**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 

**ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES**

**EXCHANGE ACT OF 1934**

 

**For the Fiscal Year Ended September 30,2010**

 

**Commission File Number 001-08931**

 

**CUBIC CORPORATION**

Exact Name of Registrant asSpecified in its Charter

 

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

 

**9333 Balboa Avenue**

**San Diego, California 92123**

**Telephone (858) 277-6780**

 

Securities registered pursuant to Section 12(b) of the Act:

 

| **Common Stock** | **New York Stock Exchange, Inc.** |
|-----------------------|-------------------------------------------------------|
| Title of each class   | Name of exchange on which registered                  |

 

Securities registered pursuant to Section 12(g) of the Act: **None**

 

Indicate by check mark if the registrant is a well known seasonedissuer, as defined in Rule 405 of the Securities Act.  Yes o  No x

 

Indicated by check mark if the registrant is not required to filereports pursuant to Section 13 or Section 15(d) of the Act.  Yes o  No x

 

Indicate by check mark whether the Registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months, and (2) has beensubject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not be contained,to the best of the registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K.  Yes o  No x

 

Indicate by check mark whether the registrant has submittedelectronically and posted on its corporate Web site, if any, every InteractiveData File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T (§232.405 of this chapter) during the preceding 12 months(or for such shorter period that the registrant was required to submit and postsuch files).  Yes o  No o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seedefinition of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act (check one).

 

| Large accelerated filer o |   | Accelerated filer x         |
|---------------------------|--------|-----------------------------|
|                      |   |                        |
| Non-accelerated filer o   |   | Smaller reporting company o |

 

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

 

The aggregate market value of 15,798,608 shares of voting stock held bynon-affiliates of the registrant was: $568,749,888 as of March 31, 2010,based on the closing stock price on that date.

 

Number of shares of common stock outstanding as of November 8,2010 including shares held by affiliates is: 26,736,406 (after deducting8,945,201 shares held as treasury stock).

 

**DOCUMENTS INCORPORATED BYREFERENCE:**

 

Portionsof the Registrant’s Proxy Statement for its 2011 Annual Meeting of Shareholdersto be held on February 22, 2011, are incorporated by reference intoPart III of this Annual Report on Form 10-K.

 

 

 

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**PART I**

 

**Item 1.    BUSINESS.**

 

**GENERAL**

 

CUBICCORPORATION (“Cubic”), was incorporated in the State of California in 1949 andbegan operations in 1951.  In 1984, wemoved our corporate domicile to the State of Delaware.

 

Cubicis mainly involved in the design, development, manufacture, integration,installation, operation, maintenance, and support of high technology productsand systems. We are focused on the defense and transportation markets and haverecently also added cyber security and asset tracking businesses. We operatethree reportable segments, including transportation systems, defense systemsand mission support services.

 

Ourtransportation systems business is the leading provider of automated revenuecollection systems and services worldwide. We provide complete turnkeysolutions. Our equipment includes contactless smart card readers, passengergates, central computer systems, and ticket vending machines for mass transitnetworks, including rail systems, buses, and parking applications. Our servicesinclude customer support, network and web operations, payment media management,distribution channel management, business and marketing support, financialclearing and settlement, and outsourced asset operations and maintenance.

 

Ourdefense systems business includes training systems, communications, cybersecurity and asset tracking. We are a leading provider of customized militaryrange instrumentation, training and applications systems, and simulators. Inaddition, we are a supplier of communications and surveillance systems,surveillance receivers, power amplifiers, and avionics systems.

 

Ourmission support services business is a leading provider of highly specializedsupport services including live, virtual, and constructive training; real-worldmission rehearsal exercises; professional military education; informationtechnology, information assurance and related cyber support; development ofmilitary doctrine; consequence management, infrastructure protection, and forceprotection; as well as support to field operations, force deployment andredeployment, and logistics.

 

Duringfiscal year 2010, approximately 57% of our total business was conducted, eitherdirectly or indirectly, with various agencies of the United Statesgovernment.  Most of the remainder of ourrevenue was from local, regional and foreign governments or agencies.

 

Cubic’sinternet address is www.Cubic.com. The content on our website is available forinformation purposes only. It should not be relied upon for investmentpurposes, nor is it incorporated by reference into this Form 10-K. We makeavailable free of charge on or through our Internet website under the heading “InvestorInformation,” our reports on Form 10-K, quarterly reports on Form 10-Q,current reports on Form 8-K and amendments to those reports as soon asreasonably practicable after we electronically file such material with theSecurities and Exchange Commission.

 

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**BUSINESS SEGMENTS**

 

Informationregarding the amounts of revenue, operating profit and loss and identifiableassets attributable to each of our business segments, is set forth in Note 10to the Consolidated Financial Statements for the year ended September 30,2010. Additional information regarding the amounts of revenue and operatingprofit and loss attributable to major classes of products and services is setforth in Management’s Discussion and Analysis which follows at Item 7.

 

**TRANSPORTATION SYSTEMS SEGMENT**

 

CubicTransportation Systems (CTS) is the leading turnkey solution provider ofautomated fare collection systems for public transport authoritiesworldwide.  We provide a range of serviceand system solutions for the bus, bus rapid transit, light rail, commuter rail,heavy rail, ferry and parking markets. These solutions and services include system design, central computersystems, equipment design and manufacturing, device-level software,integration, test, installation, warranty, maintenance, computer hosting services,call center and web services, card management and distribution services, retailpoint of sale network management, mobile phone ticketing, financial clearingand settlement, software application support and outsourced asset operationsand maintenance.  In addition, we design,develop and manufacture special technology components, such as open paymentready smart card readers for use within our suite of fare collection equipmentconsisting of on-bus solutions, access control solutions, vending solutions,retail and card issuing solutions, and mobile inspection and sales solutions.

 

Overthe years, we have been awarded over 400 projects in 40 major markets on 5continents.  Active projects includeLondon, and various other cities around the U.K., Miami, Florida, Vancouver,B.C. Canada, the New York / New Jersey region, the Washington, D.C. / Maryland/ Virginia region, the Los Angeles region, the San Diego region, San FranciscoBay region, Minneapolis/St. Paul, Chicago, Atlanta, Brisbane and Sydney inAustralia, the Frankfurt/RMV region in Germany, and Sweden. These programsprovide a base of current business and the potential for additional futurebusiness as the systems are expanded.

 

**IndustryOverview**

 

Transportagencies, particularly those based in the U.S., rely heavily on federal, stateand local governments for subsidies in capital investments, including newprocurements and/or upgrades of automated fare collection systems.  The average lifecycle for rail farecollection systems is 12 to 15 years, and for bus systems is 7 to 10years.  Procurements tend to follow along and strict competitive bid process where low price is a significantfactor.

 

Theautomated fare collection business is a niche market able to sustain only arelatively few number of suppliers. Because of the long life expectancy of these systems and only a fewcompanies able to supply them, there is fierce competition to win these jobs,often resulting in low initial contract profitability.

 

Advancesin communications, networking and security technologies are enabling interoperabilityof multiple modes of transportation within a single networked system as well asinteroperability of multiple operators within a single networked system.  As such, there is a growing trend forregional ticketing systems, usually built around a large transit agency andincluding neighboring operators, all sharing a common regional smart card.  There is an emerging trend for otherapplications to be added to these regional systems to expand the utility of thesmart card, offering higher value and incentives to the end users, and loweringcosts and creating new revenue streams for the regional system operators.  As a result, these regional systems havecreated opportunities for new levels of systems support and services includingcustomer support call center and web support services, smart card productionand distribution, financial clearing and settlement, retail merchant networkmanagement, transit benefit support, and software application support.  In some cases, operators are choosing tooutsource the ongoing operations and commercialization of these regionalticketing systems. This growing new market provides the opportunity toestablish lasting relationships and grow revenues and profits over thelong-term.

 

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**Raw Materials — CTS**:

 

Rawmaterials used by CTS include sheet steel, composite products, copperelectrical wire and castings. A significant portion of our end product iscomposed of purchased electronic components and subcontracted parts and supplies.We procure all of these items from commercial sources.  In general, supplies of raw materials andpurchased parts are adequate to meet our requirements.

 

**Backlog — CTS**:

 

Fundedsales backlog of CTS at September 30, 2010 and 2009 amounted to $1.113 billionand $772 million, respectively. We expect that approximately $774 million ofthe September 30, 2010 backlog will not be completed by September 30,2011.

 

**CTS Competitive Environment**:

 

Weare one of several companies involved in providing automated fare collectionsystems solutions and services for public transport operators worldwideincluding such competitors as Thales, ACS and Scheidt & Bachmann.  In addition, there are many smaller localcompanies, particularly in European and Asian markets.  For large national tenders, our competitorsmay form consortiums that could include, in addition to the fare collectioncompanies noted above, telecommunications, financial institutions, consultingand computer services companies.  Theseprocurement activities are very competitive and require that we have highlyskilled and experienced technical personnel to compete. We believe that ourcompetitive advantages include intermodal and interagency regional integrationexpertise, technical skills, past contract performance, systems quality andreliability, experience in the industry and long-term customer relationships.

 

**DEFENSE SYSTEMS SEGMENT**

 

CubicDefense Systems (CDS) consists of several market-focused businesses: TrainingSystems, Communications, Global Asset Tracking, and Cyber Security.  Our products include customized militaryrange instrumentation systems, electro-optical systems, firearm simulationsystems, communications and surveillance systems, surveillance receivers, poweramplifiers,  avionics systems, multi-bandcommunication tracking devices, and cross domain hardware solutions to addressmulti-level security requirements. We market our capabilities directly tovarious U.S. government departments, agencies, and foreign governments.  In addition, we frequently contract or teamwith other leading defense suppliers.

 

**Training Systems**

 

OurTraining Systems business is a pioneer and market leader in the design,innovation, and manufacture of immersive and instrumented training systems andproducts for military customers. Immersive training systems enable dismounted soldiers to train in ahyper-realistic virtual environment. Instrumented training systems are used forlive training in air and ground combat domains, with weapons and other effectssimulated by electronics, software, and/or laser technologies.  These products collect and record simulatedweapons engagements, tactical behavior, and event data to evaluate combateffectiveness, lessons learned, and provide a basis to develop after actionreviews.

 

Ourtraining business is organized into Air Combat and Ground Combatdivisions.   In Air Combat, Cubic was theinitial developer and supplier of Air Combat Maneuvering Instrumentation (ACMI)capability during the Vietnam War.  TheACMI product line has progressed through several generations of technologiesand capabilities.  We continue tomaintain a market leadership position based on the competitive award of a10-year, $525 million indefinite delivery/ indefinite quantity (IDIQ) contractin 2003, called P5, to provide advanced air combat training capability to theU.S. Air Force, Navy and Marine Corps. We also received a $50 million development contract in 2007 to developan internal version of the P5 system for use on the F-35 Joint Strike Fighter.While most of the latest ACMI systems are designed to operate in a “rangeless”environment we continue to support a number of legacy, fixed geographicranges.  Many nations employ our ACMIsystems for air to air combat training.

 

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GroundCombat training uses systems analogous to air ranges for ground force training,tactical engagement simulation systems (generally known as MILES (MultipleIntegrated Laser Engagement Simulation Equipment)), as well as virtual simulationproducts.  Our leadership role ininstrumented training was established during the 1990s when we provided turnkeysystems for U.S. Army training centers at Fort Polk, LA (Joint ReadinessTraining Center — JRTC) and Hohenfels, Germany (Combat Maneuver Training Center— CMTC).   Since these original contractswere completed we have dramatically expanded our market footprint with the saleof fixed, mobile, and urban operation training centers around the world.Increasingly, our efforts are focused on joint training solutions and thosethat can operate simultaneously in multiple simulation environments includinglive, virtual, constructive, and gaming domains.

 

Laser-basedtactical engagement simulation systems are used at combat training centers(CTC) to permit weapons to be used realistically, registering hits or kills,without live ammunition. We supply MILES equipment as part of CTC contracts andas an independent product line. Cubic MILES systems are being utilized by allbranches of the U.S. Armed Services, as well as the Department of Energy, andcivilian security firms. We manufacture MILES equipment in the San Diego areaand at our New Zealand-based wholly-owned subsidiary, Cubic Defence NewZealand.

 

Atour Simulation Systems Division (SSD) in Orlando, FL, we produce immersivevirtual training systems, employing actual or realistic weapons and systemstogether with visual imagery to simulate battle field environments. Also atSSD, we produce maintenance trainers for combat systems and vehicles, as wellas operational trainers for missiles and armored vehicles.

 

**Communications**

 

OurCommunications business is a supplier of secure data links, high power RFamplifiers, direction finding systems, remote video terminals, and search andrescue avionics for the U.S. military, government agencies, and alliednations.  We supplied the air/groundsecure data link for the U.S. Army/Air Force Joint STARS system during the1980s, as well as the United Kingdom’s ASTOR program and continue to providespare parts and system upgrades.  Morerecently we have focused on the supply of Common Data Link (CDL) products forship borne applications, unmanned aerial vehicles (UAV), and remote videoterminals. Capitalizing on a multiyear internal R&D program, we won acompetitive contract in Fiscal 2003 to develop and produce the Common Data LinkSubsystem (CDLS) for the U.S. Navy.  CDLShas been installed on major surface ships of the U.S. fleet. Smaller, tacticalversions of our Common Data Link have been selected for both UAV and remotevideo terminal applications such as the U.K. Watchkeeper and the U.S. FirescoutUAV programs.

 

OurPersonnel Locator System (PLS) is standard equipment on U.S. aircraft with asearch-rescue mission.  PLS has beenredesigned to interface with all modern search and rescue systemstandards.  We also supply high poweramplifiers, intelligence receivers and direction finding systems to majorprimes and end users for both domestic and international applications.  These include systems used by the CanadianCoast Guard, the U.S. Navy, the U.S. Air Force, and the French Army.

 

**Global Asset Tracking**

 

InMay 2010 Cubic acquired the assets of Impeva Labs and formed a newsubsidiary called Cubic Global Tracking Solutions, Inc (CGTS).  CGTS global tracking technology is deployedwith the US Department of Defense for tracking and monitoring DOD supply chainassets.  The products employs satellite,GSM mobile communications, and encrypted mesh network technologies.  The company offers a Device Management Centerthat provides continuous, reliable, real-time monitoring and event notificationwithout fixed infrastructure.  Theproducts are designed to operate remotely for years based on highly efficientbattery optimization.  The companyoperates under a indefinite delivery/indefinite quantity subcontract to developadvanced wireless solutions for the U.S. Army’s Logistics Innovation Agency.

 

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**Cyber Security**

 

InJune 2010 Cubic acquired Safe Harbor Holdings, a cyber security andinformation assurance company, based in Vienna, Virginia and formed a newsubsidiary called Cubic Cyber Solutions, Inc (CSSI).  CSSI provides specialized security andnetworking infrastructure, system certification and accreditation, and enterprise-levelnetwork architecture and engineering services. The company also provides cross domain hardware solutions to addressmulti-level security challenges across common networks.

 

**Raw Materials — CDS**:

 

Theprincipal raw materials used by CDS are sheet aluminum and steel, copperelectrical wire, and composite products. A significant portion of our end products are composed of purchasedelectronic components and subcontracted parts and supplies. We procure theseitems primarily from commercial sources. In general, supplies of raw materials and purchased parts are adequateto meet our requirements.

 

**Backlog — CDS**:

 

Fundedsales backlog of CDS at September 30, 2010 was $523 million compared to$556 million at September 30, 2009. We expect that approximately $259 million of the September 30, 2010backlog will not be completed by September 30, 2011.

 

**MISSION SUPPORT SERVICES SEGMENT**

 

CubicMission Support Services (MSS) is a leading provider of training, operations,maintenance, technical, and other support services to the U.S. Government andallied nations.  MSS comprisesapproximately 5,000 Cubic employees working at more than 130 locations in 21nations throughout the world.  Our employeesserve with clients in actual training and operational environments to helpprepare and support forces through provision of comprehensive training,exercises, staff augmentation, education, operational, technical, andlogistical assistance to meet the full scope of their assigned missions.  The scope of mission support that Cubicprovides includes training and rehearsals for both small and large scale combatoperations; training and preparation of military advisor teams; mobilizationand demobilization of forces prior to and following deployment; combat andmaterial development; military staff augmentation; information technology andinformation assurance; logistics and maintenance support for fielded anddeployed systems; support to national security and special operationsactivities; peacekeeping; consequence management; and humanitarian assistanceoperations worldwide.  We plan, prepare,execute and document realistic and focused mission rehearsal exercises (usingboth live and computer-based exercises) as final preparation of forces prior todeployment.  In addition, we provide highlevel consultation and advisory services to the governments and militaries ofallied nations.

 

U.S.government service contracts are typically awarded on a competitive basis withoptions for multiple years.  In thiscompetitive market, Cubic is viewed as a premier service provider andformidable competitor.  We typicallycompete as a prime contractor to the government, but also team with othercompanies, depending on the skills required. Much of our early work centered on battle command training andsimulation, in which military commanders are taught to make correct decisionsin battlefield situations.  Ourcomprehensive business base has broadened to include integrated live, virtual,and constructive training support; advanced distance learning and otherprofessional military education; comprehensive logistics and maintenancesupport; weapons effects and analytical modeling; analysis and other support tothe national security community; homeland security training and exercises;training and preparation of U.S. Army and Marine Corps foreign service advisorteams; and military force modernization. Additionally, we support thedeployment and re-deployment of both active and reserve component forces atU.S. Army Mobilization Centers at Forts Bliss and Hood in Texas and at severalother U.S. locations; and we provide in-country logistics, maintenance,operational, and training support to U.S. Forces deployed in Kuwait, Iraq,and Afghanistan.

 

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Cubic’scontracts include providing mission support services to three of the Army’smajor Combat Training Centers (CTCs): the Joint Readiness Training Center(JRTC) as prime contractor; and to the National Training Center (NTC) andBattle Command Training Program (BCTP) as a principal subcontractor.  These services include planning, executing,and documenting realistic and stressful large scale exercises and missionrehearsals that increase the readiness of both active and reserve U.S.conventional and special operations forces by placing them in situations asclose to actual combat as possible.

 

AtU.S. Joint Forces Command (USJFCOM), MSS is a principal member of thecontractor team that supports and helps manage and execute all aspects of theoperations of the Joint Warfighting Center (JWFC), including support toworldwide joint exercises and the development and fielding of the JointNational Training Capability (JNTC).  Weprovide technical and management support services to the U.S. Army’s NationalSimulation Center (NSC) at Fort Leavenworth, Kansas. Under the Marine AirGround Task Force (MAGTF) Training Systems Support (MTSS) contract, Cubicprovides comprehensive training and exercise support to U.S. Marine Corpsforces worldwide, including real-world mission rehearsals.  We have planned and executed virtually allMarine Corps simulation-based exercises worldwide since 1998, directlypreparing Marines for combat operations. Cubic provides training andprofessional military education support to the U.S. Army’s Quartermaster Centerand School, the Signal School and to the Transportation School. We also providecontractor maintenance and instructional support necessary to operate andmaintain a wide variety of flight simulation and training systems, and otherfacilities worldwide for U.S. and allied forces under multiple long-termcontracts, including direct support to USMC aircrew training systems worldwide.In addition, we provide a broad range of operational support to the U.S. Navyfor Anti-Submarine Warfare (ASW) and counter-mine operations and training.

 

Cubicinitiated and has continued to operate the Korea Battle Simulation Center(KBSC) since its inception in 1991.  KBSCprepares U.S. and allied forces in Korea to deal with mission situations thatmay develop in their areas of responsibility. Our KBSC contract includes support to the world’s largest and mostcomplex simulation-based training events.

 

MSSsupports the Defense Threat Reduction Agency (DTRA) with technology-basedengineering and other services necessary to accomplish DTRA’s mission ofpredicting and defeating the effects of chemical, biological, radiological,nuclear and high explosive (CBRNE) weapons. Cubic supports DTRA with modeling and simulations to analyze, assess,and predict the effects of such weapons in combat and other environments.Additionally, Cubic provides comprehensive support to help plan, manage, andexecute DTRA’s worldwide CBRNE exercise program, which trains senior U.S. andallied civilian and military personnel, first responders, and other users ofDTRA products.

 

MSSprovides research, development, and technical engineering (RDTE) support to theU.S. Air Force Research Laboratories (AFRL) for assistance in theidentification and application of current, new and emerging technologiesleading to proof-of-principle evaluations of advanced operational concepts.

 

MSShas multiple contracts with all U.S. Armed Services and other governmentagencies to improve the quality and reach of training and education ofindividuals and small teams up through collective training of largeorganizations. Cubic’s services, products and capabilities include developmentand deployment of curriculum and related courseware, computer-based training,knowledge management and distribution, advanced distance learning (e-learning),serious games for training, and other advanced education programs for U.S. andallied forces.

 

Animportant part of Cubic’s services business is to provide specialized teams ofmilitary experts to advise the governments and militaries of the nations of theformer Warsaw Pact and Soviet Union, and other former communist countries inthe transformation of their militaries to a NATO environment.  These very broad defense modernizationcontracts entail sweeping vision and minute detail, involving both the nations’strategic foundation and the detailed planning of all aspects of reform.Mission Support Services also develops and operates battle simulation centersfor U.S. forces in Europe, as well as for selected countries in Central and EasternEurope.

 

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Webelieve the combination and scope of Cubic’s growing mission support servicesand training systems business is unique in the industry, permitting us to offercustomers a complete training and combat readiness capability from one source.

 

**Backlog — MSS**:

 

Fundedsales backlog of our MSS segment at September 30, 2010 was $236 millioncompared to $207 million at September 30, 2009.  Total backlog, including unfunded customerorders and options under multiyear service contracts, was $850 million at September 30,2010 compared to $856 million at September 30, 2009. We expect thatapproximately $501 million of the September 30, 2010 total backlog willnot be completed by September 30, 2011.

 

**MSS and CDS Competitive Environment**:

 

Cubic’sbroad defense business portfolio means we compete with numerous companies,large and small, domestic and international. Well known competitors include Lockheed Martin, Northrop Grumman,General Dynamics, Boeing, L3 Communications, SAIC and others.  In many cases, we have also teamed with thesesame companies, in both prime and subcontractor roles, on specific bidopportunities.  While we are generallysmaller than our competitors, we believe our competitive advantages include anoutstanding record of past performance, strong incumbent relationships, ourability to control operating costs, and the ability to rapidly focus technologyand innovation to solve customer problems.

 

Projectsmust compete for funding in the defense budget. While the U.S. defense budget has seen above average increases in recentyears, long-term growth is expected to occur only in those segments that offerhigh payoff and are consistent with warfighting priorities and growing fiscalrestraints.  The U.S. defense markettoday can be characterized as highly dynamic, with priorities and fundingshifting in reaction to, or anticipation of, world events much more rapidlythan during the Cold War or since. Overarching military priorities include lighter, faster, more lethalforces with the ability and training to rapidly adapt to new situations basedon superior knowledge of the battle environment.  Superior knowledge is enabled by systems thatrapidly collect, process, and disseminate the right information to the rightplace at the right time, resulting in what DoD calls network-centricwarfare.  We believe our trainingsystems, training support, operational support, and intelligence, surveillanceand reconnaissance capabilities are well matched to these sustainable defensepriorities.

 

**BUSINESS STRATEGY**

 

Ourobjective is to consistently grow sales, improve profitability and deliverattractive returns on capital.  We intendto build on our position with U.S. and foreign governments as the leading fullspectrum supplier of training systems and mission support services, grow ourniche position as a supplier of data links and communications products, andmaintain our position as the leading provider of integrated intermodal regionaltransit fare collection systems and services to transit authorities worldwide.Our strategies to achieve these objectives include:

 

**Leverage Long-Term Relationships**

 

Weseek to maintain long-term relationships with our customers through repeatbusiness by continuing to achieve high levels of performance and providinginnovations on our existing contracts. By achieving this goal we can leverage our returns through repeatbusiness with existing customers and expand our presence in the market throughsales of similar systems at “good value” to additional customers.

 

CubicTransportation Systems (CTS) maintains continuous long-term relationships withits customers, such as Transport for London (TfL). Starting with a small trialof magnetic ticketing and gating in 1978, we have continuously delivered farecollection equipment and systems to Transport for London (TfL) as its exclusivefare collection system supplier. Under a 2008 contract awarded by TfL, we arenow the prime contractor responsible for operating and maintaining the Oystersystem. This contract, the Future Ticket Agreement, will continue ourrelationship with TfL through at least 2013.

 

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Ourtrack record of performance supplying and supporting the automated farecollection system in London helped us win a major new contract this year. ThePublic Transport Ticketing Corporation awarded a contract to us for theElectronic Ticketing System for Sydney and the State of New South Wales. Theirdecision was also reinforced by our long-term performance in other majormetropolitan areas including: San Francisco Bay Area since 1974, WashingtonD.C. since 1975, and New York since 1991.

 

Anexample of this at CDS is the award of a 10 year contract to provide the nextgeneration U.S. air combat training system. Starting in 1971 Cubic developed the first generation of Air CombatManeuvering Instrumentation system, or ACMI, for the U.S. Military for livecombat training.  In 2003 we were awardedthe P5 $525 million ID/IQ contract to deliver the latest technology forrangeless live training to the U.S. and foreign militaries.  In 2007 we were awarded a $50.3 millioncontract to develop the next generation of live training for the F-35 JointStrike Fighter aircraft using embedded technology.   Thus since the initial contract in 1971, wehave successfully and continuously supplied the U.S. and foreign militarieswith the latest in air combat training technologies.

 

Ourbusiness strategy is particularly important for Cubic because Mission SupportServices (MSS) relies heavily on its current and past performance to winrecompete contracts and gain new customers. As a result of maintaining a highlevel of performance, Cubic continues to provide a combination of its supportservices for its principal long-term customers including the Joint ReadinessTraining Center (JRTC) since 2001, the Marine Corps since 1998, and the KoreanBattle Simulation Center (KBSC) since 1991. Our continuous record ofperformance for these customers helps us to gain new business. For example,this year we won a new contract to support the U.S. Army’s Joint MultinationalSimulation Center in Germany. This win was largely attributable to thelong-term success of our related and ongoing work at the KBSC.

 

**ExpandServices Business**

 

We view services as a core element of our business and we are workingto expand our service offerings and customer base.  In aggregate, approximately 47% of our salesrevenue in 2010 was from service work. We believe that a strong base of servicework helps to enhance profitability and smooth the revenue fluctuationsinherent in systems work.

