our operating segments. At March 31, 2012 there were letters of credit outstanding under this agreement of $62.2 million. In support of the facility, we placed $68.6 million of our cash held in the U.K. on deposit as collateral in a restricted account with the bank providing the facility. We are required to leave the cash in the restricted account so long as the bank continues to maintain associated letters of credit under the facility. In return the bank will reduce associated letter of credit fees, accommodate extended expiration dates for the underlying letters of credit and pay an interest rate approximating the three month LIBOR on the deposit. This interest rate provides an improvement over the rate earned on our previous investment choices. The maximum amount of letters of credit currently allowed by the facility is $66.6 million, and any increase above this amount would require bank approval and additional restricted funds to be placed on deposit. The initial term of the facility is one year; however we may choose at any time to terminate the facility, pending the payment of certain breakage fees, and move the associated letters of credit to another credit facility.

As of March 31, 2012, $175.6 million of the $230.8 million of our cash, cash equivalents, and short-term investments was held by our foreign subsidiaries. Also, all of our restricted cash was held by our subsidiary in the U.K. If any of the funds held by our foreign subsidiaries are needed for our operations in the U.S., we would be required to accrue and pay U.S. taxes to repatriate these funds. However, our intent is to permanently reinvest these funds outside of the U.S. and our current plans do not demonstrate a need to repatriate them to fund our U.S. operations.

Our financial condition remains strong with working capital of $377.6 million and a current ratio of 2.2 to 1 at March 31, 2012. We expect that cash on hand, cash flows from operations, and our unused lines of credit will be adequate to meet our liquidity requirements for the foreseeable future.

Critical Accounting Policies, Estimates and Judgments

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

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

For further information, refer to the consolidated financial statements and notes thereto included in our annual report on Form 10-K for the year ended September 30, 2011.

This report, including the documents that we incorporate by reference, contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, that are subject to the "safe harbor" created by those sections. Any statements about our expectations, beliefs, plans, objectives, assumptions or future events or our future financial and/or operating performance are not historical and may be forward-looking. These statements are often, but not always, made through the use of words or phrases such as "may," "will," "anticipate," "estimate," "plan," "project," "continuing," "ongoing," "expect," "believe," "intend," "predict," "potential," "opportunity" and similar words or phrases or the negatives of these words or phrases. These statements involve estimates, assumptions and uncertainties, including those discussed in "Risk Factors" in our annual report on Form 10-K for the year ended September 30, 2011, and throughout this filing that could cause actual results to differ materially from those expressed in these statements.

Because the risk factors referred to above could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us or on our behalf, you should not place undue reliance on any forward-looking statements. In addition, past financial and/or operating performance is not necessarily a reliable indicator of future performance and you should not use our historical performance to anticipate results or future period trends. Further, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of

unanticipated events. New factors emerge from time to time, and it is not . . .