** **

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 

**ANNUAL REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES**

**EXCHANGE ACT OF 1934**

** **

**For the Fiscal Year Ended September 30, 2009**

 

**Commission File Number  1-8931**

 

**CUBIC CORPORATION**

Exact Name of Registrant as Specified in its Charter

 

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

 

**9333 Balboa Avenue**

**San Diego, California 92123**

**Telephone (858) 277-6780**

 

Securitiesregistered 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                 |

 

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

 

Indicate by check mark ifthe registrant is a well known seasoned issuer, as defined in Rule 405 of theSecurities Act.  Yes o  No x

 

Indicated by check markif the registrant is not required to file reports pursuant to Section 13 orSection 15(d) of the Act.  Yes o  No x

 

Indicate by check markwhether the Registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months, and (2) has been subject to such filing requirements for the past 90days.  Yes x  No o

 

Indicate by check mark whetherthe registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and postedpursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding12 months (or for such shorter period that the registrant was required tosubmit and post such files).  Yes o  No o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of the registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K. Yes o  No x

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See definition of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act (check one).

 

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

 

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

 

The aggregatemarket value of 15,848,189 shares of voting stock held by non-affiliates of theregistrant was: $401,434,627 as of March 31, 2009, based on the closing stockprice on that date.

 

Number of sharesof common stock outstanding as of November 12, 2009 including shares held byaffiliates is: 26,731,987 (after deducting 8,945,120 shares held as treasurystock).

 

**DOCUMENTS INCORPORATED BY REFERENCE:**

 

Portions of theRegistrant’s Proxy Statement for its 2010 Annual Meeting of Shareholders to beheld on February 23, 2010, are incorporated by reference into Part III of thisAnnual Report on Form 10-K. 

 

 

 

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**PART I**

 

**Item 1.    BUSINESS.**

 

**GENERAL**

 

CUBIC CORPORATION (“Cubic”),was incorporated in the State of California in 1949 and began operations in1951.  In 1984, we moved our corporatedomicile to the State of Delaware.

 

We design, develop,manufacture and install products and replacement parts which are mainlyelectronic in nature, such as:

 

Equipment for usein customized military range instrumentation, training and applicationssystems, simulators, communications and surveillance systems, surveillancereceivers, power amplifiers, and avionics systems.

 

Automated revenuecollection systems, including contactless smart cards, passenger gates, centralcomputer systems and ticket vending machines for mass transit networks,including rail systems, buses, and parking applications.

 

We also perform a varietyof services, such as computer simulation training, distributed interactivesimulation, military education, development of military doctrine, as well asfield operations and maintenance.

 

During fiscal year 2009,approximately 58% of our total business was conducted, either directly orindirectly, with various agencies of the United States government.  Most of the remainder of our revenue was fromlocal, regional and foreign governments or agencies.

 

Cubic’s internet addressis www.Cubic.com. The content on our website is available for informationpurposes only. It should not be relied upon for investment purposes, nor is itincorporated by reference into this Form 10-K. We make available free ofcharge 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**

 

Information regarding theamounts of revenue, operating profit and loss and identifiable assetsattributable to each of our business segments, is set forth in Note 10 to theConsolidated Financial Statements for the year ended September 30, 2009.Additional information regarding the amounts of revenue and operating profitand loss attributable to major classes of products and services is set forth inManagement’s Discussion and Analysis which follows at Item 7.

 

**MISSIONSUPPORT SERVICES SEGMENT**

 

Cubic Mission SupportServices (MSS) is a leading provider of training, operations, maintenance,technical, and other support services to the U.S. Government and alliednations, with an emphasis on military education.  MSS comprises approximately 5,000 Cubicemployees working at more than 130 locations in 20 nations throughout the world.  Our people serve with clients in actualtraining and operational environments to help prepare and support forcesthrough provision of comprehensive training, exercises, education, operational,and logistical assistance to meet the full scope of their assigned missions.  The scope of mission support that Cubicprovides includes training and rehearsal for both small and large scale combatoperations; training and preparation of military advisor teams; mobilizationand demobilization of forces prior to and following deployment; combat and materialdevelopment; military staff augmentation, logistics and maintenance support forfielded and deployed systems; special operations; peacekeeping; consequencemanagement; and humanitarian assistance operations worldwide.  We plan, prepare, execute and documentrealistic and focused mission rehearsal exercises (using both live andcomputer-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.

 

InJuly 2008, we acquired all outstanding capital stock of the privately-heldOmega Training Group, Inc. (Omega). Omega provides training, testing, analysis, logistics and staffingservices to U.S. Army and other Services at Fort Benning, Fort Bliss, FortJackson, Fort Hood, and six other locations. Founded in 1990, Omega nowoperates as the Omega Training Division of Mission Support Services. The Omegadivision now has approximately 1,000 employees.

 

U.S. government servicecontracts are typically awarded on a competitive basis with options formultiple years.  In this competitivemarket, Cubic is viewed as a premier service provider and formidablecompetitor.  We typically compete asprime contractors to the government, but also team with other companies,depending on the skills required.  Muchof our early work centered on battle command training and simulation, in whichmilitary commanders are taught to make correct decisions in battlefieldsituations.  More recently, our businessbase has broadened to include integrated live, virtual, and constructivetraining support; advanced distance learning and other professional militaryeducation; comprehensive logistics and maintenance support; weapons effects andanalytical modeling; intelligence analysis; homeland security training andexercises; training and preparation of U.S. Army and Marine Corps foreignservice advisor teams; and military force modernization. Additionally, wesupport the deployment and re-deployment of both active and reserve componentforces at U.S. Army Mobilization Centers at Forts Bliss and Hood in Texas andat several other U.S. locations; and we provide in-country logistics,maintenance, operational, and training support to U.S. Forces deployed inKuwait, Iraq, and Afghanistan.

 

Cubic’s contracts includeproviding mission support services to three of the Army’s major Combat TrainingCenters (CTCs): the Joint Readiness Training Center (JRTC) as prime contractor;and to the National Training Center (NTC) and Battle Command Training Program(BCTP) as a principal subcontractor. These services include planning, executing, and documenting large scaleexercises and mission rehearsals aimed at stressing both active and reserve U.S.forces in situations as close to actual combat as possible.

 

At U.S. Joint ForcesCommand (USJFCOM), Cubic is a principal member of the contractor team thatsupports and helps manage all aspects of the operations of the JointWarfighting Center (JWFC), including support to worldwide exercises and thedevelopment and fielding of the Joint National Training Capability (JNTC).  We provide similar technical and managementsupport services to the U.S. Army’s National 

 

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Simulation Center (NSC)at Fort Leavenworth, Kansas. Under the Marine Air Ground Task Force (MAGTF)Training Systems Support (MTSS) contract, Cubic provides comprehensive trainingand exercise support to U.S. Marine Corps forces worldwide, includingreal-world mission rehearsals.  We haveplanned and executed virtually all Marine Corps simulation-based exercisesworldwide since 1998, directly preparing Marines for combat operations. Cubicprovides training and professional military education support to the U.S. Army’sQuartermaster Center and School, the Signal School and to the TransportationSchool. We also provide contractor maintenance and instructional supportnecessary to operate and maintain a wide variety of flight simulation andtraining systems, and other facilities worldwide for U.S. and allied forcesunder multiple long-term contracts. In addition, we provide a broad range ofoperational support to the U.S. Navy for Anti-Submarine Warfare (ASW)countermine operations and training.

 

Cubic initiated and hascontinued to operate the Korea Battle Simulation Center (KBSC) since itsinception in 1991.  KBSC prepares U.S.and allied forces in Korea to deal with mission situations that may develop intheir areas of responsibility.  Our KBSCcontract includes support to the world’s largest and most complexsimulation-based training events.

 

At the U.S. Army I CorpsBattle Simulation Center, Cubic provides the technical and operationalexpertise necessary to support worldwide training, exercises, evaluations, andmission rehearsals for I Corps active and reserve component units, the newStryker brigades, other services, and joint commands.

 

Cubic supports theDefense Threat Reduction Agency (DTRA) with technology-based engineering andother services necessary to accomplish DTRA’s mission of predicting anddefeating the effects of chemical, biological, radiological, nuclear and highexplosive (CBRNE) weapons.  Cubicsupports DTRA with modeling and simulations to analyze, assess and predict theeffects of such weapons in combat and other environments. Additionally, Cubicprovides comprehensive support to help plan, manage, and execute DTRA’sworldwide CBRNE exercise program, which trains senior U.S. and allied civilianand military personnel, first responders, and other users of DTRA products.

 

Cubic has multiplecontracts with all U.S. Armed Services and other government agencies to improvethe quality and reach of training and education of individuals and small teamsup through collective training of large organizations. Cubic’s products andcapabilities include development and deployment of curriculum and relatedcourseware, computer-based training, knowledge management and distribution,advanced distance learning, serious games for training, and other advancededucation programs for U.S. and allied forces.

 

An important part ofCubic’s services business is to provide specialized teams of military expertsto advise the governments and militaries of the nations of the former WarsawPact and Soviet Union, and other former communist countries in thetransformation 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. MissionSupport Services also develops and operates battle simulation centers forselected countries in Central and Eastern Europe.

 

We believe thecombination and scope of Cubic’s growing mission support services and trainingsystems business is unique in the industry, permitting us to offer customers acomplete training and combat readiness capability from one source.

 

**Backlog —MSS**:

 

Funded sales backlog ofour MSS segment at September 30, 2009 was $207 million compared to $181million at September 30, 2008. Total backlog, including unfunded customer orders and options undermultiyear service contracts, was $856 million at September 30, 2009compared to $880 million at September 30, 2008. We expect thatapproximately $554 million of the September 30, 2009 total backlog willnot be completed by September 30, 2010.

 

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**DEFENSESYSTEMS SEGMENT**

 

Cubic Defense Systems(CDS) consists of two market-focused businesses: Training Systems andCommunications.  Our products includecustomized military range instrumentation systems, electro-optical systems,firearm simulation systems, communications and surveillance systems,surveillance receivers, power amplifiers, and avionics systems.  We market our capabilities directly tovarious U.S. government departments and agencies and foreign governments.  In addition, we frequently contract or teamwith other leading defense suppliers.

 

**TrainingSystems**

 

Our Training Systemsbusiness is a pioneer and market leader in the design, innovation, andmanufacture of immersive and instrumented training systems and products formilitary customers.  Immersive trainingsystems enable dismounted soldiers to train in a hyper-realistic virtualenvironment. Instrumented training systems are used for live training in airand ground combat domains, with weapons and other effects simulated byelectronics, 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.

 

Our training business isorganized into Air Combat and Ground Combat segments.   In Air Combat, Cubic was the initialdeveloper 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 to enjoy amarket leadership position based on the competitive award of a 10-year, $525million indefinite delivery/ indefinite quantity (IDIQ) contract in 2003,called P5, to provide advanced air combat training capability to the U.S. AirForce, Navy and Marine Corps.  We alsoreceived a $50 million development contract in 2007 to develop an internalversion of the P5 system for use on the F-35 Joint Strike Fighter. While mostof the latest ACMI systems are designed to operate in a “rangeless” environmentwe continue to support a number of legacy, fixed geographic ranges.  Many nations employ our ACMI systems for airto air combat training.

 

Ground Combat traininguses systems analogous to air ranges for ground force training, tacticalengagement simulation systems (generally known as MILES (Multiple IntegratedLaser 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 those that can operatesimultaneously in multiple simulation environments including live, virtual,constructive, and gaming domains.

 

Laser-based tacticalengagement simulation systems are used at combat training centers (CTC) topermit weapons to be used realistically, registering hits or kills, withoutlive ammunition. We supply MILES equipment as part of CTC contracts and as anindependent 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 U.S. and at ourNew Zealand-based wholly-owned subsidiary, Cubic Defence New Zealand.

 

At our Simulation SystemsDivision (SSD) in Orlando, FL, we produce immersive virtual training systems,employing actual or realistic weapons and systems together with visual imageryto simulate battle field environments. Also at SSD, we produce maintenancetrainers for combat systems and vehicles.

 

**Communications**

 

Our Communicationsbusiness is a supplier of secure data links, high power RF amplifiers,direction finding systems, remote video terminals, and search and rescueavionics for the U.S. military, government agencies, 

 

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and allied nations.  We supplied the air/ground secure data linkfor the U.S. Army/Air Force Joint STARS system during the 1980s, as well as theUnited Kingdom’s ASTOR program.  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

 

Our Personnel LocatorSystem (PLS) is standard equipment on U.S. aircraft with a search-rescue mission. PLS has been redesigned to interface with all modern search and rescuesystem standards.  We also supply highpower amplifiers, 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.

 

**RawMaterials — CDS**:

 

The principal rawmaterials used by CDS are sheet aluminum and steel, copper electrical wire, andcomposite products.  A significantportion of our end products are composed of purchased electronic components andsubcontracted parts and supplies. We procure these items primarily fromcommercial sources.  In general, suppliesof raw materials and purchased parts are adequate to meet our requirements.

 

**Backlog —CDS**:

 

Funded sales backlog ofCDS at September 30, 2009 was $556 million compared to $412 million at September 30,2008.  We expect that approximately $322million of the September 30, 2009 backlog will not be completed by September 30,2010.

 

**MSS andCDS Competitive Environment**:

 

Cubic’s broad defensebusiness portfolio means we compete with numerous companies, large and small,domestic and international.  Well knowncompetitors include Lockheed Martin, Northrop Grumman, General Dynamics,Boeing, L3 Communications, and SAIC.  Inmany cases, we have also teamed with these same companies 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.

 

Projects must compete forfunding in the defense budget.  While theU.S. defense budget has seen above average increases in recent years, long-termgrowth will only occur in those segments that offer very high payoff and areconsistent with warfighting priorities and growing fiscal restraints.  The U.S. defense market today can becharacterized as highly dynamic, with priorities and funding shifting inreaction to, or anticipation of, world events much more rapidly than during theCold War or since.  Overarching militarypriorities include lighter, faster, more lethal forces with the ability andtraining to rapidly adapt to new situations based on superior knowledge of thebattle environment.  Superior knowledgeis enabled by systems that rapidly collect, process and disseminate the rightinformation to the right place at the right time, resulting in what DoD callsnetwork-centric warfare.  We believe ourtraining systems, training support and intelligence, surveillance andreconnaissance capabilities are well matched to these sustainable defensepriorities.

 

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**TRANSPORTATIONSYSTEMS SEGMENT**

 

Cubic Transportation Systems (CTS) is the leadingturnkey solution provider of automated fare collection systems for publictransport authorities worldwide.  Weprovide a range of service and system solutions for the bus, bus rapid transit,light rail, commuter rail, heavy rail, ferry and parking markets.  These solutions and services include systemdesign, central computer systems, equipment design and manufacturing,device-level software, integration, test, installation, warranty, maintenance,computer hosting services, call center services, card management anddistribution services, financial clearing and settlement, multi-applicationsupport and outsourcing services.  Inaddition, we design, develop and manufacture special technology components,such as smart card readers and magnetic ticket transports for use within oursuite of fare collection equipment consisting of on-bus solutions, accesscontrol solutions, vending solutions, retail and card issuing solutions, andmobile 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. / Baltimore/ 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.

 

Theseprograms provide a base of current business and the potential for additionalfuture business as the systems are expanded. In 1998, Transaction Systems Limited (TranSys), a company in which wehave a 37.5% ownership, was awarded a contract called “PRESTIGE” to outsourcethe London Transport fare collection services. This contract, now in its twelfth and final year, is the largestautomated fare collection contract ever awarded. In August 2008, Transport for London (TfL) notifiedTranSys that they would terminate the PRESTIGE fare collection system contractas of August 2010 in accordance with an early termination option in thecontract. To replace PRESTIGE, TfL,awarded a contract directly to Cubic for continuing the services until2013.  The new contract, with an initialvalue of £170 million ($272 million), will include all the existing operationalservices as well as laying the groundwork for future ticketing innovations suchas mobile phone ticketing and bank card ticketing.

 

**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 enablinginteroperability of multiple modes of transportation within a single networkedsystem as well as interoperability of multiple operators within a singlenetworked system.  As such, there is agrowing trend for regional ticketing systems, usually built around a largetransit agency and including neighboring operators, all sharing a commonregional smart card.  There is anemerging trend for other applications to be added to these regional systems toexpand the utility of the smart card, offering higher value and incentives tothe end users and lowering costs and creating new revenue streams for theregional system operators.  As a result,these regional systems have created opportunities for new levels of systemssupport and services including call center support, smart card production anddistribution, financial clearing and settlement and multi-applicationsupport.  In some cases, operators arechoosing to outsource the ongoing operations and commercialization of theseregional ticketing systems. This growing new market provides the opportunity toestablish lasting relationships and grow revenues and profits over thelong-term.

 

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**RawMaterials — CTS**:

 

Raw materials used by CTSinclude sheet steel, composite products, copper electrical wire and castings. Asignificant portion of our end product is composed of purchased electroniccomponents and subcontracted parts and supplies. We procure all of these itemsfrom commercial sources.  In general,supplies of raw materials and purchased parts are adequate to meet ourrequirements.

 

**Backlog —CTS**:

 

Funded sales backlog ofCTS at September 30, 2009 and 2008 amounted to $772 million and $481million, respectively. As mentioned above, in November 2008, TfL awardedus a new three year contract that includes virtually all of the servicescurrently being performed by TranSys through the major shareholders. The termof this contract is for the time period from August 2010 to August 2013,with a base value of approximately $272 million (£170 million). We expect thatapproximately $501 million of the September 30, 2009 backlog will not becompleted by September 30, 2010.

 

**CTSCompetitive 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.

 

**BUSINESS STRATEGY**

 

Ourobjective is to consistently grow sales, improve profitability and deliver attractivereturns on capital.  We intend to buildon our position with U.S. and foreign governments as the leading full spectrumsupplier of training systems and mission support services, grow our nicheposition as a supplier of data links and communications products, and maintainour position as the leading provider of integrated intermodal regional transitfare collection systems to transit authorities worldwide. Our strategies toachieve 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 repeat businesswith existing customers and expand our presence in the market through sales ofsimilar systems at “good value” to additional customers.

 

Anexample of this at MSS is the award in April 2009 of a five year contractto develop and conduct battle simulation training exercises for the UnitedStates Forces Korea. Cubic won its first simulation support contract for UnitedStates Forces Korea in July 1991 and with this new award continues theon-going relationship. Under this contract, we plan and conduct all facets ofcomputer-based battle simulation exercises for U.S., Republic of Korea, andother allied forces from platoon through theater-levels.

 

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Anexample of this at CDS is the recent award of a 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.

 

AtCTS we have had a continuous relationship with Transport for London (TfL) sincethe 1970’s.  Starting with a small trialof magnetic ticketing and gating in 1978, we have continuously delivered farecollection equipment and systems to TfL as its exclusive fare collection systemsupplier.  Today under the PRESTIGEcontract more than 27 million Oyster smart cards have been sold, making thisone of the largest transportation smart card systems in the world.  In August 2008 TfL notified our 37.5%owned company, TranSys, that it was exercising its option to terminate thePRESTIGE contract for convenience effective in August 2010.  Subsequently, TfL awarded Cubic the follow-oncontract to operate and maintain the Oyster system under a contract called theFuture Ticket Agreement, thus continuing Cubic’s relationship through2013.  Similarly, we are regionalizingintegrated fare collection systems in Washington D.C., New York, the SanFrancisco Bay Area, and Southern California.

 

**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 48% of oursales revenue in 2009 was from service work. We believe that a strong base ofservice work helps to enhance profitability and smooth the revenue fluctuationsinherent in systems work.

 

At CTS, ourmanaged service offerings are growing. Due to the technical complexities of operating electronic farecollection systems, transit agencies are turning to third parties to supplyoperational and maintenance services, such as regional settlement, cardmanagement and customer support services, that would otherwise be performed bythe transit agency. As a result, we are now providing managed services for morethan 20 transit authorities worldwide. We have also expanded our servicesthrough acquisitions. For example, our recent acquisition of certain assets ofVix ERG Pty Ltd. further expands our presence in the managed servicesmarket.  As part of that transaction, we acquireda fully functioning service operation in Concord, CA, specifically equipped tosupport public transport authorities with complete solutions for smart carddistribution and call center operations.