 

At CTS, our managed service offerings are growing.  Due to the technical complexities ofoperating electronic fare collection systems, transit agencies are turning tothird parties to supply operational and maintenance services, such as regionalsettlement, card management and customer support services, that would otherwisebe performed by the transit agency. As a result, we are now providing a suiteof turnkey outsourced services for more than 20 transit authorities worldwide.Approximately 46% of CTS’ sales revenue was from service business in 2010.

 

In the past year we expanded the focus of our customer serviceoperation in Concord, CA, which we acquired in 2009. This full serviceoperation center primarily services transit authorities in the San FranciscoBay Area, including a wide range of services from customer support to financialmanagement and technical support. Earlier in the year, we began to utilize thisfacility as a hub of patron call support. We have co-located the call centerfor the Washington Metropolitan Area Transit Authority in Washington, D.C. withour customer service center in Concord, CA. This is the first step towarddelivering customer services from key service facilities for multiple transitauthorities in the U.S.

 

AtMSS we provide a combination of services to our many customers. We expand ourbusiness by offering additional services to current customers and transferringour skill sets to support similar programs for new customers. The broadspectrum of services we offer reinforces this strategy, and includes planningand support for theater and worldwide exercises, computer-based simulations,training and preparation of foreign military advisor and transition teams,mobilization and demobilization of deploying forces, range support andoperations, logistics and maintenance operations, curriculum and leadershipdevelopment, force modernization, open source data collection, as well as engineeringand other technical support. Under a new contract for the Joint MultinationalSimulation Center (JMSC), we will provide technical support that is similar tothe simulation and network services we have been continuously providing to theKorea Battle Simulation Center since 1991.

 

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In 2009 we won a new prime contract to support the new Africa Command(AFRICOM), located in Stuttgart, Germany. This year we expanded upon that win.As part of a team, we won an indefinite delivery/indefinite quantity contractto support the Africa Peacekeeping Program (AFRICAP). This latest contract willfurther broaden our role as a key global provider of mission support servicesto the U.S. Department of State across many African nations.

 

**Maintain a Diversified Business Mix**

 

Wehave a diverse mix of business in our three segments. Approximately 57% of oursales are made directly or indirectly to the U.S. government; however, thisrepresents a wide variety of product and service sales to many different U.S.government agencies. The largest single contract in the transportation segmentis our contract with Transport for London which represented about 9% of consolidatedsales in 2010.  No other single customerrepresented 10% or more of our revenues.

 

**ExpandInternational Footprint**

 

Wehave developed a large global presence in our three business segments. CTS hasdelivered over 400 projects in 40 major markets on five continents. CDS hasdelivered systems in more than 35 nations, and MSS supports customers in morethan 130 locations in 21 nations worldwide.

 

CTSmade an important expansion in Australia with the recent award of theElectronic Ticketing System for Sydney and the state of New South Wales. Thislong-term contract will provide a strong base for us to pursue opportunities inthe Asia-Pacific region. In Europe, we are focused on providing a newelectronic ticketing system for Germany. We were awarded this contract in 2009by Rhein Main Services (RMS), on behalf of the Transit AuthorityRhein-Main-Verkehrsverbu. Last year we established an office in India where weare supporting ongoing trials that will help define the capabilities needed foran automated fare collection system.

 

CDSis marketing its domestic products and systems for export to the militaries ofU.S. allies. Recently, we were awarded a contract to provide our EngagementSkills Trainer to the Saudi Arabian National Guard. In addition, we were recentlyawarded a contract to supply a ground combat training system to Italy. We arealso working to supply additional ground and air combat training systems toallied nations in key international markets.

 

Theexpansion of MSS to new locations further reinforces our internationalbusiness. Under a contract completed last year for the Organization of AmericanStates (OAS), we completed port security assessments and training to theindependent Caribbean island nations of Trinidad & Tobago, and SaintVincent & The Grenadines, as well as Mexico. The credentials we earnedled to a new contract award this year by the OAS for support to Colombia,Mexico, and Peru. In addition, under a new contract with the JointMultinational Simulation Center (JMSC), we will now provide services at theirheadquarters located at Grafenwöhr, Germany, and at five other European sites.

 

10

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**Pursue Strategic Acquisitions**

 

In2010, we acquired two small privately held companies which are now part of ourdefense segment. Impeva Labs, Inc. is an international provider of globalasset management, tracking, monitoring and security solutions for military andcommercial customers. The other acquisition, Safe Harbor Holdings, Inc.,is a Vienna, Virginia-based supplier of customized hardware and software forcyber solutions. With each of these acquisitions, we have gained entry into newmarkets related to our core businesses and customers. Subsequent to the end ofour fiscal year, in November 2010 we announced that we have entered intoan agreement to acquire Abraxas Corporation, a Herndon, Virginia-based companythat provides risk mitigation and subject matter, and operational expertise forlaw enforcement and homeland security clients. The all-cash transaction has avalue of approximately $124 million and will be funded from our existing cashresources. The acquisition is expected to close in December 2010, subjectto receipt of required consents and regulatory approval.

 

**OTHER MATTERS**

 

Wepursue a policy of seeking patent protection for our products where deemedadvisable, but do not regard ourselves as materially dependent on patents forthe maintenance of our competitive position.

 

Wedo not engage in any business that is seasonal in nature. Because our revenuesare generated primarily from work on contracts performed by our employees andsubcontractors, first quarter revenues tend to be lower than the other threequarters due to our policy of providing many of our employees seven holidays inthe first quarter, compared to one or two in each of the other quarters of theyear. This is not necessarily a consistent pattern as it depends upon actualactivities in any given year.

 

The cost of company sponsored research and development (R&D)activities was $19.0 million, $8.2 million and $12.2 million in 2010, 2009 and2008, respectively. In addition to internally funded R&D, a significantportion of our new product development occurs in conjunction with theperformance of work on our contracts. The amount of contract-required productdevelopment activity was $63 million in 2010 compared to $54 million and $55million in 2009 and 2008, respectively; however, these costs are included incost of sales as they are directly related to contract performance.

 

Wecomply with federal, state and local laws and regulations regarding dischargeof materials into the environment and the handling and disposal of materialsclassed as hazardous and/or toxic. Such compliance has no material effect uponour capital expenditures, earnings or competitive position.

 

Weemployed approximately 7,700 persons at September 30, 2010.

 

Ourdomestic products and services are sold almost entirely by our employees.  Overseas sales are made either directly orthrough representatives or agents.

 

**Item 1A. RISK FACTORS.**

 

The following aresome of the factors we believe could cause our actual results to differmaterially from expected and historical results.  Additional risks anduncertainties not presently known to us, or that we currently see asimmaterial, may also harm our business. If any of the risks or uncertainties described below or any suchadditional risks and uncertainties actually occur, our business, results ofoperations or financial condition could be materially and adversely affected.

 

***We depend on government contracts forsubstantially all of our revenues and the loss of government contracts or adelay or decline in funding of existing or future government contracts couldadversely affect our sales and cash flows and our ability to fund our growth.***

 

Ourrevenues from contracts, directly or indirectly, with foreign and UnitedStates, state, regional and local governmental agencies represented more than95% of our total revenues in fiscal year 2010. Although these various government agencies are subject to commonbudgetary pressures and other factors, many of our various government customersexercise independent purchasing decisions. Because of the concentration of business with governmental agencies, weare vulnerable to adverse changes in our revenues, income and cash flows if asignificant number of our government contracts or subcontracts or prospects aredelayed or canceled for budgetary or other reasons.

 

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Thefactors that could cause us to lose these contracts or could otherwisematerially harm our business, prospects, financial condition or results ofoperations include:

 

·                  re-allocation of government resources as theresult of actual or threatened terrorism or hostile activities or for otherreasons;

 

·                  budget constraints affecting governmentspending generally, or specific departments or agencies such as U.S. or foreigndefense and transit agencies and regional transit agencies, and changes infiscal policies or a reduction of available funding;

 

·                  Disruptions in our customers’ ability toaccess funding from capital markets;

 

·                  curtailment of government’s use of outsourcedservice providers;

 

·                  the adoption of new laws or regulationspertaining to government procurement;

 

·                  government appropriations delays orshutdowns;

 

·                  suspension or prohibition from contractingwith the government or any significant agency with which we conduct business;

 

·                  impairment of our reputation or relationshipswith any significant government agency with which we conduct business;

 

·                  impairment of our ability to providethird-party guarantees and letters of credit; and

 

·                  delays in the payment of our invoices bygovernment payment offices.

 

***Government spending priorities may changein a manner adverse to our businesses.***

 

Inthe past, our businesses have been adversely affected by significant changes ingovernment spending during periods of declining budgets.  A significant decline in overall spending, orthe decision not to exercise options to renew contracts, or the loss of orsubstantial decline in spending on a large program in which we participatecould materially adversely affect our business, prospects, financial conditionor results of operations.  As an example,the U.S. defense and national security budgets generally, and spending inspecific agencies with which we work, such as the Department of Defense, havedeclined from time to time for extended periods since the 1980s, resulting inprogram delays, program cancellations and a slowing of new program starts.  Although spending on defense-related programsby the U.S. government has increased in recent years, future levels ofexpenditures and authorizations for those programs may decrease, remainconstant or shift to programs in areas where we do not currently provideproducts or services.

 

Eventhough our contract periods of performance for a program may exceed one year,Congress must usually approve funds for a given program each fiscal year andmay significantly reduce funding of a program in a particular year.  Significant reductions in theseappropriations or the amount of new defense contracts awarded may affect ourability to complete contracts, obtain new work and grow our business.  Congress does not always enact spending billsby the beginning of the new fiscal year. Such delays leave the affected agencies under-funded which delays theirability to contract.  Future delays anduncertainties in funding could impose additional business risks on us.

 

***Our contracts with government agencies maybe terminated or modified prior to completion, which could adversely affect ourbusiness.***

 

Governmentcontracts typically contain provisions and are subject to laws and regulationsthat give the government agencies rights and remedies not typically found incommercial contracts, including providing the government agency with theability to unilaterally:

 

·                  terminate our existing contracts;

 

·                  reduce the value of our existing contracts;

 

·                  modify some of the terms and conditions in ourexisting contracts;

 

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·                  suspend or permanently prohibit us from doingbusiness with the government or with any specific government agency;

 

·                  control and potentially prohibit the exportof our products;

 

·                  cancel or delay existing multiyear contractsand related orders if the necessary funds for contract performance for anysubsequent year are not appropriated;

 

·                  decline to exercise an option to extend anexisting multiyear contract; and

 

·                  claim rights in technologies and systemsinvented, developed or produced by us.

 

MostU.S. government agencies and some other agencies with which we contract canterminate their contracts with us for convenience, and in that event wegenerally may recover only our incurred or committed costs, settlement expensesand profit on the work completed prior to termination.  If an agency terminates a contract with usfor default, we are denied any recovery and may be liable for excess costsincurred by the agency in procuring undelivered items from an alternativesource.  We may receive show-cause orcure notices under contracts that, if not addressed to the agency’ssatisfaction, could give the agency the right to terminate those contracts fordefault or to cease procuring our services under those contracts.

 

Inthe event that any of our contracts were to be terminated or adverselymodified, there may be significant adverse effects on our revenues, operatingcosts and income that would not be recoverable.

 

***Failure to retain existing contracts or winnew contracts under competitive bidding processes may adversely affect ourrevenue.***

 

Weobtain most of our contracts through a competitive bidding process, andsubstantially all of the business that we expect to seek in the foreseeablefuture likely will be subject to a competitive bidding process.  Competitive bidding presents a number ofrisks, including:

 

·                  the need to compete against companies orteams of companies with more financial and marketing resources and moreexperience in bidding on and performing major contracts than we have;

 

·                  the need to compete against companies orteams of companies that may be long-term, entrenched incumbents for aparticular contract for which we are competing and that have, as a result,greater domain expertise and better customer relations;

 

·                  the need to compete to retain existingcontracts that have in the past been awarded to us on a sole-source basis;

 

·                  the U.S. Government’s increased emphasis onawarding contracts to small businesses could preclude us from bidding oncertain work or reduce the scope of work we can bid as a prime contractor;

 

·                  the expense and delay that may arise if ourcompetitors protest or challenge new contract awards;

 

·                  the need to bid on some programs in advanceof the completion of their design, which may result in higher research anddevelopment expenditures, unforeseen technological difficulties, or increasedcosts which lower our profitability;

 

·                  the substantial cost and managerial time andeffort, including design, development and marketing activities, necessary toprepare bids and proposals for contracts that may not be awarded to us;

 

·                  the need to develop, introduce, and implementnew and enhanced solutions to our customers’ needs;

 

·                  the need to locate and contract with teamingpartners and subcontractors; and

 

·                  the need to accurately estimate the resourcesand cost structure that will be required to perform any fixed-price contractthat we are awarded.

 

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Wemay not be afforded the opportunity in the future to bid on contracts that areheld by other companies and are scheduled to expire if the agency decides toextend the existing contract.  If we areunable to win particular contracts that are awarded through the competitivebidding process, we may not be able to operate in the market for services thatare provided under those contracts for a number of years.  If we win a contract, and upon expiration, ifthe customer requires further services of the type provided by the contract,there is frequently a competitive rebidding process and there can be noassurance that we will win any particular bid, or that we will be able toreplace business lost upon expiration or completion of a contract.

 

Becauseof the complexity and scheduling of contracting with government agencies, weoccasionally incur costs before receiving contractual funding by the governmentagency.  In some circumstances, we maynot be able to recover these costs in whole or in part under subsequentcontractual actions.

 

Ifwe are unable to consistently retain existing contracts or win new contractawards, our business prospects, financial condition and results of operationswill be adversely affected.

 

***The U.S. Government’s increased emphasis onawarding contracts to small businesses could increase the number of contractswe receive as a subcontractor to small businesses. Some of these smallbusinesses may not be financially sound, which could******adversely affect our business.***

 

Therehas been an increased emphasis by the U.S. government recently on awardingcontracts to small businesses which may preclude companies the size of oursfrom obtaining certain work, other than as a subcontractor to these smallbusinesses. There are inherent risks in contracting with small companies thatmay not have the capability or financial resources to perform these contractsor administer them correctly. If a small business with which we have asubcontract fails to perform, fails to bill the government properly or failsfinancially, we may have difficulty receiving timely payments or may incur baddebt write-offs if the small business is unable or unwilling to pay us for workwe perform. This could result in significant adverse effects on our revenues,operating costs and cash flows.

 

***Government audits of our contracts couldresult in a material charge to our earnings and have a negative effect on our cashposition following an audit adjustment.***

 

Manyof our government contracts are subject to cost audits which may occur severalyears after the period to which the audit relates.  If an audit identifies significantunallowable costs, we could incur a material charge to our earnings orreduction in our cash position.

 

***Our international business exposes us toadditional risks, including exchange rate fluctuations, foreign tax and legalregulations and political or economic instability that could harm our operatingresults.***

 

Ourinternational operations subject us to risks associated with operating in andselling products or services in foreign countries, including:

 

·                  devaluations and fluctuations in currencyexchange rates;

 

·                  changes in foreign laws that adversely affectour ability to sell our products or services or our ability to repatriateprofits to the United States;

 

·                  increases or impositions of withholding andother taxes on remittances and other payments by foreign subsidiaries or jointventures to us;

 

·                  increases in investment and otherrestrictions or requirements by foreign governments in order to operate in theterritory or own the subsidiary;

 

·                  costs of compliance with local laws,including labor laws;

 

·                  export control regulations and policies whichgovern our ability to supply foreign customers;

 

·                  unfamiliar and unknown business practices andcustoms;

 

·                  domestic and foreign government policies,including requirements to expend a portion of program funds locally andgovernmental industrial cooperation requirements;

 

·                  the complexity and necessity of using foreignrepresentatives and consultants or being prohibited from such use;

 

·                  the uncertainty of the ability of foreigncustomers to finance purchases;

 

·                  imposition of tariffs or embargoes, exportcontrols and other trade restrictions;

 

14

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·                  the difficulty of management and operation ofan enterprise in various countries; and

 

·                  economic and geopolitical developments andconditions, including international hostilities, acts of terrorism andgovernmental reactions, inflation, trade relationships and military andpolitical alliances.

 

Ourforeign subsidiaries generally conduct business in foreign currencies and enterinto contracts and make purchase commitments that are denominated in foreigncurrencies.   Accordingly, we are exposedto fluctuations in exchange rates, which could have a significant impact on ourresults of operations.  We have nocontrol over the factors that generally affect this risk, such as economic,financial and political events and the supply of and demand for applicablecurrencies.  While we use foreignexchange forward and option contracts to hedge significant contract sales andpurchase commitments that are denominated in foreign currencies, our hedgingstrategy may not prevent us from incurring losses due to exchange fluctuations.

 

***Our operating margins may decline under ourfixed-price contracts if we fail to estimate accurately the time and resourcesnecessary to satisfy our obligations.***

 

Approximately73% of our revenues in 2010 were from fixed-price contracts under which we bearthe risk of cost overruns.  Our profitsare adversely affected if our costs under these contracts exceed theassumptions we used in bidding for the contract.  Sometimes we are required to fix the pricefor a contract before the project specifications are finalized, which increasesthe risk that we will incorrectly price these contracts. The complexity of manyof our engagements makes accurately estimating the time and resources requiredmore difficult.

 

***We may be liable for civil or criminalpenalties under a variety of complex laws and regulations, and changes ingovernmental regulations could adversely affect our business and financialposition.***

 

Ourbusinesses must comply with and are affected by various government regulationsthat impact our operating costs, profit margins and our internal organizationand operation of our businesses. These regulations affect how we do businessand, in some instances, impose added costs. Any changes in applicable laws could adversely affect our financialperformance.  Any material failure tocomply with applicable laws could result in contract termination, price or feereductions or suspension or debarment from contracting.  The more significant regulations include:

 

·                  the Federal Acquisition Regulations and alldepartment and agency supplements, which comprehensively regulate theformation, administration and performance of U.S. government contracts;

 

·                  the Truth in Negotiations Act andimplementing regulations, which require certification and disclosure of allcost and pricing data in connection with contract negotiations;

 

·                  laws, regulations and executive ordersrestricting the use and dissemination of information classified for nationalsecurity purposes and the exportation of certain products and technical data;

 

·                  regulations of most state and regionalagencies and foreign governments similar to those described above;

 

·                  the Sarbanes-Oxley Act of 2002; and

 

·                  tax laws and regulations in the U.S. and inother countries in which we operate.

 

***Business disruptions could seriously affectus.***

 

Ourbusiness may be affected by disruptions including, but not limited to: threatsto physical security of our facilities and employees, including seniorexecutives; terrorist acts; information technology attacks or failures;damaging weather or other acts of nature; and pandemics or other public healthcrises. The costs related to these events may not be fully mitigated byinsurance or other means. Disruptions could affect our internal operations orservices provided to customers, and could impact our sales, increase ourexpenses, or adversely affect our reputation or our stock price.

 

15

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***Our failure to identify, attract and retainqualified technical and management personnel could adversely affect ourexisting businesses.***

 

Wemay not be able to attract or retain the highly qualified technical personnel,including engineers, computer programmers, and personnel with securityclearances required for classified work, or management personnel to supervisesuch activities that are necessary for maintaining and growing our existingbusinesses.

 

***We may incur significant costs inprotecting our intellectual property which could adversely affect our profitmargins. Our inability to protect our patents and proprietary rights couldadversely affect our businesses’ prospects and competitive positions.***

 

Weseek to protect proprietary technology and inventions through patents and otherproprietary-right protection.  The lawsof some foreign countries do not protect proprietary rights to the same extentas the laws of the United States.  If weare unable to obtain or maintain these protections, we may not be able toprevent third parties from using our proprietary rights. In addition, we mayincur significant expense both in protecting our intellectual property and indefending or assessing claims with respect to intellectual property owned byothers.

 

Wealso rely on trade secrets, proprietary know-how and continuing technologicalinnovation to remain competitive.  Wehave taken measures to protect our trade secrets and know-how, including theuse of confidentiality agreements with our employees, consultants and advisors.  These agreements may be breached and remediesfor a breach may not be sufficient to compensate us for damages incurred.  We generally control and limit access to ourproduct documentation and other proprietary information.  Other parties may independently develop ourknow-how or otherwise obtain access to our technology.

 

***We compete primarily for governmentcontracts against many companies that are larger, better capitalized and betterknown than us.  If we are unable tocompete effectively, our business and prospects will be adversely affected.***

 

Ourbusinesses operate in highly competitive markets.  Many of our competitors are larger, betterfinanced and better known companies who may compete more effectively than wecan.  In order to remain competitive, wemust keep our capabilities technically advanced and compete on price and onvalue added to our customers.  Ourability to compete may be adversely affected by limits on our capital resourcesand our ability to invest in maintaining and expanding our market share.

 

***The terms of our financing arrangements mayrestrict our financial and operational flexibility, including our ability toinvest in new business opportunities.***

 

Wecurrently have unsecured borrowing arrangements.  The terms of these borrowing arrangementsinclude provisions that limit our levels of debt and require minimum levels ofnet worth and coverage of fixed charges. We also have provided performance guarantee to a customer that containsfinancial covenants including minimum levels of working capital and tangiblenet worth.

 

Wemay incur future obligations that would subject us to additional covenants thataffect our financial and operational flexibility or subject us to differentevents of default.

 

Ourcurrent $150 million unsecured revolving credit facility expires in December 2012.  At the present time there are no borrowingsunder our present revolving facility and $61.4 million of outstanding lettersof credit.

 

***Our revenues could be less than expected ifwe are not able to deliver services or products as scheduled due to disruptionsin supply.***

 

Becauseour internal manufacturing capacity is limited, we use contract manufacturers.While we use care in selecting our manufacturers, we have less control over thereliability of supply, quality and price of products or components than if wemanufactured them.  In some cases, weobtain products from a sole supplier or a limited group of suppliers.  Consequently, we risk disruptions in oursupply of key products and components if our suppliers fail or are unable toperform because of strikes, natural disasters, financial condition or otherfactors.  Any material supply disruptionscould adversely affect our ability to perform our obligations under ourcontracts and could result in cancellation of contracts or purchase orders, penalties,delays in realizing revenues, payment delays, as well as adversely affect ourongoing product cost structure.

 

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***Failure to perform by our subcontractorscould materially and adversely affect our contract performance and our abilityto obtain future business.***

 

Ourperformance of contracts often involves subcontractors, upon which we rely tocomplete delivery of products or services to our customers.  We may have disputes withsubcontractors.  A failure by asubcontractor to satisfactorily deliver products or services can adverselyaffect our ability to perform our obligations as a prime contractor.  Any subcontractor performance deficienciescould result in the customer terminating our contract for default, which couldexpose us to liability for excess costs of reprocurement by the customer andhave a material adverse effect on our ability to compete for other contracts.

 

***We may acquire other companies, which couldincrease our costs or liabilities or be disruptive.***

 

Part ofour strategy involves the acquisition of other companies.  We may not be able to integrate acquiredentities successfully without substantial expense, delay or operational orfinancial problems.  The acquisition andintegration of new businesses involves risk. The integration of acquired businesses may be costly and may adverselyimpact our results of operations or financial condition:

 

·                  we may need to divert management resources tointegration, which may adversely affect our ability to pursue other moreprofitable activities;

 

·                  integration may be difficult as a result ofthe necessity of coordinating geographically separated organizations,integrating personnel with disparate business backgrounds and combiningdifferent corporate cultures;

 

·                  we may not be able to eliminate redundantcosts anticipated at the time we select acquisition candidates; and

 

·                  one or more of our acquisition candidates mayhave unexpected liabilities or adverse operating issues that we fail todiscover through our due diligence procedures prior to the acquisition.

 

***Unanticipated changes in our tax provisionsor exposure to additional tax liabilities could affect our profitability.***

 

Ourbusiness operates in many locations under government jurisdictions that imposetaxes based on income and other criteria. Changes in domestic or foreign taxlaws and regulations, or their interpretation, could result in higher or lowertax rates assessed, changes in the taxability of certain revenues oractivities, or changes in the deductibility of certain expenses, therebyaffecting our tax expense and profitability. In addition, audits by taxauthorities could result in unanticipated increases in our tax expense.

 

***Our results of operations have historicallyfluctuated and may continue to fluctuate significantly in the future, whichcould adversely affect the market price of our common stock.***

 

Ourrevenues are affected by factors such as the unpredictability of contractawards due to the long procurement process for most of our products andservices, the potential fluctuation of governmental agency budgets, the time ittakes for the new markets we target to develop and for us to develop andprovide products and services for those markets, competition and generaleconomic conditions.  Our contracttype/product mix and unit volume, our ability to keep expenses within budget,and our pricing affect our operating margins. Significant growth in costs tocomplete our contracts may adversely affect our results of operations in futureperiods. These factors and other risk factors described herein may adverselyaffect our results of operations and cause our financial results to fluctuatesignificantly on a quarterly or annual basis. Consequently, we do not believe that comparison of our results ofoperations from period to period is necessarily meaningful or predictive of ourlikely future results of operations. In some future financial period ouroperating results may be below the expectations of public market analysts orinvestors.  If so, the market price ofour securities may decline significantly.

 

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**CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING INFORMATION**

 

Thisreport, including the documents that we incorporate by reference, containsforward-looking statements within the meaning of Section 21E of theSecurities Exchange Act of 1934, as amended, that are subject to the “safeharbor” created by those sections. Any statements about our expectations,beliefs, plans, objectives, assumptions or future events or our futurefinancial and/or operating performance are not historical and may beforward-looking. These statements are often, but not always, made through theuse of words or phrases such as “may”, “will”, “anticipate”, “estimate”, “plan”,“project”, “continuing”, “ongoing”, “expect”, “believe”, “intend”, “predict”, “potential”,“opportunity” and similar words or phrases or the negatives of these words orphrases.  These statements involveestimates, assumptions and uncertainties, including those discussed in “RiskFactors” and elsewhere throughout this filing and in the documents incorporatedby reference into this filing that could cause actual results to differmaterially from those expressed in these statements.

 

Becausethe risk factors referred to above could cause actual results or outcomes todiffer materially from those expressed in any forward-looking statements madeby us or on our behalf, you should not place undue reliance on anyforward-looking statements.  In addition,past financial and/or operating performance is not necessarily a reliableindicator 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.

 

**Item1B. UNRESOLVED STAFF COMMENTS.**

 

None

 

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**Item 2.    PROPERTIES.**

 

Weconduct our operations in approximately 1.6 million square feet of both ownedand leased properties located in the United States and foreign countries.  We own approximately 72% of the squarefootage, including 498,000 square feet located in San Diego, California and467,000 square feet located in Orlando, Florida.  All owned and leased properties areconsidered in good condition and, with the exception of the Orlando facility,adequately utilized.  The following tableidentifies significant properties by business segment:

 
| **Location of Property** | ** ** | **Owned or Leased** |
|------------------------------------|------------|-------------------------------|
|                               |       |                          |
| **Corporate Headquarters:**        |       |                          |
| San  Diego, CA                     |       | Owned                         |
|                               |       |                          |
| **Mission Support Services:**      |       |                          |
| Columbus,  GA                      |       | Leased and owned              |
| El  Paso, TX                       |       | Leased                        |
| Hampton,  VA                       |       | Leased                        |
| Honolulu,  HI                      |       | Leased                        |
| Kingstowne,  VA                    |       | Leased                        |
| Lacey,  WA                         |       | Leased                        |
| Leavenworth,  KS                   |       | Leased                        |
| Orlando,  FL                       |       | Leased                        |
| Prince  George, VA                 |       | Leased                        |
| San  Diego, CA                     |       | Leased                        |
| Shalimar,  FL                      |       | Leased                        |
| Twenty  Nine Palms, CA             |       | Leased                        |
|                               |       |                          |
| **Defense Systems:**               |       |                          |
| Aitkenvale,  Australia             |       | Leased                        |
| Arlington,  VA                     |       | Leased                        |
| Auckland,  New Zealand             |       | Leased                        |
| Mountain  View, CA                 |       | Leased                        |
| Ontario,  Canada                   |       | Leased                        |
| Orlando,  FL                       |       | Leased and owned              |
| Panama  City, FL                   |       | Leased                        |
| San  Diego, CA                     |       | Owned                         |
| Tijuana,  Mexico                   |       | Leased                        |
| Vienna,  VA                        |       | Leased                        |
|                               |       |                          |
| **Transportation Systems:**        | ** ** | ** **                    |
| Arlington,  VA                     |       | Leased                        |
| Atlanta,  GA                       |       | Leased                        |
| Brisbane,  Australia               |       | Leased                        |
| Chantilly,  VA                     |       | Leased                        |
| Chicago, IL                   |       | Leased                        |
| Concord,  CA                       |       | Leased                        |
| Frankfurt,  Germany                |       | Leased                        |
| Glostrup,  Denmark                 |       | Leased                        |
| Hyderabad, India              |       | Leased                        |
| London,  England                   |       | Leased                        |
| Los  Angeles, CA                   |       | Leased                        |
| Merthsham,  Surrey, England        |       | Leased                        |
| Montreal,  Canada                  |       | Leased                        |
| New  York, NY                      |       | Leased                        |
| Norwalk,  CA                       |       | Leased                        |
| Oakland,  CA                       |       | Leased                        |
| Ontario,  Canada                   |       | Leased                        |
| Salfords,  Surrey, England         |       | Owned                         |
| San  Diego, CA                     |       | Owned                         |
| San  Francisco, CA                 |       | Leased                        |
| Sydney,  Australia                 |       | Leased                        |
| Tullahoma,  TN                     |       | Owned                         |
|                               |       |                          |
| **Investment properties:**         |       |                          |
| Teterboro,  NJ                     |       | Leased                        |
| Vancouver,  Canada                 |       | Leased                        |

 

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**Item 3.    LEGAL PROCEEDINGS.**

 

In1998, the Ministry of Defense for the Armed Forces of the Islamic Republic ofIran obtained a United States District Court judgment enforcing an arbitrationaward in its favor against us of $2.8 million, plus costs and interest relatedto a contract awarded to us by Iran in 1977. Both parties appealed to the 9th Circuit Court of Appeals, where thecases are awaiting scheduling for oral argument.  Several potential lienors of Iran’s judgmenthave filed liens but have not obtained valid court orders enforcing theliens.  We are not aware whether any suchclaimants against Iran’s judgment have received Terrorism Risk Insurance Actfunds (which would make their claims unenforceable).  Under a 1979 Presidential executive order,all transactions by United States citizens with Iran are prohibited.  Therefore, even if Iran were to prevail inthe 9th Circuit litigation, it is unlikely that we would be permitted to payany amount to Iran.  Payments to validlienors could potentially be enforced, so in a previous year we recorded aliability for the amount of the judgment and are continuing to accrue interest.

 

Weare not a party to any other material pending proceedings and we consider allother matters to be ordinary proceedings incidental to the business. We believethe outcome of these proceedings and the proceedings described above will nothave a materially adverse effect on our financial position.

 

**Item 4.    SUBMISSION OFMATTERS TO A VOTE OF SECURITY HOLDERS.**

 

Informationregarding submission of matters to a vote of security holders is incorporatedherein by reference from our definitive Proxy Statement, which will be filed nolater than 30 days prior to the date of the Annual Meeting of Shareholders.

 

**PART II**

 

**Item 5.    MARKET FOR THEREGISTRANT’S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS**.

 

Theprincipal market on which our common stock is being traded is the New YorkStock Exchange under the symbol CUB.  Theclosing high and low sales prices for the stock, as reported in theconsolidated transaction reporting system of the New York stock exchange forthe quarterly periods during the past two fiscal years, and dividendinformation for those periods, are as follows:

 

MARKETAND DIVIDEND INFORMATION

 
| ** **  | ** ** | **Sales Price of Common Shares** | ** ** | **Dividends per Share** | ** ** |
|-------------|------------|------------------------------------------------------|------------|-----------------------------------|------------|
| ** **  | ** ** | **Fiscal 2010**                                 | ** ** | **Fiscal 2009**              | ** ** | **Fiscal 2010** | ** ** | **Fiscal 2009** | ** ** |
| **Quarter** | ** ** | **High**                                             | ** ** | **Low**                           | ** ** | **High** | ** ** | **Low** | ** ** | ** ** | ** ** | ** ** | ** ** |
| First       |       | $                                                    | 38.95      |                              | $          | 33.77 |   | $ | 28.91 |   | $ | 18.85 |   | — |   | — |   |
| Second      |       | 42.01                                                |       | 32.42                             |       | 31.43 |   | 22.50 |   | $ | 0.09 |   | $ | 0.09 |   |
| Third       |       | 39.52                                                |       | 33.66                             |       | 40.05 |   | 25.10 |   | — |   | — |   |
| Fourth      |       | 41.80                                                |       | 35.99                             |       | 41.40 |   | 33.73 |   | $ | 0.09 |   | $ | 0.09 |   |
|             |            |                                                      |            |                                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

On November 9, 2010, the closing price of our common stock on theNew York Stock Exchange was $44.49. There were 862 shareholders of record ofour common stock as of November 9, 2010.

 

20

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**Item 6. SELECTED FINANCIAL DATA.**

 

FINANCIAL HIGHLIGHTS AND SUMMARY OF CONSOLIDATED OPERATIONS

 

(amounts in thousands, except per share data)

 
| ** **                                   | ** ** | **Years Ended September 30,** | ** ** |
|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                   | ** ** | **2010**                                     | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                         |       |                                         |       |   |   |   |   |   |   |   |   |
| **Results of Operations:**                   |       |                                         |       |   |   |   |   |   |   |   |   |
| Sales                                        |       | $                                            | 1,194,189  |   | $ | 1,016,657 |   | $ | 881,135 |   | $ | 889,870 |   | $ | 821,386 |   |
| Cost of sales                                |       | 941,994                                      |       | 805,516 |   | 709,481 |   | 727,540 |   | 687,213 |   |
| Selling, general and administrative expenses |       | 120,848                                      |       | 111,828 |   | 98,613 |   | 94,107 |   | 96,325 |   |
| Interest expense                             |       | 1,755                                        |       | 2,031 |   | 2,745 |   | 3,403 |   | 5,112 |   |
| Income taxes                                 |       | 35,285                                       |       | 29,554 |   | 20,385 |   | 23,662 |   | 12,196 |   |
| Net income                                   |       | 70,636                                       |       | 55,686 |   | 36,854 |   | 41,586 |   | 24,133 |   |
|                                         |       |                                         |       |   |   |   |   |   |   |   |   |
| Average number of shares outstanding         |       | 26,735                                       |       | 26,731 |   | 26,725 |   | 26,720 |   | 26,720 |   |
|                                         |       |                                         |       |   |   |   |   |   |   |   |   |
| **Per Share Data:**                          |       |                                         |       |   |   |   |   |   |   |   |   |
| Net income                                   |       | $                                            | 2.64       |   | $ | 2.08 |   | $ | 1.38 |   | $ | 1.56 |   | $ | 0.90 |   |
| Cash dividends                               |       | 0.18                                         |       | 0.18 |   | 0.18 |   | 0.18 |   | 0.18 |   |
|                                         |       |                                         |       |   |   |   |   |   |   |   |   |
| **Year-End Data:**                           |       |                                         |       |   |   |   |   |   |   |   |   |
| Shareholders’ equity                    |       | $                                            | 488,322    |   | $ | 420,845 |   | $ | 388,852 |   | $ | 382,771 |   | $ | 323,226 |   |
| Equity per share                             |       | 18.27                                        |       | 15.74 |   | 14.55 |   | 14.33 |   | 12.10 |   |
| Total assets                                 |       | 856,089                                      |       | 756,315 |   | 641,252 |   | 592,565 |   | 548,071 |   |
| Long-term debt                               |       | 15,949                                       |       | 20,570 |   | 25,700 |   | 32,699 |   | 38,159 |   |

 

This summary should be read in conjunction with the relatedconsolidated financial statements and accompanyingnotes.

 

**Item 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS.**

 

Our primarybusinesses are in the defense and transportation industries. For the year endedSeptember 30, 2010, 68% of sales were derived from defense systems andservices, while 32% were derived from transportation fare collection systemsand other commercial operations. These are high technology businesses thatdesign, manufacture and integrate complex systems to meet the needs of variousfederal and regional government agencies in the U.S. and other nations aroundthe world. The U.S. Government remains our largest customer, accounting forapproximately 57% of sales in 2010 compared to 58% in 2009 and 54% in 2008.

 

Cubic Transportation Systems(CTS) develops and delivers innovative fare collection systems for publictransit authorities worldwide.  Weprovide hardware, software and multiagency, multimodal transportationintegration technologies and a full scope of operational services that allowthe agencies to efficiently collect fares, manage their operations, reduceshrinkage and make using public transit a more convenient and attractive optionfor commuters.

 

21

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Cubic Defense Systems (CDS)is focused on two primary lines of business: Training Systems andCommunications.  The segment is adiversified supplier of live and virtual military training systems, andcommunication systems and products to the U.S. Department of Defense, othergovernment agencies and allied nations. We design instrumented range systemsfor fighter aircraft, armored vehicles and infantry force-on-force livetraining; weapons effects simulations; laser-based tactical and communicationsystems; and precision gunnery solutions. Our communications products are aimedat intelligence, surveillance, and search and rescue markets. In 2010, throughtwo acquisitions, we added new product lines including multi-band communicationtracking devices, and cross domain hardware solutions to address multi-levelsecurity requirements.

 

Mission Support Services(MSS) is a leading provider of highly specialized support services includinglive, virtual, and constructive training; real-world mission rehearsal exercises;professional military education; information technology, information assuranceand related cyber support; development of military doctrine; consequencemanagement, infrastructure protection, and force protection; as well as supportto field operations, force deployment and redeployment, and logistics.

 

**Consolidated Overview**

 

Sales increased 17% in fiscal 2010 after increasing 15% in 2009, due togrowth in all three business segments in both years. Sales grew to $1.194billion in 2010, compared to $1.017 billion in 2009 and $881.1 million in 2008.More than 80% of the growth in 2010 was organic, while the remainder came fromthe consolidation of TranSys, a variable interest entity (VIE), this year andfrom two small acquisitions we made during the year. The VIE added $29.9million to 2010 sales; however these sales were at break-even against costs andtherefore had no effect on operating income. Sales growth in 2010 withoutconsolidation of the VIE would have been approximately 14%. In 2009,approximately 60% of the growth was organic, with the remainder coming fromacquisitions we made in 2009 and late in 2008. See the segment discussionsfollowing for further information about segment sales.

 

Our operating income increased 25% in 2010 to $105.5 million from $84.7million in 2009. Last year’s results had included a provision for anuncollectable receivable of $3.1 million; however, this year we were able torecover the full amount plus attorney’s fees, costs and interest, bringing thetotal recovery to $4.2 million. If the $4.2 million were subtracted from the2010 results and $3.1 million added back to the 2009 results, operating incomewould have increased about 15% in 2010, commensurate with the increase insales.

 

Operating income had increased 59% in fiscal 2009 from $53.3 million in2008. The 2008 results had included a restructuring charge of $6.2 million andan operating loss of $15.6 million in the communications business within CDS.See the segment discussions following for further information about segmentoperating income.

 

Netincome increased to $70.6 million ($2.64 per share) in 2010 from $55.7 million($2.08 per share) in 2009 and $36.9 million ($1.38 per share) in 2008. Highernet income in both 2009 and 2010 resulted primarily from the improvement inoperating income, as described above. In 2009, lower investment income, due tolower interest rates, partially offset the increase in operating income. Theresults in 2009 had also included a provision for settlement of a lawsuit of$1.4 million that reduced net income by approximately $0.9 million, afterapplicable income taxes, or $0.03 per share. The 2008 results had included again of $1.2 million on the sale of our investment in a defense-related jointventure that added approximately $0.8 million to net income, after applicableincome taxes, or $0.03 per share. Reductions in tax contingency reservesaccounted for approximately $1.7 million, $0.1 million and $1.2 million,respectively, of the 2010, 2009 and 2008 net income.

 

22

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The gross margin from product sales was 28.1% in 2010 compared to 25.1%in 2009 and 21.4% in 2008. Improved performance from the CDS training systemsbusiness accounted for the increase in 2010 while improvement in the CDScommunications business had contributed to the increase in 2009. The grossmargin from service sales was 13.1% in 2010 compared to 16.1% in 2009 and 17.2%in 2008. The primary reason for the decrease in 2010 was the consolidation ofTranSys, as mentioned above. This added nearly $30 million to sales in 2010,but at a very low gross margin, because this VIE was designed as a pass-throughentity and is intended to break-even. In addition, MSS recorded a provision of$2.0 million in 2010 for a dispute with a customer over contract terms, furtherdecreasing the services gross margin.

 

Selling, general and administrative (SG&A) expenses increased to$120.8 million or 10.1% of sales in 2010 compared to $111.8 million, or 11.0%of sales, in 2009, and $98.6 million, or 11.2% of sales, in 2008. The increasein 2010 is due primarily to increased bid and proposal costs, and growth of ourbusiness in Australia. Reversal in 2010 of the bad debt provision of $3.1million made in 2009 partially offset the increase in SG&A from 2009 to2010. SG&A had increased in 2009 due to the $3.1 million bad debt provisionand from the businesses acquired in 2009 and late in 2008.

 

Amortization expense increased to $6.8 million or 0.6% of sales in 2010compared to $6.4 million, or 0.6% of sales, in 2009, and $1.3 million, or 0.2%of sales, in 2008. The increase in 2010 was due primarily to the two smalldefense systems acquisitions made in 2010, while the increase in 2009 was aresult of the acquisition of Omega Training Group Inc. (Omega) late in 2008.

 

Company sponsored research and development (R&D) spending was $19.0million in 2010 compared to $8.2 million in 2009 and $12.2 million in 2008. Weincreased R&D spending in 2010 primarily related to new technologies forground combat training systems in our defense systems business. In addition, weacquired two small businesses in the third quarter of 2010 and have invested inthe development of their products for cyber security and global asset trackingin the fourth quarter. A significant portion of our R&D spending isincurred in connection with the performance of work on our contracts. Theamount of contract required development activity in 2010 was $63 million,compared to $54 million in 2009 and $55 million in 2008; however, these costsare included in cost of sales, rather than R&D, as they are directlyrelated to contract performance.

 

Interest and dividend income remained low in 2010, despite higher cashbalances available for investment, due to low interest rates earned on our cashand short-term investments. Interest and dividend income was $1.6 million in2010 and $1.7 million in 2009, compared to $6.4 million in 2008. Other Income(Expense) netted to income of $0.6 million in 2010 and $0.9 million in 2009 comparedto an expense of $0.7 million in 2008. In 2010 and 2009 we realized foreigncurrency exchange gains on advances to our foreign subsidiaries, compared to aloss in 2008. Interest expense decreased to $1.8 million in 2010 compared to$2.0 million in 2009 and $2.7 million in 2008 due to a reduction in long-termborrowings over the three year period.

 

Our effective tax rate for 2010 was 33.3% of pretax income compared to34.7% in 2009 and 35.6% in 2008. The effective rate decreased in 2010 comparedto 2009 primarily because of the reversal of tax contingency provisions, due tothe expiration of statutes, totaling $1.7 million compared to only $0.1 millionin 2009. In addition, we did not provide for U.S. taxes on earnings of ourforeign subsidiaries in 2010, as we consider them to be permanently reinvested.These factors were partially offset by a lower Research and Experimentation(R&E) credit realized in 2010 because U.S. Congress allowed the credit toexpire as of December 31, 2009.

 

The effective rate had decreased in 2009 from 2008 because of a higherR&E credit due in part to an increase in qualifying activity. The R&Ecredit for 2009 had also included $0.8 million from fiscal 2008 that was notrealized until 2009 because the credit had expired and was not reinstated bythe U.S. Congress until the 2009 fiscal year. Higher income in the U.S. addedto our effective tax rate in 2009 due to higher state income taxes, however,this was partially offset by a lower provision for taxes from foreign earningsrepatriation. The effective rate in 2008 had also benefited from the reversalof tax contingency provisions of $1.2 million, due to the expiration ofstatutes.

 

Our effective tax rate could be affected in future years by, amongother factors, the mix of business between U.S. and foreign jurisdictions, ourability to take advantage of available tax credits, and audits of our recordsby taxing authorities.

 

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**TransportationSystems Segment**

** **
| **Years ended September 30,** | ** ** | **2010**               | ** ** | **2009** | ** ** | **2008** | ** ** |
|----------------------------------------------|------------|------------------------|------------|----------|------------|----------|------------|
| ** **                                   | ** ** | **(in millions)** | ** ** |
| Transportation Systems Sales                 |       | $                      | 386.0      |     | $          | 303.4    |       | $ | 272.3 |   |
|                                         |       |                   |       |     |       |     |       |
| Transportation Systems Operating Income      |       | $                      | 54.7       |     | $          | 44.1     |       | $ | 43.0 |   |

 

CTSsales increased 27% in 2010 to $386.0 million from $303.4 million in 2009.Sales were higher in 2010 from work in the San Francisco Bay area, our contractwith Transport for London (TfL), the installation of a gating system inSouthern California and from our new contract in Sydney, Australia. Theseincreases were partially offset by lower sales from a system installationcontract in Florida, which was completed early in the year, and from trainoperating companies in the U.K. A portion of the sales increase from the TfLcontract this year resulted from consolidation of the company’s 50% ownedsubsidiary, TranSys, beginning in March of this year. This newlyconsolidated subsidiary added $29.9 million to sales in 2010. The averageexchange rate between the British Pound and the U.S. Dollar was nearlyidentical in 2010 as in 2009, resulting in virtually no impact on sales for2010 compared to 2009.

 

CTSsales had increased 11%, from $272.3 million in 2008 to $303.4 million in 2009.Sales had increased in North America from a fare collection developmentcontract awarded in 2008, from the sale of spare parts and from contracts weadded in a service business acquisition made in July 2009. In the U.K.,higher sales came primarily from contracts with TfL and U.K. train operatingcompanies; however, a lower average exchange rate between the British pound andthe U.S. dollar in 2009 had resulted in a decrease in the dollar value of U.K.sales of $38.6 million compared to the rate in effect in 2008.

 

Operatingincome from CTS increased 24% in 2010 to $54.7 million from $44.1 million in2009. Increased income resulted from higher sales and margins in North Americaand from slightly higher operating profits from European operations. A contractmodification received in 2010 resolved a contingency on a contract in Europe,allowing us to reverse a reserve of $1.6 million. Results in 2009 had alsoincluded contract restructuring agreements that added $1.6 million to operatingincome and a foreign currency exchange gain that added $1.4 million. Resultsfrom European operations for 2010 also include a pension curtailment charge of$0.7 million. The additional sales from TranSys mentioned above did not add tooperating income, because TranSys operates on a break-even basis, as it wasdesigned to do. The average exchange rate between the British Pound and theU.S. Dollar was nearly identical in 2010 as in 2009, resulting in virtually noimpact on operating income for 2010 compared to 2009.

 

CTS operating income had improved to $44.1 million in 2009 from $43.0million in 2008, a 3% increase. Higher sales of spare parts added to operatingincome in 2009 as well as the contract restructuring agreements and currencygain mentioned above. As a result of one of the contract restructurings, wewrote off accounts receivable of $4.1 million against the associated allowancefor doubtful accounts, resulting in no impact on operating income. In addition,the successful completion of a new fare collection system in North America hadresulted in an additional contribution to operating income in 2009. Althoughoperating income in the U.K. was higher in 2009 than in 2008 as a result ofhigher sales, the lower British pound vs. U.S. dollar exchange rate hadnegatively impacted operating income by $8.8 million in 2009.

 

24

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**DefenseSystems Segment**

** **
| **Years ended September 30,** | ** ** | **2010**               | ** ** | **2009** | ** ** | **2008** | ** ** |
|----------------------------------------------|------------|------------------------|------------|----------|------------|----------|------------|
| ** **                                   | ** ** | **(in millions)** | ** ** |
|                                         |       |                   |       |     |       |     |       |
| **Defense Systems Sales**                    |       |                   |       |     |       |     |       |
| Training systems                             |       | $                      | 297.4      |     | $          | 238.5    |       | $ | 227.7 |   |
| Communications                               |       | 61.9                   |       | 45.4     |       | 36.0     |       |
| Other                                        |       | 3.5                    |       | 1.5      |       | 11.6     |       |
|                                         |       | $                      | 362.8      |     | $          | 285.4    |       | $ | 275.3 |   |
|                                         |       |                   |       |     |       |     |       |
| **Defense Systems Operating Income**         |       |                   |       |     |       |     |       |
| Training systems                             |       | $                      | 26.9       |     | $          | 16.2     |       | $ | 6.8 |   |
| Communications                               |       | 4.3                    |       | 3.4      |       | (15.6    | )          |
| Other                                        |       | (2.5                   | )          | (0.6     | )          | (0.7     | )          |
|                                         |       | $                      | 28.7       |     | $          | 19.0     |       | $ | (9.5 | ) |

 

**TrainingSystems**

 

Trainingsystems sales increased 25% in 2010 to $297.4 million compared to $238.5million in 2009. Sales were higher in 2010 from all major product lines,including air and ground combat training systems, MILES (Multiple IntegratedLaser Engagement Simulation) equipment, and small arms training systems.Significant deliveries, in the fourth quarter, of air combat training systemsto the U.S. military helped to push sales higher for the year, more thanoffsetting lower air combat training sales to customers in the Far East. Saleswere also higher for the year from a ground combat training system we arebuilding for a customer in the Far East.

 

Saleshad increased to $238.5 million in 2009, a 5% increase over 2008 sales of$227.7 million. In 2009, sales of small arms virtual training systems and aircombat training systems had increased compared to 2008, while ground combattraining systems sales had decreased. Sales were higher in 2009 than in 2008from the air combat training system contract known as P5 and from air combattraining sales to the Far East. Sales were lower in 2009 from ground combattraining systems in the U.K. and Canada.

 

Trainingsystems operating income increased 66% in 2010 to $26.9 million, from $16.2million in 2009. Higher sales from the ground combat training system in the FarEast mentioned above added to operating income in 2010, as well as higher salesand improved profit margins from MILES. In addition, in 2009 we had establisheda $3.1 million allowance for doubtful accounts receivable related to a companythrough which we sold training systems products to the U.S. government becausethey failed to pass on to us cash they collected from the government on ourbehalf. In 2010, we were able to collect the entire amount plus attorney’sfees, costs and interest, for a total recovery in 2010 of $4.2 million. Theseimprovements were partially offset by lower operating income from lower salesof air combat training systems to customers in the Far East where we hadrealized higher margins last year. In addition, in the fourth quarter of 2010,we invested $3.2 million in the development of new ground combat trainingtechnology for tactical vehicles, which limited growth in our operating incomein 2010. We expect further orders of this new system in future periods thatwill provide opportunities to recoup this investment.

 

Operatingincome in 2009 had more than doubled to $16.2 million from $6.8 million in2008. Higher sales of air combat training systems and small arms virtualtraining systems in 2009 and higher profit margins on air combat trainingsystems in the Far East had contributed to the improvement in 2009 over 2008.In addition, the 2008 results had included cost growth for the development ofthe next generation of MILES, which totaled $9.6 million compared to $3.6million in 2009. Product shipments on this contract began in 2009 contributingto the improved results for the year compared to 2008.

 

25

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**Communications**

 

Communicationssales grew 36% in 2010 to $61.9 million from $45.4 million in 2009.  Sales were higher in 2010 from all threemajor product lines, including personnel locator systems, data links and poweramplifiers. We began work on a new contract in 2010 called Video Scout andproduced spare parts for the Joint-STARS system we delivered years ago, whichcontributed to the increase in data link sales.

 

Communicationssales had improved 26% to $45.4 million in 2009 over 2008 sales of $36.0million. In 2009, a settlement agreement reached with the U.S. Navy on a datalink development contract had added $3.3 million to sales and facilitatedprogress toward completion of the contract, further increasing sales for theyear. Sales were also higher in 2009 than 2008 from a contract to develop adata link for unmanned aerial vehicles for a U.K. customer. Lower sales ofpower amplifiers in 2009 had partially offset the growth in data link sales forthe year.

 

Communications operating income increased to $4.3 million in 2010,compared to $3.4 million in 2009, which is a 26% increase. In 2010, higheroperating income on higher sales from all three product lines was partiallyoffset by development costs for new products, including Video Scout and aminiaturized common data link.

 

In 2009, operating income had improved dramatically from the $15.6million loss we incurred in 2008. The settlement agreement with the U.S. Navyreferred to above had no significant impact on operating income. The operatingloss in 2008 had resulted from cost growth on three data link developmentcontracts; however, in 2009 two of the three contracts generated operatingincome due to contract restructurings and change orders received. Lower salesof power amplifiers in 2009 had resulted in lower operating income than in2008, partially offsetting the improvements in profitability from the data linkcontracts.