 

AtMSS, we offer a full suite of defense services including planning and supportfor theater and worldwide exercises, computer-based simulation, training andpreparation of foreign military advisor and transition teams, mobilization anddemobilization of deploying forces, range support and operations, logistics andmaintenance operations, curriculum and leadership development, forcemodernization, open source data collection and engineering and technicalsupport. Our integration of last year’s acquisition of Omega Training Group hasfurther expanded our defense services and customer base.  This acquisition enhances our position atseveral key U.S. Army installations, including Forts Bliss and Hood, in Texas,and at Fort Benning, Georgia, that should become even more important as theBase Realignment and Closing (BRAC) efforts are fully implemented. Thisacquisition has also enabled us to expand our logistics services offerings tothe U.S. Army.

 

**Maintain a Diversified Business Mix**

 

Wehave a diverse mix of business in our three segments. Approximately 58% 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 the PRESTIGE contract in London which represented about 10% of consolidatedsales in 2009.  No other single customerrepresented 10 percent or more of our revenues.

 

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**ExpandInternational Footprint**

 

Wehave developed a large global presence in our three business segments.  CTS has delivered over 400 projects in 40major markets on five continents.  InLondon, we continue to expand the city’s PRESTIGE system and pursue otherprojects with train operating companies in the Greater London area.  In Vancouver, we recently completed expansionof the automated fare collection system for the new Canada Line in advance ofthe 2010 Winter Olympics.  We are alsopursuing significant upcoming opportunities in Australia and Germany, and werecently established a new subsidiary in India.

 

CDSis actively marketing its domestic products and systems for export to themilitaries of U.S. allies.Recently,we were awarded contracts to provide our Engagement Skills Trainer to thegovernments of Lebanon and Kyrgyzstan. In addition, we were recently awarded a contract to supply a groundcombat training system to the Kingdom of Jordan.  We are also working to supply additionalground and air combat training systems to allied nations in key internationalmarkets.

 

Theexpansion of MSS to new locations further reinforces our internationalbusiness. For example, under a contract awarded by the Organization of AmericanStates, we are providing port security assessments and maritime securitytraining in the independent Caribbean island nations of Trinidad and Tobago,and Saint Vincent and the Grenadines, and at other locations. In addition, wewere recently awarded a new competitive Defense Department contract by the U.S.Africa Command headquartered in Stuttgart, Germany. Additionally, we wereawarded a position on a new State Department contract to providepeacekeeping-related services to selected African nations.

 

**Pursue Strategic Acquisitions**

 

Weare focused on finding attractive acquisitions to enhance our marketpositions.  We look for specific growthopportunities at CDS, MSS and CTS, and adjacent markets in smart cards andsecurity.  In 2009, we acquired theConcord operations center and licenses on select software from the U.S.subsidiary of Australia-based Vix ERG Pty Ltd. The acquired assets will add approximately $20 million in annualrevenues and expand our services business to transit agencies in the SanFrancisco Bay area, Boston, Ventura, and Las Vegas.  In addition, approximately 125 ERG employeeshave joined Cubic from ERG’s U.S. operations and engineering operations inPerth, Australia.

 

**OTHER MATTERS**

 

We pursue a policy ofseeking patent protection for our products where deemed advisable, but do notregard ourselves as materially dependent on patents for the maintenance of ourcompetitive position.

 

We do not engage in anybusiness that is seasonal in nature. Because our revenues are generatedprimarily from work on contracts performed by our employees and subcontractors,first quarter revenues tend to be lower than the other three quarters due toour policy of providing many of our employees seven holidays in the firstquarter, compared to one or two in each of the other quarters of the year. Thisis not necessarily a consistent pattern as it depends upon actual activities inany given year.

 

The cost ofcompany sponsored research and development (R&D) activities was $8.2million, $12.2 million and $5.2 million in 2009, 2008 and 2007, respectively.We do not rely heavily on internally funded R&D, as most of our new productdevelopment occurs in conjunction with the performance of work on ourcontracts. The amount of contract-required product development activity was $54million in 2009 compared to $55 million and $66 million in 2008 and 2007,respectively; however, these costs are included in cost of sales as they aredirectly related to contract performance.

 

We comply with federal,state and local laws and regulations regarding discharge of materials into theenvironment and the handling and disposal of materials classed as hazardousand/or toxic. Such compliance has no material effect upon our capitalexpenditures, earnings or competitive position.

 

10

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We employed approximately7,400 persons at September 30, 2009.

 

Our domestic products andservices are sold almost entirely by our employees.  Overseas sales are made either directly orthrough representatives or agents.

 

**Item 1A.    RISKFACTORS.**

 

The following are some of the factors webelieve could cause our actual results to differ materially from expected andhistorical results.  Additional risks and uncertainties notpresently known to us, or that we currently see as immaterial, may also harmour business.  If any of the risks oruncertainties described below or any such additional risks and uncertaintiesactually occur, our business, results of operations or financial conditioncould be materially and adversely affected.

 

***We depend ongovernment contracts for substantially all of our revenues and the loss ofgovernment contracts or a delay or decline in funding of existing or futuregovernment contracts could adversely affect our sales and cash flows and ourability 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 2009. Although these various government agencies are subject to common budgetarypressures and other factors, many of our various government customers exerciseindependent 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.

 

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

 

·      re-allocationof government resources as the result of actual or threatened terrorism orhostile activities or for other reasons;

 

·      budgetconstraints affecting government spending generally, or specific departments oragencies such as U.S. or foreign defense and transit agencies and regionaltransit agencies, and changes in fiscal policies or a reduction of availablefunding;

 

·      Disruptionsin our customers’ ability to access funding from capital markets;

 

·      curtailmentof government’s use of outsourced service providers;

 

·      theadoption of new laws or regulations pertaining to government procurement;

 

·      governmentappropriations delays or shutdowns;

 

·      suspensionor prohibition from contracting with the government or any significant agencywith which we conduct business;

 

·      impairmentof our reputation or relationships with any significant government agency withwhich we conduct business;

 

·      impairmentof our ability to provide third-party guarantees and letters of credit; and

 

·      delaysin the payment of our invoices by government payment offices.

 

***Government spendingpriorities may change in a manner adverse to our businesses.***

 

In thepast, 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 intelligence budgets generally, and spending 

 

11

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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 these appropriationsor the amount of new defense contracts awarded may affect our ability tocomplete 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 withgovernment agencies may be terminated or modified prior to completion, whichcould adversely affect our business.***

 

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:

 

·      terminateour existing contracts;

 

·      reducethe value of our existing contracts;

 

·      modifysome of the terms and conditions in our existing contracts;

 

·      suspendor permanently prohibit us from doing business with the government or with anyspecific government agency;

 

·      controland potentially prohibit the export of our products;

 

·      cancelor delay existing multiyear contracts and related orders if the necessary fundsfor contract performance for any subsequent year are not appropriated;

 

·      declineto exercise an option to extend an existing multiyear contract; and

 

·      claimrights in technologies and systems invented, 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.

 

In theevent that any of our contracts were to be terminated or adversely modified,there may be significant adverse effects on our revenues, operating costs andincome that would not be recoverable.

 

***Failure to retainexisting contracts or win new contracts under competitive bidding processes mayadversely affect our revenue.***

 

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:

 

·      theneed to compete against companies or teams of companies with more financial andmarketing resources and more experience in bidding on and performing majorcontracts than we have;

 

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·      theneed to compete against companies or teams of companies that may be long-term,entrenched incumbents for a particular contract for which we are competing andthat have, as a result, greater domain expertise and better customer relations;

 

·      theneed to compete to retain existing contracts that have in the past been awardedto us on a sole-source basis;

 

·      theU.S. Government’s increased emphasis on awarding contracts to small businessescould preclude us from bidding on certain work or reduce the scope of work wecan bid as a prime contractor;

 

·      theexpense and delay that may arise if our competitors protest or challenge newcontract awards;

 

·      theneed to bid on some programs in advance of the completion of their design,which may result in higher research and development expenditures, unforeseentechnological difficulties, or increased costs which lower our profitability;

 

·      thesubstantial cost and managerial time and effort, including design, developmentand marketing activities, necessary to prepare bids and proposals for contractsthat may not be awarded to us;

 

·      theneed to develop, introduce, and implement new and enhanced solutions to ourcustomers’ needs;

 

·      theneed to locate and contract with teaming partners and subcontractors; and

 

·      theneed to accurately estimate the resources and cost structure that will berequired to perform any fixed-price contract that we are awarded.

 

We maynot be afforded the opportunity in the future to bid on contracts that are heldby other companies and are scheduled to expire if the agency decides to extendthe existing contract.  If we are unableto win particular contracts that are awarded through the competitive biddingprocess, we may not be able to operate in the market for services that areprovided 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.

 

If weare unable to consistently retain existing contracts or win new contractawards, our business prospects, financial condition and results of operations willbe adversely affected.

 

***The U.S. Government’sincreased emphasis on awarding contracts to small businesses could increase thenumber of contracts we receive as a subcontractor to small businesses. Some ofthese small businesses may not be financially sound, which could adverselyaffect 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 a subcontractfails to perform, fails to bill the government properly or fails financially,we may have difficulty receiving timely payments or may incur bad debtwrite-offs if the small business is unable or unwilling to pay us for work weperform. This could result in significant adverse effects on our revenues,operating costs and cash flows.

 

***Government audits of ourcontracts could result in a material charge to our earnings and have a negativeeffect on our cash position 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.

 

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***Our internationalbusiness exposes us to additional risks, including exchange rate fluctuations,foreign tax and legal regulations and political or economic instability thatcould harm our operating results.***

 

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

 

·      devaluationsand fluctuations in currency exchange rates;

 

·      changesin foreign laws that adversely affect our ability to sell our products orservices or our ability to repatriate profits to the United States;

 

·      increasesor impositions of withholding and other taxes on remittances and other paymentsby foreign subsidiaries or joint ventures to us;

 

·      increasesin investment and other restrictions or requirements by foreign governments inorder to operate in the territory or own the subsidiary;

 

·      costsof compliance with local laws, including labor laws;

 

·      exportcontrol regulations and policies which govern our ability to supply foreigncustomers;

 

·      unfamiliarand unknown business practices and customs;

 

·      domesticand foreign government policies, including requirements to expend a portion ofprogram funds locally and governmental industrial cooperation requirements;

 

·      thecomplexity and necessity of using foreign representatives and consultants orbeing prohibited from such use;

 

·      theuncertainty of the ability of foreign customers to finance purchases;

 

·      impositionof tariffs or embargoes, export controls and other trade restrictions;

 

·      thedifficulty of management and operation of an enterprise in various countries;and

 

·      economicand geopolitical developments and conditions, including internationalhostilities, acts of terrorism and governmental reactions, inflation, traderelationships and military and political alliances.

 

Ourforeign subsidiaries generally conduct business in foreign currencies and enterinto contracts and make purchase commitments that are denominated in foreign currencies.   Accordingly, we are exposed to fluctuationsin exchange rates, which could have a significant impact on our results ofoperations.  We have no control over thefactors that generally affect this risk, such as economic, financial andpolitical events and the supply of and demand for applicable currencies.  While we use foreign exchange forward andoption contracts to hedge significant contract sales and purchase commitmentsthat are denominated in foreign currencies, our hedging strategy may notprevent us from incurring losses due to exchange fluctuations.

 

***Our operating margins maydecline under our fixed-price contracts if we fail to estimate accurately thetime and resources necessary to satisfy our obligations.***

 

Approximately71% of our revenues in 2009 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 forcivil or criminal penalties under a variety of complex laws and regulations,and changes in governmental regulations could adversely affect our business andfinancial position.***

 

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 

 

14

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applicablelaws could adversely affect our financial performance.  Any material failure to comply withapplicable laws could result in contract termination, price or fee reductionsor suspension or debarment from contracting. The more significant regulations include:

 

·      theFederal Acquisition Regulations and all department and agency supplements,which comprehensively regulate the formation, administration and performance ofU.S. government contracts;

 

·      theTruth in Negotiations Act and implementing regulations, which requirecertification and disclosure of all cost and pricing data in connection withcontract negotiations;

 

·      laws,regulations and executive orders restricting the use and dissemination ofinformation classified for national security purposes and the exportation ofcertain products and technical data;

 

·      regulationsof most state and regional agencies and foreign governments similar to thosedescribed above;

 

·      theSarbanes-Oxley Act of 2002; and

 

·      taxlaws and regulations in the U.S. and in other countries in which we operate.

 

***Our failure to identify,attract and retain qualified technical and management personnel could adverselyaffect our existing businesses.***

 

We maynot 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 significantcosts in protecting our intellectual property which could adversely affect ourprofit margins. Our inability to protect our patents and proprietary rightscould adversely 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 andadvisors.  These agreements may bebreached and remedies for a breach may not be sufficient to compensate us fordamages incurred.  We generally controland limit access to our product documentation and other proprietary information.  Other parties may independently develop ourknow-how or otherwise obtain access to our technology.

 

***We compete primarily forgovernment contracts against many companies that are larger, better capitalizedand better known than us.  If we areunable to compete effectively, our business and prospects will be adverselyaffected.***

 

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.

 

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***The terms of ourfinancing arrangements may restrict our financial and operational flexibility,including our ability to invest in new business opportunities.***

 

Wecurrently have unsecured borrowing arrangements.  The terms of these borrowing arrangementsinclude provisions that require and/or limit our levels of working capital,debt and net worth and coverage of fixed charges.  We also have provided performance guaranteesto various customers that include financial covenants including limits onworking capital, debt, tangible net worth and cash flow coverage.

 

Ourcurrent $150 million unsecured revolving credit facility expires in March 2010.  We are in the process of negotiating a newcredit facility and expect to pay higher interest rates and fees, and will besubject to new loan covenants under the new facility.  These new covenants may create restrictionsthat could affect our financial and operational flexibility or subject us todifferent events of default. We may also incur future obligations that wouldsubject us to additional covenants that could further affect our operations andfinancial capabilities.

 

***Our revenues could beless than expected if we are not able to deliver services or products asscheduled due to disruptions in 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 adverselyaffect our ongoing product cost structure.

 

***Failure to perform by oneof our subcontractors could materially and adversely affect our contractperformance and our ability to 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 othercompanies, which could increase 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:

 

·      wemay need to divert management resources to integration, which may adverselyaffect our ability to pursue other more profitable activities;

 

·      integrationmay be difficult as a result of the necessity of coordinating geographicallyseparated organizations, integrating personnel with disparate businessbackgrounds and combining different corporate cultures;

 

·      wemay not be able to eliminate redundant costs anticipated at the time we selectacquisition candidates; and

 

·      oneor more of our acquisition candidates may have unexpected liabilities oradverse operating issues that we fail to discover through our due diligenceprocedures prior to the acquisition.

 

***Our results of operationshave historically fluctuated and may continue to fluctuate significantly in thefuture, which could adversely affect the market price of our common stock.***

 

Our revenues are affectedby factors such as the unpredictability of contract awards due to the longprocurement process for most of our products and services, the potentialfluctuation of governmental 

 

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agency budgets, the timeit takes 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.

 

**CAUTIONARY STATEMENT ABOUT FORWARD-LOOKINGINFORMATION**

 

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.**

 

We conduct our operationsin approximately 1.6 million square feet of both owned and leased propertieslocated in the United States and foreign countries.  We own approximately 73% 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              |
| Ontario, Canada                |       | Leased              |
| Orlando, FL                    |       | Owned               |
| San Diego, CA                  |       | Owned               |
| San Jose, CA                   |       | Leased              |
| Tijuana, Mexico                |       | Leased              |
|                           |       |                |
| **Transportation  Systems:**   | ** ** | ** **          |
| Arlington, VA                  |       | Leased              |
| Atlanta, GA                    |       | Leased              |
| Brisbane, Australia            |       | Leased              |
| Chantilly, VA                  |       | Leased              |
| Concord, CA                    |       | Leased              |
| Frankfurt, Germany             |       | Leased              |
| Glostrup, Denmark              |       | Leased              |
| London, England                |       | Leased              |
| Los Angeles, CA                |       | Leased              |
| Merthsham, Surrey,  England    |       | Leased              |
| Montreal, Canada               |       | Leased              |
| New York, NY                   |       | Leased              |
| Ontario, Canada                |       | Leased              |
| Princeton, VA                  |       | Leased              |
| Salfords, Surrey,  England     |       | Owned               |
| San Diego, CA                  |       | Owned               |
| San Francisco, CA              |       | Leased              |
| Tullahoma, TN                  |       | Leased and owned    |
|                           |       |                |
| **Investment  properties:**    |       |                |
| Teterboro, NJ                  |       | Leased              |
| Vancouver, Canada              |       | Leased              |

 

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**Item 3.    LEGAL PROCEEDINGS.**

 

In 1998, the Ministry ofDefense for the Armed Forces of the Islamic Republic of Iran obtained a UnitedStates District Court judgment enforcing an arbitration award in its favoragainst us of $2.8 million, plus costs and interest.  Both parties appealed to the 9th CircuitCourt of Appeals, where the cases are stayed. Several potential lienors of Iran’s judgment have filed liens but havenot obtained valid court orders enforcing the liens.  We are not aware whether any such claimantsagainst Iran’s judgment have received Terrorism Risk Insurance Act funds (whichwould make their claims unenforceable). Under a 1979 Presidential executive order, all transactions by UnitedStates citizens with Iran are prohibited. Therefore, even if Iran were to prevail in the 9th Circuit litigation,it is unlikely that we would be permitted to pay any amount to Iran.  Payments to valid lienors could potentiallybe enforced, so in a previous year we recorded a liability for the amount ofthe judgment and are continuing to accrue interest.

 

In December 2008, wewere named in a class action lawsuit alleging misclassification of TrainingAnalysts as exempt from overtime, seeking damages for overtime pay and back wages,as well as damages for various violations of California and federal wage andhour laws. We filed an Answer in January 2009. We sent a demand forindemnity to our prime contractor, and we sent a demand to our insurancecarrier for coverage on some or all of the claims. Mediation was conducted in August 2009and we settled the matter for $1.7 million. The insurance carrier agreed tocontribute $0.3 million toward the settlement; however, we are still awaiting aresponse from the prime contractor. Preparation of a Settlement Agreement and related documents are inprocess.  We expect preliminary courtapproval of the settlement in late 2009. We recorded a liability for thesettlement amount less the insurance carrier contribution in the fourth quarterof fiscal 2009.

 

We are not a party to anyother material pending proceedings and we consider all other matters to beordinary proceedings incidental to the business. We believe the outcome ofthese proceedings and the proceedings described above will not have amaterially adverse effect on our financial position.

 

**Item 4.    SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS.**

 

Information regardingsubmission of matters to a vote of security holders 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.

 

**PART II**

 

**Item 5.    MARKET FOR THE REGISTRANT’S COMMON STOCKAND RELATED SECURITY HOLDER MATTERS**.

 

The principal market onwhich our common stock is being traded is the New York Stock Exchange under thesymbol CUB.  The closing high and lowsales prices for the stock, as reported in the consolidated transactionreporting systems of the American and New York stock exchanges for thequarterly periods during the past two fiscal years, and dividend informationfor those periods, are as follows:

 

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MARKET AND DIVIDENDINFORMATION

 
| ** **  | ** ** | **Sales Price of Common Shares** | ** ** | ** **      | ** ** | ** **              | ** ** |
|-------------|------------|----------------------------------|------------|-----------------|------------|-------------------------|------------|
| ** **  | ** ** | **Fiscal 2009**                  | ** ** | **Fiscal 2008** | ** ** | **Dividends per Share** | ** ** |
| **Quarter** | ** ** | **High**                         | ** ** | **Low**         | ** ** | **High**                | ** ** | **Low** | ** ** | **Fiscal 2009** | ** ** | **Fiscal 2008** | ** ** |
| First       |       | $                                | 28.91      |            | $          | 18.85                   |       | $ | 47.80 |   | $ | 34.90 |   | — |   | — |   |
| Second      |       | 31.43                            |       | 22.50           |       | 35.99                   |       | 25.42 |   | $ | 0.09 |   | $ | 0.09 |   |
| Third       |       | 40.05                            |       | 25.10           |       | 28.72                   |       | 20.12 |   | — |   | — |   |
| Fourth      |       | 41.40                            |       | 33.73           |       | 29.58                   |       | 21.43 |   | $ | 0.09 |   | $ | 0.09 |   |
|             |            |                                  |            |                 |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

On November 12,2009, the closing price of our common stock on the New York Stock Exchange was$34.08. There were 927 shareholders of record of our common stock as of November 12,2009.