 

**Other**

 

In2010, CDS added two new businesses through acquisitions that are developingcyber security and global asset tracking products. Subsequent to theacquisitions we have continued to invest in development of these product lines.These costs are reflected in the 2010 operating loss in the “Other’ caption onthe table above.  Results in 2008 hadincluded sales from a VIE that we sold in 2008.

 

**MissionSupport Services Segment**

 
| **Years ended September 30,** | ** ** | **2010**               | ** ** | **2009** | ** ** | **2008** | ** ** |
|----------------------------------------------|------------|------------------------|------------|----------|------------|----------|------------|
| ** **                                   | ** ** | **(in millions)** | ** ** |
| Mission Support Services Sales               |       | $                      | 443.3      |     | $          | 424.4    |       | $ | 332.5 |   |
|                                         |       |                   |       |     |       |     |       |
| Mission Support Services Operating Income    |       | $                      | 26.5       |     | $          | 27.9     |       | $ | 27.8 |   |

 

MSSsales increased 4% in 2010 over 2009 compared to a 28% increase in 2009 over2008. Increased activity at the Joint Readiness Training Center (JRTC) in FortPolk, LA and at the U.S. Army Quartermaster Center and School added to sales inboth 2010 and 2009. In addition, higher sales from two contracts with the U.S.Marine Corps and a contract at the Joint Warfighting Center (JWFC) added to thesales total in 2010 compared to 2009. Partially offsetting these improvementsin 2010 were lower sales from a trainer maintenance contract that we lost to asmall business competitor and from a contract for services performed in Iraqthat had added approximately $6.8 million to sales in 2009, but was completed.In 2010 we have also lost a number of individual positions on our contracts dueto expanded U.S. Department of Defense in-sourcing policies that have limitedMSS growth and may continue to do so in the near term. About half of the salesincrease in 2009 had come from Omega, the company we acquired at the end of July 2008.

 

26

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MSSoperating income decreased 5% to $26.5 million in 2010 from $27.9 million in2009. During the first quarter of 2010 we recorded a provision of $2.0 millionfor a dispute with a customer over contract terms. We are continuing to pursuealternatives for resolution that could lead to ultimate recovery of the fullamount.  At this time, however, we cannotquantify or determine the likelihood of recovery. The contract in Iraqmentioned above that was completed in 2009 also had added to operating incomein 2009. Higher operating income on higher sales in 2010 from the contractsmentioned above partially offset these decreases when compared to 2009.

 

Operatingincome from MSS had increased less than 1% in 2009 to $27.9 from $27.8 millionin 2008. In 2009, higher sales from the JRTC contract had helped to increaseoperating profits compared to 2008, in addition to better performance fromcertain operations and maintenance contracts. However, we realized loweroperating income in 2009 from a new U.S. Marine Corps contract, as it wascompetitively bid at a lower profit margin than we had experienced from theprevious Marine Corps contract. In 2009, a contract modification thatreimbursed us for out-of-scope costs we had incurred in 2008 related to thecompleted Marine Corps contract, had added $1.2 million to operating income.However, offsetting this in 2009 was a reserve of $1.4 million we provided forsettlement of a wage-related lawsuit on one of our contracts in California. Inaddition, the new company, Omega, had contributed over $2 million to operatingincome in the first two months we owned it in 2008; however, the contract thatgenerated much of that profit was scaled back significantly in 2009, resultingin lower operating income.

 

Amortizationof purchased intangibles included in the MSS results amounted to $4.5 million,$5.4 million and $0.9 million in 2010, 2009 and 2008, respectively.

 

**Backlog**

 
| **September 30,**   | ** ** | **2010**               | ** ** | **2009** | ** ** |
|--------------------------|------------|------------------------|------------|----------|------------|
| ** **               | ** ** | **(in millions)** | ** ** |
| **Total backlog**        |       |                   |       |     |       |
| Transportation Systems   |       | $                      | 1,112.6    |     | $          | 772.2 |   |
| Mission Support Services |       | 850.3                  |       | 855.5    |       |
| Defense Systems          |       |                   |       |     |       |
| Training systems         |       | 469.0                  |       | 484.4    |       |
| Communications           |       | 46.6                   |       | 69.0     |       |
| Other                    |       | 7.8                    |       | 2.3      |       |
| Total Defense Systems    |       | 523.4                  |       | 555.7    |       |
| Total                    |       | $                      | 2,486.3    |     | $          | 2,183.4 |   |
|                     |       |                   |       |     |       |
| **Funded backlog**       |       |                   |       |     |       |
| Transportation Systems   |       | $                      | 1,112.6    |     | $          | 772.2 |   |
| Mission Support Services |       | 236.3                  |       | 206.7    |       |
| Defense Systems          |       |                   |       |     |       |
| Training systems         |       | 469.0                  |       | 484.4    |       |
| Communications           |       | 46.6                   |       | 69.0     |       |
| Other                    |       | 7.8                    |       | 2.3      |       |
| Total Defense Systems    |       | 523.4                  |       | 555.7    |       |
| Total                    |       | $                      | 1,872.3    |     | $          | 1,534.6 |   |

 

The difference between total backlog and funded backlog representsoptions under multiyear service contracts. Funding for these contracts comesfrom annual operating budgets of the U.S. government and the options arenormally exercised annually. Options for the purchase of additional systems orequipment are not included in backlog until exercised. In addition to theamounts identified above, we have been selected as a participant in or, in somecases, the sole contractor for several substantial indefinite delivery/indefinite quantity (IDIQ) contracts. IDIQ contracts are not included in backlog until an order is received.

 

27

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A decrease in the value of the British pound vs. the U.S. dollarbetween September 30, 2009 and September 30, 2010, resulted in adecrease in transportation systems backlog of approximately $8 million.

 

**New Accounting Standards**

 

InDecember 2007 the FASB issued an accounting standard that applies to all transactions or other eventsin which an entity obtains control of one or more businesses. This standardapplies to all business entities, including mutual entities that previouslyused the pooling-of-interests method of accounting for some businesscombinations.  We adopted this standardin the fiscal year beginning October 1, 2009 with no material impact toour results of operations, financial position or cash flows. The future impactof this standard will depend on the size and structure of future acquisitions.

 

InDecember 2007, the FASB issued an accounting standard that requires all entities to reportnoncontrolling (minority) interests in subsidiaries as equity in theconsolidated financial statements. This standard is effective for fiscal yearsbeginning after December 15, 2008. Weadopted this standard in the fiscal year beginning October 1, 2009 with nomaterial impact to our results of operations, financial position or cash flows.

 

InDecember 2008, the FASB issued a standard which expands the disclosurerequirements about plan assets for defined benefit pension plans andpostretirement plans.  This standard is effective for financialstatements issued for fiscal years ending after December 15, 2009, whichfor us is this fiscal year. The adoption of this standard did not have amaterial impact on our results of operations, financial position or cash flows.

 

InJune 2009, the FASB issued a standard which changes the approach indetermining whether an entity is a variable interest entity, and modifies themethods allowed for determining the primary beneficiary of a variable interestentity.  In addition, this standard requires ongoing reassessments ofwhether an enterprise is the primary beneficiary of a variable interest entityand enhanced disclosures related to an enterprise’s involvement in a variableinterest entity.  This standard is effective for the first annualreporting period that begins after November 15, 2009, which for us will bethe fiscal year beginning October 1, 2010. The adoption of this standardis not expected to have a significant impact on our results of operations,financial position or cash flows. Thefuture impact of this standard will depend on the size and structure offuture investments in variable interest entities.

 

InOctober 2009, the FASB issued revised accounting guidance relating tomultiple-deliverable revenue arrangements, which can be applied prospectivelyor retrospectively.  This guidancemodifies the objective-and-reliable-evidence-of-fair-value criterion from theseparation criteria used to determine whether an arrangement involving multipledeliverables contains more than one unit of accounting, replaces references to “fairvalue” with “selling price” to distinguish from the fair value measurementrequired under the “Fair Value Measurements and Disclosures” guidance, providesa hierarchy that entities must use to estimate the selling price, eliminatesthe use of the residual method for allocation, and expands the ongoingdisclosure requirements. This revised guidance is effective for new ormaterially modified arrangements in fiscal years beginning on or after June 15,2010, although early adoption is allowed. We have elected to early adopt thisguidance prospectively as of October 1, 2009. The adoption of this updatedid not have a material impact on our consolidated financial position, resultsof operations, or cash flows.

 

InJanuary 2010, the FASB issued an accounting standard that requires all entities to provideinformation about movements of assets among Level 1 and 2 of the three-tierfair value hierarchy, and provide a reconciliation of purchases, sales,issuance, and settlements of anything valued with a Level 3 method. Thisstandard is effective for fiscal years beginning after December 15, 2010. We do not expect the adoption of thisstandard to have a material impact on our results of operations, financialposition or cash flows.

 

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**Liquidity and Capital Resources**

 

Operatingactivities provided cash of $111.7 million in 2010, compared to $176.0 millionin 2009, and $92.7 million in 2008. In addition to cash generated by earnings,a decrease in accounts receivable in each of the three years amounting to $28.6million, $36.2 million and $40.5 million in 2010, 2009 and 2008, respectively,contributed to the positive cash flows. In addition, net customer advances of$20.7 million, $48.7 million and $17.0 million in 2010, 2009 and 2008,respectively, added to the positive result. A decrease in inventory of $16.6million also contributed to the positive results in 2010. For 2009 and 2008, anincrease in inventory partially offset the improvements, using cash of $4.3million and $18.7 million, respectively. Positive operating cash flows in 2010,2009 and 2008 came from all three segments. In 2010 and 2008, CTS provided thegreatest portion of the positive cash flows, while in 2009, CDS provided morethan half of the operating cash flows. Partially offsetting the positive operating cash flows for 2010 was apayment of $27.0 million in value added tax (VAT) during the third quarter,related to the wind-up of the PRESTIGE contract within TranSys, our 50% ownedvariable interest entity. We consolidated TranSys with our results for thefirst time in the second quarter of 2010, adding cash of $38.3 million toinvesting activities, a portion of which was used to make this VAT paymentwhich is included in operating activities.

 

Wehave classified certain unbilled accounts receivable balances as noncurrentbecause we do not expect to receive payment within one year from the balancesheet date. At September 30, 2010, this balance was $28.1 million comparedto $13.4 million at September 30, 2009. The increase came from atransportation related contract in North America that included long-termfinancing provided to the customer.

 

Cash flows used in investing activities in 2010 included $7.4 millionfor two small defense systems acquisitions made during the year, and anadditional payment of $0.9 million for a transportation systems acquisitionmade in 2009. As mentioned above, the consolidation of TranSys added $38.3million to cash from investing activities. We also made normal capitalexpenditures of $6.9 million and net purchases of short-term investmentstotaling $76.0 million in 2010. In 2009, two transportation systemsacquisitions used $13.9 million, as well as the final payment of $6.1 millionfrom our 2008 acquisition of Omega. We also made normal capital expenditures of$5.3 million and purchased short-term investments totaling $8.1 million in2009. In 2008 our acquisition of Omega used cash of $53.8 million, net of cashacquired. We made capital expenditures of $8.1 million in 2008, partiallyoffset by proceeds of $1.8 million from the sale of our interest in a jointventure. We also liquidated $27.2 million of short-term investments in early 2008,thereby avoiding much of the turmoil in the credit markets that occurred laterin that year.

 

Financing activities in 2010 included scheduled payments on long-termborrowings of $4.5 million and the payment of a dividend to shareholders of$4.8 million (18 cents per share). Similarly, in 2009 and 2008 financingactivities included payments on long-term borrowings of $6.0 million and $6.1million, respectively, and both years included payments of dividends toshareholders of $4.8 million (18 cents per share).

 

Theaccumulated deficit in other comprehensive income (loss) decreased $1.6 millionin 2010 due to a positive adjustment from foreign currency translation of $2.1million and an unrealized gain on cash flow hedges of $1.5 million. Partiallyoffsetting these positive adjustments was an increase in the recorded liabilityfor our pension plans of $1.9 million after applicable income taxes. Theseadjustments resulted in a negative balance in accumulated other comprehensiveincome of $9.7 million at September 30, 2010 compared to a negativebalance of $11.4 million at September 30, 2009.

 

Thepension plan unfunded balance increased from the September 30, 2009balance of $32.2 million to $37.0 million at September 30, 2010. Thisdecrease in the funded position can be attributed primarily to a decrease inthe discount rate we used to calculate the pension liability.

 

Thenet deferred tax asset increased to $36.4 million at September 30, 2010compared to $36.2 million at September 30, 2009. The increase included theeffect of recording adjustments to the pension liability through othercomprehensive income, which resulted in an additional deferred tax asset of$1.0 million at September 30, 2010. We expect to generate sufficienttaxable income in the future such that the net deferred tax asset will berealized.

 

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Ourfinancial condition remains strong with working capital of $367.6 million and acurrent ratio of 2.2 to 1 at September 30, 2010. We expect that cash onhand and our ability to access the debt markets will be adequate to meet ourworking capital requirements for the foreseeable future. In addition to ashort-term borrowing arrangement we have in New Zealand, we have a committedthree year credit facility from a group of financial institutions in the U.S.,aggregating $150 million. This agreement will expire in December 2012. Asof September 30, 2010, $61.4 million of this capacity was used for lettersof credit, leaving an additional $88.6 million available.  Our total debt to capital ratio at September 30,2010 was 4%. In addition, our cash and short-term investments totaled $379.5million at September 30, 2010 which exceeded our total long-term debt by$359.0 million. Our cash is invested primarily in highly liquid governmenttreasury and other agency instruments in the U. S. and Europe.

 

Thefollowing is a schedule of our contractual obligations outstanding as of September 30,2010:

 

 
| ** **            | ** ** | **Total**              | ** ** | **Less than 1  Year** | ** ** | **1 - 3 years** | ** ** | **4 - 5 years** | ** ** | **After 5 years** | ** ** |
|-----------------------|------------|------------------------|------------|---------------------------------|------------|--------------------------------|------------|--------------------------------|------------|-----------------------------|------------|
| ** **            | ** ** | **(in millions)** | ** ** |
| Long-term debt        |       | $                      | 20.5       |                            | $          | 4.5                            |       | $                              | 9.1        |                        | $          | 5.1 |   | $ | 1.8 |   |
| Interest payments     |       | 2.8                    |       | 1.1                             |       | 1.2                            |       | 0.3                            |       | 0.2                         |       |
| Operating leases      |       | 25.4                   |       | 7.1                             |       | 9.8                            |       | 5.3                            |       | 3.2                         |       |
| Deferred compensation |       | 9.4                    |       | 0.9                             |       | 1.6                            |       | 1.1                            |       | 5.8                         |       |
|                  |       | $                      | 58.1       |                            | $          | 13.6                           |       | $                              | 21.7       |                        | $          | 11.8 |   | $ | 11.0 |   |

 

**CriticalAccounting Policies, Estimates and Judgments**

 

Our consolidated financial statements are based on the application ofU.S. Generally Accepted Accounting Principles (GAAP), which require us to makeestimates and assumptions about future events that affect the amounts reportedin our consolidated financial statements and the accompanying notes. Futureevents and their effects cannot be determined with certainty. Therefore, thedetermination of estimates requires the exercise of judgment. Actual resultscould differ from those estimates, and any such differences may be material toour consolidated financial statements. We believe the estimates set forth belowmay involve a higher degree of judgment and complexity in their applicationthan our other accounting estimates and represent the critical accountingestimates used in the preparation of our consolidated financial statements. Webelieve our judgments related to these accounting estimates are appropriate.However, if different assumptions or conditions were to prevail, the resultscould be materially different from the amounts recorded.

 

*RevenueRecognition*

 

Asignificant portion of our business is derived from long-term development,production and system integration contracts. We consider the nature of thesecontracts, and the types of products and services provided, when we determinethe proper accounting for a particular contract. Generally, we record revenuefor long-term fixed price contracts on a percentage of completion basis usingthe cost-to-cost method to measure progress toward completion. Many of ourlong-term fixed-price contracts require us to deliver minimal quantities over along period of time or to perform a substantial level of development effort inrelation to the total value of the contract. Under the cost-to-cost method ofaccounting, we recognize revenue based on a ratio of the costs incurred to theestimated total costs at completion. For certain other long-term, fixed priceproduction contracts not requiring substantial development effort we use theunits-of-delivery percentage completion method as the basis to measure progresstoward completing the contract and recognizing sales. The units-of-deliverymeasure is a modification of the percentage-of-completion method, which recognizesrevenues as deliveries are made to the customer generally using unit salesvalues in accordance with the contract terms. We estimate profit as thedifference between total estimated revenue and total estimated cost of acontract and recognize that profit over the life of the contract based ondeliveries.

 

30

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Asa general rule, we recognize sales and profits earlier in a production cyclewhen we use the cost-to-cost method of percentage of completion accounting thanwhen we use the units-of-delivery method. In addition, our profits and marginsmay vary materially depending on the types of long-term contracts undertaken,the costs incurred in their performance, the achievement of other performanceobjectives, and the stage of performance at which the right to receive fees,particularly under award and incentive fee contracts, is finally determined.

 

Awardfees and incentives related to performance on contracts, which are generallyawarded at the discretion of the customer, as well as penalties related tocontract performance, are considered in estimating sales and profit rates.Estimates of award fees are based on actual awards and anticipated performance.Incentive provisions that increase or decrease earnings based solely on asingle significant event are generally not recognized until the event occurs.Those incentives and penalties are recorded when there is sufficientinformation for us to assess anticipated performance.

 

Accountingfor long-term contracts requires judgment relative to assessing risks,estimating contract revenues and costs, and making assumptions for schedule andtechnical issues. Due to the scope and nature of the work required to beperformed on many of our contracts, the estimation of total revenue and cost atcompletion is complicated and subject to many variables. Contract costs includematerial, labor, and subcontracting costs, as well as an allocation of indirectcosts. We have to make assumptions regarding labor productivity and availability,the complexity of the work to be performed, the availability of materials,estimated increases in wages and prices for materials, performance by oursubcontractors, and the availability and timing of funding from our customer,among other variables. For contract change orders, claims, or similar items, weapply judgment in estimating the amounts and assessing the potential forrealization. These amounts are only included in contract value when they can bereliably estimated and realization is considered probable. We have accountingpolicies in place to address these, as well as other contractual and businessarrangements to properly account for long-term contracts.

 

Productsand services provided under long-term, fixed-price contracts represented approximately73% of our net sales for 2010. Because of the significance of the judgments andestimation processes, it is likely that materially different amounts could berecorded if we used different assumptions or if our underlying circumstanceswere to change. For example, if underlying assumptions were to change such thatour estimated profit rate at completion for all fixed-price contracts washigher or lower by one percentage point, our 2010 net earnings would haveincreased or decreased by approximately $6 million. When adjustments inestimated contract revenues or estimated costs at completion are required, anychanges from prior estimates are recognized by recording adjustments in thecurrent period for the inception-to-date effect of the changes on current andprior periods. When estimates of total costs to be incurred on a contractexceed total estimates of revenue to be earned, a provision for the entire losson the contract is recorded in the period the loss is determined.

 

Weoccasionally enter into contracts, primarily in our transportation systemsbusiness, that include multiple deliverables such as the construction orupgrade of a system and subsequent services related to the delivered system.Historically, these contracts have not been common in our business; however,recently we have seen an increase in the number of customer requests forproposal that include this type of contractual arrangement. An example of thisis a contract we entered into in 2010 to provide system upgrades and long-termservices for the Sydney, Australia Electronic Ticketing System. We elected toadopt updated authoritative accounting guidance for multiple-elementarrangements in 2010 on a prospective basis. For contracts of this natureentered into in 2010 and beyond, the contract value is allocated at theinception of the contract to the different contract elements based on theirrelative selling price. The relative selling price for each deliverable isdetermined using vendor specific objective evidence (VSOE) of selling price orthird-party evidence of selling price if VSOE does not exist. If neither VSOEnor third-party evidence exists, we use our best estimate of the selling pricefor each deliverable. Once the contract value is allocated to the separatedeliverables, revenue recognition guidance relevant to each contractual elementis followed. For example, for the long-term construction portion of a contractwe use the percentage completion method and for the services portion werecognize the service revenues on a straight-line basis over the contractualservice period or based on measurable units of work performed or incentivesearned. The judgment we apply in allocating the relative selling price to eachdeliverable can have a significant impact on the timing of recognizing revenuesand operating income on a contract.

 

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Revenueunder contracts for services other than those associated with design,development, or production activities is recognized either as services areperformed or when a contractually required event has occurred, depending on thecontract. The majority of our services contracts are in our MSS and CTSsegments, Services contracts primarily include outsourcing-type arrangementsand operations and maintenance contracts. Revenue under such contracts isgenerally recognized on a straight-line basis over the period of contractperformance, unless evidence suggests that the revenue is earned or theobligations are fulfilled in a different pattern. Costs incurred under theseservices contracts are expensed as incurred, Earnings related to servicescontracts may fluctuate from period to period, particularly in the earlierphases of the contract. Award fees and incentives related to performance onservices contracts at MSS are generally accrued during the performance of thecontract based on our historical experience with such awards. Incentive feesincluded in some of our transportation systems service contracts are recognizedwhen they become fixed and determinable based on the provisions of thecontract. Often these fees are based on meeting certain contractually requiredservice levels or based on system usage levels.

 

Morethan half of our total sales are driven by pricing based on costs incurred toproduce products or perform services under contracts with the U.S. Government.Cost-based pricing is determined under the Federal Acquisition Regulation(FAR). The FAR provides guidance on the types of costs that are allowable inestablishing prices for goods and services under U.S. Government contracts. Forexample, costs such as those related to charitable contributions, interestexpense, and certain advertising activities are unallowable, and therefore notrecoverable through sales.

 

Weclosely monitor compliance with, and the consistent application of, ourcritical accounting policies related to contract accounting. Business segmentpersonnel evaluate our contracts through periodic contract status andperformance reviews. Corporate management and our internal auditors alsomonitor compliance with our revenue recognition policies and review contractstatus with segment personnel. Costs incurred and allocated to contracts arereviewed for compliance with U.S. Government regulations by our personnel, andare subject to audit by the Defense Contract Audit Agency. For otherinformation on accounting policies we have in place for recognizing sales andprofits, see our discussion under “Revenue Recognition” in Note 1 to thefinancial statements.

 

*IncomeTaxes*

 

Significantjudgment is required in determining our income tax provisions and in evaluatingour tax return positions. We establish reserves when, despite our belief thatour tax return positions are fully supportable, we believe it ismore-likely-than-not a tax position taken or expected to be taken in a taxreturn, if examined, would be challenged and that we may not prevail. We adjustthese reserves in light of changing facts and circumstances, such as theprogress of a tax audit.

 

Taxregulations require items to be included in the tax return at different timesthan the items are reflected in the financial statements and are referred to astiming differences. In addition, some expenses are not deductible on our taxreturn and are referred to as permanent differences. Timing differences createdeferred tax assets and liabilities. Deferred tax assets generally represent itemsthat can be used as a tax deduction or credit in future years for which we havealready recorded the benefit in our income statement. We establish valuationallowances for our deferred tax assets when the amount of expected futuretaxable income is not likely to support the use of the deduction or credit.Deferred tax liabilities generally represent deductions we have taken on ourtax return but have not yet recognized as expense in our financial statements.

 

We have notrecognized any United States tax expense on undistributed earnings of ourforeign subsidiaries since we intend to reinvest the earnings outside the U.S.for the foreseeable future. These undistributed earnings totaled approximately$90.2 million at September 30, 2010. Annually we evaluate the capitalrequirements in our foreign subsidiaries and determine the amount of excesscapital, if any, that is available for distribution. Whether or not we actuallyrepatriate the excess capital in the form of a dividend, we would provide forU.S. taxes on the amount determined to be available for distribution. Thisevaluation is judgmental in nature and, therefore, the amount of U.S. taxesprovided on undistributed earnings of our foreign subsidiaries is affected bythese judgments.

 

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*PurchasedIntangibles*

 

We generallyfund acquisitions using cash on hand. The purchase price of an acquisition isallocated to the assets acquired and liabilities assumed using the fair valuesdetermined by management as of the acquisition day, with any excess purchaseprice recorded as goodwill. We amortize intangible assets acquired as part ofbusiness combinations over their estimated useful lives unless their usefullives are determined to be indefinite. For certain business combinations, weutilize independent valuations to assist us in recording purchased intangibles.Our purchased intangibles primarily relate to contracts and programs acquiredand customer relationships, which are amortized over periods of 15 years orless. The determination of the value and useful life of purchased intangiblesis judgmental in nature and, therefore, the amount of annual amortizationexpense we record is affected by these judgments. For example, if the weightedaverage amortization period for our purchased intangibles was one year lessthan we have determined, our 2010 net earnings would have decreased byapproximately $0.7 million.

 

*Valuationof Goodwill*

 

Weevaluate our recorded goodwill balances for potential impairment annually bycomparing the fair value of each reporting unit to its carrying value,including recorded goodwill. Our annual testing date is June 30. We have notyet had a case where the carrying value exceeded the fair value; however, if itdid, impairment would be measured by comparing the derived fair value ofgoodwill to its carrying value, and any impairment determined would be recordedin the current period. To date there has been no impairment of our recordedgoodwill. Goodwill balances by reporting unit are as follows:

 
| **September 30,**   | ** ** | **2010**               | ** ** | **2009** | ** ** |
|--------------------------|------------|------------------------|------------|----------|------------|
| ** **               | ** ** | **(in millions)** | ** ** |
|                     |       |                   |       |     |       |
| Mission Support Services |       | $                      | 36.7       |     | $          | 36.7 |   |
| Defense Systems          |       | 20.1                   |       | 15.3     |       |
| Transportation Systems   |       | 7.3                    |       | 7.4      |       |
| Total goodwill           |       | $                      | 64.1       |     | $          | 59.4 |   |

 

Determiningthe fair value of a reporting unit for purposes of the goodwill impairment testis judgmental in nature and involves the use of estimates and assumptions.These estimates and assumptions could have a significant impact on whether ornot an impairment charge is recognized and also the magnitude of any suchcharge. Estimates of fair value are primarily determined using discounted cashflows and comparisons with recent transactions and market multiples frompublically traded comparable companies. These approaches use significantestimates and assumptions including projected future cash flows, discount ratereflecting the inherent risk in future cash flows, perpetual growth rate anddetermination of appropriate market comparables.

 

Forfiscal 2010, the discounted cash flows for each reporting unit were based ondiscrete three-year financial forecasts developed by management for planningpurposes. Cash flows beyond the three-year discrete forecasts were estimatedbased on projected growth rates and financial ratios, influenced by an analysisof historical ratios, and by calculating a terminal value at the end of fiveyears for our defense segments, and three years for our transportation segment.The annual growth rates for sales ranged from 7.8% to 13.5% and for operatingprofit margins ranged from 6.3% to 7.8% for the reporting units, beyond thediscrete forecast period. The future cash flows were discounted to presentvalue using a discount rate of 11.5% for our defense segments, and 10.0% forour transportation segment. The estimated fair value of each of our reportingunits was in excess of the carrying value and, accordingly, there was noindicator that goodwill was impaired as of June 30, 2010. Changes in estimatesand assumptions we make in conducting our goodwill assessment could affect the estimatedfair value of one or more of our reporting units and could result in a goodwillimpairment charge in a future period. However, the fair value of our reportingunits would remain in excess of their respective carrying values even if therewere a 10% decrease in their fair value st June 30, 2010.

 

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*PensionCosts*

 

Themeasurement of our pension obligations and costs is dependent on a variety ofassumptions used by our actuaries. These assumptions include estimates of thepresent value of projected future pension payments to plan participants, takinginto consideration the likelihood of potential future events such as salaryincreases and demographic experience. These assumptions may have an effect on theamount and timing of future contributions.

 

Theassumptions used in developing the required estimates include the following keyfactors:

 

·                  Discount rates

·                  Inflation

·                  Salary growth

·                  Expected return on plan assets

·                  Retirement rates

·                  Mortality rates

 

We base thediscount rate assumption on investment yields available at year-end on highquality corporate long-term bonds. Our inflation assumption is based on anevaluation of external market indicators. The salary growth assumptions reflectour long-term actual experience in relation to the inflation assumption. Theexpected return on plan assets reflects asset allocations, our historical experience,our investment strategy and the views of investment managers and large pensionsponsors. Mortality rates are based on published mortality tables. Retirementrates are based primarily on actual plan experience. The effects of actualresults differing from our assumptions are accumulated and amortized overfuture periods, and therefore, generally affect our recognized expense in suchfuture periods.

 

Changes inthe above assumptions can affect our financial statements, although therelatively small size of our defined benefit pension plans limits the impactany individual assumption changes can have on earnings. For example, if theassumed rate of return on pension assets was 50 basis points higher or lowerthan we have determined, our 2010 net earnings would have increased ordecreased by approximately $0.4 million.

 

**Item7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK**

 

**InterestRate Risk**

 

Weinvest in money market instruments and short-term marketable debt securitieswhose return is tied to short-term interest rates being offered at the time theinvestment is made. We maintain short-term borrowing arrangements in the U.S.and New Zealand which are also tied to short term rates (the U.S. prime rateand the New Zealand base rate). We also have senior unsecured notes payable toinsurance companies that are due in annual installments. These notes have fixedcoupon interest rates. See Note 5 to the Consolidated Financial Statements formore information.

 

Interestincome earned on our short-term investments is affected by changes in thegeneral level of interest rates in the U.S., the U.K., Australia and NewZealand. These income streams are generally not hedged.  Interest expense incurred under the short-termborrowing arrangements is affected by changes in the general level of interestrates in the U.S. and New Zealand. The expense related to these cost streams isusually not hedged since it is either revolving, payable within three monthsand/or immediately callable by the lender at any time. Interest expenseincurred under the long-term notes payable is not affected by changes in anyinterest rate because it is fixed. However, we have in the past, and may in the future, use an interestrate swap to essentially convert this fixed rate into a floating rate for someor all of the long-term debt outstanding. The purpose of a swap would be to tie the interest expense risk relatedto these borrowings to the interest income risk on our short-term investments,thereby mitigating our net interest rate risk. We believe that we are notsignificantly exposed to interest rate risk at this point in time.  There was no interest rate swap outstandingat September 30, 2010.

 

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**ForeignCurrency Exchange Risk**

 

Inthe ordinary course of business, we enter into firm sale and purchasecommitments denominated in many foreign currencies.  We have a policy to hedge those commitmentsgreater than $20,000 by using foreign currency exchange forward and optioncontracts that are denominated in currencies other than the functional currencyof the subsidiary responsible for the commitment, typically the British pound,Canadian dollar, Singapore dollar, Euro, Swedish krona, New Zealand dollar andAustralian dollar.  These contracts aredesigned to be effective hedges regardless of the direction or magnitude of anyforeign currency exchange rate change, because they result in an equal andopposite income or cost stream that offsets the change in the value of theunderlying commitment.  See Note 1 to theConsolidated Financial Statements for more information on our foreign currencytranslation and transaction accounting policies.  We also use balance sheet hedges to mitigateforeign exchange risk.  This strategyinvolves incurring British pound denominated debt (See Interest Rate Riskabove) and having the option of paying off the debt using U.S. dollar orBritish pound funds. We do not believe that we are significantly exposed toforeign currency exchange rate risk at this point in time.

 

Investmentsin our foreign subsidiaries in the U.K., Australia, New Zealand, and Canada arenot hedged because we consider them to be invested indefinitely.  In addition, we generally have control overthe timing and amount of earnings repatriation, if any, and expect to use thiscontrol to mitigate foreign currency exchange risk.

 

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**Item 8.    FINANCIAL STATEMENTS AND SUPPLEMENTALDATA.**

 

CUBIC CORPORATION

 

CONSOLIDATED BALANCE SHEETS

(in thousands)

 
| ** **                                | ** ** | **September 30,** | ** ** |
|-------------------------------------------|------------|------------------------|------------|
| ** **                                | ** ** | **2010**               | ** ** | **2009** | ** ** |
| ASSETS                                    |       |                   |       |   |   |
|                                      |       |                   |       |   |   |
| CURRENT ASSETS                            |       |                   |       |   |   |
| Cash and cash equivalents                 |       | $                      | 295,434    |   | $ | 244,074 |   |
| Short-term investments                    |       | 84,081                 |       | 8,127 |   |
| Accounts receivable:                      |       |                   |       |   |   |
| Trade and other receivables               |       | 11,594                 |       | 12,833 |   |
| Long-term contracts                       |       | 199,353                |       | 223,186 |   |
| Allowance for doubtful accounts           |       | (663                   | )          | (4,558 | ) |
|                                      |       | 210,284                |       | 231,461 |   |
|                                      |       |                   |       |   |   |
| Inventories                               |       | 32,820                 |       | 49,107 |   |
| Deferred income taxes                     |       | 17,825                 |       | 22,132 |   |
| Prepaid expenses and other current assets |       | 25,893                 |       | 29,957 |   |
| TOTAL CURRENT ASSETS                      |       | 666,337                |       | 584,858 |   |
|                                      |       |                   |       |   |   |
| LONG-TERM CONTRACT RECEIVABLES            |       | 28,080                 |       | 13,400 |   |
|                                      |       |                   |       |   |   |
| PROPERTY, PLANT AND EQUIPMENT             |       |                   |       |   |   |
| Land and land improvements                |       | 15,821                 |       | 15,292 |   |
| Buildings and improvements                |       | 42,754                 |       | 42,661 |   |
| Machinery and other equipment             |       | 82,129                 |       | 80,018 |   |
| Leasehold improvements                    |       | 4,829                  |       | 4,685 |   |
| Accumulated depreciation and amortization |       | (98,064                | )          | (93,761 | ) |
|                                      |       | 47,469                 |       | 48,895 |   |
|                                      |       |                   |       |   |   |
| OTHER ASSETS                              |       |                   |       |   |   |
| Deferred income taxes                     |       | 18,570                 |       | 14,082 |   |
| Goodwill                                  |       | 64,142                 |       | 59,433 |   |
| Purchased intangibles                     |       | 26,295                 |       | 28,618 |   |
| Miscellaneous other assets                |       | 5,196                  |       | 7,029 |   |
|                                      |       | 114,203                |       | 109,162 |   |
|                                      |       |                   |       |   |   |
| TOTAL ASSETS                              |       | $                      | 856,089    |   | $ | 756,315 |   |

 

See accompanying notes.

 

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CUBIC CORPORATION

 

CONSOLIDATED BALANCE SHEETS—continued

(in thousands)

 
| ** **                                                      | ** ** | **September 30,** | ** ** |
|-----------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                      | ** ** | **2010**               | ** ** | **2009** | ** ** |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                       |       |                   |       |   |   |
|                                                            |       |                   |       |   |   |
| CURRENT LIABILITIES                                             |       |                   |       |   |   |
| Trade accounts payable                                          |       | $                      | 33,638     |   | $ | 28,626 |   |
| Customer advances                                               |       | 139,723                |       | 123,458 |   |
| Accrued compensation                                            |       | 48,994                 |       | 49,134 |   |
| Other current liabilities                                       |       | 60,041                 |       | 60,402 |   |
| Income taxes payable                                            |       | 11,787                 |       | 3,491 |   |
| Current maturities of long-term debt                            |       | 4,545                  |       | 4,554 |   |
| TOTAL CURRENT LIABILITIES                                       |       | 298,728                |       | 269,665 |   |
|                                                            |       |                   |       |   |   |
| LONG-TERM DEBT                                                  |       | 15,949                 |       | 20,570 |   |
|                                                            |       |                   |       |   |   |
| OTHER LIABILITIES                                               |       |                   |       |   |   |
| Accrued pension liability                                       |       | 37,015                 |       | 32,214 |   |
| Deferred compensation                                           |       | 8,508                  |       | 7,902 |   |
| Income taxes payable                                            |       | 3,382                  |       | 5,119 |   |
| Other non-current liabilities                                   |       | 4,748                  |       | — |   |
|                                                            |       |                   |       |   |   |
| COMMITMENTS AND CONTINGENCIES                                   |       |                   |       |   |   |
|                                                            |       |                   |       |   |   |
| SHAREHOLDERS’ EQUITY                                       |       |                   |       |   |   |
| Preferred stock, no par value:                                  |       |                   |       |   |   |
| Authorized—5,000 shares                                    |       |                   |       |   |   |
| Issued and outstanding—none                                |       | —                 |       | — |   |
| Common stock, no par value:                                     |       |                   |       |   |   |
| Authorized—50,000 shares                                   |       |                   |       |   |   |
| 2010—Issued 35,682 shares, outstanding—26,736  shares |       |                   |       |   |   |
| 2009—Issued 35,677 shares, outstanding—26,732  shares |       | 12,574                 |       | 12,530 |   |
| Retained earnings                                               |       | 521,567                |       | 455,743 |   |
| Accumulated other comprehensive income (loss)                   |       | (9,745                 | )          | (11,357 | ) |
| Treasury stock at cost:                                         |       |                   |       |   |   |
| 2010 and 2009—8,945 shares                                 |       | (36,074                | )          | (36,071 | ) |
| Shareholders’ equity related to Cubic                      |       | 488,322                |       | 420,845 |   |
| Noncontrolling interest in variable interest  entity            |       | (563                   | )          | — |   |
| Total Shareholders’ equity                                 |       | 487,759                |       | 420,845 |   |
|                                                            |       |                   |       |   |   |
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY                 |       | $                      | 856,089    |   | $ | 756,315 |   |

 

See accompanying notes.

 

37

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CUBIC CORPORATION

 

CONSOLIDATED STATEMENTS OFINCOME

(amounts in thousands, except per share data)

 
| ** **                                    | ** ** | **Years Ended September 30,** | ** ** |
|-----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                    | ** ** | **2010**                                     | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                          |       |                                         |       |   |   |   |   |
| Net sales:                                    |       |                                         |       |   |   |   |   |
| Products                                      |       | $                                            | 636,739    |   | $ | 526,879 |   | $ | 478,478 |   |
| Services                                      |       | 557,450                                      |       | 489,778 |   | 402,657 |   |
|                                          |       | 1,194,189                                    |       | 1,016,657 |   | 881,135 |   |
| Costs and expenses:                           |       |                                         |       |   |   |   |   |
| Products                                      |       | 457,651                                      |       | 394,478 |   | 376,213 |   |
| Services                                      |       | 484,343                                      |       | 411,038 |   | 333,268 |   |
| Selling, general and administrative expenses  |       | 120,848                                      |       | 111,828 |   | 98,613 |   |
| Restructuring costs                           |       | —                                       |       | — |   | 6,203 |   |
| Research and development                      |       | 18,976                                       |       | 8,173 |   | 12,231 |   |
| Amortization of purchased intangibles         |       | 6,846                                        |       | 6,432 |   | 1,343 |   |
|                                          |       | 1,088,664                                    |       | 931,949 |   | 827,871 |   |
|                                          |       |                                         |       |   |   |   |   |
| Operating income                              |       | 105,525                                      |       | 84,708 |   | 53,264 |   |
|                                          |       |                                         |       |   |   |   |   |
| Other income (expenses):                      |       |                                         |       |   |   |   |   |
| Gain on sale of assets                        |       | —                                       |       | — |   | 1,238 |   |
| Interest and dividends                        |       | 1,590                                        |       | 1,664 |   | 6,351 |   |
| Interest expense                              |       | (1,755                                       | )          | (2,031 | ) | (2,745 | ) |
| Other income (expense)                        |       | 561                                          |       | 899 |   | (653 | ) |
| Minority interest in income of subsidiary     |       | —                                       |       | — |   | (216 | ) |
|                                          |       |                                         |       |   |   |   |   |
| Income before income taxes                    |       | 105,921                                      |       | 85,240 |   | 57,239 |   |
|                                          |       |                                         |       |   |   |   |   |
| Income taxes                                  |       | 35,285                                       |       | 29,554 |   | 20,385 |   |
|                                          |       |                                         |       |   |   |   |   |
| Net income                                    |       | $                                            | 70,636     |   | $ | 55,686 |   | $ | 36,854 |   |
|                                          |       |                                         |       |   |   |   |   |
| Basic and diluted net income per common share |       | $                                            | 2.64       |   | $ | 2.08 |   | $ | 1.38 |   |
|                                          |       |                                         |       |   |   |   |   |
| Average number of common shares outstanding   |       | 26,735                                       |       | 26,731 |   | 26,725 |   |

 

See accompanying notes.

 

38

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CUBIC CORPORATION

 

CONSOLIDATED STATEMENTS OFCASH FLOWS

(in thousands)

 

 
| ** **                                                                         | ** ** | **Years Ended September 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                         | ** ** | **2010**                                     | ** ** | **2009** | ** ** | **2008** | ** ** |
| Operating Activities:                                                              |       |                                         |       |   |   |   |   |
| Net income                                                                         |       | $                                            | 70,636     |   | $ | 55,686 |   | $ | 36,854 |   |
| Adjustments to reconcile net income to net cash provided  by operating activities: |       |                                         |       |   |   |   |   |
| Depreciation and amortization                                                      |       | 14,469                                       |       | 15,586 |   | 9,688 |   |
| Deferred income taxes                                                              |       | (164                                         | )          | 3,346 |   | (6,203 | ) |
| Provision for doubtful accounts                                                    |       | (3,889                                       | )          | 3,038 |   | (39 | ) |
| Gain on sale of assets                                                             |       | —                                       |       | — |   | (1,238 | ) |
| Minority interest in income of subsidiary                                          |       | —                                       |       | — |   | 216 |   |
| Changes in operating assets and liabilities, net  of effects from acquisitions:    |       |                                         |       |   |   |   |   |
| Accounts receivable                                                                |       | 28,565                                       |       | 36,211 |   | 40,495 |   |
| Inventories                                                                        |       | 16,638                                       |       | (4,275 | ) | (18,748 | ) |
| Prepaid expenses and other current assets                                          |       | 4,401                                        |       | 5,141 |   | 451 |   |
| Accounts payable and other current liabilities                                     |       | (27,498                                      | )          | 14,175 |   | 4,037 |   |
| Customer advances                                                                  |       | 20,672                                       |       | 48,663 |   | 16,952 |   |
| Income taxes                                                                       |       | (14,614                                      | )          | (2,890 | ) | 7,835 |   |
| Other items - net                                                                  |       | 2,507                                        |       | 1,352 |   | 2,355 |   |
| NET CASH PROVIDED BY OPERATING ACTIVITIES                                          |       | 111,723                                      |       | 176,033 |   | 92,655 |   |
|                                                                               |       |                                         |       |   |   |   |   |
| Investing Activities:                                                              |       |                                         |       |   |   |   |   |
| Acquisition of businesses, net of cash acquired                                    |       | (8,250                                       | )          | (19,965 | ) | (53,776 | ) |
| Consolidation of variable interest entity                                          |       | 38,264                                       |       | — |   | — |   |
| Proceeds from sale of assets                                                       |       | —                                       |       | — |   | 1,779 |   |
| Proceeds from sale of short-term investments                                       |       | 82,992                                       |       | — |   | 66,160 |   |
| Purchases of short-term investments                                                |       | (158,946                                     | )          | (8,127 | ) | (39,070 | ) |
| Purchases of property, plant and equipment                                         |       | (6,878                                       | )          | (5,332 | ) | (8,100 | ) |
| Other items - net                                                                  |       | —                                       |       | 41 |   | (2,254 | ) |
| NET CASH USED IN INVESTING ACTIVITIES                                              |       | (52,818                                      | )          | (33,383 | ) | (35,261 | ) |
|                                                                               |       |                                         |       |   |   |   |   |
| Financing Activities:                                                              |       |                                         |       |   |   |   |   |
| Principal payments on long-term debt                                               |       | (4,541                                       | )          | (5,970 | ) | (6,112 | ) |
| Proceeds from issuance of common stock                                             |       | 44                                           |       | 45 |   | 128 |   |
| Purchases of treasury stock                                                        |       | (3                                           | )          | — |   | (2 | ) |
| Dividends paid to shareholders                                                     |       | (4,812                                       | )          | (4,811 | ) | (4,810 | ) |
| NET CASH USED IN FINANCING ACTIVITIES                                              |       | (9,312                                       | )          | (10,736 | ) | (10,796 | ) |
|                                                                               |       |                                         |       |   |   |   |   |
| Effect of exchange rates on cash                                                   |       | 1,767                                        |       | (536 | ) | (7,465 | ) |
|                                                                               |       |                                         |       |   |   |   |   |
| NET INCREASE IN CASH AND CASH EQUIVALENTS                                          |       | 51,360                                       |       | 131,378 |   | 39,133 |   |
|                                                                               |       |                                         |       |   |   |   |   |
| Cash and cash equivalents at the beginning of the  year                            |       | 244,074                                      |       | 112,696 |   | 73,563 |   |
|                                                                               |       |                                         |       |   |   |   |   |
| CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR                                   |       | $                                            | 295,434    |   | $ | 244,074 |   | $ | 112,696 |   |

 

See accompanying notes.

 

39

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CUBIC CORPORATION

 

CONSOLIDATED STATEMENTS OFCHANGES IN SHAREHOLDERS’ EQUITY

 
| ** **                                                 | ** ** | ** **        | ** ** | ** ** | ** ** | ** **   | ** ** | **Accumulated**   | ** ** | ** **   | ** ** | ** **           | ** ** | ** **         | ** ** |
|------------------------------------------------------------|------------|-------------------|------------|------------|------------|--------------|------------|-------------------|------------|--------------|------------|----------------------|------------|--------------------|------------|
| ** **                                                 | ** ** | ** **        | ** ** | ** ** | ** ** | ** **   | ** ** | **Other**         | ** ** | ** **   | ** ** | **Noncontrolling**   | ** ** | **Number**         | ** ** |
| **(in thousands except**                         | ** ** | **Comprehensive** | ** ** | **Common** | ** ** | **Retained** | ** ** | **Comprehensive** | ** ** | **Treasury** | ** ** | **Interest in** | ** ** | **of Shares** | ** ** |
| **per share amounts)**                           | ** ** | **Income**        | ** ** | **Stock**  | ** ** | **Earnings** | ** ** | **Income**        | ** ** | **Stock**    | ** ** | **VIE**              | ** ** | **Outstanding**    | ** ** |
| October 1,  2007                                      |       |              |       | $          | 12,357     |         | $          | 375,299           |       | $            | 31,184     |                 | $          | (36,069            | )          | $ | — |   | 26,720 |   |
|                                                       |       |              |       |       |       |         |       |              |       |         |       |                 |       |               |       |
| Comprehensive  income:                                     |       |              |       |       |       |         |       |              |       |         |       |                 |       |               |       |
| Net  income                                                |       | $                 | 36,854     |       | —     |         | 36,854     |              | —     |         | —     |                 | —     |               | —     |   |
| Increase  in minimum pension liability, net of taxes       |       | (12,383           | )          | —     |       | —       |       | (12,383           | )          | —       |       | —               |       | —             |       |
| Foreign  currency translation adjustment                   |       | (11,231           | )          | —     |       | —       |       | (11,231           | )          | —       |       | —               |       | —             |       |
| Comprehensive  income                                      |       | $                 | 13,240     |       |       |         |       |              |       |         |       |                 |       |               |       |   |
|                                                       |       |              |       |       |       |         |       |              |       |         |       |                 |       |               |       |
| Adoption  of new accounting pronouncement                  |       |              |       | —     |       | (2,475       | )          | —            |       | —       |       | —               |       | —             |       |
| Stock  issued under equity incentive plan                  |       |              |       | 128        |       | —       |       | —            |       | —       |       | —               |       | 7                  |       |
| Purchase  of treasury stock                                |       |              |       | —     |       | —       |       | —            |       | (2           | )          | —               |       | —             |       |
| Cash  dividends paid — $.18 per share of common stock |       |              |       | —     |       | (4,810       | )          | —            |       | —       |       | —               |       | —             |       |
|                                                       |       |              |       |       |       |         |       |              |       |         |       |                 |       |               |       |
| September 30,  2008                                   |       |              |       | 12,485     |       | 404,868      |       | 7,570             |       | (36,071      | )          | —               |       | 26,727             |       |
|                                                       |       |              |       |       |       |         |       |              |       |         |       |                 |       |               |       |
| Comprehensive  income:                                     |       |              |       |       |       |         |       |              |       |         |       |                 |       |               |       |
| Net  income                                                |       | $                 | 55,686     |       | —     |         | 55,686     |              | —     |         | —     |                 | —     |               | —     |   |
| Increase  in minimum pension liability, net of taxes       |       | (15,155           | )          | —     |       | —       |       | (15,155           | )          | —       |       | —               |       | —             |       |
| Foreign  currency translation adjustment                   |       | (3,884            | )          | —     |       | —       |       | (3,884            | )          | —       |       | —               |       | —             |       |
| Net  unrealized gains from cash flow hedges                |       | 112               |       | —     |       | —       |       | 112               |       | —       |       | —               |       | —             |       |
| Comprehensive  income                                      |       | $                 | 36,759     |       |       |         |       |              |       |         |       |                 |       |               |       |   |
|                                                       |       |              |       |       |       |         |       |              |       |         |       |                 |       |               |       |
| Stock  issued under equity incentive plan                  |       |              |       | 45         |       | —       |       | —            |       | —       |       | —               |       | 5                  |       |
| Cash  dividends paid — $.18 per share of common stock |       |              |       | —     |       | (4,811       | )          | —            |       | —       |       | —               |       | —             |       |
|                                                       |       |              |       |       |       |         |       |              |       |         |       |                 |       |               |       |
| September 30,  2009                                   |       |              |       | 12,530     |       | 455,743      |       | (11,357           | )          | (36,071      | )          | —               |       | 26,732             |       |
|                                                       |       |              |       |       |       |         |       |              |       |         |       |                 |       |               |       |
| Comprehensive  income:                                     |       |              |       |       |       |         |       |              |       |         |       |                 |       |               |       |
| Net  income                                                |       | $                 | 70,636     |       | —     |         | 70,636     |              | —     |         | —     |                 | —     |               | —     |   |
| Increase  in minimum pension liability, net of taxes       |       | (1,932            | )          | —     |       | —       |       | (1,932            | )          | —       |       | —               |       | —             |       |
| Foreign  currency translation adjustment                   |       | 2,061             |       | —     |       | —       |       | 2,061             |       | —       |       | —               |       | —             |       |
| Net  unrealized gains from cash flow hedges                |       | 1,483             |       | —     |       | —       |       | 1,483             |       | —       |       | —               |       | —             |       |
| Comprehensive  income                                      |       | $                 | 72,248     |       |       |         |       |              |       |         |       |                 |       |               |       |   |
|                                                       |       |              |       |       |       |         |       |              |       |         |       |                 |       |               |       |
| Consolidation  of variable interest entity                 |       |              |       | —     |       | —       |       | —            |       | —       |       | (563                 | )          | —             |       |
| Stock  issued under equity incentive plan                  |       |              |       | 44         |       | —       |       | —            |       | —       |       | —               |       | 4                  |       |
| Purchase  of treasury stock                                |       |              |       | —     |       | —       |       | —            |       | (3           | )          | —               |       | —             |       |
| Cash  dividends paid — $.18 per share of common stock |       |              |       | —     |       | (4,812       | )          | —            |       | —       |       | —               |       | —             |       |
|                                                       |       |              |       |       |       |         |       |              |       |         |       |                 |       |               |       |
| September 30,  2010                                   |       |              |       | $          | 12,574     |         | $          | 521,567           |       | $            | (9,745     | )                    | $          | (36,074            | )          | $ | (563 | ) | 26,736 |   |

 

See accompanying notes.

 

40

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CUBICCORPORATION

 

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

 

September 30,2010

 

NOTE1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Organizationand Nature of the Business:  We design, develop and manufacture productswhich are mainly electronic in nature, provide government services and servicesrelated to products previously produced by us and others. Our principal linesof business are defense systems, defense services, and transportation farecollection systems and services. Our principal customers for defense productsand services are the United States and foreign governments. Our transportationfare collection systems and services are sold primarily to large localgovernment agencies in the United States and worldwide.

 

Principlesof Consolidation:  Theconsolidated financial statements include the accounts of Cubic Corporation,its majority-owned subsidiaries and, as of March 5, 2010, its 50% ownedvariable interest entity, Transaction Systems Limited (TranSys). We consolidatevariable interest entities (VIE) when we determine that Cubic is the primarybeneficiary of the VIE. All significant intercompany balances and transactionshave been eliminated in consolidation. The consolidation of foreignsubsidiaries requires translation of their assets and liabilities into U.S.dollars at year-end exchange rates. We translate our statements of income andcash flows at the average exchange rates for each year. Transaction gains andlosses on advances to foreign subsidiaries amounted to a $0.8 million gain in 2010,$1.8 million gain in 2009, and a $1.0 million loss in 2008.