 

**Item 6.    SELECTED FINANCIAL DATA.**

 

FINANCIALHIGHLIGHTS AND SUMMARY OF CONSOLIDATED OPERATIONS

 

(amounts inthousands, except per share data)

 
| ** **                                   | ** ** | **Years Ended September 30,** | ** ** |
|----------------------------------------------|------------|------------------------------------|------------|
| ** **                                   | ** ** | **2009**                           | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                         |       |                               |       |   |   |   |   |   |   |   |   |
| **Results of Operations:**                   |       |                               |       |   |   |   |   |   |   |   |   |
| Sales                                        |       | $                                  | 1,016,657  |   | $ | 881,135 |   | $ | 889,870 |   | $ | 821,386 |   | $ | 804,372 |   |
| Cost of sales                                |       | 805,516                            |       | 709,481 |   | 727,540 |   | 687,213 |   | 672,541 |   |
| Selling, general and administrative expenses |       | 111,828                            |       | 98,613 |   | 94,107 |   | 96,325 |   | 110,109 |   |
| Interest expense                             |       | 2,031                              |       | 2,745 |   | 3,403 |   | 5,112 |   | 5,386 |   |
| Income taxes                                 |       | 29,554                             |       | 20,385 |   | 23,662 |   | 12,196 |   | 453 |   |
| Net income                                   |       | 55,686                             |       | 36,854 |   | 41,586 |   | 24,133 |   | 11,628 |   |
|                                         |       |                               |       |   |   |   |   |   |   |   |   |
| Average number of shares outstanding         |       | 26,731                             |       | 26,725 |   | 26,720 |   | 26,720 |   | 26,720 |   |
|                                         |       |                               |       |   |   |   |   |   |   |   |   |
| **Per Share Data:**                          |       |                               |       |   |   |   |   |   |   |   |   |
| Net income                                   |       | $                                  | 2.08       |   | $ | 1.38 |   | $ | 1.56 |   | $ | 0.90 |   | $ | 0.44 |   |
| Cash dividends                               |       | 0.18                               |       | 0.18 |   | 0.18 |   | 0.18 |   | 0.18 |   |
|                                         |       |                               |       |   |   |   |   |   |   |   |   |
| **Year-End Data:**                           |       |                               |       |   |   |   |   |   |   |   |   |
| Shareholders’ equity                    |       | $                                  | 420,845    |   | $ | 388,852 |   | $ | 382,771 |   | $ | 323,226 |   | $ | 297,158 |   |
| Equity per share                             |       | 15.74                              |       | 14.55 |   | 14.33 |   | 12.10 |   | 11.12 |   |
| Total assets                                 |       | 756,315                            |       | 641,252 |   | 592,565 |   | 548,071 |   | 547,280 |   |
| Long-term debt                               |       | 20,570                             |       | 25,700 |   | 32,699 |   | 38,159 |   | 43,776 |   |
|                                              |            |                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

This summaryshould be read in conjunction with the related consolidated financialstatements and accompanying notes.

 

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**Item 7.****          ****MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS****.**

 

 

Our primary businesses are in the defense and transportation industries. For the year ended September 30, 2009, 70% of sales were derived from defense systems and services, while 30% were derived from transportation fare collection systems and other commercial operations. These are high technology businesses that design, manufacture and integrate complex systems to meet the needs of various federal and regional government agencies in the U.S. and other nations around the world. The U.S. Government remains our largest customer, accounting for approximately 58% of sales in 2009 compared to 54% in 2008 and 2007.

 

At September 30,2009, we reevaluated our segment reporting in light of changes to ourmanagement structure, internal performance reporting and incentive compensationplans that became effective in 2009. Previously our defense business had beenreported as a single segment, with a single executive responsible for theentire business, operating performance measured as a single unit and managementincentive plans that were based on total defense segment performance. With thechanges during the current fiscal year, we are now reporting results for twodefense segments, Defense Systems and Mission Support Services. TheTransportation Systems segment is still considered one reporting segment. Wehave reclassified prior period amounts to reflect this organizational change.

 

Mission Support Services(MSS) operates constructive military training systems, provides live trainingmission support, distributed interactive simulation, development of militarytraining doctrine, force modernization services for NATO entrants and fieldoperations and maintenance.

 

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.

 

Cubic TransportationSystems (CTS) develops and delivers innovative fare collection systems forpublic transit 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.

 

**Consolidated Overview**

Sales in fiscal2009 increased 15% from 2008 due to growth in all three segments. About 60% ofthe growth was from our previously existing businesses, with the remainder dueto acquisitions we made in 2008 and 2009. In 2009 sales exceeded $1 billion forthe first time in our history, totaling $1.017 billion, compared to $881.1million in 2008. In 2008, sales were down slightly from 2007 because of thesale of our corrugated box business in the fourth quarter of 2007 and becauseof a transition in some of our defense systems contracts from thedevelopment phase to the production phase. This is described more fully in thesegment discussion following.

 

As a result of the growth in sales and improved operating performancefrom CDS, our operating income increased 59% in fiscal 2009 to $84.7 millionfrom $53.3 million in 2008. Last year’s results had included a restructuringcharge of $6.2 million and an operating loss of $15.6 million in thecommunications business within CDS. We made two small transportation systemsacquisitions in 2009 which resulted in a slight decrement to operating incomethis year, as the amortization of purchased intangibles exceeded the operatingincome from the acquired businesses. We believe this is a short-term situation,as the amortization charges are highest in the first year and profitability ofthe acquired contracts is expected to improve in future years.

 

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Operating income decreased 14% in fiscal 2008 from $62.1 million in2007. Operating income from CTS increased significantly in 2008, more thandoubling from the 2007 level. However, CDS incurred an operating loss in 2008more than offsetting the improvement from CTS. In addition, we incurred therestructuring charge in 2008, as mentioned above. See the segment discussionsfollowing for further details of segment operating results.

 

Netincome increased to $55.7 million ($2.08 per share) from $36.9 million ($1.38per share) in 2008 and $41.6 million ($1.56 per share) in 2007. Higher netincome resulted primarily from the improvement in operating income, asdescribed above. This was partially offset by lower investment income due tolower interest rates and a provision for settlement of a lawsuit of $1.4million that reduced net income in the fourth quarter by approximately $0.9 million,after applicable income taxes, or $0.03 per share. Net income in 2008 was lowerthan in 2007 primarily because of the operating loss in CDS. The restructuringcosts mentioned above also reduced net income in 2008 by approximately $3.7million after applicable income taxes, or $0.14 per share.  Also included in 2008 was a gain of $1.2million in the fourth quarter on the sale of our investment in adefense-related joint venture that added approximately $0.8 million to netincome, after applicable income taxes, or $0.03 per share. In 2007 we sold ourcorrugated box business, also in the fourth quarter, for a gain ofapproximately $0.6million, after applicable income taxes, or $0.02 per share. Reductions intax contingency reserves accounted for approximately $0.1 million, $1.2 millionand $0.9 million, respectively, of the 2009, 2008 and 2007 net income.

 

The gross marginfrom product sales improved in 2009 to 25.1% from 21.4% in 2008 and 19.6% in2007. Improved performance from CDS accounted for the improvement in 2009. In2008, better performance from CTS systems contracts contributed to the grossmargin improvement over 2007, partially offset by a lower margin from CDS dueto the operating loss in the communications business. The gross margin fromservice sales was 16.1% in 2009 compared to 17.2% in 2008 and 16.3% in 2007.Gross margins in the MSS business were lower in 2009 primarily because of acompetitively bid follow-on contract that generated lower margins than theprevious contract had in 2008 and 2007. Higher sales and margins from CTSservice contracts in Europe contributed to the improvement in 2008 over 2007.

 

Selling, general and administrative (SG&A) expenses increased to$111.8 million or 11.0% of sales in 2009 compared to $98.6 million, or 11.2% ofsales, in 2008, and $94.1 million, or 10.6% of sales, in 2007. SG&Aincreased in 2009 due to a bad debt write-off of $3.1 million incurred at CDSand from the businesses acquired in 2008 and 2009.  In 2008, SG&A increased at CDS due toincreased bid and proposal expenditures.

 

Amortization expense increased to $6.4 million or 0.6% of salescompared to $1.3 million, or 0.2% of sales, in 2008, and $0.9 million, or 0.1%of sales, in 2007. The increase in 2009 was due primarily to the acquisition ofOmega in the 4th quarter of 2008, as well as from thetransportation systems acquisitions made in 2009.

 

Company sponsoredresearch and development (R&D) spending was $8.2 million in 2009 comparedto $12.2 million in 2008 and $5.2 million in 2007. R&D projects for thedevelopment of data link technologies begun in 2008 were completed, resultingin lower spending in 2009; however, this was partially offset by increasedspending for transportation and security related projects. Our R&D spendingcontinues to be incurred primarily in connection with customer fundedactivities. We do not rely heavily on company sponsored R&D, as most of ournew product development occurs in conjunction with the performance of work onour contracts. The amount of contract required development activity in 2009 was$54 million, compared to $55 million in 2008 and $66 million in 2007; however, thesecosts are included in cost of sales, rather than R&D, as they are directlyrelated to contract performance.

 

Interest anddividend income decreased significantly in 2009 to $1.6 million compared to$6.4 million in 2008 and $3.4 million in 2007, despite higher available cashbalances, due to lower interest rates. Other Income (Expense) netted to incomeof $0.9 million in 2009 compared to an expense of $0.7 million in 2008 andincome of $1.3 million in 2007. In 2009 and 2007 we realized foreign currency exchangegains on advances to our foreign subsidiaries, compared to a loss in 2008.Interest expense decreased to $2.0 million in 2009 compared to $2.7 million in2008 and $3.4 million in 2007 due to a reduction in long-term borrowings overthe three year period.

 

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Our effective taxrate for 2009 was 34.7% of pretax income compared to 35.6% in 2008 and 36.3% in2007. The effective rate decreased in 2009 primarily because of a higher Research andExperimentation (R&E) credit realized this year due partially to anincrease in qualifying activity. The credit for 2009 also included $0.8 millionfrom fiscal 2008 that was not realized until 2009 because the credit hadexpired and was not reinstated by the U.S. Congress until October 2008.Higher income in the U.S. added to our effective tax rate in 2009 due to higherstate income taxes, however, this was partially offset by a lower provision fortaxes from foreign earnings repatriation. The effective rates in 2009, 2008 and 2007 benefitedfrom the reversal of tax contingency provisions amounting to a net $0.1million, $1.2 million and $0.9 million, respectively. Our effective tax ratecould be affected in future years by, among other factors, the mix of businessbetween U.S. and foreign jurisdictions, our ability to take advantage ofavailable tax credits, and audits of our records by taxing authorities.

 

**MissionSupport Services****Segment**

 
| **Years ended September 30,**        | ** ** | **2009**          | ** ** | **2008** | ** ** | **2007** |   |
|-------------------------------------------|------------|-------------------|------------|----------|------------|----------|--------|
|                                      |       | **(in millions)** |       |
| Mission Support Services Sales            |       | $                 | 424.4      |     | $          | 332.5    |   | $ | 308.0 |   |
|                                      |       |              |       |     |       |     |   |
| Mission Support Services Operating Income |       | $                 | 27.9       |     | $          | 27.8     |   | $ | 27.6 |   |

 

MSSsales increased 28% in 2009 compared to an 8% increase in 2008 over 2007. Abouthalf of the sales increase in both years came from Omega, the company weacquired at the end of July 2008. The sales improvement in 2009 also camefrom an increase in activity at the Joint Readiness Training Center (JRTC) inFort Polk, LA and at the U.S. Army Quartermaster School. In 2008, lower salesfrom the JRTC were more than offset by higher sales from the QuartermasterSchool contract which was new that year and from our contract with the U.S.Marine Corps that was expanded as a result of the contract renewal in 2008.

 

Operatingincome from MSS increased less than 1% in 2009, after increasing 1% in 2008.The new company, Omega, contributed over $2 million to operating income in thefirst two months we owned it in 2008, however, the contract that generated muchof that profit was scaled back significantly in 2009, resulting in loweroperating income this year. Overall, Omega was only slightly profitable for theyear, after covering acquisition related costs of $0.4 million and amortizationof intangible assets of $5.4 million. Higher sales from the JRTC contract in2009 helped to increase operating profits, in addition to better performancefrom certain operations and maintenance contracts. However, we realized loweroperating income from the U.S. Marine Corp. contract, as it was competitivelybid at a lower profit margin than we had experienced from the previous MarineCorp. contract. We did, however, receive a contract modification in 2009related to the completed Marine Corp. contract that reimbursed us forout-of-scope costs expensed in 2008, adding $1.2 million to operating income in2009. We also provided a reserve of $1.4 million in 2009 for settlement of awage-related lawsuit on one of our contracts in California. In 2008, highersales from the U.S. Marine Corps contract contributed to operating incomegrowth. However, these increases were nearly offset by lower sales and profitmargins from the JRTC contract and from other MSS contracts that hadexperienced particularly strong performance in 2007.

 

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**Defense Systems Segment**

 
| **Years ended September 30,**   | ** ** | **2009**          | ** ** | **2008** | ** ** | **2007** |   |
|--------------------------------------|------------|-------------------|------------|----------|------------|----------|--------|
|                                 |       | **(in millions)** |       |
|                                 |       |              |       |     |       |     |   |
| **Defense Systems Sales**            |       |              |       |     |       |     |   |
| Training systems                     |       | $                 | 238.5      |     | $          | 227.7    |   | $ | 263.4 |   |
| Communications                       |       | 45.4              |       | 36.0     |       | 57.4     |   |
| Tactical systems and other           |       | 1.5               |       | 11.6     |       | 12.3     |   |
|                                 |       | $                 | 285.4      |     | $          | 275.3    |   | $ | 333.1 |   |
|                                 |       |              |       |     |       |     |   |
| **Defense Systems Operating Income** |       |              |       |     |       |     |   |
| Training systems                     |       | $                 | 16.2       |     | $          | 6.8      |   | $ | 18.9 |   |
| Communications                       |       | 3.4               |       | (15.6    | )          | (0.7     | )      |
| Tactical systems and other           |       | (0.6              | )          | (0.7     | )          | (1.6     | )      |
|                                 |       | $                 | 19.0       |     | $          | (9.5     | )      | $ | 16.6 |   |

 

**TrainingSystems**

Training Systems salesincreased 5% in 2009 after decreasing 14% in 2008. Sales of small arms virtualtraining systems and air combat training systems increased in 2009, whileground combat training systems sales decreased. Sales were higher from the aircombat training system contract known as P5 and from air combat training salesto the Far East. Sales were lower in 2009 from ground combat training systemsin the U.K. and Canada.

 

Thedecrease in 2008 sales came from each of the major product lines, including aircombat training, ground combat training and small arms virtual trainingsystems. Sales were lower in 2008 by $23.0 million from the P5 contract andfrom an air combat training system in Australia that was completed in the firstquarter. Partially offsetting these sales decreases was an increase in salesfrom the new Joint Strike Fighter (JSF) development contract and other aircombat training contracts. Sales in three major Training Systems product lines were impactedin 2008 by a transition from the development phase, where revenue is recognizedon a cost-to-cost percentage completion basis, to the production phase, wherewe recognize revenues from production orders on a units-of-delivery percentagecompletion basis, resulting in the recording of sales when the product isdelivered and accepted by the customer. This includes the P5 air combattraining contract, electro-optics contracts and small arms training systems.This transition also resulted in an increase in inventories of $30.3 million fromthese product lines in fiscal 2008, partially offset by customer advances of$11.5 million.

 

TrainingSystems operating income increased from $6.8 million in 2008 to $16.2 millionthis year. Higher sales of air combat training systems and small arms virtualtraining systems and higher profit margins on air combat training systems inthe Far East contributed to the improvement. In addition, last year’s resultsincluded cost growth for the development of an electro-optic training system,which totaled $9.6 million compared to $3.6 million this year. Productshipments on this contract also contributed to the improved results for theyear, adding $2.3 million to operating income in 2009. Partially offsettingthese profit improvements was a $3.1 million allowance for doubtful accountsestablished during the second fiscal quarter this year. A company through whichwe sold training systems products to the U.S. government in previous periodsfailed to pass on to us cash they collected from the government on our behalf.We were able to collect a portion of the money they owed us and have negotiateda payment plan with them; however, the company appears to be in financialtrouble and collection of the remainder continues to be doubtful. We willreverse the reserve only upon the collection of cash from them.

 

Training Systems operatingincome decreased 64% in 2008 compared to 2007. Lower sales from the P5 andAustralian air combat training contracts and small arms virtual trainingsystems contributed to the decrease in operating income. However, the primarycause of the decrease was cost growth of $9.6 million on the electro-opticscontract mentioned above. This cost growth stemmed from problems 

 

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encounteredin the second quarter during system integration testing, resulting in increasedengineering development costs for design changes and higher manufacturing andrework costs. We also experienced further cost growth of $4.2 million in 2008on a contract for the development of a ground combat training system in theMiddle East. This compares to cost growth of $5.1 million in 2007 on the samecontract. Improved profit margins in 2008 from a ground combat training systemin Canada partially offset the loss from this Middle East contract.

 

**Communications**

Communicationssales improved to $45.4 million this year compared to $36.0 million last year,a 26% increase. A settlement agreement reached in the first quarter with theU.S. Navy on a data link development contract added $3.3 million to sales andfacilitated progress toward completion of the contract, further increasingsales for the year. Sales were also higher from a contract to develop a datalink for unmanned aerial vehicles for a U.K. customer. Lower sales of power amplifierspartially offset the growth in data link sales for the year.

 

Salesfrom Communications decreased 37% in 2008, as lower sales were realized fromcontracts for the development of data links for unmanned aerial vehicles in theU.S. and U.K. and from a contract for the development of a data link for theU.S. Navy. These decreases were partially offset by higher sales of personnellocator systems and power amplifiers.

 

Communications operating income improved in 2009 to $3.4 million froman operating loss of $15.6 million last year. Cost growth on three data linkdevelopment contracts had resulted in last year’s operating loss. This year twoof the three contracts generated operating income due to contractrestructurings and change orders received. Lower sales of power amplifiers in2009 resulted in lower operating income, partially offsetting the improvementsin profitability from the data link contracts.

 

The primary cause of the $15.6 million operating loss in Communicationsin 2008 was cost growth of $9.5 million from a contract to develop new datalink technology for unmanned aerial vehicles for a U.K. customer.  As mentioned above, the contract wasrestructured in early 2009. Cost growth on two other data link developmentcontracts impacted profitability by $6.2 million in 2008. One of these is theU.S. Navy contract mentioned above for which we reached a settlement agreementwith the customer in early 2009. In addition, we incurred costs on severalresearch and development projects for new data link technology during 2008,which added $2.7 million to the operating loss for the year. Partiallyoffsetting these increased costs was higher operating income on higher sales ofpower amplifiers and personnel locator systems.

 

**TransportationSystems Segment**

 
| **Years ended September 30,**      | ** ** | **2009** | ** ** | **2008**          | ** ** | **2007** |   |
|-----------------------------------------|------------|----------|------------|-------------------|------------|----------|--------|
|                                    |       |     |       | **(in millions)** |       |     |   |
| Transportation Systems Sales            |       | $        | 303.4      |              | $          | 272.3    |   | $ | 236.6 |   |
|                                    |       |     |       |              |       |     |   |
| Transportation Systems Operating Income |       | $        | 44.1       |              | $          | 43.0     |   | $ | 20.1 |   |

 

CTSsales increased 11%, from $272.3 million in 2008 to $303.4 million in 2009.Sales increased in North America from a fare collection development contractawarded last year, from the sale of spare parts and from contracts we added ina small service business acquisition made in July 2009. In the U.K., highersales came primarily from contracts with Transport for London and U.K. trainoperating companies, however, a lower average exchange rate between the BritishPound and the U.S. Dollar in 2009 resulted in a decrease in the dollar value ofU.K. sales of $38.6 million compared to the rate in effect in 2008.

 

CTS sales increased 15%in 2008 primarily due to additional work from change orders on the PRESTIGEcontract and from other contracts in the U.K. Sales were also higher fromsystem installation work on a contract in Australia and increased sales ofspare parts in North America. These increases were partially 

 

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offsetby decreased salesfrom system installation contracts in North America and Sweden. The exchangerate between the British Pound and the U.S. Dollar had no impact on sales for2008, when compared to 2007, as the average rate for the year was virtually thesame as in 2007.