 

CashEquivalents:  We considerhighly liquid investments with maturity of three months or less when purchasedto be cash equivalents.

 

Concentrationof Credit Risk:  We haveestablished guidelines pursuant to which our cash and cash equivalents arediversified among various money market instruments and investment funds. Theseguidelines emphasize the preservation of capital by requiring minimum creditratings assigned by established credit organizations.  We achieve diversification by specifyingmaximum investments in each instrument type and issuer. The majority of theseinvestments are not on deposit in federally insured accounts.

 

FairValue of Financial Instruments:  We carry financial instruments, includingcash equivalents, accounts receivable, accounts payable and accrued liabilitiesat cost, which we believe approximates fair value because of the short-termmaturity of these instruments.  The fairvalue of long-term debt is calculated by discounting the value of the notebased on market interest rates for similar debt instruments. At September 30,2010, the fair value of our long-term debt was estimated to be approximately$21.6 million compared to a carrying value of $20.5 At September 30, 2009the fair value of our long-term debt approximated the carrying value of thedebt.  Receivables consist primarily ofamounts due from U.S. and foreign governments for defense products and localgovernment agencies for transportation systems. Due to the nature of our customers, we generally do not requirecollateral.  We have limited exposure tocredit risk as we have historically collected substantially all of ourreceivables from government agencies.  Wegenerally require no allowance for doubtful accounts for these customers unlessspecific contractual circumstances warrant it.

 

41

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CUBICCORPORATION

 

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS—Continued

 

NOTE1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES—Continued

 

Thevaluation techniques required to determine fair value are based upon observableand unobservable inputs. Observable inputs reflect market data obtained fromindependent sources, while unobservable inputs reflect internal market assumptions.The two types of inputs create the following fair value hierarchy:

 

·                  Level 1 - Quoted prices for identicalinstruments in active markets.

·                  Level 2 - Quoted prices for similarinstruments in active markets; quoted prices for identical or similarinstruments in markets that are not active; and model-derived valuations whoseinputs are observable or whose significant value drivers are observable.

·                  Level 3 - Significant inputs to the valuationmodel are unobservable.

 

Thefollowing table presents assets and liabilities measured and recorded at fairvalue on our Balance Sheet on a recurring basis (in thousands). The fair valueof cash equivalents and short term investments approximates their cost. Thematurity dates of certificates of deposit are within approximately one year.The maturity dates of U.S. government agency securities and tax exempt bondsare approximately two years.

 
| ** **                                                  | ** ** | **September 30, 2010** | ** ** | **September 30,** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------|------------|------------------------|------------|
| ** **                                                  | ** ** | **Level 1**                 | ** ** | **Level 2**       | ** ** | **Total** | ** ** | **2009** | ** ** |
|                                                        |       |                             |       |                   |       |   |   |   |   |
| Assets                                                      |       |                             |       |                   |       |   |   |   |   |
| Cash equivalents - money market funds                       |       | $                                | 129,756    |                   | $          | — |   | $ | 129,756 |   | $ | 178,893 |   |
| Short-term investments - U.S. government agency  securities |       | 36,000                           |       | —                 |       | 36,000 |   | 8,127 |   |
| Short-term investments - tax exempt bonds                   |       | 48,081                           |       |                   |       | 48,081 |   | — |   |
| Current derivative assets                                   |       | —                           |       | 11,428                 |       | 11,428 |   | 18,106 |   |
| Total assets                                                |       | 213,837                          |       | 11,428                 |       | 225,265 |   | 205,126 |   |
| Liabilities                                                 |       |                             |       |                   |       |   |   |   |   |
| Current derivative liabilities                              |       | —                           |       | 3,193                  |       | 3,193 |   | 17,933 |   |
| Noncurrent derivative liabilities                           |       | —                           |       | 4,748                  |       | 4,748 |   | — |   |
| Net assets                                                  |       | $                                | 213,837    |                   | $          | 3,487 |   | $ | 217,324 |   | $ | 187,193 |   |

 

Short-termInvestments:  Short-terminvestments include marketable U.S. government agency securities andpre-refunded tax exempt bonds that may be purchased at a discount or premium,may have callable options, and are categorized as available-for-salesecurities. The securities in our portfolio had contractual maturities up toapproximately two years at September 30, 2010. We record short-terminvestments at fair value and we would record any net difference between fairmarket value and cost in Accumulated Other Comprehensive Income (Loss) on theConsolidated Balance Sheets; however, the difference between cost and fairmarket value was not material at September 30, 2010.

 

Inventories:  We state our inventories at the lower of costor market. We determine cost using the first-in, first-out (FIFO) method, whichapproximates current replacement cost. We value our work in process at theactual production and engineering costs incurred to date, including applicableoverhead, and reduce the value by charging any amounts in excess of estimatedrealizable value to cost of sales. Where contracts include advances,performance-based payments and progress payments, we reflect the advances as anoffset against any related inventory balances. Costs we incur for certaingovernment contracts include general and administrative costs as allowed bygovernment cost accounting standards. The amounts remaining in inventory at September 30,2010 and 2009 were $4.2 million and $7.4 million respectively.

 

42

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CUBICCORPORATION

 

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS—Continued

 

NOTE1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES—Continued

 

Property,Plant and Equipment:  We carryproperty, plant and equipment at cost. We provide depreciation in amountssufficient to amortize the cost of the depreciable assets over their estimateduseful lives. Generally, we use straight-line methods for real property overestimated useful lives ranging from 15 to 39 years or the term of theunderlying lease for leasehold improvements. We use accelerated methods (declining balance and sum-of-the-years-digits)for machinery and equipment over estimated useful lives ranging from five toseven years.  Our provisions fordepreciation of plant and equipment and amortization of leasehold improvementsamounted to $7.6 million, $9.2 million and $8.3 million in 2010, 2009 and 2008,respectively.

 

Goodwill:  We evaluate goodwill for potential impairmentannually as of June 30 by comparing the fair value of a reporting unit toits carrying value, including recorded goodwill. If the carrying value exceedsthe fair value, we would measure impairment by comparing the derived fair valueof goodwill to its carrying value, and any impairment determined would berecorded in the current period. To date there has been no impairment of ourrecorded goodwill.

 

Thechanges in the carrying amount of goodwill for the two years ended September 30,2010 are as follows:

 
| ** **                             | ** ** | **Transportation   Systems** | ** ** | **Defense   Systems** | ** ** | **Mission   Support   Services** | ** ** | **Total** | ** ** |
|----------------------------------------|------------|-----------------------------------|------------|----------------------------|------------|--------------------------------------------|------------|-----------|------------|
| ** **                             | ** ** | **(in thousands)**           | ** ** |
| Balances at October 1, 2008       |       | $                                 | 8,210      |                       | $          | 16,087                                     |       | $         | 36,735     |   | $ | 61,032 |   |
| Reduction of acquired tax accrual      |       | —                            |       | (1,083                     | )          | —                                     |       | (1,083    | )          |
| Foreign currency exchange rate changes |       | (772                              | )          | 256                        |       | —                                     |       | (516      | )          |
| Balances at September 30, 2009    |       | 7,438                             |       | 15,260                     |       | 36,735                                     |       | 59,433    |       |
| Goodwill acquired during the year      |       | —                            |       | 4,767                      |       | —                                     |       | 4,767     |       |
| Foreign currency exchange rate changes |       | (115                              | )          | 57                         |       | —                                     |       | (58       | )          |
| Balances at September 30, 2010    |       | $                                 | 7,323      |                       | $          | 20,084                                     |       | $         | 36,735     |   | $ | 64,142 |   |

 

PurchasedIntangible Assets:  The tablebelow summarizes our purchased intangible assets (in thousands):

 
| ** **                                 | ** ** | **September 30, 2010**       | ** ** | **September 30, 2009**    | ** ** |
|--------------------------------------------|------------|----------------------------------------|------------|-------------------------------------|------------|
| ** **                                 | ** ** | **Gross Carrying    Amount** | ** ** | **Accumulated   Amortization** | ** ** | **Net   Carrying   Amount** | ** ** | **Gross   Carrying   Amount** | ** ** | **Accumulated   Amortization** | ** ** | **Net Carrying   Amount** | ** ** |
| Contract and program intangibles           |       | $                                      | 38,560     |                                | $          | (15,170 | ) | $ | 23,390 |   | $ | 35,614 |   | $ | (8,875 | ) | $ | 26,739 |   |
| In-process research & development |       | 1,671                                  |       | —                              |       | 1,671 |   | — |   | — |   | — |   |
| Other purchased intangibles                |       | 2,787                                  |       | (1,553                              | )          | 1,234 |   | 2,787 |   | (908 | ) | 1,879 |   |
| Total                                      |       | $                                      | 43,018     |                                | $          | (16,723 | ) | $ | 26,295 |   | $ | 38,401 |   | $ | (9,783 | ) | $ | 28,618 |   |

 

Weacquired two small defense system companies in 2010, which added $4.8 millionto goodwill, and $4.3 million to in-process research and development andcontract and program intangibles. We believe the purchased intangibles andgoodwill acquired in 2010 will be tax deductible over a 15 year amortizationperiod in accordance with U.S. tax regulations.

 

43

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CUBICCORPORATION

 

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS—Continued

 

NOTE1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES—Continued

 

Ourpurchased intangible assets are subject to amortization and we use acombination of straight-line and accelerated methods, based on the expectedcash flows from the assets, over a weighted average period of 7 years.  Total amortization expense for 2010, 2009,and 2008, was $6.8 million, $6.4 million and $1.3 million, respectively.

 

Thetable below shows our expected amortization for purchased intangibles as of September 30,2010, for each of the next five years (in thousands):

 
| ** ** | ** ** | **Transportation  Systems** | ** ** | **Defense  Systems** | ** ** | **Mission  Support  Services** | ** ** | **Total** | ** ** |
|------------|------------|-----------------------------|------------|----------------------|------------|--------------------------------|------------|-----------|------------|
| 2011       |       | $                           | 1,835      |                 | $          | 1,376                          |       | $         | 3,550      |   | $ | 6,761 |   |
| 2012       |       | 1,692                       |       | 1,160                |       | 2,650                          |       | 5,502     |       |
| 2013       |       | 1,651                       |       | 1,020                |       | 1,734                          |       | 4,405     |       |
| 2014       |       | 1,651                       |       | 326                  |       | 750                            |       | 2,727     |       |
| 2015       |       | 1,470                       |       | 188                  |       | —                         |       | 1,658     |       |
| Thereafter |       | 5,177                       |       | 65                   |       | —                         |       | 5,242     |       |
|       |       | $                           | 13,476     |                 | $          | 4,135                          |       | $         | 8,684      |   | $ | 26,295 |   |

 

Impairmentof Long-Lived Assets:  Wegenerally evaluate the carrying values of long-lived assets other than goodwillfor impairment only if events or changes in facts and circumstances indicatethat carrying values may not be recoverable. If we determined there was anyimpairment, we would measure it by comparing the fair value of the relatedasset to its carrying value and record the difference in the current period.Fair value is generally determined by identifying estimated discounted cashflows to be generated by those assets. We have not recorded any material impairments for the years ended September 30,2010, 2009 and 2008.

 

DeferredCompensation:  Deferredcompensation includes amounts due under an arrangement in which participatingmembers of management may elect to defer receiving payment for a portion oftheir compensation a minimum of five years or until periods after theirrespective retirements.  We accrueinterest on deferred compensation at market rates, until such time as it ispaid in full. We adjust the interest rate semi-annually; it was 3.125% at September 30,2010.

 

OtherComprehensive Income:  Wepresent other comprehensive income (OCI) and its components in the statement ofchanges in shareholders’ equity. Accumulated OCI (loss) consisted of the following:

 
| **September 30,**                     | ** ** | **2010**                | ** ** | **2009** | ** ** |
|--------------------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                                 | ** ** | **(in thousands)** | ** ** |
| Adjustment to pension liability            |       | $                       | (24,523    | )        | $          | (22,591 | ) |
| Foreign currency translation               |       | 13,183                  |       | 11,122   |       |
| Net unrealized gains from cash flow hedges |       | 1,595                   |       | 112      |       |
|                                       |       | $                       | (9,745     | )        | $          | (11,357 | ) |

 

Theadjustment to the pension liability is shown net of a tax benefit of $13.2million and $12.2 million at September 30, 2010 and 2009,respectively.  Deferred income taxes arenot recognized for translation-related temporary differences of foreignsubsidiaries whose undistributed earnings are considered to be permanentlyinvested.

 

44

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CUBICCORPORATION

 

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS—Continued

 

NOTE1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES—Continued

 

RevenueRecognition:  We recognizesales and profits under our long-term fixed-price contracts, which generallyrequire a significant amount of development effort in relation to totalcontract value, using the cost-to-cost percentage of completion method ofaccounting. We record sales and profits based on the ratio of costs incurred toestimated total costs at completion. In the early stages of contract performance,we do not recognize profit until progress is demonstrated or contractmilestones are reached. For certain other long-term, fixed price productioncontracts not requiring substantial development effort we use theunits-of-delivery percentage of completion method as the basis to measureprogress toward completing the contract and recognizing sales. We only includeamounts representing contract change orders, claims or other items in thecontract value when they can be reliably estimated and we consider realizationprobable.

 

Werecord sales of products when a firm sales agreement is in place, delivery hasoccurred and collectibility of the fixed or determinable sales price isreasonably assured. For fixed-price service contracts that do not containmeasurable units of work performed we generally recognize sales on astraight-line basis over the contractual service period, unless evidencesuggests that the revenue is earned, or obligations fulfilled, in a differentmanner. For fixed-price service contracts that contain measurable units of workperformed we recognize sales when the units of work are completed. For servicecontracts that contain service level or system usage incentives, we recognizerevenues when the incentive award is fixed and determinable.

 

Werecord sales under cost-reimbursement-type contracts as we incur the costs. Weconsider incentives or penalties and awards applicable to performance oncontracts in estimating sales and profits, and record them when there issufficient information to assess anticipated contract performance. We do notrecognize incentive provisions that increase or decrease earnings based solelyon a single significant event until the event occurs.

 

Weoccasionally enter into contracts, primarily in our transportation systemsbusiness, that include multiple deliverables such as the construction orupgrade of a system and subsequent services related to the delivered system.Historically, these contracts were not common in our business; however,recently we have seen an increase in the number of customer requests forproposal that include this type of contractual arrangement. We elected to earlyadopt Accounting Standards Update 2009-13 for multiple-element arrangements in2010 on a prospective basis. For contracts of this nature entered into in 2010and beyond, the contract value is allocated at the inception of the contract tothe different contract elements based on their relative selling price. Therelative selling price for each deliverable is determined using vendor specificobjective evidence (VSOE) of selling price or third-party evidence of sellingprice if VSOE does not exist. If neither VSOE nor third-party evidence exists,we use our best estimate of the selling price for each deliverable. Once thecontract value is allocated to the separate deliverables, revenue recognitionguidance relevant to each contractual element is followed. For example, for thelong-term construction portion of a contract we use the percentage completionmethod and for the services portion we recognize the service revenues on astraight-line basis over the contractual service period or based on measurableunits of work performed or incentives earned.

 

Priorto 2010, we allocated contract values in multiple element arrangements based onthe relative fair value when objective and reliable evidence of fair valueexisted for all units of accounting in an arrangement. The fair value of acontractual element was generally the price charged for the element in asimilar arrangement, if the element was regularly sold on a stand-alone basis.If objective and reliable evidence of fair value existed for undelivered items,but not for the delivered items, the residual method would be used to allocatethe contract value. If we could not establish stand-alone value for thedelivered items or when fair value of undelivered items had not beenestablished, revenue would be deferred until all elements had been delivered orservices had been performed, or until fair value could be objectivelydetermined for any remaining undelivered elements. Given the historicalmateriality of our multiple element arrangements, had we adopted the guidancein 2009 our revenues would not have been materially different from our reportedamounts. Therefore, the adoption of this updated guidance in 2010 did not havea material impact on our consolidated financial position, results of operationsor cash flows.

 

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CUBICCORPORATION

 

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS—Continued

 

NOTE1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES—Continued

 

Wemake provisions in the current period to fully recognize any anticipated losseson contracts.  If we receive cash on acontract prior to revenue recognition we classify it as a customer advance onthe balance sheet.

 

IncomeTaxes:  Our provision for income taxesincludes federal, state, local, and foreign income taxes.  We recognize tax credits, primarily forresearch and development and export programs, as a reduction of our provisionfor income taxes in the year in which they are available for tax purposes.  We provide deferred income taxes on temporarydifferences between assets and liabilities for financial reporting and taxpurposes as measured by enacted tax rates we expect to apply when the temporarydifferences are settled or realized.  Weestablish valuation allowances for deferred tax assets when the amount offuture taxable income we expect is not likely to support the use of thededuction or credit. Deferred tax liabilities generally represent deductionsthat have been taken on tax returns but have not yet been recognized as expensein the financial statements. Annually we evaluate the capital requirements ofour foreign subsidiaries and determine the amount of excess capital, if any,that is available for distribution. We provide for U.S. taxes on the amount wedetermine to be excess capital available for distribution. U.S. taxes are notprovided on amounts we consider to be indefinitely reinvested.

 

EarningsPer Share:  We calculateper share amounts based upon the weighted average number of shares of commonstock outstanding.

 

RestructuringActivity: In 2008 we reduced our defensesegment facility workforce by 139 employees. In addition, weeliminated 6 corporate office positions. Affected employees received severancepay and outplacement assistance, as well as company paid medical coverage for adefined period based on years of service. The cost of this restructuring was$6.2 million and is reflected in our results for 2008.

 

DerivativeFinancial Instruments:   Weutilize derivative and nonderivative financial instruments, such as foreigncurrency forwards and options, foreign currency debt obligations and foreigncurrency cash balances, to manage our exposure to fluctuations in foreigncurrency exchange rates. We do not use any derivative financial instruments fortrading or other speculative purposes. The purpose of our foreign currencyhedging activities is to fix the dollar value of specific commitments,investments, payments to foreign vendors, and the value of foreign currencydenominated receipts from our customers. At September 30, 2010 and 2009,we had foreign exchange contracts with a notional value of $232.5 million and$148.3 million outstanding, respectively.

 

Allderivatives are recorded at fair value, however, the classification of gains and losses resultingfrom changes in the fair values of derivatives are dependent on the intendeduse of the derivative and its resulting designation. If a derivativeis designated as a fair value hedge, then a change in the fair value of thederivative is offset against the change in the fair value of the underlyinghedged item and only the ineffective portion of the hedge, if any, is recognized in cost ofsales. If a derivative is designated as a cash flow hedge, then the effectiveportion of a change in the fair value of the derivative is recognized as acomponent of Accumulated OCI until the underlying hedged item is recognized incost of sales, or the forecasted transaction is no longer probable ofoccurring. If a derivative does not qualify as a highly effective hedge, a change infair value is immediately recognized in earnings. We formally document hedgingrelationships for all derivative hedges and the underlying hedged items, aswell as the risk management objectives and strategies for undertaking the hedgetransactions.

 

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CUBICCORPORATION

 

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS—Continued

 

NOTE1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES—Continued

 

Weclassify the fair value of all derivative contracts as current or noncurrentassets or liabilities, depending on the realized and unrealized gain or lossposition of the hedged contract at the balance sheet date. The cash flows fromderivatives treated as hedges are classified in the Consolidated Statements ofCash Flows in the same category as the item being hedged.

 

Theamount of gains and losses from derivative instruments and hedging activitiesclassified as not highly effective did not have a material impact on theresults of operations for the years ended September 30, 2010, 2009 and2008. There are no significant credit risks related to contingent features inour derivative agreements, and the amount of estimated unrealized net gainsfrom cash flow hedges which are expected to be reclassified to earnings in thenext twelve months is $5.4 million, net of income taxes.

 

NewAccounting Standards: In December 2007 the FASB issued anaccounting standard that applies toall transactions or other events in which an entity obtains control of one ormore businesses. This standard applies to all business entities, includingmutual entities that previously used the pooling-of-interests method ofaccounting for some business combinations. We adopted this standard in the fiscal year beginning October 1,2009 with no material impact to our results of operations, financial positionor cash flows. The future impact of this standard will depend on thesize and structure of future acquisitions.

 

InDecember 2007, the FASB issued an accounting standard that requires all entities to reportnoncontrolling (minority) interests in subsidiaries as equity in the consolidatedfinancial statements. This standard is effective for fiscal years beginningafter December 15, 2008. Weadopted this standard in the fiscal year beginning October 1, 2009 with nomaterial impact to our results of operations, financial position or cash flows.

 

InDecember 2008, the FASB issued a standard which expands the disclosurerequirements about plan assets for defined benefit pension plans andpostretirement plans.  This standard is effective for financialstatements issued for fiscal years ending after December 15, 2009, whichfor us is this fiscal year. The adoption of this standard did not have amaterial impact on our results of operations, financial position or cash flows.

 

InJune 2009, the FASB issued a standard which changes the approach indetermining whether an entity is a variable interest entity, and modifies themethods allowed for determining the primary beneficiary of a variable interestentity.  In addition, this standard requires ongoing reassessments ofwhether an enterprise is the primary beneficiary of a variable interest entityand enhanced disclosures related to an enterprise’s involvement in a variableinterest entity.  This standard is effective for the first annualreporting period that begins after November 15, 2009, which for us will bethe fiscal year beginning October 1, 2010. The adoption of this standardis not expected to have a significant impact on our results of operations,financial position or cash flows. Thefuture impact of this standard will depend on the size and structure offuture investments in variable interest entities.

 

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CUBICCORPORATION

 

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS—Continued

 

NOTE1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES—Continued

 

InOctober 2009, the FASB issued revised accounting guidance relating tomultiple-deliverable revenue arrangements, which can be applied prospectivelyor retrospectively.  This guidancemodifies the objective-and-reliable-evidence-of-fair-value criterion from theseparation criteria used to determine whether an arrangement involving multipledeliverables contains more than one unit of accounting, replaces references to “fairvalue” with “selling price” to distinguish from the fair value measurementrequired under the “Fair Value Measurements and Disclosures” guidance, providesa hierarchy that entities must use to estimate the selling price, eliminatesthe use of the residual method for allocation, and expands the ongoingdisclosure requirements. This revised guidance is effective for new ormaterially modified arrangements in fiscal years beginning on or after June 15,2010, although early adoption is allowed. We have elected to early adopt thisguidance prospectively as of October 1, 2009. As described in the *Revenue Recognition* section above, the adoption of thisupdate did not have a material impact on our consolidated financial position,results of operations, or cash flows.

 

InJanuary 2010, the FASB issued an accounting standard that requires all entities to provideinformation about movements of assets among Level 1 and 2 of the three-tierfair value hierarchy, and provide a reconciliation of purchases, sales,issuance, and settlements of anything valued with a Level 3 method. Thisstandard is effective for fiscal years beginning after December 15, 2010. We do not expect the adoption of thisstandard to have a material impact on our results of operations, financialposition or cash flows.

 

Useof Estimates:  Thepreparation of financial statements in conformity with U.S. generally acceptedaccounting principles requires us to make estimates and assumptions that affectthe amounts reported in the financial statements and accompanying notes.Significant estimates include the estimated total costs at completion of ourlong-term contracts, estimated discounted cash flows of our reporting unitsused for goodwill impairment testing, and estimated rates of return anddiscount rates related to our defined benefit pension plans. Actual resultscould differ from our estimates.

 

Risksand Uncertainties:  We aresubject to the normal risks and uncertainties of performing large, multiyear,often fixed-price contracts. In addition, we are subject to audit of incurredcosts related to many of our U.S. Government contracts. These audits couldproduce different results than we have estimated; however, our experience hasbeen that our costs are acceptable to the government.

 

SubsequentEvents:  In November 2010 weannounced that we have entered into an agreement to acquire AbraxasCorporation, a Herndon, Virginia-based company that provides risk mitigationand subject matter, and operational expertise for law enforcement and homelandsecurity clients. The all-cash transaction has a value of approximately $124million and will be funded from our existing cash resources. The acquisition isexpected to close in December 2010, subject to receipt of requiredconsents and regulatory approval.

 

Wehave completed an evaluation of all subsequent events through the issuance dateof these consolidated financial statements.

 

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CUBICCORPORATION

 

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS—Continued

 

NOTE2—INVESTMENT IN VARIABLE INTEREST ENTITY

 

Priorto March 5, 2010, we owned 37.5% of the common stock of TransactionSystems Limited (TranSys), a U.K. company formed in 1998 to bid on a contractcalled “PRESTIGE” (Procurement of Revenue Services, Ticketing, Information,Gates and Electronics), which outsourced most of the functions of the Transportfor London (TfL) fare collection system for a period of twelve years beginningin August 1998. We did not previously consolidate TranSys because we werenot the primary beneficiary of this VIE. We have participated in the PRESTIGEcontract solely through subcontracts from TranSys. All of the work performed byTranSys was subcontracted to us and the other shareholder and the arrangementprovided for the pass-through of virtually all revenues from TfL to the twoshareholders until August 2010. Beginning in August 2010, theservices formerly provided by TranSys are now provided by Cubic under a newcontract.

 

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

 

OnMarch 5, 2010, the two 37.5% shareholders of TranSys each acquired half ofthe shares in TranSys previously held by the minority shareholders forapproximately $0.1 million, bringing our share ownership up to 50% each.TranSys continues to be considered a VIE because it has not demonstrated theability to finance its activities without additional subordinated financialsupport from its equity investors and because its underlying risks do notcoincide with the voting interests. As a result of the ownership transfer andthe early payment by TfL, we conducted a new evaluation of the primarybeneficiary of TranSys. This evaluation, as described below, determined thatCubic is now the primary beneficiary and as a result we determined we wererequired to consolidate TranSys as of March 5, 2010.