 

CTS operating income improved from $43.0 million in 2008 to $44.1 millionin 2009, a 3% increase. Higher sales of spare parts added to operating incomeand contract restructuring agreements reached during the first quarter added anet $1.6 million to operating income. As a result of one of the contractrestructurings, we wrote off accounts receivable of $4.1 million against theassociated allowance for doubtful accounts, resulting in no impact on operatingincome. In addition, the successful completion of a new fare collection systemin North America resulted in an additional contribution to operating income forthe year. Although operating income in the U.K. was higher in 2009 than in 2008as a result of higher sales, the lower British Pound vs. U.S. Dollar exchangerate negatively impacted operating income by $8.8 million in 2009.

 

Operating income for CTS more than doubled in 2008 when compared to2007. Higher sales and improved performance from U.K. contracts, includingbonuses earned on the PRESTIGE contract for system usage, and profits fromincreased spares sales in the U.S. contributed to the increase in 2008. Costgrowth on North American contracts was limited to $1.6 million in 2008, asignificant improvement over 2007 when cost growth on the same contracts hadbeen $7.0 million. Partially offsetting the profit improvements in 2008 wascost growth of $3.4 million on a contract in Sweden and an investment in newtechnology of $1.8 million we made related to a new contract in North America.A reduction in legal fees of $2.0 million in 2008 also contributed to theoperating income improvement. As mentioned above relating to sales, currencyexchange between the British Pound and U.S. Dollar had no impact on 2008operating income when compared to 2007.

 

**Backlog**

 
| **September 30,**   | ** ** | **2009**          | ** ** | **2008** | ** ** |
|--------------------------|------------|-------------------|------------|----------|------------|
| ** **               | ** ** | **(in millions)** | ** ** |
| **Total backlog**        |       |              |       |     |       |
| Transportation Systems   |       | $                 | 772.2      |     | $          | 480.6 |   |
| Mission Support Services |       | 855.5             |       | 880.0    |       |
| Defense Systems          |       |              |       |     |       |
| Training systems         |       | 484.4             |       | 363.6    |       |
| Communications           |       | 69.0              |       | 45.9     |       |
| Other                    |       | 2.3               |       | 2.4      |       |
| Total Defense Systems    |       | 555.7             |       | 411.9    |       |
| Total                    |       | $                 | 2,183.4    |     | $          | 1,772.5 |   |
|                     |       |              |       |     |       |
| **Funded backlog**       |       |              |       |     |       |
| Transportation Systems   |       | $                 | 772.2      |     | $          | 480.6 |   |
| Mission Support Services |       | 206.7             |       | 180.6    |       |
| Defense Systems          |       |              |       |     |       |
| Training systems         |       | 484.4             |       | 363.6    |       |
| Communications           |       | 69.0              |       | 45.9     |       |
| Other                    |       | 2.3               |       | 2.4      |       |
| Total Defense Systems    |       | 555.7             |       | 411.9    |       |
| Total                    |       | $                 | 1,534.6    |     | $          | 1,073.1 |   |

 

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.

 

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In August 2008,Transport for London (TfL) notified our 37.5% owned subsidiary, TranSys, thatthey will be terminating the PRESTIGE fare collection system contract as of August 2010in accordance with the early termination provision of the contract. As a resultof this early termination, $290 million (£142 million) was removed fromtransportation systems backlog as of September 30, 2008. However, in November 2008,TfL awarded Cubic directly a new three year contract that includes virtuallyall of the services currently being performed by TranSys through itsshareholders. The term of this contract is for the time period from August 2010to August 2013, with a base value of approximately $272 million (£170million), which was added to the September 30, 2009 backlog. The contractvalue will be indexed for inflation from August 2008 through itscompletion and additionally includes variable payments that are contingent uponsystem usage, similar to provisions that were contained in the PRESTIGEcontract.

 

A decrease in the value of the British Pound vs. the U.S. Dollarbetween September 30, 2008 and September 30, 2009, resulted in adecrease in transportation systems backlog of approximately $28 million.

 

The differencebetween total backlog and funded backlog represents options under multiyearservice contracts. Funding for these contracts comes from annual operatingbudgets of the U.S. government and the options are normally exercised annually.Options for the purchase of additional systems or equipment are not included inbacklog until exercised.

 

**NewAccounting Standards**

 

On July 1, 2009 theFinancial Accounting Standards Board officially launched the AccountingStandards Codification *(FASB ASC)*, asthe authoritative source of generally accepted accounting principles in theUnited States. The ASC is effective for financial statements issued for interimand annual periods ending after September 15, 2009. Rules andinterpretive releases of the Securities and Exchange Commission (SEC) underfederal securities laws are also sources of authoritative GAAP for SECregistrants. The adoption of this standard had no impact on our consolidatedfinancial position, results of operations or cash flows.

 

In August 2009, the SECissued guidance regarding the impact of the FASB ASC on certain SEC rules,regulations, and interpretive releases and staff accounting bulletins. The SECadvised that references to FASB standards in current SEC text should correspondto the rules in the FASB ASC. The FASB ASC does not supersede any SEC rules orregulations. The FASB ASC should not be considered the authoritative source forSEC guidance.

 

In September 2006,the FASB issuedan accounting standard that defines fair value, establishes a framework andgives guidance regarding the methods used for measuring fair value, and expandsdisclosures about fair value measurements. We adopted this standard in thequarter ending December 31, 2008 with no material impact to our results ofoperations, financial position or cash flows.

 

In February 2007,the FASB issuedan accounting standard that permits an entity to choose to measure manyfinancial instruments and certain other items at fair value at specifiedelection dates. Subsequent unrealized gains and losses on items for which thefair value option has been elected will be reported in earnings. We adoptedthis standard in the quarter ending December 31, 2008 with no materialimpact to our results of operations, financial position or cash flows.

 

InDecember 2007 the FASB issued an accounting standard that applies to all transactions or other events in which an entity obtainscontrol of one or more businesses. This standard applies to all businessentities, including mutual entities that previously used thepooling-of-interests method of accounting for some business combinations.  We will adopt this standard in the fiscalyear beginning October 1, 2009. The impact of this standard will depend on the size andstructure of future acquisitions.

 

In March 2008 the FASB issued anaccounting standard that requires enhanceddisclosures about an entity’s financial position, financial performance, andcash flows. The statement requires that objectives for using derivativeinstruments be disclosed in terms of underlying risks and accountingdesignation. We adopted this standard in the quarter ended March 31, 2009 with no material impact to our resultsof operations, financial position or cash flows.

 

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Duringthe quarter ended June 30, 2009, we adopted a standard that establishesgeneral accounting for and disclosures of events that occur after the balancesheet date but before financial statements are issued or are available to beissued.  The adoption of this standard did not have a material impacton our results of operations, financial position or cash flows.

 

InDecember 2007, the FASB issued an accounting standard thatrequires allentities to report noncontrolling (minority) interests in subsidiaries asequity in the consolidated financial statements. This standard is effective forfiscal years beginning after December 15, 2008, which for us will be the fiscal year beginning October 1, 2009.We currently do not expect that the adoption of this standard will have amaterial impact on ourresults 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 will be the fiscal year beginning October 1, 2009. We currently donot expect that the adoption of this standard will have a material impact on our results of operations, financialposition 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.  We are currently evaluating the impact that the adoptionof this standard will have on our results of operations, financial position or cashflows. This standard is effective for the first annual reporting period thatbegins after November 15, 2009, which for us will be the fiscal yearbeginning October 1, 2010.

 

InOctober 2009, the FASB issued revised accounting guidance, which can beapplied prospectively or retrospectively. This guidance modifies the objective-and-reliable-evidence-of-fair-valuecriterion from the separation criteria used to determine whether an arrangementinvolving multiple deliverables contains more than one unit of accounting,replaces references to “fair value” with “selling price” to distinguish fromthe fair value measurement required under the “Fair Value Measurements andDisclosures” guidance, provides a hierarchy that entities must use to estimatethe selling price, eliminates the use of the residual method for allocation,and expands the ongoing disclosure requirements. We are currently evaluatingthe effect that adoption of this update will have, if any, on our consolidatedfinancial position, results of operations, or cash flows. This revised guidanceis effective for new or materially modified arrangements in fiscal yearsbeginning on or after June 15, 2010, and we expect to adopt it in thefiscal year beginning October 1, 2010, although early adoption is allowed.

 

**Liquidityand Capital Resources**

Operating activitiesprovided cash of $176.0 million in 2009, compared to $92.7 million in 2008, and$69.2 million in 2007. In addition to cash generated by earnings, a decrease inaccounts receivable in each of the three years amounting to $36.2 million,$40.5 million and $18.1 million in 2009, 2008 and 2007, respectively,contributed to the positive cash flows. In addition, net customer advances of$48.7 million, $17.0 million and $12.2 million in 2009, 2008 and 2007,respectively, added to the positive result. Growth in inventories partiallyoffset these improvements in each of the three years, using cash of $4.3million, $18.7 million and $7.6 million, respectively, reflecting thetransition from development type contracts to production contracts described inthe Defense Systems section above and a temporary build-up of inventories atCTS related to one contract in 2009. Positive operating cash flows in 2009 and2008 came from all three segments, with CDS providing more than half of theoperating cash flows in 2009. In 2008 the greater portion came from CTS. All ofthe operating cash flows in 2007 came from CTS, while CDS and MSS cash flowswere slightly negative for the year.

 

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We have classifiedcertain unbilled accounts receivable balances as noncurrent because we do notexpect to receive payment within one year from the balance sheet date. At September 30,2009, this balance was $13.4 million compared to $19.9 million at September 30,2008.

 

Cash flows used ininvesting activities in 2009 included two small transportation systemsacquisitions made during the year and the final payment of $6.1 million fromour 2008 acquisition of Omega Training Group, Inc. We also made normalcapital expenditures of $5.3 million and purchased marketable securitiestotaling $8.1 million in 2009. In 2008 our acquisition of Omega used cash of$53.8 million, net of cash acquired. We made capital expenditures of $8.1million in 2008, partially offset by proceeds of $1.8 million from the sale ofour interest in a joint venture. We also liquidated $27.2 million of short-terminvestments in early 2008, thereby avoiding much of the turmoil in the creditmarkets that occurred later in the year. During 2007 we had invested a net of$18.3 million in these financial instruments, received $3.8 million from thesale of our former corrugated box business and made $6.1 million in capitalexpenditures.

 

Financingactivities in 2009 included scheduled payments on long-term borrowings of $6.0million and the payment of a dividend to shareholders of $4.8 million (18 centsper share). Similarly, in 2008 financing activities included payments onlong-term borrowings of $6.1 million and the payment of a dividend toshareholders of $4.8 million (18 cents per share). Financing activities in 2007included the repayment of short term borrowings of $10.0 million and scheduledpayments on long-term borrowings of $6.1 million, in addition to the payment ofa dividend to shareholders of $4.8 million (18 cents per share).

 

Accumulatedother comprehensive income decreased $18.9 million in 2009 primarily because ofan increase in the recorded liability for our pension plans which reduced thebalance by $15.2 million after applicable income taxes. In addition, foreigncurrency translation adjustments also reduced the balance by $3.9 million.These adjustments, less a small unrealized gain from cash flow hedges, resultedin a negative balance in accumulated other comprehensive income of $11.4million at September 30, 2009 compared to a positive balance of $7.6million at September 30, 2008.

 

Thepension plan unfunded balance increased from the September 30, 2008balance of $16.5 million to $32.2 million at September 30, 2009. 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 $36.2 million at September 30, 2009compared to $31.7 million at September 30, 2008. The reason for theincrease is that the effect of recording adjustments to the pension liabilitythrough other comprehensive income resulted in a deferred tax asset of $12.2million at September 30, 2009 compared to $4.0 million at September 30,2008. We expect to generate sufficient taxable income in the future such thatthe net deferred tax asset will be realized.

 

We own37.5% of the common stock of Transaction Systems Limited (TranSys), aspecial-purpose company formed in the United Kingdom to bid on the PRESTIGEfare collection system contract, which outsourced most of the functions of theTransport for London (TfL) fare collection system. In August 2008, TfLnotified TranSys that they will be terminating the PRESTIGE contract as of August 2010in accordance with the early termination provision of the contract. As a resultof this termination for convenience, upon completion of the contract in 2010,the operations of TranSys will cease.

 

Thecontract termination notice triggered a requirement for TranSys to engage anindependent engineer to produce a report on the state of the assets associatedwith the PRESTIGE system. The engineer is scheduled to deliver their report in December 2009,stating whether, in their opinion, the fare collection system assets are ableto pass a “Performance Test” for a period of two years beyond the contracttermination. The Performance Test requires the assets to perform at contractualminimum levels with broadly the same level of maintenance as that performedunder the contract. If the engineer determines that the assets may fail thePerformance Test then TranSys and its subcontractors have until August 2010to carry out the necessary remediation of the assets.

 

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Atthe date of the termination of the contract in August 2010, the sameengineer will deliver a “Supplementary Report” which is a follow up assessmentto take into account the remediation efforts of TranSys and its subcontractors,and to give an opinion on the remaining level of remediation work required inorder to allow the system to pass the Performance Test for the two year period.The contract allows TfL to withhold an amount up to approximately £40 million($64 million) from its final payment to TranSys pending the delivery of theSupplementary Report and the completion of any remediation work identified inthe report. This process is not expected to take longer than six months and TfLwould be required to pay interest on any funds withheld.

 

TranSysis required to repay the banks in August 2010 and, to the extent thatthere is a funding shortfall in TranSys because of a withhold by TfL, the shareholdersare each required to provide TranSys their share of the cash required to fullyrepay the debt until the funds are returned to TranSys by TfL, at which timethe shareholders would be repaid by TranSys. We estimate that our share of thiswithhold could be as much as $38.5 million. In addition, although we considerthe possibility remote, if the other shareholders of TranSys fail to providetheir share of the funding, we could be forced to provide the entire fundingamount to TranSys for up to six months. While there is the possibility that TfLwill withhold some amount from TranSys upon contract termination, we do notbelieve this will be necessary. In recent years the fare collection system hasconsistently exceeded the contractual performance levels and we believe thatsufficient costs have been included in our estimated costs to complete thecontract to continue this level of performance for the required period. Inaddition, since we have been selected as the successor contractor to thePRESTIGE contract, we believe TfL will have no reason to withhold funds toassure any required remediation will be completed. However, there remains thepossibility that we will be required to provide some amount of funding toTranSys for up to 6 months following the end of the contract in August 2010.

 

Our financial conditionremains strong with working capital of $315.2 million and a current ratio of2.2 to 1 at September 30, 2009. We expect that cash on hand and ourability to access the debt markets will be adequate to meet our working capitalrequirements for the foreseeable future. In addition to the short-termborrowing arrangement we have in New Zealand, we have a committed fiveyear credit facility from a group of financial institutions in the U.S.,aggregating $150 million. This agreement will expire in March 2010 and weare currently in negotiations for a new three year agreement for the sameamount. We expect the annual fees under the new arrangement to increase byseveral hundred thousand dollars per year. As of September 30, 2009, $45.3 million of this capacity was usedfor letters of credit, leaving an additional $104.7 million available.  Our total debt to capital ratio at September 30,2009 was less than 6%. In addition, our cash and short-term investments totaled$252.2 million at September 30, 2009 which exceeded our total long-termdebt by $227.1 million. Our cash is invested primarily in highly liquidgovernment treasury instruments in the U. S. and Europe.

 

Thefollowing is a schedule of our contractual obligations outstanding as of September 30,2009:

 
|                  |   | **Total**         | ** ** | **Less than 1  Year** | ** ** | **1 - 3 years** | ** ** | **4 - 5 years** | ** ** | **After 5 years** |   |
|-----------------------|--------|-------------------|------------|-----------------------|------------|-----------------|------------|-----------------|------------|-------------------|--------|
|                  |   | **(in millions)** |       |
| Long-term debt        |   | $                 | 25.1       |                  | $          | 4.6             |       | $               | 9.1        |              | $      | 9.1 |   | $ | 2.3 |   |
| Interest payments     |   | 4.2               |       | 1.4                   |       | 1.8             |       | 0.7             |       | 0.3               |   |
| Operating leases      |   | 19.9              |       | 6.7                   |       | 9.1             |       | 3.2             |       | 0.9               |   |
| Deferred compensation |   | 9.0               |       | 1.1                   |       | 1.2             |       | 0.8             |       | 5.9               |   |
|                  |   | $                 | 58.2       |                  | $          | 13.8            |       | $               | 21.2       |              | $      | 13.8 |   | $ | 9.4 |   |

 

**Critical Accounting Policies, Estimates and Judgments**

Our financial statements are prepared in accordance with accounting principles that are generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, and disclosure of contingent assets 

 

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and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We continually evaluate our estimates and judgments, the most critical of which are those related to revenue recognition, income taxes, valuation of goodwill, purchased intangibles and pension liabilities. We base our estimates and judgments on historical experience and other factors that we believe to be reasonable under the circumstances. Materially different results can occur as circumstances change and additional information becomes known.

 

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

 

This discussion of critical accounting policies, estimates and judgments should be read in conjunction with other disclosures included in this discussion, and the Notes to the Consolidated Financial Statements related to estimates, contingencies and new accounting standards. Significant accounting policies are identified in Note 1 to the Consolidated Financial Statements. We have discussed each of the “critical” accounting policies and the related estimates with the audit committee of the Board of Directors.

 

*Revenue Recognition*

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. Most 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, whichrecognizes revenues as deliveries are made to the customer generally using unitsales values 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. Amounts representing contract change orders, claims or other itemsare included in the contract value only when they can be reliably estimated andrealization is considered probable. Provisions are made on a current basis tofully recognize any anticipated losses on contracts.

 

Werecord sales under cost-reimbursement-type contracts as we incur the costs.Incentives or penalties and awards applicable to performance on contracts areconsidered in estimating sales and profits, and are recorded when there issufficient information to assess anticipated contract performance. Incentiveprovisions that increase or decrease earnings based solely on a singlesignificant event are not recognized until the event occurs.

 

Salesof products are recorded when a firm sales agreement is in place, delivery hasoccurred and collectibility of the fixed or determinable sales price isreasonably assured. Sales for fixed-price service contracts that do not containmeasurable units of work performed are generally recognized on a straight-linebasis over the contractual service period, unless evidence suggests that therevenue is earned, or obligations fulfilled, in a different manner. Sales forfixed-price service contracts that contain measurable units of work performedare recognized when the units of work are completed.

 

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Sales and profits on contracts that specify multiple deliverables areallocated to separate units of accounting when there is objective evidence offair value and that each accounting unit has value to the customer on astand-alone basis.

 

*Income Taxes*

Significant judgment is required in determining our income tax provisions and in evaluating our tax return positions. We establish reserves when, despite our belief that our tax return positions are fully supportable, we believe it is more-likely-than-not a tax position taken or expected to be taken in a tax return, if examined, would be challenged and that we may not prevail. We adjust these reserves in light of changing facts and circumstances, such as the progress of a tax audit.

 

Tax regulations require items to be included in the tax return at different times than the items are reflected in the financial statements and are referred to as timing differences. In addition, some expenses are not deductible on our tax return and are referred to as permanent differences. Timing differences create deferred tax assets and liabilities. Deferred tax assets generally represent items that can be used as a tax deduction or credit in future years for which we have already recorded the benefit in our income statement. We establish valuation allowances for our deferred tax assets when the amount of expected future taxable income is not likely to support the use of the deduction or credit. Deferred tax liabilities generally represent deductions we have taken on our tax return but have not yet recognized as expense in our financial statements.

 

We have not recognized any United States tax expense on undistributed earnings of our foreign subsidiaries since we intend to reinvest the earnings outside the U.S. for the foreseeable future. These undistributed earnings totaled approximately $57.5 million at September 30, 2009. Annually we evaluate the capital requirements in our foreign subsidiaries and determine the amount of excess capital, if any, that is available for distribution. Whether or not we actually repatriate the excess capital in the form of a dividend, we would provide for U.S. taxes on the amount determined to be available for distribution. This evaluation is judgmental in nature and, therefore, the amount of U.S. taxes provided on undistributed earnings of our foreign subsidiaries is affected by these judgments. Based on this analysis in 2009, we determined that 12.0 million British pounds ($18.4 million, net of hedge losses) was excess capital in the U.K. and that 10.0 million New Zealand Dollars ($6.4 million, net of hedge losses) was excess capital in New Zealand and paid dividends in these amounts to the U.S. parent company.  U.S. taxes provided on these dividends amounted to $3.1 million in 2009.

 

*Valuation of Goodwill*

We evaluate our recorded goodwill balances for potential impairmentannually by comparing the fair value of each reporting unit to its carryingvalue, including recorded goodwill. Our annual testing date is June 30. We havenot yet had a case where the carrying value exceeded the fair value; however,if it did, 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,**        | ** ** | **2009**          | ** ** | **2008** | ** ** |
|--------------------------|------------|-------------------|------------|----------|------------|
| ** **               | ** ** | **(in millions)** | ** ** |
|                     |       |              |       |     |       |
| Mission Support Services |       | $                 | 36.7       |     | $          | 36.7 |   |
| Defense Systems          |       | 15.3              |       | 16.1     |       |
| Transportation Systems   |       | 7.4               |       | 8.2      |       |
| Total goodwill           |       | $                 | 59.4       |     | $          | 61.0 |   |

 

Determining the fair value of a reporting unit for purposes of thegoodwill impairment test is judgmental in nature and involves the use ofestimates and assumptions. These estimates and assumptions could have asignificant impact on whether or not an impairment charge is recognized andalso the magnitude of any such charge. We currently perform internal valuationanalysis and consider other market information that is publicly available.Estimates of fair value are primarily determined using discounted cash flowsand 

 

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comparisons with recent transactions. 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.

 

For fiscal 2009, the discounted cash flowsfor each reporting unit were based on discrete three-year financial forecastsdeveloped by management for planning purposes. Cash flows beyond the three-yeardiscrete forecasts were estimated based on projected growth rates and financialratios, influenced by an analysis of historical ratios, and by calculating aterminal value at the end of ten years. The compound annual growth rates forsales ranged from 5.0% to 8.0% and for operating profit margins ranged from7.0% to 10.0% for the reporting units, beyond the discrete forecast period. Thefuture cash flows were discounted to present value using a discount rate of12.0%. We did not recognize any goodwill impairment as a result of performingthis annual test. Changes in estimates and assumptions we make in conductingour goodwill assessment could affect the estimated fair value of one or more ofour reporting units and could result in a goodwill impairment charge in afuture period. However, a 10% decrease in the estimated fair value of any ofour reporting units at June 30, 2009 would not have resulted in a goodwillimpairment charge.

 

*Purchased Intangibles*

We generally fund acquisitions using cash on hand. The purchase price of an acquisition is allocated to the assets acquired and liabilities assumed using the fair values determined by management as of the acquisition day, with any excess purchase price recorded as goodwill. We amortize intangible assets acquired as part of business combinations over their estimated useful lives unless their useful lives are determined to be indefinite. For certain business combinations, the amounts we record related to purchased intangibles are determined from independent valuations. Our purchased intangibles primarily relate to contracts and programs acquired and customer relationships, which are amortized over periods of 15 years or less.

 

*Pension Costs*

The measurement of our pension obligations and costs is dependent on a variety of assumptions used by our actuaries. These assumptions include estimates of the present value of projected future pension payments to plan participants, taking into consideration the likelihood of potential future events such as salary increases and demographic experience. These assumptions may have an effect on the amount and timing of future contributions.

 

The assumptions used in developing the required estimates include the following key factors:

·                  Discount rates

·                  Inflation

·                  Salary growth

·                  Expected return on plan assets

·                  Retirement rates

·                  Mortality rates

 

We base the discount rate assumption on investment yields available at year-end on high quality corporate long-term bonds. Our inflation assumption is based on an evaluation of external market indicators. The salary growth assumptions reflect our long-term actual experience in relation to the inflation assumption. The expected return on plan assets reflects asset allocations, our historical experience, our investment strategy and the views of investment managers and large pension sponsors. Retirement and mortality rates are based primarily on actual plan experience. The effects of actual results differing from our assumptions are accumulated and amortized over future periods, and therefore, generally affect our recognized expense in such future periods.

 

Changes in the above assumptions can affect our financial statements, although the relatively small size of our defined benefit pension plans limits the impact any individual assumption changes can have on earnings. For example, a 50 basis point change in the assumed rate of return on assets would have changed the pension expense recorded in 2009 by about $0.6 million, before applicable income taxes.

 

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**Item 7a.   QUANTITATIVEAND QUALITATIVE DISCLOSURE ABOUT MARKET RISK**

 

**Interest Rate Risk**

 

We invest in money market instruments and short-term marketable debtsecurities whose return is tied to short-term interest rates being offered atthe time the investment is made. We maintain short-term borrowing arrangementsin the U.S. and New Zealand which are also tied to short term rates (the U.S.prime rate and the New Zealand base rate). We also have senior unsecured notespayable to insurance companies that are due in annual installments. These noteshave fixed coupon interest rates. See Note 5 to the Consolidated FinancialStatements for more information.

 

Interest income earned on our short-term investments is affected bychanges in the general level of interest rates in the U.S., the U.K., and NewZealand. These income streams are generally not hedged.  Interest expense incurred under theshort-term borrowing arrangements is affected by changes in the general levelof interest rates in the U.S. and New Zealand. The expense related to thesecost streams is usually not hedged since it is either revolving, payable withinthree months and/or immediately callable by the lender at any time. Interestexpense incurred under the long-term notes payable is not affected by changesin any interest 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, 2009.

 

**Foreign Currency Exchange Risk**

 

In the ordinary course of business, we enter into firm sale andpurchase commitments 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.

 

Investments in our foreign subsidiaries in the U.K., Australia, NewZealand, and Canada are not hedged because we consider them to be investedindefinitely.  In addition, we generallyhave control over the timing and amount of earnings repatriation, if any, andexpect to use this control to mitigate foreign currency exchange risk.

 

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**Item 8.    FINANCIALSTATEMENTS AND SUPPLEMENTAL DATA.**

 

CUBICCORPORATION

 

CONSOLIDATED BALANCE SHEETS

 
| ** **                                | ** ** | **September 30,**  | ** ** |
|-------------------------------------------|------------|--------------------|------------|
| ** **                                | ** ** | **2009**           | ** ** | **2008** | ** ** |
| ** **                                | ** ** | **(in thousands)** | ** ** |
| ASSETS                                    |       |               |       |   |   |
|                                      |       |               |       |   |   |
| CURRENT ASSETS                            |       |               |       |   |   |
| Cash and cash equivalents                 |       | $                  | 244,074    |   | $ | 112,696 |   |
| Short-term investments                    |       | 8,127              |       | — |   |
| Accounts receivable:                      |       |               |       |   |   |
| Trade and other receivables               |       | 12,833             |       | 9,014 |   |
| Long-term contracts                       |       | 223,186            |       | 264,748 |   |
| Allowance for doubtful accounts           |       | (4,558             | )          | (4,878 | ) |
|                                      |       | 231,461            |       | 268,884 |   |
|                                      |       |               |       |   |   |
| Inventories                               |       | 49,107             |       | 45,118 |   |
| Deferred income taxes                     |       | 22,132             |       | 27,082 |   |
| Prepaid expenses and other current assets |       | 29,957             |       | 21,548 |   |
| TOTAL CURRENT ASSETS                      |       | 584,858            |       | 475,328 |   |
|                                      |       |               |       |   |   |
| LONG-TERM CONTRACT RECEIVABLES            |       | 13,400             |       | 19,930 |   |
|                                      |       |               |       |   |   |
| PROPERTY, PLANT AND EQUIPMENT             |       |               |       |   |   |
| Land and land improvements                |       | 15,292             |       | 15,408 |   |
| Buildings and improvements                |       | 42,661             |       | 43,379 |   |
| Machinery and other equipment             |       | 80,018             |       | 83,598 |   |
| Leasehold improvements                    |       | 4,685              |       | 4,656 |   |
| Accumulated depreciation and amortization |       | (93,761            | )          | (93,154 | ) |
|                                      |       | 48,895             |       | 53,887 |   |
|                                      |       |               |       |   |   |
| OTHER ASSETS                              |       |               |       |   |   |
| Deferred income taxes                     |       | 14,082             |       | 4,631 |   |
| Goodwill                                  |       | 59,433             |       | 61,032 |   |
| Purchased intangibles                     |       | 28,618             |       | 19,060 |   |
| Miscellaneous other assets                |       | 7,029              |       | 7,384 |   |
|                                      |       | 109,162            |       | 92,107 |   |
|                                      |       |               |       |   |   |
| TOTAL ASSETS                              |       | $                  | 756,315    |   | $ | 641,252 |   |

 

Seeaccompanying notes.

 

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CUBICCORPORATION

 

CONSOLIDATEDBALANCE SHEETS—continued

 
| ** **                                                     | ** ** | **September 30,**  | ** ** |
|----------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                     | ** ** | **2009**           | ** ** | **2008** | ** ** |
| ** **                                                     | ** ** | **(in thousands)** | ** ** |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                      |       |               |       |   |   |
|                                                           |       |               |       |   |   |
| CURRENT LIABILITIES                                            |       |               |       |   |   |
| Trade accounts payable                                         |       | $                  | 28,626     |   | $ | 23,288 |   |
| Customer advances                                              |       | 123,458            |       | 74,963 |   |
| Accrued compensation                                           |       | 49,134             |       | 41,111 |   |
| Other current liabilities                                      |       | 60,402             |       | 44,721 |   |
| Income taxes payable                                           |       | 3,491              |       | 6,017 |   |
| Current maturities of long-term debt                           |       | 4,554              |       | 6,045 |   |
| TOTAL CURRENT LIABILITIES                                      |       | 269,665            |       | 196,145 |   |
|                                                           |       |               |       |   |   |
| LONG-TERM DEBT                                                 |       | 20,570             |       | 25,700 |   |
|                                                           |       |               |       |   |   |
| OTHER LIABILITIES                                              |       |               |       |   |   |
| Accrued pension liability                                      |       | 32,214             |       | 16,451 |   |
| Deferred compensation                                          |       | 7,902              |       | 7,821 |   |
| Income taxes payable                                           |       | 5,119              |       | 6,283 |   |
|                                                           |       |               |       |   |   |
| COMMITMENTS AND CONTINGENCIES                                  |       |               |       |   |   |
|                                                           |       |               |       |   |   |
| SHAREHOLDERS’ EQUITY                                      |       |               |       |   |   |
| Preferred stock, no par value (in thousands):                  |       |               |       |   |   |
| Authorized—5,000 shares                                   |       |               |       |   |   |
| Issued and outstanding—none                               |       | —             |       | — |   |
| Common stock, no par value (in thousands):                     |       |               |       |   |   |
| Authorized—50,000 shares                                  |       |               |       |   |   |
| 2009—Issued 35,677 shares, outstanding—26,732 shares |       |               |       |   |   |
| 2008—Issued 35,673 shares, outstanding—26,727 shares |       | 12,530             |       | 12,485 |   |
| Retained earnings                                              |       | 455,743            |       | 404,868 |   |
| Accumulated other comprehensive (loss) income                  |       | (11,357            | )          | 7,570 |   |
| Treasury stock at cost (in thousands):                         |       |               |       |   |   |
| 2009 and 2008—8,945 shares                                |       | (36,071            | )          | (36,071 | ) |
|                                                           |       | 420,845            |       | 388,852 |   |
|                                                           |       |               |       |   |   |
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY                |       | $                  | 756,315    |   | $ | 641,252 |   |

 

Seeaccompanying notes.

 

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CUBICCORPORATION

 

CONSOLIDATED STATEMENTS OF INCOME

 
| ** **                                       | ** ** | **Years Ended September 30,**                     | ** ** |
|--------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                       | ** ** | **2009**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                       | ** ** | **(amounts in thousands, except per share data)** | ** ** |
|                                             |       |                                              |       |   |   |   |   |
| Net sales:                                       |       |                                              |       |   |   |   |   |
| Products                                         |       | $                                                 | 526,879    |   | $ | 478,478 |   | $ | 517,165 |   |
| Services                                         |       | 489,778                                           |       | 402,657 |   | 372,705 |   |
|                                             |       | 1,016,657                                         |       | 881,135 |   | 889,870 |   |
| Costs and expenses:                              |       |                                              |       |   |   |   |   |
| Products                                         |       | 394,478                                           |       | 376,213 |   | 415,729 |   |
| Services                                         |       | 411,038                                           |       | 333,268 |   | 311,811 |   |
| Selling, general and administrative expenses     |       | 111,828                                           |       | 98,613 |   | 94,107 |   |
| Restructuring costs                              |       | —                                            |       | 6,203 |   | — |   |
| Research and development                         |       | 8,173                                             |       | 12,231 |   | 5,178 |   |
| Amortization of purchased intangibles            |       | 6,432                                             |       | 1,343 |   | 947 |   |
|                                             |       | 931,949                                           |       | 827,871 |   | 827,772 |   |
|                                             |       |                                              |       |   |   |   |   |
| Operating income                                 |       | 84,708                                            |       | 53,264 |   | 62,098 |   |
|                                             |       |                                              |       |   |   |   |   |
| Other income (expenses):                         |       |                                              |       |   |   |   |   |
| Gain on sale of assets                           |       | —                                            |       | 1,238 |   | 1,052 |   |
| Interest and dividends                           |       | 1,664                                             |       | 6,351 |   | 3,431 |   |
| Interest expense                                 |       | (2,031                                            | )          | (2,745 | ) | (3,403 | ) |
| Other income (expense)                           |       | 899                                               |       | (653 | ) | 1,299 |   |
| Minority interest in loss (income) of subsidiary |       | —                                            |       | (216 | ) | 771 |   |
|                                             |       |                                              |       |   |   |   |   |
| Income before income taxes                       |       | 85,240                                            |       | 57,239 |   | 65,248 |   |
|                                             |       |                                              |       |   |   |   |   |
| Income taxes                                     |       | 29,554                                            |       | 20,385 |   | 23,662 |   |
|                                             |       |                                              |       |   |   |   |   |
| Net income                                       |       | $                                                 | 55,686     |   | $ | 36,854 |   | $ | 41,586 |   |
|                                             |       |                                              |       |   |   |   |   |
| Basic and diluted net income per common share    |       | $                                                 | 2.08       |   | $ | 1.38 |   | $ | 1.56 |   |
|                                             |       |                                              |       |   |   |   |   |
| Average number of common shares outstanding      |       | 26,731                                            |       | 26,725 |   | 26,720 |   |

 

Seeaccompanying notes.

 

37

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CUBIC CORPORATION

 

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

 
| ** **                                                                         | ** ** | **Years Ended September 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                         | ** ** | **2009**                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                                         | ** ** | **(in thousands)**            | ** ** |
| Operating  Activities:                                                             |       |                          |       |   |   |   |   |
| Net income                                                                         |       | $                             | 55,686     |   | $ | 36,854 |   | $ | 41,586 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                          |       |   |   |   |   |
| Depreciation and  amortization                                                     |       | 15,586                        |       | 9,688 |   | 8,854 |   |
| Deferred income  taxes                                                             |       | 3,346                         |       | (6,203 | ) | 745 |   |
| Provision for  doubtful accounts                                                   |       | 3,038                         |       | (39 | ) | 19 |   |
| Gain on sale of  assets                                                            |       | —                        |       | (1,238 | ) | (1,052 | ) |
| Minority  interest in income (loss) of subsidiary                                  |       | —                        |       | 216 |   | (771 | ) |
| Changes in  operating assets and liabilities, net of effects from acquisitions:    |       |                          |       |   |   |   |   |
| Accounts  receivable                                                               |       | 36,211                        |       | 40,495 |   | 18,091 |   |
| Inventories                                                                        |       | (4,275                        | )          | (18,748 | ) | (7,610 | ) |
| Prepaid expenses  and other current assets                                         |       | 5,141                         |       | 451 |   | (8,048 | ) |
| Accounts payable  and other current liabilities                                    |       | 14,175                        |       | 4,037 |   | 9,965 |   |
| Customer  advances                                                                 |       | 48,663                        |       | 16,952 |   | 12,181 |   |
| Income taxes                                                                       |       | (2,890                        | )          | 7,835 |   | (2,741 | ) |
| Other items -  net                                                                 |       | 1,352                         |       | 2,355 |   | (2,063 | ) |
| NET CASH  PROVIDED BY OPERATING ACTIVITIES                                         |       | 176,033                       |       | 92,655 |   | 69,156 |   |
|                                                                               |       |                          |       |   |   |   |   |
| Investing  Activities:                                                             |       |                          |       |   |   |   |   |
| Acquisition of  businesses, net of cash acquired                                   |       | (19,965                       | )          | (53,776 | ) | — |   |
| Proceeds from  sale of assets                                                      |       | —                        |       | 1,779 |   | 3,775 |   |
| Proceeds from  sale of short-term investments                                      |       | —                        |       | 66,160 |   | 241,606 |   |
| Purchases of  short-term investments                                               |       | (8,127                        | )          | (39,070 | ) | (259,935 | ) |
| Purchases of  property, plant and equipment                                        |       | (5,332                        | )          | (8,100 | ) | (6,098 | ) |
| Other items -  net                                                                 |       | 41                            |       | (2,254 | ) | (139 | ) |
| NET CASH USED IN  INVESTING ACTIVITIES                                             |       | (33,383                       | )          | (35,261 | ) | (20,791 | ) |
|                                                                               |       |                          |       |   |   |   |   |
| Financing  Activities:                                                             |       |                          |       |   |   |   |   |
| Change in  short-term borrowings                                                   |       | —                        |       | — |   | (10,000 | ) |
| Principal  payments on long-term debt                                              |       | (5,970                        | )          | (6,112 | ) | (6,112 | ) |
| Proceeds from  issuance of common stock                                            |       | 45                            |       | 128 |   | — |   |
| Purchases of  treasury stock                                                       |       | —                        |       | (2 | ) | — |   |
| Dividends paid  to shareholders                                                    |       | (4,811                        | )          | (4,810 | ) | (4,810 | ) |
| NET CASH USED IN  FINANCING ACTIVITIES                                             |       | (10,736                       | )          | (10,796 | ) | (20,922 | ) |
|                                                                               |       |                          |       |   |   |   |   |
| Effect of exchange  rates on cash                                                  |       | (536                          | )          | (7,465 | ) | 3,740 |   |
|                                                                               |       |                          |       |   |   |   |   |
| NET INCREASE IN  CASH AND CASH EQUIVALENTS                                         |       | 131,378                       |       | 39,133 |   | 31,183 |   |
|                                                                               |       |                          |       |   |   |   |   |
| Cash and cash  equivalents at the beginning of the year                            |       | 112,696                       |       | 73,563 |   | 42,380 |   |
|                                                                               |       |                          |       |   |   |   |   |
| CASH AND CASH  EQUIVALENTS AT THE END OF THE YEAR                                  |       | $                             | 244,074    |   | $ | 112,696 |   | $ | 73,563 |   |

 

See accompanyingnotes.

 

38

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CUBIC CORPORATION

 

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’EQUITY

 
| ** **                                                 | ** ** | ** **        | ** ** | ** **   | ** ** | **Accumulated**   | ** ** | ** **   | ** ** | ** ** | ** ** | ** **      | ** ** |
|------------------------------------------------------------|------------|-------------------|------------|--------------|------------|-------------------|------------|--------------|------------|------------|------------|-----------------|------------|
| ** **                                                 | ** ** | ** **        | ** ** | ** **   | ** ** | **Other**         | ** ** | ** **   | ** ** | ** ** | ** ** | **Number**      | ** ** |
| **(in  thousands except**                                  | ** ** | **Comprehensive** | ** ** | **Treasury** | ** ** | **Comprehensive** | ** ** | **Retained** | ** ** | **Common** | ** ** | **of  Shares**  | ** ** |
| **per  share amounts)**                                    | ** ** | **Income**        | ** ** | **Stock**    | ** ** | **Income**        | ** ** | **Earnings** | ** ** | **Stock**  | ** ** | **Outstanding** | ** ** |
| October 1, 2006                                            |       |              |       | (36,069      | )          | 8,415             |       | 338,523      |       | 12,357     |       | 26,720          |       |
|                                                       |       |              |       |         |       |              |       |         |       |       |       |            |       |
| Comprehensive  income:                                     |       |              |       |         |       |              |       |         |       |       |       |            |       |
| Net income                                                 |       | $                 | 41,586     |         | —     |              | —     |         | 41,586     |       | —     |            | —     |   |
| Decrease in  minimum pension liability, net of taxes       |       | 13,580            |       | —       |       | 13,580            |       | —       |       | —     |       | —          |       |
| Foreign currency translation  adjustment                   |       | 9,189             |       | —       |       | 9,189             |       | —       |       | —     |       | —          |       |
| Comprehensive  income                                      |       | $                 | 64,355     |         |       |              |       |         |       |       |       |            |       |   |
|                                                       |       |              |       |         |       |              |       |         |       |       |       |            |       |
| Cash dividends  paid — $.18 per share of common stock |       |              |       | —       |       | —            |       | (4,810       | )          | —     |       | —          |       |
|                                                       |       |              |       |         |       |              |       |         |       |       |       |            |       |
| September 30,  2007                                        |       |              |       | (36,069      | )          | 31,184            |       | 375,299      |       | 12,357     |       | 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                                        |       |              |       | (36,071      | )          | 7,570             |       | 404,868      |       | 12,485     |       | 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                                        |       |              |       | $            | (36,071    | )                 | $          | (11,357      | )          | $          | 455,743    |            | $          | 12,530 |   | $ | 26,732 |   |
|                                                            |            |                   |            |              |            |                   |            |              |            |            |            |                 |            |  |  |  |  |  |  |

 

See accompanyingnotes.