 

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

 

Summarizedunaudited financial information for TranSys prior to consolidation is asfollows (in millions):

 
| ** **                             | ** ** | **Results for the periods ending** | ** ** |
|----------------------------------------|------------|--------------------------------------------------------|------------|
| **Statement of Operations:** | ** ** | **3/5/2010**                                           | ** ** | **9/30/2009** | ** ** | **9/30/2008** | ** ** |
| Sales                                  |       | $                                                      | 87.3       |   | $ | 203.0 |   | $ | 215.3 |   |
| Operating income (loss)                |       | $                                                      | 0.2        |   | $ | (1.7 | ) | $ | — |   |
| Net income (loss)                      |       | $                                                      | 0.1        |   | $ | (1.3 | ) | $ | — |   |

 

49

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CUBICCORPORATION

 

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS—Continued

 

NOTE2—INVESTMENT IN VARIABLE INTEREST ENTITY—Continued

 

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

 

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

 

Theactivities of TranSys included in our consolidated results for the year ended September 30,2010 consist of breakeven sales of $29.9 million, cash used in operatingactivities of $19.9 million including VAT and income tax payments ofapproximately $34.3 million which were partially offset by collection ofreceivables of approximately $16.7 million. The creditors of TranSys have norecourse to Cubic Corporation. The assets and liabilities of TranSys as of September 30,2010 were as follows (in millions):

 

| Cash and cash equivalents      |   | $      | 18.4   |   |
|--------------------------------|--------|--------|--------|--------|
| Other current assets           |   | 0.2    |   |
| Purchased intangibles          |   | 0.2    |   |
| Total Assets                   |   | $      | 18.8   |   |
|                           |   |   |   |
| Income taxes payable           |   | $      | 13.4   |   |
| Other current liabilities      |   | 6.5    |   |
| Equity related to Cubic        |   | (0.5   | )      |
| Noncontrolling interest in VIE |   | (0.6   | )      |
| Total Liabilities and Equity   |   | $      | 18.8   |   |

 

NOTE3—ACCOUNTS RECEIVABLE

 

Thecomponents of accounts receivable under long-term contracts are as follows (inthousands):

 
| **September 30,**                                                       | ** ** | **2010** | ** ** | **2009** | ** ** |
|------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| U.S. Government Contracts:                                                   |       |     |       |     |       |
| Amounts billed                                                               |       | $        | 50,925     |     | $          | 62,093 |   |
| Recoverable costs and accrued profits on progress  completed—not billed |       | 53,569   |       | 44,556   |       |
|                                                                         |       | 104,494  |       | 106,649  |       |
| Commercial Customers:                                                        |       |     |       |     |       |
| Amounts billed                                                               |       | 31,753   |       | 41,907   |       |
| Recoverable costs and accrued profits on progress  completed—not billed |       | 91,186   |       | 88,030   |       |
|                                                                         |       | 122,939  |       | 129,937  |       |
|                                                                         |       | 227,433  |       | 236,586  |       |
| Less unbilled amounts not currently due—commercial  customers           |       | (28,080  | )          | (13,400  | )          |
|                                                                         |       | $        | 199,353    |     | $          | 223,186 |   |

 

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CUBICCORPORATION

 

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS—Continued

 

NOTE3—ACCOUNTS RECEIVABLE—Continued

 

Aportion of recoverable costs and accrued profits on progress completed isbillable under progress or milestone payment provisions of the relatedcontracts. The remainder of these amounts is billable upon delivery of productsor furnishing of services, with an immaterial amount subject to retainageprovisions of the contracts. It is anticipated that we will bill and collectsubstantially all of the unbilled portion of receivables identified as currentassets under progress billing provisions of the contracts or upon completion ofmilestones and/or acceptance by the customers during fiscal 2011. The amountclassified as not currently due is an estimate of the amount of long-termcontract accounts receivable that will not be collected within one year from September 30,2010 under transportation systems contracts in the U.S., Australia and theU.K., and a defense contract in Canada. The non-current balance at September 30,2009 represented non-current amounts due from customers in the same countries.

 

NOTE4—INVENTORIES

 

Inventoriesare classified as follows:

 
| **September 30,**                                           | ** ** | **2010**                | ** ** | **2009** | ** ** |
|------------------------------------------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                                                       | ** ** | **(in thousands)** | ** ** |
|                                                             |       |                    |       |     |       |
| Finished products                                                |       | $                       | —     |     | $          | 55 |   |
| Work in process and inventoried costs under  long-term contracts |       | 71,696                  |       | 96,962   |       |
| Customer advances                                                |       | (41,575                 | )          | (49,734  | )          |
| Materials and purchased parts                                    |       | 2,699                   |       | 1,824    |       |
|                                                             |       | $                       | 32,820     |     | $          | 49,107 |   |

 

NOTE5—FINANCING ARRANGEMENTS

 

Long-termdebt consists of the following:

 
| **September 30,**                                                                                                                                                                         | ** ** | **2010**                | ** ** | **2009** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                                                                                                                                                                                     | ** ** | **(in thousands)** | ** ** |
| Unsecured notes payable to a group of insurance companies,  with annual principal payments of $4,000,000 due in November. Interest at  6.31% is payable semiannually in November and May. |       | $                       | 16,000     |     | $          | 20,000 |   |
| Mortgage note from a UK financial institution,  with quarterly installments of principal and interest at 6.5%                                                                                  |       | 4,494                   |       | 5,124    |       |
|                                                                                                                                                                                           |       | 20,494                  |       | 25,124   |       |
| Less current portion                                                                                                                                                                           |       | (4,545                  | )          | (4,554   | )          |
|                                                                                                                                                                                           |       | $                       | 15,949     |     | $          | 20,570 |   |

 

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CUBICCORPORATION

 

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS—Continued

 

NOTE5—FINANCING ARRANGEMENTS

 

Theterms of the notes payable include provisions that require and/or limit, amongother financial ratios and measurements, the permitted levels of debt andtangible net worth and coverage of fixed charges. At September 30, 2010,this agreement leaves consolidated retained earnings of $237 million availablefor the payment of dividends to shareholders, purchases of our common stock andother charges to shareholders’ equity. To date, there have been no covenantviolations.

 

Wemaintain a short-term borrowing arrangement in New Zealand totaling $0.5million New Zealand dollars (equivalent to approximately $0.4 million) to helpmeet the short-term working capital requirements of our subsidiary in thatcountry.  At September 30, 2010, noamounts were outstanding under this borrowing arrangement.

 

We have a $150 million revolving line of credit arrangement with agroup of U.S. banks which expires in December 2012. Commitment feesassociated with this financing arrangement are 0.25% of the unutilized balanceper annum. As of September 30, 2010 we had no short-term debt outstandingunder this line of credit and $61.4 million in outstanding letters of credit.

 

Maturitiesof long-term debt for each of the five years in the period ending September 30,2015, are as follows: 2011 — $4.5 million; 2012 — $4.5 million; 2013 — $4.5million; 2014 — $4.5 million; 2015 — $0.5 million.

 

Interestpaid amounted to $1.4 million, $1.8 million, and $2.3 million in 2010, 2009,and 2008, respectively.

 

Asof September 30, 2010 we had letters of credit and bank guaranteesoutstanding totaling $94.3 million, which guarantee either our performance orcustomer advances under certain contracts. In addition, we had financial lettersof credit outstanding totaling $5.7 million as of September 30, 2010,which primarily guarantee our payment of certain self-insured liabilities. Wehave never had a drawing on a letter of credit instrument, nor are anyanticipated; therefore, we estimate the fair value of these instruments to bezero.

 

Ourself-insurance arrangements are limited to certain workers’ compensation plans,automobile liability, and product liability claims. Under these arrangements,we self-insure only up to the amount of a specified deductible for eachclaim.  Self-insurance liabilitiesincluded in other current liabilities on the balance sheet amounted to $8.2million and $7.6 million as of September 30, 2010 and 2009, respectively.

 

NOTE6—COMMITMENTS

 

Welease certain office, manufacturing and warehouse space, and miscellaneouscomputer and other office equipment under noncancelable operating leasesexpiring in various years through 2019. These leases, some of which may be renewed for periods up to 10 years,generally require us to pay all maintenance, insurance and property taxes.Several leases are subject to periodic adjustment based on price indices orcost increases. Rental expense, net of sublease income of $0.6 million in 2010,2009 and 2008, for all operating leases amounted to $8.0 million, $6.6 million,and $6.2 million in 2010, 2009 and 2008, respectively.

 

52

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CUBICCORPORATION

 

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS—Continued

 

NOTE6—COMMITMENTS

 

Futureminimum payments, net of minimum sublease income, under noncancelable operatingleases with initial terms of one year or more consist of the following at September 30,2010 (in thousands):

 

| 2011       |   | $     | 7,057  |   |
|------------|--------|-------|--------|--------|
| 2012       |   | 5,825 |   |
| 2013       |   | 4,032 |   |
| 2014       |   | 2,949 |   |
| 2015       |   | 2,338 |   |
| Thereafter |   | 3,227 |   |
|       |   | $     | 25,428 |   |

 

NOTE7—INCOME TAXES

 

Significantcomponents of the provision for income taxes are as follows:

 
| **Years ended September 30,** | ** ** | **2010**                | ** ** | **2009** | ** ** | **2008** | ** ** |
|----------------------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                                   | ** ** | **(in thousands)** | ** ** |
| Current:                                     |       |                    |       |     |       |     |       |
| Federal                                      |       | $                       | 16,362     |     | $          | 11,417   |       | $ | 8,474 |   |
| State                                        |       | 4,611                   |       | 3,691    |       | 2,063    |       |
| Foreign                                      |       | 15,268                  |       | 11,090   |       | 16,051   |       |
| Total current                                |       | 36,241                  |       | 26,198   |       | 26,588   |       |
|                                         |       |                    |       |     |       |     |       |
| Deferred (credit):                           |       |                    |       |     |       |     |       |
| Federal                                      |       | 268                     |       | 2,516    |       | (5,440   | )          |
| State                                        |       | 69                      |       | 420      |       | (1,078   | )          |
| Foreign                                      |       | (1,293                  | )          | 420      |       | 315      |       |
| Total deferred                               |       | (956                    | )          | 3,356    |       | (6,203   | )          |
| Total income tax expense                     |       | $                       | 35,285     |     | $          | 29,554   |       | $ | 20,385 |   |

 

53

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CUBICCORPORATION

 

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS—Continued

 

NOTE7—INCOME TAXES—Continued

 

Wecalculate deferred tax assets and liabilities based on differences betweenfinancial reporting and tax bases of assets and liabilities, and measure themusing the enacted tax rates and laws that we expect will be in effect when thedifferences reverse. Significant components of our deferred tax assets andliabilities are as follows:

 
| **September 30,**                                   | ** ** | **2010**                | ** ** | **2009** | ** ** |
|----------------------------------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                                               | ** ** | **(in thousands)** | ** ** |
| Deferred tax assets:                                     |       |                    |       |     |       |
| Accrued employee benefits                                |       | $                       | 9,112      |     | $          | 8,064 |   |
| Allowance for doubtful accounts                          |       | 99                      |       | 1,670    |       |
| Long-term contracts and inventory valuation reductions   |       | 9,612                   |       | 10,643   |       |
| Allowances for loss contingencies                        |       | 6,144                   |       | 5,192    |       |
| Deferred compensation                                    |       | 3,246                   |       | 3,306    |       |
| Book over tax depreciation                               |       | 1,964                   |       | 1,954    |       |
| Adjustment to pension liability                          |       | 13,204                  |       | 12,163   |       |
| California research and development credit  carryforward |       | 4,762                   |       | 3,410    |       |
| Other                                                    |       | 1,820                   |       | 3,115    |       |
| Subtotal                                                 |       | 49,963                  |       | 49,517   |       |
| Valuation allowance                                      |       | (4,762                  | )          | (3,410   | )          |
| Deferred tax assets                                      |       | 45,201                  |       | 46,107   |       |
|                                                     |       |                    |       |     |       |
| Deferred tax liabilities:                                |       |                    |       |     |       |
| Amortization of goodwill and intangibles                 |       | 1,770                   |       | 4,681    |       |
| Prepaid expenses                                         |       | 2,080                   |       | 1,924    |       |
| State taxes                                              |       | 850                     |       | 980      |       |
| Other                                                    |       | 4,106                   |       | 2,308    |       |
| Deferred tax liabilities                                 |       | 8,806                   |       | 9,893    |       |
| Net deferred tax asset                                   |       | $                       | 36,395     |     | $          | 36,214 |   |

 

Thereconciliation of income tax computed at the U.S. federal statutory tax rate toincome tax expense is as follows:

 
| **Years ended September 30,**      | ** ** | **2010**                | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                                        | ** ** | **(in thousands)** | ** ** |
|                                              |       |                    |       |     |       |     |       |
| Tax at federal statutory rate                     |       | $                       | 37,072     |     | $          | 29,834   |       | $ | 20,034 |   |
| State income taxes, net of federal tax effect     |       | 3,042                   |       | 2,672    |       | 640      |       |
| Nondeductible expenses                            |       | 324                     |       | 408      |       | 152      |       |
| Reversal of reserve accrued for tax contingencies |       | (1,737                  | )          | (80      | )          | (1,205   | )          |
| Tax effect from foreign earnings repatriation     |       | —                  |       | 3,063    |       | 3,856    |       |
| Tax effect from foreign subsidiaries              |       | (2,212                  | )          | (2,523   | )          | (2,651   | )          |
| Tax credits and other                             |       | (1,204                  | )          | (3,820   | )          | (441     | )          |
|                                              |       | $                       | 35,285     |     | $          | 29,554   |       | $ | 20,385 |   |

 

54

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CUBICCORPORATION

 

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS—Continued

 

NOTE7—INCOME TAXES—Continued

 

Weare subject to ongoing audits from various taxing authorities in thejurisdictions in which we do business. As of September 30, 2010, our open tax years in significantjurisdictions include 2006-2009 in the U.K. and 2007-2009 in the U.S. Webelieve we have adequately provided for uncertain tax issues we have not yetresolved with federal, state and foreign tax authorities. Although not morelikely than not, the most adverse resolution of these issues could result inadditional charges to earnings in future periods. Based upon a consideration ofall relevant facts and circumstances, we do not believe the ultimate resolutionof uncertain tax issues for all open tax periods will have a materially adverseeffect upon our results of operations or financial condition.

 

Wehave recorded liabilities for unrecognized tax benefits related to permanentand temporary tax adjustments which totaled $3.2 million at September 30,2010 and $4.8 million at September 30, 2009. The net changes in theliability were as follows:

 
| **Years ended September 30,**              | ** ** | **2010**                | ** ** | **2009** | ** ** |
|-----------------------------------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                                                | ** ** | **(in thousands)** | ** ** |
|                                                      |       |                    |       |     |       |
| Balance at October 1                                 |       | $                       | 4,809      |     | $          | 5,845 |   |
| Decrease related to tax positions in prior years:         |       |                    |       |     |       |
| Recognition of benefits from expiration of  statutes      |       | (1,747                  | )          | (1,555   | )          |
| Tax positions related to the current year                 |       | 106                     |       | 778      |       |
| Decreases related to settlements with taxing  authorities |       | —                  |       | (259     | )          |
| Balance at September 30                              |       | $                       | 3,168      |     | $          | 4,809 |   |

 

AtSeptember 30, 2010, the amount of unrecognized tax benefits from permanenttax adjustments that, if recognized, would affect the effective rate was $3.2million. Effective October 1, 2009, we adopted the revised accountingstandard referred to in Note 1, which changed the accounting for acquired taxliabilities under business combinations such that the utilization of a netoperating loss carryforward no longer reduces goodwill. Over the next year, wedo not expect a significant increase or decrease in the unrecognized taxbenefits recorded as of September 30, 2010. The amount of net interest andpenalties recognized as a component of income tax expense during 2010, 2009 and2008 was not material.  Interest andpenalties accrued at September 30, 2010 and 2009 amounted to $0.2 millionand $0.4 million, respectively, bringing the total liability for uncertain taxissues to $3.4 million and $5.1 million as of September 30, 2010 and 2009,respectively.

 

Wemade income tax payments, net of refunds, totaling $30.0 million, $28.8 millionand $18.2 million in 2010, 2009 and 2008, respectively.

 

Incomebefore income taxes includes the following components:

 
| **Years ended September 30,** | ** ** | **2010**                | ** ** | **2009** | ** ** | **2008** | ** ** |
|----------------------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                                   | ** ** | **(in thousands)** | ** ** |
|                                         |       |                    |       |     |       |     |       |
| United States                                |       | $                       | 60,451     |     | $          | 45,329   |       | $ | 4,920 |   |
| Foreign                                      |       | 45,470                  |       | 39,911   |       | 52,319   |       |
| Total                                        |       | $                       | 105,921    |     | $          | 85,240   |       | $ | 57,239 |   |

 

55

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CUBICCORPORATION

 

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS—Continued

 

NOTE7—INCOME TAXES—Continued

 

Managementevaluates our capital requirements in our foreign subsidiaries on an annualbasis to determine what level of capital is needed for the long-term operationsof the businesses. We provide U.S. taxes on the amount of capital that isdetermined to be in excess of the long-term requirements of the business andis, therefore, available for distribution. Undistributed earnings of all ourforeign subsidiaries amounted to approximately $90.2 million at September 30,2010. We consider those earnings to be indefinitely reinvested, andaccordingly, we have not provided for U.S. federal and state income taxesthereon. Upon distribution of those earnings in the form of dividends orotherwise, we would be subject to both U.S. income taxes and withholding taxespayable to the foreign countries, but would also be able to offset unrecognizedforeign tax credit carryforwards. It is not practicable for us to determine thetotal amount of unrecognized deferred U.S. income tax liability because of thecomplexities associated with its hypothetical calculation.

 

NOTE8—PENSION, PROFIT SHARING AND OTHER RETIREMENT PLANS

 

DefinedContribution Plans

 

Wehave profit sharing and other defined contribution retirement plans thatprovide benefits for most employees in the U.S. An employee is eligible toparticipate in these plans after six months to one year of service, and maymake additional contributions to the plans from their date of hire. These plansprovide for full vesting of benefits over periods from zero to five years. Morethan half of our contributions to these plans are discretionary with the Boardof Directors. Effective October 1, 2010, we adopted a new definedcontribution plan for European employees that were formerly eligible for thedefined benefit plan described below. Similar to a 401(k) plan in theU.S., the company will match employee contributions 2 to 1, up to a totalcompany contribution of 8% of an employee’s eligible compensation. Companycontributions to defined contribution plans aggregated $15.9 million, $15.4million and $14.2 million in 2010, 2009 and 2008, respectively.

 

DefinedBenefit Pension Plans

 

Certainemployees in the U.S. are covered by a noncontributory defined benefit pensionplan for which benefits were frozen as of December 31, 2006 (“curtailment”).The effect of the curtailment is that no new benefits have been accrued afterthat date. Approximately one-half of our European employees are covered by acontributory defined benefit pension plan for which benefits were frozen as of September 30,2010. Although the effect of the curtailment of this plan is that no newbenefits will accrue after September 30, 2010, the plan is a final payplan, which means that benefits will be adjusted for increases in the salariesof participants until their retirement or departure from the company. The losson curtailment of $0.7 million is reflected in the following disclosures.

 

Ourfunding policy for the defined benefit pension plans provides thatcontributions will be at least equal to the minimum amounts mandated bystatutory requirements. Based on our known requirements for the U.S. and U.K.plans, as of September 30, 2010, we expect to make contributions ofapproximately $3 million in 2011. September 30 is used as the measurementdate for these plans.

 

56

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CUBICCORPORATION

 

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS—Continued

 

NOTE8—PENSION, PROFIT SHARING AND OTHER RETIREMENT PLANS—Continued

 

Theunrecognized amounts recorded in accumulated other comprehensive income (loss)will be subsequently recognized as net periodic pension cost, consistent withour historical accounting policy for amortizing those amounts. We willrecognize actuarial gains and losses that arise in future periods and are notrecognized as net periodic pension cost in those periods as increases ordecreases in other comprehensive income, net of tax, in the period they arise.We adjust actuarial gains and losses recognized in other comprehensive income(loss) as they are subsequently recognized as a component of net periodicpension cost. The unrecognized actuarial gain or loss included in accumulatedother comprehensive income (loss) at September 30, 2010 and expected to berecognized in net pension cost during fiscal 2011 is a loss of $853 thousand($554 thousand net of income tax benefits). No plan assets are expected to bereturned to us in 2011.

 

Thefollowing table sets forth changes in the projected benefit obligation and fairvalue of plan assets and the funded status for these defined benefit plans:

 
| **September 30,**                                  | ** ** | **2010**                | ** ** | **2009** | ** ** |
|---------------------------------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                                              | ** ** | **(in thousands)** | ** ** |
| **Change in benefit obligations:**                      |       |                    |       |     |       |
| Net benefit obligation at the beginning of the  year    |       | $                       | 164,622    |     | $          | 145,440 |   |
| Service cost                                            |       | 3,972                   |       | 2,521    |       |
| Interest cost                                           |       | 9,034                   |       | 9,679    |       |
| Actuarial loss                                          |       | 8,269                   |       | 16,065   |       |
| Curtailments                                            |       | 225                     |       | —   |       |
| Participant contributions                               |       | 1,210                   |       | 1,124    |       |
| Gross benefits paid                                     |       | (5,562                  | )          | (5,197   | )          |
| Foreign currency exchange rate changes                  |       | (1,060                  | )          | (5,010   | )          |
| Net benefit obligation at the end of the year           |       | 180,710                 |       | 164,622  |       |
|                                                    |       |                    |       |     |       |
| **Change in plan assets:**                              |       |                    |       |     |       |
| Fair value of plan assets at the beginning of the  year |       | 132,408                 |       | 128,989  |       |
| Actual return on plan assets                            |       | 13,614                  |       | 3,207    |       |
| Employer contributions                                  |       | 3,374                   |       | 9,504    |       |
| Participant contributions                               |       | 1,210                   |       | 1,124    |       |
| Gross benefits paid                                     |       | (5,562                  | )          | (5,197   | )          |
| Administrative expenses                                 |       | (555                    | )          | (701     | )          |
| Foreign currency exchange rate changes                  |       | (793                    | )          | (4,518   | )          |
| Fair value of plan assets at the end of the year        |       | 143,696                 |       | 132,408  |       |
|                                                    |       |                    |       |     |       |
| Unfunded status of the plans                            |       | (37,014                 | )          | (32,214  | )          |
| Unrecognized net actuarial loss                         |       | 37,727                  |       | 34,754   |       |
| Net amount recognized                                   |       | $                       | 713        |     | $          | 2,540 |   |
|                                                    |       |                    |       |     |       |
| **Amounts recognized in Accumulated  OCI**              |       |                    |       |     |       |
| Liability adjustment to OCI                             |       | $                       | (37,727    | )        | $          | (34,754 | ) |
| Deferred tax asset                                      |       | 13,204                  |       | 12,163   |       |
| Accumulated other comprehensive loss                    |       | $                       | (24,523    | )        | $          | (22,591 | ) |

 

57

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CUBICCORPORATION

 

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS—Continued

 

NOTE8—PENSION, PROFIT SHARING AND OTHER RETIREMENT PLANS—Continued

 

Theprojected benefit obligation, ABO and fair value of plan assets for the definedbenefit pension plans in which the ABO was in excess of the fair value of planassets were as follows:

 
| **September 30,**         | ** ** | **2010**                | ** ** | **2009** | ** ** |
|--------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                     | ** ** | **(in thousands)** | ** ** |
| Projected benefit obligation   |       | $                       | 180,710    |     | $          | 164,622 |   |
| Accumulated benefit obligation |       | 175,995                 |       | 148,375  |       |
| Fair value of plan assets      |       | 143,696                 |       | 132,408  |       |
|                                |            |                         |            |          |            |  |  |

 

Thecomponents of net periodic pension cost were as follows:

 
| **Years ended September 30,** | ** ** | **2010**                | ** ** | **2009** | ** ** | **2008** | ** ** |
|----------------------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                                   | ** ** | **(in thousands)** | ** ** |
|                                         |       |                    |       |     |       |     |       |
| Service cost                                 |       | $                       | 3,972      |     | $          | 2,521    |       | $ | 3,520 |   |
| Interest cost                                |       | 9,034                   |       | 9,679    |       | 9,761    |       |
| Expected return on plan assets               |       | (9,334                  | )          | (9,569   | )          | (12,706  | )          |
| Amortization of actuarial loss (gain)        |       | 850                     |       | —   |       | (243     | )          |
| Curtailment charge                           |       | 689                     |       | —   |       | —   |       |
| Administrative expenses                      |       | 92                      |       | 100      |       | 112      |       |
| Net pension cost                             |       | $                       | 5,303      |     | $          | 2,731    |       | $ | 444 |   |

 
| **Years ended September 30,**                                                                     | ** ** | **2010** | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                                                             |       |     |       |     |       |     |       |
| Weighted-average assumptions used to determine  benefit obligation at September 30:                         |       |     |       |     |       |     |       |
| Discount rate                                                                                                    |       | 5.2      | %          | 5.6      | %          | 7.3      | %          |
| Rate of compensation increase                                                                                    |       | 4.3      | %          | 4.5      | %          | 4.8      | %          |
| Weighted-average assumptions used to determine net  periodic benefit cost for the years ended September 30: |       |     |       |     |       |     |       |
| Discount rate                                                                                                    |       | 5.6      | %          | 7.3      | %          | 6.2      | %          |
| Expected return on plan assets                                                                                   |       | 7.2      | %          | 7.8      | %          | 8.0      | %          |
| Rate of compensation increase                                                                                    |       | 4.5      | %          | 4.8      | %          | 4.4      | %          |

 

Thelong-term rate of return assumption represents the expected average rate ofearnings on the funds invested or to be invested to provide for the benefitsincluded in the benefit obligations. That assumption is determined based on anumber of factors, including historical market index returns, the anticipatedlong-term asset allocation of the plans, historical plan return data, planexpenses, and the potential to outperform market index returns.

 

58

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CUBICCORPORATION

 

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS—Continued

 

NOTE8—PENSION, PROFIT SHARING AND OTHER RETIREMENT PLANS—Continued

 

Weexpect the following pension benefit payments, which reflect expected futureservice, as appropriate, to be paid (in thousands):

 

| 2011      |   | $      | 6,466  |   |
|-----------|--------|--------|--------|--------|
| 2012      |   | 6,667  |   |
| 2013      |   | 6,891  |   |
| 2014      |   | 7,302  |   |
| 2015      |   | 7,912  |   |
| 2016-2020 |   | 46,043 |   |

 

Wehave the responsibility to formulate the investment policies and strategies forthe plans’ assets. Our overall policies and strategies include: maintain thehighest possible return commensurate with the level of assumed risk, preservebenefit security for the plans’ participants, and minimize the necessity ofcontributions by maintaining a ratio of plan assets to liabilities in excess of1.0.