 

39

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CUBIC CORPORATION

 

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS

 

September 30, 2009

 

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Organization and Nature of the Business: We design, develop and manufacture products which are mainly electronicin nature, provide government services and services related to productspreviously produced by us and others. Our principal lines of business aredefense systems, defense services, and transportation fare collection systems.Our principal customers for defense products and services are the United Statesand foreign governments. Our transportation fare collection systems are soldprimarily to large local government agencies in the United States andworldwide.

 

Principles of Consolidation: The consolidated financial statements include the accounts of CubicCorporation and its majority-owned subsidiaries. All significant intercompanybalances and transactions have been eliminated in consolidation. Theconsolidation of foreign subsidiaries requires translation of their assets andliabilities into U.S. dollars at year-end exchange rates. We translate ourstatements of income and cash flows at the average exchange rates for eachyear. Transaction gains and losses on advances to foreign subsidiaries amountedto a $1.8 million gain in 2009, a $1.0 million loss in 2008 and a gain of $0.7million in 2007.

 

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

 

Concentration of Credit Risk: We have established guidelines pursuant to which our cash and cashequivalents are diversified among various money market instruments andinvestment funds. These guidelines emphasize the preservation of capital byrequiring minimum credit ratings assigned by established creditorganizations.  We achievediversification by specifying maximum investments in each instrument type andissuer. The majority of these investments are not on deposit in federallyinsured accounts.

 

Fair Value of Financial Instruments:  We carry financial instruments,including cash equivalents, accounts receivable, accounts payable and accruedliabilities at cost, which we believe approximates fair value because of theshort-term maturity of these instruments. The fair value of long-term debt is based upon quoted market prices forthe same or similar debt instruments and approximates 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.

 

In the quarter ended December 31, 2008 weadopted a new accounting standard that clarifies the definition of fair value,prescribes methods for measuring fair value, establishes a fair value hierarchybased on the inputs used to measure fair value, and expands disclosures aboutthe use of fair value measurements. The valuation techniques required are basedupon observable and unobservable inputs. Observable inputs reflect market dataobtained from independent sources, while unobservable inputs reflect internalmarket assumptions. The two types of inputs create the following fair valuehierarchy:

 

·                  Level 1 - Quoted prices for identical instruments inactive markets.

·                  Level 2 - Quoted prices for similar instruments inactive markets; quoted prices for identical or similar instruments in marketsthat are not active; and model-derived valuations whose inputs are observableor whose significant value drivers are observable.

·                  Level 3 - Significant inputs to the valuation modelare unobservable.

 

40

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CUBIC CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued

 

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES—Continued

 

The following table presents assets and liabilities measured andrecorded at fair value on our Balance Sheet on a recurring basis. All arecategorized as Level 2.

 
| **September 30,**      | ** ** | **2009**           | ** ** | **2008** | ** ** |
|------------------------|------------|--------------------|------------|----------|------------|
| ** **             | ** ** | **(in thousands)** | ** ** |
| Assets                 |       |               |       |     |       |
| Short-term investments |       | $                  | 8,127      |     | $          | — |   |
| Derivative assets      |       | 18,106             |       | 4,285    |       |
| Total assets           |       | 26,233             |       | 4,285    |       |
| Liabilities            |       |               |       |     |       |
| Derivative liabilities |       | 17,933             |       | 4,285    |       |
| Net assets             |       | $                  | 8,300      |     | $          | — |   |

 

Short-term Investments:  Short-term investments include marketable U.S.government agency securities and pre-refunded municipal bonds that may bepurchased at a discount or premium, may have callable options, and arecategorized as available-for-sale securities. The securities in ourportfolio had contractual maturities of approximately two years at September 30,2009. We record short-term investments at fair value and we wouldrecord any net difference between fair market value and cost in AccumulatedOther Comprehensive Income (Loss) on the Consolidated Balance Sheets; however,the difference between cost and fair market value was not material at September30, 2009.

 

Inventories:  We state ourinventories at the lower of cost or market. We determine cost using the first-in,first-out (FIFO) method, which approximates current replacement cost. We valueour work in process at the actual production and engineering costs incurred todate, including applicable overhead, and reduce the value by charging anyamounts in excess of estimated realizable value to cost of sales. Wherecontracts include advances, performance-based payments and progress payments,we reflect the advances as an offset against any related inventory balances.Costs we incur for certain government contracts include general andadministrative costs as allowed by government cost accounting standards. Theamounts remaining in inventory at September 30, 2009 and 2008 were $7.4 millionand $5.1 million respectively.

 

Property, Plant and Equipment: We carry property, plant and equipment at cost. We provide depreciationin amounts sufficient to amortize the cost of the depreciable assets over theirestimated useful lives. Generally, we use straight-line methods for realproperty over estimated useful lives ranging from 15 to 39 years or the term ofthe underlying lease for leasehold improvements.  We use accelerated methods (declining balanceand sum-of-the-years-digits) for machinery and equipment over estimated usefullives ranging from five to seven years. Our provisions for depreciation of plant and equipment and amortizationof leasehold improvements amounted to $9.2 million, $8.3 million and $7.9million in 2009, 2008 and 2007, respectively.

 

Goodwill:  We evaluategoodwill for potential impairment annually by comparing the fair value of areporting unit to its carrying value, including recorded goodwill. If thecarrying value exceeds the fair value, we would measure impairment by comparingthe derived fair value of goodwill to its carrying value, and any impairmentdetermined would be recorded in the current period. To date there has been noimpairment of our recorded goodwill.

 

41

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CUBIC CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued

 

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES—Continued

 

The changes in the carrying amount of goodwill for the two years ended September30, 2009 are as follows:

 
| ** **                             | ** ** | **Transportation  Systems** | ** ** | **Defense  Systems** | ** ** | **Mission  Support  Services** | ** ** | **Total** | ** ** |
|----------------------------------------|------------|-----------------------------|------------|----------------------|------------|--------------------------------|------------|-----------|------------|
| ** **                             | ** ** | **(in thousands)**          | ** ** |
| Balances at October 1, 2007            |       | $                           | 9,362      |                 | $          | 16,951                         |       | $         | 9,690      |   | $ | 36,003 |   |
| Goodwill acquired during the year      |       | —                      |       | —               |       | 27,045                         |       | 27,045    |       |
| Reduction of acquired tax accrual      |       | —                      |       | (435                 | )          |                           |       | (435      | )          |
| Foreign currency exchange rate changes |       | (1,152                      | )          | (429                 | )          |                           |       | (1,581    | )          |
| Balances at September 30, 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 |   |

 

Purchased Intangible Assets: The table below summarizes our purchased intangible assets:

 
| ** **                       | ** ** | **September 30, 2009**      | ** ** | **September 30, 2008**        | ** ** |
|----------------------------------|------------|-----------------------------|------------|-------------------------------|------------|
| **(in thousands)**               | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Carrying  Amount** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net Carrying  Amount** | ** ** |
| Contract and program intangibles |       | $                           | 33,346     |                          | $          | (8,371 | ) | $ | 24,975 |   | $ | 19,545 |   | $ | (3,139 | ) | $ | 16,406 |   |
| Other purchased intangibles      |       | 5,055                       |       | (1,412                        | )          | 3,643 |   | 2,787 |   | (133 | ) | 2,654 |   |
| Total                            |       | $                           | 38,401     |                          | $          | (9,783 | ) | $ | 28,618 |   | $ | 22,332 |   | $ | (3,272 | ) | $ | 19,060 |   |

 

Our purchased intangible assets are subject to amortization and we usea combination of straight-line and accelerated methods over a weighted averageperiod of 7 years.  Total amortizationexpense for 2009, 2008 and 2007, was $6.4 million, $1.3 million and $0.9million, respectively.

 

The table below shows our expected amortization for purchasedintangibles as of September 30, 2009, for each of the next five years (inthousands):

 
| ** ** | ** ** | **Transportation  Systems** | ** ** | **Defense  Systems** | ** ** | **Mission  Support  Services** | ** ** | **Total** | ** ** |
|------------|------------|-----------------------------|------------|----------------------|------------|--------------------------------|------------|-----------|------------|
|       |       | **(in thousands)**          |       |
| 2010       |       | $                           | 1,914      |                 | $          | 157                            |       | $         | 4,533      |   | $ | 6,604 |   |
| 2011       |       | 1,772                       |       | 79                   |       | 3,550                          |       | 5,401     |       |
| 2012       |       | 1,641                       |       | —               |       | 2,650                          |       | 4,291     |       |
| 2013       |       | 1,604                       |       | —               |       | 1,734                          |       | 3,338     |       |
| 2014       |       | 1,604                       |       | —               |       | 749                            |       | 2,353     |       |
| Thereafter |       | 6,631                       |       | —               |       | —                         |       | 6,631     |       |
|       |       | $                           | 15,166     |                 | $          | 236                            |       | $         | 13,216     |   | $ | 28,618 |   |

 

Impairment of Long-Lived Assets: We generally evaluate the carrying values of long-lived assets otherthan goodwill for impairment only if events or changes in facts andcircumstances indicate that carrying values

 

42

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CUBIC CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued

 

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES—Continued

 

may not be recoverable. If we determined there was any impairment, wewould measure it by comparing the fair value of the related asset to itscarrying value and record the difference in the current period. Fair value isgenerally determined by identifying estimated undiscounted cash flows to begenerated by those assets.  We have notrecorded any impairments for the years ended September 30, 2009, 2008 and 2007.

 

Deferred Compensation:  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 4.875% at September30, 2009.

 

Other Comprehensive Income: We present other comprehensive income (OCI) and its components in thestatement of changes in shareholders’ equity. Accumulated OCI (loss) consisted of the following:

 
| **September 30,**                          | ** ** | **2009**           | ** ** | **2008** | ** ** |
|--------------------------------------------|------------|--------------------|------------|----------|------------|
| ** **                                 | ** ** | **(in thousands)** | ** ** |
| Adjustment to pension liability            |       | $                  | (22,591    | )        | $          | (7,436 | ) |
| Foreign currency translation               |       | 11,122             |       | 15,006   |       |
| Net unrealized gains from cash flow hedges |       | 112                |       | —   |       |
|                                       |       | $                  | (11,357    | )        | $          | 7,570 |   |

 

The adjustment to the pension liability is shown net of a tax benefitof $12.2 million and $4.0 million at September 30, 2009 and 2008,respectively.  Deferred income taxes arenot recognized for translation-related temporary differences of foreignsubsidiaries whose undistributed earnings are considered to be permanentlyinvested.

 

Revenue Recognition:  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 contractperformance, we do not recognize profit until progress is demonstrated orcontract milestones are reached. For certain otherlong-term, fixed price production contracts not requiring substantialdevelopment effort we use the units-of-delivery percentage of completion methodas the basis to measure progress toward completing the contract and recognizingsales. We onlyinclude amounts representing contract change orders, claims or other items inthe contract value when they can be reliably estimated and we considerrealization probable.

 

We record sales of products when a firm sales agreement is in place,delivery has occurred and collectibility of the fixed or determinable salesprice is reasonably assured. For fixed-price service contracts that do notcontain measurable 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.

 

We record sales under cost-reimbursement-typecontracts as we incur the costs. We consider incentives or penalties and awardsapplicable to performance on contracts in estimating sales and profits, andrecord them when there is sufficient information to assess anticipated contractperformance. We do not recognize incentive provisions that increase or decreaseearnings based solely on a single significant event until the event occurs.

 

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CUBIC CORPORATION

 

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS—Continued

 

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES—Continued

 

For contracts that specify multiple deliverables, we allocate sales andprofits to separate units of accounting when there is objective evidence offair value and that each accounting unit has value to the customer on astand-alone basis.

 

We make provisions in the current period to fully recognize anyanticipated losses on contracts.  If wereceive cash on a contract prior to revenue recognition we classify it as acustomer advance on the balance sheet.

 

Income Taxes:  Our provision for income taxes includesfederal, 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.

 

Earnings Per Share:  We calculateper share amounts based upon the weighted average number of shares of common stockoutstanding.

 

Restructuring Activity: In 2008 wereduced our defense segment facility workforce by 139 employees. In addition,we eliminated 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.

 

The following table presents a roll forwardof our restructuring liability, which was included in other current liabilitiesin the audited consolidated balance sheet at September 30, 2008 (in thousands):

 
| ** **                         | ** ** | **Employee**   | ** ** |
|------------------------------------|------------|----------------|------------|
| ** **                         | ** ** | **Separation** | ** ** |
| ** **                         | ** ** | **Expenses**   | ** ** |
| Liability as of October 1, 2007    |       | $              | —     |   |
| Additions                          |       | 6,203          |       |
| Cash Payments                      |       | (4,523         | )          |
| Liability as of September 30, 2008 |       | 1,680          |       |
| Additions                          |       | —         |       |
| Cash Payments                      |       | (1,680         | )          |
| Liability as of September 30, 2009 |       | $              | —     |   |

 

Derivative Financial Instruments:  We use derivative andnonderivative financial instruments, such as foreign currency forwards, foreigncurrency debt obligations and foreign currency cash balances, to manage ourexposure to fluctuations in foreign currency exchange rates. We do not use anyderivative financial instruments for trading or other speculative purposes. The purpose of our foreign currency hedgingactivities is to fix the dollar value of specific commitments, investments,payments to foreign vendors, and the value of foreign currency denominatedreceipts from our customers. At September 30, 2009, we had foreign exchangecontracts with a notional value of $148.3 million outstanding.

 

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NOTESTO CONSOLIDATED FINANCIAL STATEMENTS—Continued

 

NOTE1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES—Continued

 

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 earnings. If a derivativeis designated as a cash flow hedge, then the effective portion of a change inthe fair value of the derivative is recognized as a component of AccumulatedOCI until the underlying hedged item is recognized in earnings, or theforecasted transaction is no longer probable of occurring. If a derivative doesnot qualify as a highly effective hedge, a change in fair value isimmediately recognized in earnings. We formally document all hedgingrelationships for all derivative hedges and the underlying hedged items, aswell as the risk management objectives and strategies for undertaking the hedgetransactions.

 

Weclassify the fair value of all derivative contracts as either current assets orliabilities, depending on the realized and unrealized gain or loss position ofthe hedged contract at the balance sheet date. The cash flows from derivativestreated as hedges are classified in the Consolidated Statements of Cash Flowsin 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, 2009, 2008 and2007. Due to delays in completion of a contract in Sweden, a foreign currencyhedge contract became classified as not highly effective in 2009. As a result,we realized a $1.4 million gain on this foreign currency exchange contractduring the second quarter of 2009; however, in the fourth quarter we recorded a$1.5 million loss, more than offsetting the earlier gain. In addition, a foreigncurrency forward has been excluded from the assessment of hedge effectivenessas it is marked to market on a quarterly basis. There are no significant creditrisks related to contingent features in our derivative agreements, and theamount of estimated unrealized net gains or losses from cash flow hedges whichare expected to be reclassified to earnings in the next twelve months is notsignificant.

 

New Accounting Standards:  On July 1,2009 the Financial Accounting Standards Board officially launched theAccounting Standards Codification *(FASB ASC)*, asthe authoritative source of generally accepted accounting principles in theUnited States. The ASC is effective for financial statements issued for interimand annual periods ending after September 15, 2009. Rules andinterpretive releases of the Securities and Exchange Commission (SEC) underfederal securities laws are also sources of authoritative GAAP for SECregistrants. The adoption of this standard had no impact on our consolidatedfinancial position, results of operations or cash flows.

 

In August 2009, the SECissued guidance regarding the impact of the FASB ASC on certain SEC rules,regulations, and interpretive releases and staff accounting bulletins. The SECadvised that references to FASB standards in current SEC text should correspondto the rules in the FASB ASC. The FASB ASC does not supersede any SEC rules orregulations. The FASB ASC should not be considered the authoritative source forSEC guidance.

 

In September 2006,the FASB issuedan accounting standard that defines fair value, establishes a framework andgives guidance regarding the methods used for measuring fair value, and expandsdisclosures about fair value measurements. We adopted this standard in thequarter ending December 31, 2008 with no material impact to our results ofoperations, financial position or cash flows.

 

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NOTESTO CONSOLIDATED FINANCIAL STATEMENTS—Continued

 

NOTE1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES—Continued

 

In February 2007,the FASB issuedan accounting standard that permits an entity to choose to measure manyfinancial instruments and certain other items at fair value at specifiedelection dates. Subsequent unrealized gains and losses on items for which thefair value option has been elected will be reported in earnings. We adoptedthis standard in the quarter ending December 31, 2008 with no materialimpact to our results of operations, financial position or cash flows.

 

InDecember 2007 the FASB issued an accounting standard that applies to all transactions or other events in which an entity obtainscontrol of one or more businesses. This standard applies to all businessentities, including mutual entities that previously used thepooling-of-interests method of accounting for some business combinations.  We will adopt this standard in the fiscalyear beginning October 1, 2009. The impact of this standard will depend on the size andstructure of future acquisitions.

 

In March 2008 the FASB issued anaccounting standard that requires enhanced disclosuresabout an entity’s financial position, financial performance, and cash flows.The statement requires that objectives for using derivative instruments bedisclosed in terms of underlying risks and accounting designation. We adoptedthis standard in the quarter ended March 31, 2009 with no material impact to our resultsof operations, financial position or cash flows.

 

Duringthe quarter ended June 30, 2009, we adopted a standard that establishesgeneral accounting for and disclosures of events that occur after the balancesheet date but before financial statements are issued or are available to beissued.  The adoption of this standard did not have a material impacton our results of operations, financial position or cash flows.

 

InDecember 2007, the FASB issued an accounting standard thatrequires allentities to report noncontrolling (minority) interests in subsidiaries asequity in the consolidated financial statements. This standard is effective forfiscal years beginning after December 15, 2008, which for us will be the fiscal year beginning October 1, 2009.We currently do not expect that the adoption of this standard will have amaterial impact on ourresults 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 will be the fiscal year beginning October 1, 2009. We currently donot expect that the adoption of this standard will have a material impact on our results of operations, financialposition 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.  We are currently evaluating the impact that the adoptionof this standard will have on our results of operations, financial position or cashflows. This standard is effective for the first annual reporting period thatbegins after November 15, 2009, which for us will be the fiscal yearbeginning October 1, 2010.

 

InOctober 2009, the FASB issued revised accounting guidance, which can beapplied prospectively or retrospectively. This guidance modifies the objective-and-reliable-evidence-of-fair-valuecriterion from the separation criteria used to determine whether an arrangementinvolving multiple deliverables contains more than one unit of accounting,replaces references to “fair value” with “selling price” to distinguish fromthe fair value measurement required under the “Fair Value Measurements andDisclosures” guidance, provides

 

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CUBICCORPORATION

 

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS—Continued

 

NOTE1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES—Continued

 

ahierarchy that entities must use to estimate the selling price, eliminates theuse of the residual method for allocation, and expands the ongoing disclosurerequirements. We are currently evaluating the effect that adoption of thisupdate will have, if any, on our consolidated financial position, results ofoperations, or cash flows. This revised guidance is effective for new ormaterially modified arrangements in fiscal years beginning on or after June 15,2010, and we expect to adopt it in the fiscal year beginning October 1,2010, although early adoption is allowed.

 

Use of 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.

 

Risks and Uncertainties: We are subject to the normal risks and uncertainties of performinglarge, multiyear, often fixed-price contracts. In addition, we are subject toaudit of incurred costs related to many of our U.S. Government contracts. Theseaudits could produce different results than we have estimated; however, ourexperience has been that our costs are acceptable to the government.

 

Subsequent Events:  We havecompleted an evaluation of all subsequent events through December 9, 2009,which is the issuance date of these consolidated financial statements, andconcluded no subsequent events have occurred that require recognition ordisclosure.

 

Reclassifications: We reclassified Amortization of Purchased Intangibles in 2008 and 2007from Selling, General and Administrative expenses to a separate line item inthe Consolidated Statements of Income, for comparative purposes, as the expensebecame significant in 2009.

 

NOTE 2—INVESTMENT INVARIABLE INTEREST ENTITY

 

We own 37.5% of thecommon stock of Transaction Systems Limited (TranSys), a special-purposecompany formed in the United Kingdom to bid on a contract called “PRESTIGE”(Procurement of Revenue Services, Ticketing, Information, Gates and Electronics),which outsourced most of the functions of the Transport for London (TfL) farecollection system for a period of twelve to seventeen years. In August 1998,TranSys was awarded the contract and began operations. We and the other 37.5%shareholder participate in the PRESTIGE contract solely through subcontractsfrom TranSys. All of the work to be performed by TranSys is subcontracted tothe two 37.5% shareholders and the arrangement provides for the pass-through ofvirtually all revenues from TfL to the two shareholders. Our investment inTranSys is immaterial. TranSys is considered a variable interest entity; however, wedo not consolidate TranSys as we are not considered the primary beneficiary.

 

In August 2008, TfLnotified TranSys that they will be terminating the PRESTIGE fare collectionsystem contract as of August 2010 in accordance with the early terminationprovision of the contract. As a result of this termination for convenience,upon completion of the contract in 2010, the operations of TranSys will cease.Our best estimate at this time is that TranSys will incur a loss ofapproximately $1.3 million by the time the contract is completed in August 2010.We have recorded a provision of approximately $0.6 million for our share of theloss in the year ended September 30, 2009.

 

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NOTESTO CONSOLIDATED FINANCIAL STATEMENTS—Continued

 

NOTE 2—INVESTMENT INVARIABLE INTEREST ENTITY—Continued

 

Financing for the projectwas provided by a syndicate of banks which participated in creating the project’sfinancial structure. Debt servicing began in 2003 and will continue until theend of the contract in August 2010, at which time TfL is obligated to payTranSys an amount sufficient to repay the loan, subject to a possible withhold,as described below. This debt is guaranteed by TfL and is nonrecourse to theshareholders of TranSys.

 

Thecontract termination notice triggered a requirement for TranSys to engage anindependent engineer to produce a report on the state of the assets associatedwith the PRESTIGE system. The engineer is scheduled to deliver their report in December 2009,stating whether, in their opinion, the fare collection system assets are ableto pass a “Performance Test” for a period of two years beyond the contracttermination. The Performance Test requires the assets to perform at contractualminimum levels with broadly the same level of maintenance as that performedunder the contract. If the engineer determines that the assets may fail thePerformance Test then TranSys and its subcontractors have until August 2010to carry out the necessary remediation of the assets.

 

Upontermination of the contract in August 2010, the same engineer will delivera “Supplementary Report” which is a follow up assessment to take into accountthe remediation efforts of TranSys and its subcontractors, and to give anopinion on the remaining level of remediation work required in order to allowthe system to pass the Performance Test for the two year period. The contractallows TfL to withhold an amount up to approximately £40 million ($64 million)from its final payment to TranSys pending the delivery of the SupplementaryReport and the completion of any remediation work identified in the report.

 

TranSysis required to repay the banks in August 2010 and, to the extent thatthere is a funding shortfall in TranSys because of a withhold by TfL, theshareholders are each required to provide TranSys their share of the cashrequired to fully repay the debt until the funds are returned to TranSys byTfL, at which time the shareholders would be repaid by TranSys. We estimatethat our share of this withhold could be as much as $38.5 million. In recentyears the fare collection system has consistently exceeded the contractualperformance levels and we believe that sufficient costs have been included inour estimated costs to complete the contract to continue this level ofperformance for the required period. In addition, since we have been selectedas the successor contractor to the PRESTIGE contract, we believe TfL will haveno reason to withhold funds to assure any required remediation will becompleted.

 

We have provided certainperformance guarantees to various parties related to the PRESTIGE contract andTranSys, including TfL, the banks and the TranSys shareholders. The otherTranSys shareholders have provided similar performance guarantees to the sameparties and to us.

 

Summarized unauditedfinancial information for TranSys is as follows:

 
| **Years ended September 30,** | ** ** | **2009**          | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------|------------|-------------------|------------|----------|------------|----------|------------|
| ** **                         | ** ** | **(in millions)** | ** ** |
| **Statement of Operations:**       |       |              |       |     |       |     |       |
| Sales                              |       | $                 | 203.0      |     | $          | 215.3    |       | $ | 210.8 |   |
| Operating loss                     |       | $                 | (1.7       | )        | $          | —   |       | $ | — |   |
| Net loss                           |       | $                 | (1.3       | )        | $          | —   |       | $ | — |   |

 

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CUBICCORPORATION

 

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS—Continued

 

NOTE 2—INVESTMENT INVARIABLE INTEREST ENTITY—Continued

 
| **September 30,**                | ** ** | **2009**          | ** ** | **2008** | ** ** |
|---------------------------------------|------------|-------------------|------------|----------|------------|
| ** **                            | ** ** | **(in millions)** | ** ** |
| **Balance Sheets:**                   |       |              |       |     |       |
| Cash                                  |       | $                 | 44.6       |     | $          | 43.7 |   |
| Unbilled contract accounts receivable |       | 131.1             |       | 171.6    |       |
| Other current assets                  |       | 79.6              |       | 116.3    |       |
| Total Assets                          |       | $                 | 255.3      |     | $          | 331.6 |   |
|                                  |       |              |       |     |       |
| Current portion of long-term debt     |       | $                 | 217.4      |     | $          | 297.7 |   |
| Other current liabilities             |       | 39.2              |       | 33.9     |       |
| Equity                                |       | (1.3              | )          | —   |       |
| Total Liabilities and Equity          |       | $                 | 255.3      |     | $          | 331.6 |   |

 

NOTE 3—ACCOUNTSRECEIVABLE

 

The components ofaccounts receivable under long-term contracts are as follows:

 
| **September 30,**                                                       | ** ** | **2009**           | ** ** | **2008** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------|------------|----------|------------|
| ** **                                                                   | ** ** | **(in thousands)** | ** ** |
| U.S. Government Contracts:                                                   |       |               |       |     |       |
| Amounts billed                                                               |       | $                  | 62,093     |     | $          | 60,016 |   |
| Recoverable costs and accrued profits on progress  completed—not billed |       | 44,556             |       | 50,600   |       |
|                                                                         |       | 106,649            |       | 110,616  |       |
| Commercial Customers:                                                        |       |               |       |     |       |
| Amounts billed                                                               |       | 41,907             |       | 47,209   |       |
| Recoverable costs and accrued profits on progress  completed—not billed |       | 88,030             |       | 126,853  |       |
|                                                                         |       | 129,937            |       | 174,062  |       |
|                                                                         |       | 236,586            |       | 284,678  |       |
| Less unbilled amounts not currently due—commercial  customers           |       | (13,400            | )          | (19,930  | )          |
|                                                                         |       | $                  | 223,186    |     | $          | 264,748 |   |

 

A portion of recoverablecosts and accrued profits on progress completed is billable under progress paymentprovisions of the related contracts. The remainder of these amounts is billableupon delivery of products or furnishing of services, with an immaterial amountsubject to retainage provisions of the contracts.  It is anticipated that we will bill andcollect substantially all of the unbilled portion of receivables identified ascurrent assets under progress billing provisions of the contracts or uponcompletion of performance tests and/or acceptance by the customers duringfiscal 2010.

 

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NOTESTO CONSOLIDATED FINANCIAL STATEMENTS—Continued

 

NOTE 4—INVENTORIES

 

Inventories areclassified as follows:

 
| **September 30,**                                           | ** ** | **2009**           | ** ** | **2008** | ** ** |
|------------------------------------------------------------------|------------|--------------------|------------|----------|------------|
| ** **                                                       | ** ** | **(in thousands)** | ** ** |
|                                                             |       |               |       |     |       |
| Finished products                                                |       | $                  | 55         |     | $          | 172 |   |
| Work in process and inventoried costs under  long-term contracts |       | 96,962             |       | 64,179   |       |
| Customer advances                                                |       | (49,734            | )          | (20,783  | )          |
| Materials and purchased parts                                    |       | 1,824              |       | 1,550    |       |
|                                                             |       | $                  | 49,107     |     | $          | 45,118 |   |

 

AtSeptember 30, 2009 and 2008, work in process and inventoried costs underlong-term contracts included approximately $0.9 million and $1.6 million,respectively, in costs incurred outside the scope of work on several contractsin the defense systems segment. We believe it is probable we will recover thesecosts, plus a profit margin, under contract change orders within the next year.

 

NOTE 5—FINANCINGARRANGEMENTS

 

Long-term debt consistsof the following:

 
| **September 30,**                                                                                                                                                                    | ** ** | **2009**           | ** ** | **2008** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|----------|------------|
| ** **                                                                                                                                                                                | ** ** | **(in thousands)** | ** ** |
| Unsecured notes  payable to a group of insurancecompanies, with annual principal  payments of $4,000,000 due in November. Interest at 6.31% is payable  semiannually in November and May. |       | $                  | 20,000     |     | $          | 24,000 |   |
| Unsecured note payable to an insurance company,  interest at 6.11%.                                                                                                                       |       | —             |       | 1,429    |       |
| Mortgage note from a UK financial institution,  with quarterly installments of principal and interest at 6.5%                                                                             |       | 5,124              |       | 6,316    |       |
|                                                                                                                                                                                      |       |               |       |     |       |
|                                                                                                                                                                                      |       | 25,124             |       | 31,745   |       |
| Less current portion                                                                                                                                                                      |       | (4,554             | )          | (6,045   | )          |
|                                                                                                                                                                                      |       |               |       |     |       |
|                                                                                                                                                                                      |       | $                  | 20,570     |     | $          | 25,700 |   |

 

The terms of the notespayable and other financial instruments include provisions that require and/orlimit, among other financial ratios and measurements, the permitted levels ofworking capital, debt and tangible net worth and coverage of fixed charges. Wehave also provided certain performance guarantees to various parties related tothe PRESTIGE contract and the TranSys arrangement. As consideration for theperformance guarantee, we have agreed to certain financial covenants includinglimits on working capital, debt, tangible net worth and cash flow coverage. At September 30,2009, the most restrictive covenant under these agreements leaves consolidatedretained earnings of $188 million available for the payment of dividends toshareholders, purchases of our common stock and other charges to shareholders’equity. To date, there have been no covenant violations.

 

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CUBIC CORPORATION

 

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS—Continued

 

NOTE 5—FINANCINGARRANGEMENTS—Continued

 

We maintain a short-termborrowing arrangement in New Zealand totaling $0.5 million New Zealand dollars(equivalent to approximately $0.4 million) to help meet the short-term workingcapital requirements of our subsidiary in that country.  At September 30, 2009, no amounts wereoutstanding under this borrowing arrangement.

 

We have a $150 million revolving line of credit arrangement with a groupof U.S. banks which expires in March 2010. Commitment fees associated withthis financing arrangement are 0.15% of the unutilized balance per annum. As ofSeptember 30, 2009 we had no short-term debt outstanding under this lineof credit and $45.3 million in outstanding letters of credit.

 

Maturities of long-termdebt for each of the five years in the period ending September 30, 2014,are as follows: 2010 – $4.6 million; 2011 – $4.6 million; 2012 – $4.6 million; 2013 – $4.6 million; 2014 –$4.6 million.

 

Interest paid amounted to$1.8 million, $2.3 million, and $3.6 million in 2009, 2008 and 2007,respectively.

 

As of September 30,2009 we had letters of credit and bank guarantees outstanding totaling $72.8million, which guarantee either our performance or customer advances undercertain contracts. In addition, we had financial letters of credit outstandingtotaling $5.8 million as of September 30, 2009, which primarily guaranteeour payment of certain self-insured liabilities. We have never had a drawing ona letter of credit instrument, nor are any anticipated; therefore, we estimatethe fair value of these instruments to be zero.

 

Our self-insurancearrangements are limited to certain workers’ compensation plans, automobileliability, and product liability claims. Under these arrangements, weself-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 $7.6million and $5.4 million as of September 30, 2009 and 2008, respectively.

 

NOTE 6—COMMITMENTS

 

We lease certain office,manufacturing and warehouse space, and miscellaneous computer and other officeequipment under noncancelable operating leases expiring in various yearsthrough 2018.  These leases, some ofwhich may be renewed for periods up to 10 years, generally require us to payall maintenance, insurance and property taxes. Several leases are subject toperiodic adjustment based on price indices or cost increases. Rental expense,net of sublease income, for all operating leases amounted to $6.6 million, $6.2million, and $6.7 million in 2009, 2008 and 2007, respectively.

 

Future minimum payments,net of minimum sublease income, under noncancelable operating leases withinitial terms of one year or more consist of the following at September 30,2009 (in thousands):

 
| 2010       |   | $     | 6,738  |   |
|------------|--------|-------|--------|--------|
| 2011       |   | 5,179 |   |
| 2012       |   | 3,907 |   |
| 2013       |   | 1,978 |   |
| 2014       |   | 1,215 |   |
| Thereafter |   | 935   |   |
|       |   | $     | 19,952 |   |

 

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NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS—Continued

 

NOTE 7—INCOME TAXES

 

Significant components ofthe provision for income taxes are as follows:

 
| **Years ended September 30,** | ** ** | **2009**           | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------|------------|--------------------|------------|----------|------------|----------|------------|
| ** **                         | ** ** | **(in thousands)** | ** ** |
| Current:                           |       |               |       |     |       |     |       |
| Federal                            |       | $                  | 11,417     |     | $          | 8,474    |       | $ | 9,695 |   |
| State                              |       | 3,691              |       | 2,063    |       | 2,793    |       |
| Foreign                            |       | 11,090             |       | 16,051   |       | 10,429   |       |
| Total current                      |       | 26,198             |       | 26,588   |       | 22,917   |       |
|                               |       |               |       |     |       |     |       |
| Deferred (credit):                 |       |               |       |     |       |     |       |
| Federal                            |       | 2,516              |       | (5,440   | )          | 670      |       |
| State                              |       | 420                |       | (1,078   | )          | 352      |       |
| Foreign                            |       | 420                |       | 315      |       | (277     | )          |
| Total deferred                     |       | 3,356              |       | (6,203   | )          | 745      |       |
| Total income tax expense           |       | $                  | 29,554     |     | $          | 20,385   |       | $ | 23,662 |   |

 

We calculate deferred taxassets and liabilities based on differences between financial reporting and taxbases of assets and liabilities, and measure them using the enacted tax ratesand laws that we expect will be in effect when the differences reverse.Significant components of our deferred tax assets and liabilities are asfollows:

 
| **September 30,**                                   | ** ** | **2009**           | ** ** | **2008** | ** ** |
|----------------------------------------------------------|------------|--------------------|------------|----------|------------|
| ** **                                               | ** ** | **(in thousands)** | ** ** |
| Deferred tax assets:                                     |       |               |       |     |       |
| Accrued employee benefits                                |       | $                  | 8,064      |     | $          | 9,796 |   |
| Allowance for doubtful accounts                          |       | 1,670              |       | 1,833    |       |
| Long-term contracts and inventory valuation  reductions  |       | 10,643             |       | 14,185   |       |
| Allowances for loss contingencies                        |       | 5,192              |       | 4,506    |       |
| Deferred compensation                                    |       | 3,306              |       | 3,145    |       |
| Book over tax depreciation                               |       | 1,954              |       | 2,295    |       |
| Adjustment to pension liability                          |       | 12,163             |       | 4,003    |       |
| California research and development credit  carryforward |       | 3,410              |       | —   |       |
| Other                                                    |       | 3,115              |       | 1,498    |       |
| Subtotal                                                 |       | 49,517             |       | 41,261   |       |
| Valuation allowance                                      |       | (3,410             | )          | —   |       |
| Deferred tax assets                                      |       | 46,107             |       | 41,261   |       |
|                                                     |       |               |       |     |       |
| Deferred tax liabilities:                                |       |               |       |     |       |
| Amortization of goodwill and intangibles                 |       | 4,681              |       | 3,726    |       |
| Prepaid expenses                                         |       | 1,924              |       | 2,007    |       |
| State taxes                                              |       | 980                |       | 1,316    |       |
| Other                                                    |       | 2,308              |       | 2,499    |       |
| Deferred tax liabilities                                 |       | 9,893              |       | 9,548    |       |
| Net deferred tax asset                                   |       | $                  | 36,214     |     | $          | 31,713 |   |

 

52

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CUBIC CORPORATION

 

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS—Continued

 

NOTE 7—INCOMETAXES—Continued

 

The reconciliation ofincome tax computed at the U.S. federal statutory tax rate to income taxexpense is as follows:

 
| **Years ended September 30,**                | ** ** | **2009**           | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------------------------------|------------|--------------------|------------|----------|------------|----------|------------|
| ** **                                        | ** ** | **(in thousands)** | ** ** |
|                                              |       |               |       |     |       |     |       |
| Tax at federal statutory rate                     |       | $                  | 29,834     |     | $          | 20,034   |       | $ | 22,837 |   |
| State income taxes, net of federal tax effect     |       | 2,672              |       | 640      |       | 2,044    |       |
| Income exclusion on export sales                  |       | —             |       | —   |       | (192     | )          |
| Nondeductible expenses                            |       | 408                |       | 152      |       | 157      |       |
| Reversal of reserve accrued for tax contingencies |       | (80                | )          | (1,205   | )          | (911     | )          |
| Tax effect from foreign earnings repatriation     |       | 3,063              |       | 3,856    |       | 2,626    |       |
| Tax effect from foreign subsidiaries              |       | (2,523             | )          | (2,651   | )          | (1,368   | )          |
| Tax credits and other                             |       | (3,820             | )          | (441     | )          | (1,531   | )          |
|                                              |       | $                  | 29,554     |     | $          | 20,385   |       | $ | 23,662 |   |

 

Weare subject to ongoing audits from various taxing authorities in thejurisdictions in which we do business. As of September 30, 2009, our open tax years in significantjurisdictions include 2006-2009 in both the U.S. and the U.K. We believe wehave adequately provided for uncertain tax issues we have not yet resolved withfederal, state and foreign tax authorities. Although not more likely than not, themost adverse resolution of these issues could result in additional charges toearnings in future periods. Based upon a consideration of all relevant factsand circumstances, we do not believe the ultimate resolution of uncertain taxissues for all open tax periods will have a materially adverse effect upon ourresults of operations or financial condition.

 

Wehave recorded liabilities for unrecognized tax benefits related to permanentand temporary tax adjustments which totaled $4.8 million at September 30,2009 and $5.8 million at September 30, 2008. The net changes in theliability were as follows:

 
| **Years ended September 30,**                               | ** ** | **2009**           | ** ** | **2008** | ** ** |
|------------------------------------------------------------------|------------|--------------------|------------|----------|------------|
| ** **                                                       | ** ** | **(in thousands)** | ** ** |
|                                                             |       |               |       |     |       |
| Balance at October 1                                        |       | $                  | 5,845      |     | $          | 10,001 |   |
| Increase (decrease) related to tax positions in prior  years     |       |               |       |     |       |
| Recognition of benefits from change in tax method  of accounting |       | —             |       | (1,577   | )          |
| Recognition of benefits from expiration of  statutes             |       | (1,555             | )          | (2,673   | )          |
| Tax postions related to the current year                         |       | 778                |       | 1,008    |       |
| Decreases related to settlements with taxing  authoritites       |       | (259               | )          | (914     | )          |
| Balance at September 30                                     |       | $                  | 4,809      |     | $          | 5,845 |   |

 

At September 30,2009, the amount of unrecognized tax benefits from permanent tax adjustmentsthat, if recognized, would affect the effective rate was $3.0 million, and $1.8million would decrease goodwill. Effective October 1, 2009, we areadopting the revised accounting standard referred to in Note 1, whichchanges the accounting for acquired tax liabilities such that the utilizationof a net operating loss carryforward will no longer reduce goodwill. Therefore,as of October 1, 2009, the amount of unrecognized tax benefits from permanent tax adjustmentsthat, if recognized, would affect the effective rate

 

53

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CUBIC CORPORATION

 

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS—Continued

 

NOTE 7—INCOMETAXES—Continued

 

is $4.7 million. Over the nextyear, we do not expect a significant increase or decrease in the unrecognizedtax benefits recorded as of September 30, 2009. The amount of net interest and penaltiesrecognized as a component of income tax expense during 2009, 2008 and 2007 wasnot material.  Interest and penaltiesaccrued at September 30, 2009 and 2008 amounted to $0.4 million and $0.5million, respectively, bringing the total liability for uncertain taxissues to $5.1 million and $6.3 million as of September 30, 2009 and 2008,respectively.