 

Beginningin the fiscal year ended September 30, 2010, the rules related toaccounting for postretirement benefit plans under GAAP require certain fairvalue disclosures related to postretirement benefit plan assets, even thoughthose assets are not included on our Balance Sheet. The following tablepresents the fair value of the assets of our defined benefit pension plans byasset category and their level within the fair value hierarchy as of September 30,2010 (in thousands). See note 1 for a description of each level within the fairvalue hierarchy.

 
| ** **                      | ** ** | **September 30, 2010** | ** ** | **September 30,** | ** ** |
|---------------------------------|------------|----------------------------------|------------|------------------------|------------|
| ** **                      | ** ** | **Level 1**                 | ** ** | **Level 2**       | ** ** | **Level 3** | ** ** | **Total** | ** ** | **2009** | ** ** |
| Cash and cash equivalents       |       | $                                | 2,579      |                   | $          | — |   | $ | — |   | $ | 2,579 |   | $ | 3,678 |   |
| Equity:                         |       |                             |       |                   |       |   |   |   |   |   |   |
| U.S. equity securities          |       | 41,756                           |       | —                 |       | — |   | 41,756 |   | 40,529 |   |
| U.K. equity securities          |       | 30,580                           |       | —                 |       | — |   | 30,580 |   | 26,939 |   |
| Other foreign equity securities |       | 22,625                           |       | —                 |       | — |   | 22,625 |   | 20,343 |   |
| Fixed Income:                   |       |                             |       |                   |       |   |   |   |   |   |   |
| U.S. treasury securities        |       | 15,509                           |       | —                 |       | — |   | 15,509 |   | 14,848 |   |
| U.K. treasury securities        |       | 5,659                            |       | —                 |       | — |   | 5,659 |   | 4,636 |   |
| Corporate debt securities       |       | 12,603                           |       | 8,866                  |       | — |   | 21,469 |   | 18,496 |   |
| Real Estate                     |       | —                           |       | —                 |       | 3,519 |   | 3,519 |   | 2,939 |   |
| Total                           |       | $                                | 131,311    |                   | $          | 8,866 |   | $ | 3,519 |   | $ | 143,696 |   | $ | 132,408 |   |

 

Thefollowing table presents the changes during fiscal 2010 in the fair value ofplan assets categorized as Level 3 in the preceding table (in thousands):

 
| ** **                            | ** ** | **Real Estate** | ** ** |
|---------------------------------------|------------|----------------------|------------|
| Balance as of September 30, 2009 |       | $                    | 2,939      |   |
| Actual return on plan assets:         |       |                 |       |
| Realized gains, net                   |       | 175                  |       |
| Unrealized gains, net                 |       | 73                   |       |
| Purchases, sales and settlements, net |       | (68                  | )          |
| Transfers in and out of Level 3, net  |       | 400                  |       |
| Balance as of September 30, 2010 |       | $                    | 3,519      |   |

 

59

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CUBICCORPORATION

 

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS—Continued

 

NOTE8—PENSION, PROFIT SHARING AND OTHER RETIREMENT PLANS—Continued

 

Thepension plans held no positions in Cubic Corporation common stock as of September 30,2010 and 2009.

 

Wedo not direct the day-to-day operations and selection process of individualsecurities and investments, and, accordingly, we have retained the professionalservices of investment management organizations to fulfill those tasks. Theinvestment management organizations have investment discretion over the assetsplaced under their management. We provide each investment manager with specificinvestment guidelines by asset class. The table below presents the ranges foreach major category of the plans’ assets at September 30, 2010:

 

| **Asset Category** | ** ** | **Range**            | ** ** |
|-------------------------|------------|----------------------|------------|
| Equity securities       |       | 40% to 80% |       |
| Debt securities         |       | 25% to 60% |       |
| Real estate and cash    |       | 0% to 10%  |       |

 

NOTE9—LEGAL MATTERS

 

In1998, the Ministry of Defense for the Armed Forces of the Islamic Republic ofIran obtained a United States District Court judgment enforcing an arbitrationaward in its favor against us of $2.8 million, plus costs and interest relatedto a contract awarded to us by Iran in 1977. Both parties appealed to the 9th Circuit Courtof Appeals, where the cases are awaiting scheduling for oral argument.  Several potential lienors of Iran’s judgmenthave filed liens but have not obtained valid court orders enforcing theliens.  We are not aware whether any suchclaimants against Iran’s judgment have received Terrorism Risk Insurance Actfunds (which would make their claims unenforceable).  Under a 1979 Presidential executive order,all transactions by United States citizens with Iran are prohibited.  Therefore, even if Iran were to prevail inthe 9th Circuit litigation, it is unlikely that wewould be permitted to pay any amount to Iran. Payments to valid lienors could potentially be enforced, so in aprevious year we recorded a liability for the amount of the judgment and arecontinuing to accrue interest.

 

We are not a party to any other material pending proceedings and weconsider all other matters to be ordinary proceedings incidental to thebusiness. We believe the outcome of these proceedings and the proceedingsdescribed above will not have a materially adverse effect on our financialposition.

 

NOTE10—BUSINESS SEGMENT INFORMATION

 

Description of the types of products and services from which eachreportable segment derives its revenues:

 

Wehave three primary business segments: Cubic Transportation Systems (CTS), CubicDefense Systems (CDS) and Mission Support Services (MSS). CTS designs,produces, installs and services electronic revenue collection systems for masstransit projects, including railways and buses. CDS performs work under U.S.and foreign government contracts relating to electronic defense systems andequipment.  Products include customizedrange instrumentation and training systems, simulators, communications andsurveillance systems, surveillance receivers, power amplifiers,  avionics systems, multi-band communicationtracking devices, and cross domain hardware solutions to address multi-levelsecurity requirements.  MSS providescomputer simulation training, development of training doctrine, live trainingsupport and field operations and maintenance services.

 

60

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CUBICCORPORATION

 

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS—Continued

 

NOTE10—BUSINESS SEGMENT INFORMATION—Continued

 

Measurement of segment profit or loss and segment assets:

 

We evaluate performance and allocate resources based on total segmentoperating profit or loss. The accounting policies of the reportable segmentsare the same as those described in the summary of significant accountingpolicies. Intersegment sales and transfers are immaterial.

 

Factors management used to identify our reportable segments:

 

Ourreportable segments are business units that offer different products andservices and are each managed separately. Operating results for each segmentare reported separately to senior corporate management to make decisions as tothe allocation of corporate resources and to assess performance.

 

Businesssegment financial data is as follows:

 
| **Years ended September 30,** | ** ** | **2010**               | ** ** | **2009** | ** ** | **2008** | ** ** |
|----------------------------------------------|------------|------------------------|------------|----------|------------|----------|------------|
| ** **                                   | ** ** | **(in millions)** | ** ** |
| **Sales:**                                   |       |                   |       |     |       |     |       |
| Transportation Systems                       |       | $                      | 386.0      |     | $          | 303.4    |       | $ | 272.3 |   |
| Defense Systems                              |       | 362.8                  |       | 285.4    |       | 275.3    |       |
| Mission Support Services                     |       | 443.3                  |       | 424.4    |       | 332.5    |       |
| Other                                        |       | 2.1                    |       | 3.5      |       | 1.0      |       |
| Total sales                                  |       | $                      | 1,194.2    |     | $          | 1,016.7  |       | $ | 881.1 |   |
|                                         |       |                   |       |     |       |     |       |
| **Operating income:**                        |       |                   |       |     |       |     |       |
| Transportation Systems                       |       | $                      | 54.7       |     | $          | 44.1     |       | $ | 43.0 |   |
| Defense Systems                              |       | 28.7                   |       | 19.0     |       | (9.5     | )          |
| Mission Support Services                     |       | 26.5                   |       | 27.9     |       | 27.8     |       |
| Restructuring activity                       |       | —                 |       | —   |       | (6.2     | )          |
| Unallocated corporate expenses and other     |       | (4.4                   | )          | (6.3     | )          | (1.8     | )          |
| Total operating income                       |       | $                      | 105.5      |     | $          | 84.7     |       | $ | 53.3 |   |
|                                         |       |                   |       |     |       |     |       |
| **Assets:**                                  |       |                   |       |     |       |     |       |
| Transportation Systems                       |       | $                      | 164.4      |     | $          | 172.6    |       | $ | 144.5 |   |
| Defense Systems                              |       | 151.0                  |       | 157.2    |       | 206.1    |       |
| Mission Support Services                     |       | 124.4                  |       | 142.1    |       | 151.1    |       |
| Corporate and other                          |       | 416.3                  |       | 284.4    |       | 139.6    |       |
| Total assets                                 |       | $                      | 856.1      |     | $          | 756.3    |       | $ | 641.3 |   |

 

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CUBICCORPORATION

 

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS—Continued

 

NOTE10—BUSINESS SEGMENT INFORMATION—Continued

 
| **Years ended September 30,** | ** ** | **2010**               | ** ** | **2009** | ** ** | **2008** | ** ** |
|----------------------------------------------|------------|------------------------|------------|----------|------------|----------|------------|
| ** **                                   | ** ** | **(in millions)** | ** ** |
| **Depreciation and amortization:**           |       |                   |       |     |       |     |       |
| Transportation Systems                       |       | $                      | 3.5        |     | $          | 2.4      |       | $ | 1.8 |   |
| Defense Systems                              |       | 4.8                    |       | 6.0      |       | 5.7      |       |
| Mission Support Services                     |       | 5.2                    |       | 6.2      |       | 1.7      |       |
| Corporate and other                          |       | 1.0                    |       | 1.0      |       | 0.5      |       |
| Total depreciation and amortization          |       | $                      | 14.5       |     | $          | 15.6     |       | $ | 9.7 |   |
|                                         |       |                   |       |     |       |     |       |
| **Expenditures for long-lived  assets:**     |       |                   |       |     |       |     |       |
| Transportation Systems                       |       | $                      | 1.8        |     | $          | 1.2      |       | $ | 1.0 |   |
| Defense Systems                              |       | 4.4                    |       | 3.3      |       | 4.7      |       |
| Mission Support Services                     |       | 0.3                    |       | —   |       | 0.1      |       |
| Corporate and other                          |       | 0.4                    |       | 0.8      |       | 2.3      |       |
| Total expenditures for long-lived assets     |       | $                      | 6.9        |     | $          | 5.3      |       | $ | 8.1 |   |
|                                         |       |                   |       |     |       |     |       |
| **Geographic Information:**                  |       |                   |       |     |       |     |       |
| Sales (a):                                   |       |                   |       |     |       |     |       |
| United States                                |       | $                      | 774.3      |     | $          | 666.2    |       | $ | 532.3 |   |
| United Kingdom                               |       | 216.3                  |       | 179.2    |       | 189.6    |       |
| Canada                                       |       | 8.1                    |       | 18.5     |       | 25.4     |       |
| Australia                                    |       | 60.6                   |       | 39.9     |       | 43.0     |       |
| Middle East                                  |       | 26.9                   |       | 19.3     |       | 37.8     |       |
| Far East                                     |       | 81.6                   |       | 61.5     |       | 38.1     |       |
| Other                                        |       | 26.4                   |       | 32.1     |       | 14.9     |       |
| Total sales                                  |       | $                      | 1,194.2    |     | $          | 1,016.7  |       | $ | 881.1 |   |

 

(a) Sales areattributed to countries or regions based on the location of customers.

 
| Long-lived assets, net:      |   |   |   |   |   |   |   |
|------------------------------|--------|--------|--------|--------|--------|--------|--------|
| United States                |   | $      | 41.0   |   | $      | 43.7   |   | $ | 47.4 |   |
| United Kingdom               |   | 9.5    |   | 10.3   |   | 12.0   |   |
| Other foreign countries      |   | 2.2    |   | 1.9    |   | 1.9    |   |
| Total long-lived assets, net |   | $      | 52.7   |   | $      | 55.9   |   | $ | 61.3 |   |

 

MSSand CDS segment sales include $685.0 million, $592.1 million and $477.8 millionin 2010, 2009 and 2008, respectively, of sales to U.S. governmentagencies.  Transportation systems salesin 2008 included $110.7 million of sales to TranSys. No other single customeraccounts for 10% or more of our revenues.

 

62

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CUBICCORPORATION

 

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS—Continued

 

NOTE 11—SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

 

Thefollowing is a summary of our quarterly results of operations for the yearsended September 30, 2010 and 2009:

 
| ** **           | ** ** | **Quarter Ended**                                             | ** ** |
|----------------------|------------|--------------------------------------------------------------------|------------|
| ** **           | ** ** | **December 31**                                               | ** ** | **March 31** | ** ** | **June 30** | ** ** | **September 30** | ** ** |
| ** **           | ** ** | **(in thousands, except per share data)** | ** ** |
| Fiscal 2010          |       |                                                               |       |   |   |   |   |   |   |
| Net sales            |       | $                                                                  | 250,684    |   | $ | 264,559 |   | $ | 331,240 |   | $ | 347,706 |   |
| Operating income     |       | 20,374                                                             |       | 26,132 |   | 32,636 |   | 26,383 |   |
| Net income           |       | 13,663                                                             |       | 17,391 |   | 22,702 |   | 16,880 |   |
| Net income per share |       | 0.51                                                               |       | 0.65 |   | 0.85 |   | 0.63 |   |
|                 |       |                                                               |       |   |   |   |   |   |   |
| Fiscal 2009          |       |                                                               |       |   |   |   |   |   |   |
| Net sales            |       | $                                                                  | 244,851    |   | $ | 242,873 |   | $ | 248,177 |   | $ | 280,756 |   |
| Operating income     |       | 21,130                                                             |       | 21,809 |   | 21,649 |   | 20,120 |   |
| Net income           |       | 14,183                                                             |       | 14,217 |   | 14,908 |   | 12,378 |   |
| Net income per share |       | 0.53                                                               |       | 0.53 |   | 0.56 |   | 0.46 |   |

 

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

TheBoard of Directors and Shareholders of Cubic Corporation

 

Wehave audited the accompanying consolidated balance sheets of Cubic Corporationas of September 30, 2010 and 2009, and the related consolidated statementsof income, shareholders’ equity, and cash flows for each of the three years inthe period ended September 30, 2010. These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that our auditsprovide a reasonable basis for our opinion.

 

Inour opinion, the financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of Cubic Corporation at September 30,2010 and 2009, and the consolidated results of its operations and its cashflows for each of the three years in the period ended September 30, 2010,in conformity with U.S. generally accepted accounting principles.

 

Asdiscussed in Note 1 to the consolidated financial statements, the Companychanged its method of accounting for revenue recognition with the adoption ofamendments to the Financial Accounting Standards Board Accounting StandardsCodification resulting from Accounting Standards Update No.  2009-13, *Multiple-Deliverable Revenue Arrangements*, and AccountingStandards Update No. 2009-14, *Certain RevenueArrangements That Include Software Elements*, both adopted effective October 1,2009.

 

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), Cubic’s internal control overfinancial reporting as of September 30, 2010, based on criteriaestablished in Internal Control-Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission and our report dated December 8,2010 expressed an unqualified opinion thereon.

 
|                   | /s/    ERNST &  YOUNG LLP |
|------------------------|--------------------------------------------------------|
|                   |                                                   |
| San Diego, California  |                                                   |
| December 8,  2010 |                                                   |

 

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**Item 9.****          ****DISAGREEMENTSON ACCOUNTING AND FINANCIAL DISCLOSURE**.

 

None.

 

**Item 9a. CONTROLS AND PROCEDURES**.

 

***Evaluation of Disclosure Controls andProcedures*** — We maintain disclosure controls and procedureswhich are designed to ensure that information required to be disclosed in ourperiodic filings with the SEC is recorded, processed, summarized and reportedwithin the time periods specified in the SEC’s rules and forms. Ourdisclosure controls and procedures are also designed to ensure that informationis accumulated and communicated to our management, including our ChiefExecutive Officer (CEO) and Chief Financial Officer (CFO), as appropriate, toallow timely decisions regarding required disclosure. In designing andevaluating such controls and procedures, we recognize that any controls andprocedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives, andmanagement necessarily is required to use its judgment in evaluating thecost-benefit relationship of possible controls and procedures.

 

Weperformed an evaluation of the effectiveness of our disclosure controls andprocedures as of September 30, 2010. The evaluation was performed with theparticipation of senior management of each business segment and key corporatefunctions, and under the supervision of the CEO and CFO. Based on ourevaluation, we concluded that our disclosure controls and procedures wereeffective as of September 30, 2010.

 

***Management’s Report on Internal Control over Financial Reporting***

 

Weare responsible for establishing and maintaining adequate internal control overfinancial reporting for the company. In order to evaluate the effectiveness ofinternal control over financial reporting, as required by Section 404 ofthe Sarbanes-Oxley Act, we conducted an assessment, including testing, usingthe criteria in Internal Control — Integrated Framework, issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO). Oursystem of internal control over financial reporting is designed to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withgenerally accepted accounting principles. Because of its inherent limitations,internal control over financial reporting may not prevent or detectmisstatements. Also, projections of any evaluation of effectiveness to futureperiods are subject to the risk that controls may become inadequate because ofchanges in conditions, or that the degree of compliance with the policies orprocedures may deteriorate.

 

Basedon our assessment, we concluded that we maintained, in all material respects,effective internal control over financial reporting as of September 30,2010, based on criteria in Internal Control — Integrated Framework, issued byCOSO. Our internal control over financial reporting as of September 30,2010, has been audited by Ernst & Young, LLP, an independentregistered public accounting firm, as stated in their report which follows.

 

***Changes in Internal Control over FinancialReporting*** — There were no changes in our internal controlover financial reporting that occurred during the fourth fiscal quarter of 2010that have materially affected, or are reasonably likely to materially affectour internal control over financial reporting.

 

65

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

 

TheBoard of Directors and Shareholders of Cubic Corporation

 

Wehave audited Cubic Corporation’s internal control over financial reporting asof September 30, 2010, based on criteria established in InternalControl—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (the COSO criteria). Cubic Corporation’smanagement is responsible for maintaining effective internal control overfinancial reporting, and for its assessment of the effectiveness of internalcontrol over financial reporting included in the accompanying Management’sReport on Internal Control over Financial Reporting. Our responsibility is toexpress an opinion on the company’s internal control over financial reportingbased on our audit.

 

Weconducted our audit in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in allmaterial respects. Our audit included obtaining an understanding of internalcontrol over financial reporting, assessing the risk that a material weaknessexists, testing and evaluating the design and operating effectiveness ofinternal control based on the assessed risk, and performing such otherprocedures as we considered necessary in the circumstances. We believe that ouraudit provides a reasonable basis for our opinion.

 

Acompany’s internal control over financial reporting is a process designed toprovide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles. A company’s internal controlover financial reporting includes those policies and procedures that (1) pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Becauseof its inherent limitations, internal control over financial reporting may not preventor detect misstatements.  Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

 

Inour opinion, Cubic Corporation maintained, in all material respects, effectiveinternal control over financial reporting as of September 30, 2010, basedon the COSO criteria.

 

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the consolidated balance sheets ofCubic Corporation as of September 30, 2010 and 2009, and the relatedstatements of income, shareholders’ equity, and cash flows for each of thethree years in the period ended September 30, 2010 of Cubic Corporationand our report dated December 8, 2010 expressed an unqualified opinion thereon.

 
|                   | /s/    ERNST &  YOUNG LLP |
|------------------------|--------------------------------------------------------|
|                   |                                                   |
| San  Diego, California |                                                   |
| December 8,  2010 |                                                   |

 

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**PART III**

 

**Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT**.

 

Certain information regarding directors and executive officers isincorporated herein by reference from our definitive Proxy Statement, whichwill be filed no later than 30 days prior to the date of the Annual Meeting ofShareholders.

 

We have adopted a code of ethics that applies to our principalexecutive officer, principal financial officer, and principal accountingofficer.  Such code of ethics appears onour web site at: http://www.cubic.com/corp1/invest/governance.html.

 

**Item 11. EXECUTIVE COMPENSATION**.

 

Information regarding executive compensation is incorporated herein byreference from our definitive Proxy Statement, which will be filed no laterthan 30 days prior to the date of the Annual Meeting of Shareholders.

 

**Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**.

 

Information regarding security ownership of certain beneficial ownersand management is incorporated herein by reference from our definitive ProxyStatement, which will be filed no later than 30 days prior to the date of theAnnual Meeting of Shareholders.

 

**Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**.

 

Information regarding certain relationships and related transactions isincorporated herein by reference from our definitive Proxy Statement, whichwill be filed no later than 30 days prior to the date of the Annual Meeting ofShareholders.

 

**Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.**

 

Information regarding principal accountant fees and services isincorporated herein by reference from our definitive Proxy Statement, whichwill be filed no later than 30 days prior to the date of the Annual Meeting ofShareholders.

 

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**PART IV**

 

**Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES**

 

(a)                                  Documents filedas part of this Report:

 

(1)                                  The followingconsolidated financial statements of Cubic Corporation, as referenced in Item8:

 
| Consolidated Balance Sheets   September 30, 2010 and 2009                                                        |
|-----------------------------------------------------------------------------------------------------------------------|
|                                                                                                                  |
| Consolidated Statements of Income   Years ended September 30, 2010, 2009 and 2008                                |
|                                                                                                                  |
| Consolidated Statements of Changes in Shareholders’  Equity   Years ended September 30, 2010, 2009 and 2008 |
|                                                                                                                  |
| Consolidated Statements of Cash Flows   Years ended September 30, 2010, 2009 and 2008                            |
|                                                                                                                  |
| Notes to Consolidated Financial Statements   September 30, 2010                                                  |

 

(2)                                  The followingconsolidated financial statement schedules of Cubic Corporation andsubsidiaries, as referenced in Item 15(d):

 

None are required under the applicable accounting rules andregulations of the Securities and Exchange Commission.

 

(b)                                 Exhibits:

 
| 3.1  | Amended  and Restated Certificate of Incorporation. Incorporated by reference from  Form 10-Q for the quarter ended June 30, 2006, file  No. 001-08931, Exhibit 3.1.  |
|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.2  | Amended  and Restated Bylaws. Attached hereto as Exhibit 3.2.                                                                                                                        |
| 10.1 | 2005  Equity Incentive Plan. Incorporated by reference from Form 10-K filed  for the fiscal year ended September 30, 2005, file No. 001-08931,  Exhibit 10.1.         |
| 10.2 | Amended  Transition Protection Plan. Incorporated by reference from Form 10-K  filed for the fiscal year ended September 30, 2007, file  No. 001-08931, Exhibit 10.2. |
| 10.3 | Credit  Agreement dated December 16, 2009. Incorporated by reference from  Form 10-Q for the quarter ended December 31, 2009, file  No. 001-08931, Exhibit 10.3  |
| 10.4 | Revised  Deferred Compensation Plan. Incorporated by reference to Form 10-Q for  the quarter ended March 31, 2008, file No. 001-08931,  Exhibit 10.4.                 |
| 10.5 | Compensatory  Arrangements of Certain Officers. Incorporated by reference to Form 8-K  filed February 23, 2010, file No. 001-08931                                         |
| 10.6 | Indemnity  Agreement. Incorporated by reference to Form 8-K filed May 3, 2010,  file No. 001-08931, Exhibit 10.1.                                                     |
| 21.1 | List  of Subsidiaries                                                                                                                                                                     |
| 23.1 | Consent  of Independent Registered Accounting Firm.                                                                                                                                       |
| 31.1 | Section 302  Certifications.                                                                                                                                                         |
| 32.1 | Section 906  Certifications.                                                                                                                                                         |

 

68

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**SIGNATURES**

 

Pursuant to the requirements of Sections 13 or 15(d) of theSecurities Exchange Act of 1934, the Registrant has duly caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized:

 
| (Registrant) |   | CUBIC CORPORATION           |   |   |
|--------------|--------|-----------------------------|--------|--------|
|         |   |                        |   |   |
|         |   |                        |   |   |
| *12/7/10*    |   | /s/  Walter J. Zable        |   |   |
| Date         |   | WALTER  J. ZABLE, President |   |   |

 

Pursuant to the requirements of the Securities Exchange Act of 1934,this report has been signed below by the following persons on behalf of theRegistrant and in the capacities and on the dates indicated:

 

 
| *12/7/10* | * * | /s/  Walter J. Zable                | * * | *12/7/10* | * * | /s/  William W. Boyle                |
|-----------|----------|-------------------------------------|----------|-----------|----------|--------------------------------------|
| Date      |     | WALTER  J. ZABLE,                   |     | Date      |     | WILLIAM  W. BOYLE,                   |
|      |     | President,  Chief Executive Officer |     |      |     | Director,  Senior Vice President and |
|      |     | and  Chairman of the Board of       |     |      |     | Chief  Financial Officer             |
|      |     | Directors                           |     |      |     |                                 |
|      |     |                                |     |      |     |                                 |
|      |     |                                |     |      |     |                                 |
| *12/7/10* | * * | /s/  Walter C. Zable                | * * | *12/7/10* | * * | /s/  Mark A. Harrison                |
| Date      |     | WALTER  C. ZABLE,                   |     | Date      |     | MARK  A. HARRISON,                   |
|      |     | Vice  President and Vice Chairman   |     |      |     | Vice  President and Corporate        |
|      |     | of  the Board of Directors          |     |      |     | Controller  (Principal Accounting    |
|      |     |                                |     |      |     | Officer)                             |
|      |     |                                |     |      |     |                                 |
|      |     |                                |     |      |     |                                 |
| *12/7/10* | * * | /s/  Raymond E. Peet                | * * | *12/7/10* | * * | /s/  John H. Warner                  |
| Date      |     | RAYMOND  E. PEET,                   |     | Date      |     | JOHN  H. WARNER,                     |
|      |     | Director                            |     |      |     | Director                             |
|      |     |                                |     |      |     |                                 |
|      |     |                                |     |      |     |                                 |
| *12/7/10* | * * | /s/  Robert S. Sullivan             | * * | *12/7/10* | * * | /s/  Bruce G. Blakley                |
| Date      |     | ROBERT  S. SULLIVAN,                |     | Date      |     | BRUCE  G. BLAKLEY,                   |
|      |     | Director                            |     |      |     | Director                             |
|      |     |                                |     |      |     |                                 |
|      |     |                                |     |      |     |                                 |
| *12/7/10* |     | /s/  Edwin A. Guiles                |     |      |     |                                 |
| Date      |     | EDWIN  A. GUILES,                   |     |      |     |                                 |
|      |     | Director                            |     |      |     |                                 |

 

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