 

Wemade income tax payments, net of refunds, totaling $28.8 million, $18.2 millionand $26.2 million in 2009, 2008 and 2007, respectively.

 

Income before incometaxes includes the following components:

 
| **Years ended September 30,** | ** ** | **2009**           | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------|------------|--------------------|------------|----------|------------|----------|------------|
| ** **                         | ** ** | **(in thousands)** | ** ** |
|                               |       |               |       |     |       |     |       |
| United States                      |       | $                  | 45,329     |     | $          | 4,920    |       | $ | 33,412 |   |
| Foreign                            |       | 39,911             |       | 52,319   |       | 31,836   |       |
| Total                              |       | $                  | 85,240     |     | $          | 57,239   |       | $ | 65,248 |   |

 

Management evaluates ourcapital requirements in our foreign subsidiaries on an annual basis todetermine what level of capital is needed for the long-term operations of thebusinesses. We provide U.S. taxes on the amount of capital that is determinedto be in excess of the long-term requirements of the business and is,therefore, available for distribution. In 2009, we determined that 12 millionBritish Pounds ($18.4 million, net of hedge losses) was excess capital in theU.K. and 10 million New Zealand Dollars ($6.4 million, net of hedge losses) wasexcess capital in New Zealand and paid dividends of those amounts to the U.S.parent company in 2009. U.S. taxes provided on these dividends amounted toapproximately $3.1 million in 2009.

 

Undistributed earnings ofall our foreign subsidiaries amounted to approximately $57.5 million at September 30,2009. 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.

 

NOTE 8—PENSION, PROFITSHARING AND OTHER RETIREMENT PLANS

 

We have profit sharingand other defined contribution retirement plans that provide benefits for mostemployees in the U.S. An employee is eligible to participate in these plansafter six months to one year of service, and may make additional contributionsto the plans from their date of hire. These plans provide for full vesting ofbenefits over periods from zero to five years. More than half of ourcontributions to these plans are discretionary with the Board of Directors.Company contributions to the plans aggregated $15.4 million, $14.2 million and$13.6 million in 2009, 2008 and 2007, respectively.

 

Certain employees in theU.S. are covered by a noncontributory defined benefit pension plan for whichbenefits were frozen as of December 31, 2006 (“curtailment”). The effectof the curtailment is that no new benefits have been accrued after that date.Approximately one-half of our European employees are covered by a contributorydefined benefit pension plan. Our funding policy provides that contributionswill be at least equal to the minimum amounts mandated by statutoryrequirements. September 30 is used as the measurement date for theseplans.

 

54

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CUBIC CORPORATION

 

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS—Continued

 

NOTE 8—PENSION, PROFITSHARING AND OTHER RETIREMENT PLANS—Continued

 

The unrecognized amountsrecorded in accumulated other comprehensive income will be subsequentlyrecognized as net periodic pension cost, consistent with our historicalaccounting policy for amortizing those amounts. We will recognize actuarialgains and losses that arise in future periods and are not recognized as netperiodic pension cost in those periods as increases or decreases in othercomprehensive income, net of tax, in the period they arise. We adjust actuarialgains and losses recognized in other comprehensive income as they aresubsequently recognized as a component of net periodic pension cost.

 

The following table setsforth changes in the projected benefit obligation and fair value of plan assetsand the funded status for these defined benefit plans:

 
| **September 30,**                                  | ** ** | **2009**           | ** ** | **2008** | ** ** |
|---------------------------------------------------------|------------|--------------------|------------|----------|------------|
| ** **                                              | ** ** | **(in thousands)** | ** ** |
| **Change in benefit obligations:**                      |       |               |       |     |       |
| Net benefit obligation at the beginning of the  year    |       | $                  | 145,440    |     | $          | 164,075 |   |
| Service cost                                            |       | 2,521              |       | 3,520    |       |
| Interest cost                                           |       | 9,679              |       | 9,761    |       |
| Actuarial loss (gain)                                   |       | 16,065             |       | (19,898  | )          |
| Participant contributions                               |       | 1,124              |       | 1,211    |       |
| Gross benefits paid                                     |       | (5,197             | )          | (5,148   | )          |
| Foreign currency exchange rate changes                  |       | (5,010             | )          | (8,081   | )          |
| Net benefit obligation at the end of the year           |       | 164,622            |       | 145,440  |       |
|                                                    |       |               |       |     |       |
| **Change in plan assets:**                              |       |               |       |     |       |
| Fair value of plan assets at the beginning of the  year |       | 128,989            |       | 162,542  |       |
| Actual return on plan assets                            |       | 3,207              |       | (24,913  | )          |
| Employer contributions                                  |       | 9,504              |       | 3,380    |       |
| Participant contributions                               |       | 1,124              |       | 1,211    |       |
| Gross benefits paid                                     |       | (5,197             | )          | (5,148   | )          |
| Administrative expenses                                 |       | (701               | )          | (809     | )          |
| Foreign currency exchange rate changes                  |       | (4,518             | )          | (7,274   | )          |
| Fair value of plan assets at the end of the year        |       | 132,408            |       | 128,989  |       |
|                                                    |       |               |       |     |       |
| Unfunded status of the plans                            |       | (32,214            | )          | (16,451  | )          |
| Unrecognized net actuarial loss                         |       | 34,754             |       | 11,439   |       |
| Net amount recognized                                   |       | $                  | 2,540      |     | $          | (5,012 | ) |
|                                                    |       |               |       |     |       |
| **Amounts recognized in Accumulated  OCI**              |       |               |       |     |       |
| Liability adjustment to OCI                             |       | $                  | (34,754    | )        | $          | (11,439 | ) |
| Deferred tax asset                                      |       | 12,163             |       | 4,003    |       |
| Accumulated other comprehensive loss                    |       | $                  | (22,591    | )        | $          | (7,436 | ) |

 

55

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CUBIC CORPORATION

 

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS—Continued

 

NOTE 8—PENSION, PROFITSHARING AND OTHER RETIREMENT PLANS—Continued

 

The projected benefitobligation, ABO and fair value of plan assets for the defined benefit pensionplans in which the ABO was in excess of the fair value of plan assets were asfollows:

 
| **September 30,**         | ** ** | **2009**           | ** ** | **2008** | ** ** |
|--------------------------------|------------|--------------------|------------|----------|------------|
| ** **                     | ** ** | **(in thousands)** | ** ** |
| Projected benefit obligation   |       | $                  | 164,622    |     | $          | 91,988 |   |
| Accumulated benefit obligation |       | 148,375            |       | 91,988   |       |
| Fair value of plan assets      |       | 132,408            |       | 82,534   |       |
|                                |            |                    |            |          |            |  |  |

 

The ABO for our U.K.pension plan did not exceed the fair value of plan assets at September 30,2008 and, therefore, values for the U.K. plan are not included in the tableabove for 2008.

 

The components of netperiodic pension cost were as follows:

 
| **Years ended September 30,** | ** ** | **2009**           | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------|------------|--------------------|------------|----------|------------|----------|------------|
| ** **                         | ** ** | **(in thousands)** | ** ** |
|                               |       |               |       |     |       |     |       |
| Service cost                       |       | $                  | 2,521      |     | $          | 3,520    |       | $ | 5,056 |   |
| Interest cost                      |       | 9,679              |       | 9,761    |       | 9,581    |       |
| Expected return on plan assets     |       | (9,569             | )          | (12,706  | )          | (11,323  | )          |
| Amortization of:                   |       |               |       |     |       |     |       |
| Prior service cost                 |       | —             |       | —   |       | 7        |       |
| Actuarial loss (gain)              |       | —             |       | (243     | )          | 458      |       |
| Administrative expenses            |       | 100                |       | 112      |       | 114      |       |
| Net pension cost                   |       | $                  | 2,731      |     | $          | 444      |       | $ | 3,893 |   |

 
| **Years ended September 30,**                                                                               | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Weighted-average assumptions used to determine  benefit obligation at September 30:                         |       |     |       |     |       |     |       |
| Discount rate                                                                                                    |       | 5.6      | %          | 7.3      | %          | 6.2      | %          |
| Rate of compensation increase                                                                                    |       | 4.5      | %          | 4.8      | %          | 4.4      | %          |
| Weighted-average assumptions used to determine net  periodic benefit cost for the years ended September 30: |       |     |       |     |       |     |       |
| Discount rate                                                                                                    |       | 7.3      | %          | 6.2      | %          | 5.6      | %          |
| Expected return on plan assets                                                                                   |       | 7.8      | %          | 8.0      | %          | 8.1      | %          |
| Rate of compensation increase                                                                                    |       | 4.8      | %          | 4.4      | %          | 4.5      | %          |

 

56

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CUBIC CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued

 

NOTE 8—PENSION, PROFIT SHARING AND OTHER RETIREMENT PLANS—Continued

 

The weighted average asset allocations by asset category for ourpension plans as of September 30 were as follows:

 
| ** **        | ** ** | **2009** | ** ** | **2008** | ** ** |
|-------------------|------------|----------|------------|----------|------------|
| Equity securities |       | 67%      |       | 71%      |       |
| Debt securities   |       | 30%      |       | 22%      |       |
| Real estate       |       | 2%       |       | 5%       |       |
| Other             |       | 1%       |       | 2%       |       |
| Total             |       | 100%     |       | 100%     |       |

 

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.

 

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, 2009:

 
| **Asset Category**                          | ** ** | **Allocation  Range** |
|---------------------------------------------|------------|-----------------------|
| Equity securities                           |       | 35% to 80%  |
| Debt securities                             |       | 10% to 60%  |
| Other, primarily cash and  cash equivalents |       | 0% to 8%    |

 

The pension plans held no positions in Cubic Corporation common stockas of September 30, 2009 and 2008.

 

We expect to contribute approximately $3.2 million to our pension plansin 2010.

 

We expect the following pension benefit payments, which reflectexpected future service, as appropriate, to be paid (in thousands):

 
| 2010      |   | $      | 5,692  |   |
|-----------|--------|--------|--------|--------|
| 2011      |   | 6,257  |   |
| 2012      |   | 6,645  |   |
| 2013      |   | 7,051  |   |
| 2014      |   | 7,311  |   |
| 2015-2019 |   | 43,092 |   |

 

57

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CUBIC CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued

 

NOTE 9—LEGAL MATTERS

 

In 1998, the Ministry of Defense for theArmed Forces of the Islamic Republic of Iran obtained a United States DistrictCourt judgment enforcing an arbitration award in its favor against us of $2.8million, plus costs and interest.  Bothparties appealed to the 9th Circuit Court of Appeals, wherethe cases are stayed.  Several potentiallienors of Iran’s judgment have filed liens but have not obtained valid courtorders enforcing the liens.  We are notaware whether any such claimants against Iran’s judgment have receivedTerrorism Risk Insurance Act funds (which would make their claimsunenforceable).  Under a 1979Presidential executive order, all transactions by United States citizens withIran are prohibited.  Therefore, even ifIran were to prevail in the 9th Circuit litigation, it isunlikely that we would be permitted to pay any amount to Iran.  Payments to valid lienors could potentiallybe enforced, so in a previous year we recorded a liability for the amount ofthe judgment and are continuing to accrue interest.

 

In December 2008, we were named in a class actionlawsuit alleging misclassification of Training Analysts as exempt fromovertime, seeking damages for overtime pay and back wages, as well as damagesfor various violations of California and federal wage and hour laws. We filedan Answer in January 2009. We sent a demand for indemnity to our primecontractor, and we sent a demand to our insurance carrier for coverage on someor all of the claims. Mediation was conducted in August 2009 and wesettled the matter for $1.7 million. The insurance carrier agreed to contribute$0.3 million toward the settlement; however, we are still awaiting a responsefrom the prime contractor.  Preparationof a Settlement Agreement and related documents are in process.  We expect preliminary court approval of thesettlement in late 2009. We recorded a liability for the settlement amount lessthe insurance carrier contribution in the fourth quarter of fiscal 2009.

 

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.

 

NOTE 10—BUSINESS SEGMENT INFORMATION

 

At September 30, 2009, we reevaluated our segment reporting inlight of changes to our management structure, internal performance reportingand incentive compensation plans that became effective in 2009. Previously ourdefense business had been reported as a single segment, with a single executiveresponsible for the entire business, operating performance measured as a singleunit and management incentive plans that were based on total defense segmentperformance. With the changes during the current fiscal year, we are nowreporting results for two defense segments, Defense Systems and Mission SupportServices. The Transportation Systems segment is still considered one reportingsegment. We have reclassified prior period amounts to reflect thisorganizational change.

 

###### Descriptionof the types of products and services from which each reportable segmentderives 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 customized range instrumentation and trainingsystems, simulators, communications and surveillance systems, avionics systems,power amplifiers and receivers. MSS provides computer simulation training,development of training doctrine, live training support and field operationsand maintenance services.

 

58

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CUBIC CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued

 

NOTE 10—BUSINESS SEGMENT INFORMATION—Continued

 

Measurement of segment profit or loss and segmentassets:

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 reportablesegments:

Our reportable segments are business units that offer differentproducts and services and are each managed separately. Operating results foreach segment are reported separately to senior corporate management to makedecisions as to the allocation of corporate resources and to assessperformance.

 

Business segment financial data is as follows:

 
| **Years ended September 30,**       | ** ** | **2009**          | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------|------------|-------------------|------------|----------|------------|----------|------------|
| ** **                               | ** ** | **(in millions)** | ** ** |
| **Sales:**                               |       |              |       |     |       |     |       |
| Transportation Systems                   |       | $                 | 303.4      |     | $          | 272.3    |       | $ | 236.6 |   |
| Defense Systems                          |       | 285.4             |       | 275.3    |       | 333.1    |       |
| Mission Support Services                 |       | 424.4             |       | 332.5    |       | 308.0    |       |
| Other                                    |       | 3.5               |       | 1.0      |       | 12.2     |       |
| Total sales                              |       | $                 | 1,016.7    |     | $          | 881.1    |       | $ | 889.9 |   |
|                                     |       |              |       |     |       |     |       |
| **Operating income:**                    |       |              |       |     |       |     |       |
| Transportation Systems                   |       | $                 | 44.1       |     | $          | 43.0     |       | $ | 20.1 |   |
| Defense Systems                          |       | 19.0              |       | (9.5     | )          | 16.6     |       |
| Mission Support Services                 |       | 27.9              |       | 27.8     |       | 27.6     |       |
| Restructuring activity                   |       | —            |       | (6.2     | )          | —   |       |
| Unallocated corporate expenses and other |       | (6.3              | )          | (1.8     | )          | (2.2     | )          |
| Total operating income                   |       | $                 | 84.7       |     | $          | 53.3     |       | $ | 62.1 |   |
|                                     |       |              |       |     |       |     |       |
| **Assets:**                              |       |              |       |     |       |     |       |
| Transportation Systems                   |       | $                 | 172.6      |     | $          | 144.5    |       | $ | 170.6 |   |
| Defense Systems                          |       | 157.2             |       | 206.1    |       | 214.1    |       |
| Mission Support Services                 |       | 142.1             |       | 151.1    |       | 79.0     |       |
| Corporate and other                      |       | 284.4             |       | 139.6    |       | 128.9    |       |
| Total assets                             |       | $                 | 756.3      |     | $          | 641.3    |       | $ | 592.6 |   |

 

59

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CUBIC CORPORATION

 

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS—Continued

 

NOTE 10—BUSINESS SEGMENT INFORMATION—Continued

 
| **Years ended September 30,**       | ** ** | **2009**          | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------|------------|-------------------|------------|----------|------------|----------|------------|
| ** **                               | ** ** | **(in millions)** | ** ** |
| **Depreciation and amortization:**       |       |              |       |     |       |     |       |
| Transportation Systems                   |       | $                 | 2.4        |     | $          | 1.8      |       | $ | 2.2 |   |
| Defense Systems                          |       | 6.0               |       | 5.7      |       | 5.3      |       |
| Mission Support Services                 |       | 6.2               |       | 1.7      |       | 0.8      |       |
| Corporate and other                      |       | 1.0               |       | 0.5      |       | 0.5      |       |
| Total depreciation and amortization      |       | $                 | 15.6       |     | $          | 9.7      |       | $ | 8.8 |   |
|                                     |       |              |       |     |       |     |       |
| **Expenditures for long-lived assets:**  |       |              |       |     |       |     |       |
| Transportation Systems                   |       | $                 | 1.2        |     | $          | 1.0      |       | $ | 1.8 |   |
| Defense Systems                          |       | 3.3               |       | 4.7      |       | 3.8      |       |
| Mission Support Services                 |       | —            |       | 0.1      |       | 0.5      |       |
| Corporate and other                      |       | 0.8               |       | 2.3      |       | —   |       |
| Total expenditures for long-lived assets |       | $                 | 5.3        |     | $          | 8.1      |       | $ | 6.1 |   |

 
| **Years ended September 30,** | ** ** | **2009**          | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------|------------|-------------------|------------|----------|------------|----------|------------|
| ** **                         | ** ** | **(in millions)** | ** ** |
| **Geographic Information:**        |       |              |       |     |       |     |       |
| Sales (a):                         |       |              |       |     |       |     |       |
| United States                      |       | $                 | 666.2      |     | $          | 532.3    |       | $ | 606.6 |   |
| United Kingdom                     |       | 179.2             |       | 189.6    |       | 153.1    |       |
| Canada                             |       | 18.5              |       | 25.4     |       | 26.5     |       |
| Australia                          |       | 39.9              |       | 43.0     |       | 26.9     |       |
| Middle East                        |       | 19.3              |       | 37.8     |       | 17.2     |       |
| Far East                           |       | 61.5              |       | 38.1     |       | 43.4     |       |
| Other                              |       | 32.1              |       | 14.9     |       | 16.2     |       |
| Total sales                        |       | $                 | 1,016.7    |     | $          | 881.1    |       | $ | 889.9 |   |

 

----

(a) Sales are attributed to countries or regions based on thelocation of customers.

 
| Long-lived assets, net:      |   |   |   |   |   |   |   |
|------------------------------|--------|--------|--------|--------|--------|--------|--------|
| United States                |   | $      | 43.7   |   | $      | 47.4   |   | $ | 48.0 |   |
| United Kingdom               |   | 10.3   |   | 12.0   |   | 14.1   |   |
| Other foreign countries      |   | 1.9    |   | 1.9    |   | 2.0    |   |
| Total long-lived assets, net |   | $      | 55.9   |   | $      | 61.3   |   | $ | 64.1 |   |

 

MSS and CDS segment sales include $592.1 million, $477.8 million and$484.4 million in 2009, 2008 and 2007, respectively, of sales to U.S.Government agencies.  Transportationsystems sales include $97.3 million, $110.7 million, and $71.4 million of salesto TranSys in 2009, 2008 and 2007, respectively. No other single customeraccounts for 10% or more of our revenues.

 

60

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CUBIC CORPORATION

 

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS—Continued

 

NOTE 11—SUMMARY OFQUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

 

The following is a summary of our quarterly results ofoperations for the years ended September 30, 2009 and 2008:

 
| ** **           | ** ** | **Quarter Ended**                         | ** ** |
|----------------------|------------|-------------------------------------------|------------|
| ** **           | ** ** | **December 31**                      | ** ** | **March 31** | ** ** | **June 30** | ** ** | **September 30** | ** ** |
| ** **           | ** ** | **(in thousands, except per share data)** | ** ** |
| 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 |   |
|                 |       |                                      |       |   |   |   |   |   |   |
| Fiscal 2008          |       |                                      |       |   |   |   |   |   |   |
| Net sales            |       | $                                         | 202,722    |   | $ | 210,280 |   | $ | 232,892 |   | $ | 235,241 |   |
| Operating income     |       | 17,088                                    |       | 13,886 |   | 11,475 |   | 10,815 |   |
| Net income           |       | 10,676                                    |       | 9,646 |   | 8,478 |   | 8,054 |   |
| Net income per share |       | 0.40                                      |       | 0.36 |   | 0.32 |   | 0.30 |   |

 

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**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

 

The Boardof Directors and Stockholders of Cubic Corporation

 

We have audited the accompanying consolidatedbalance sheets of Cubic Corporation as of September 30, 2009 and 2008, andthe related consolidated statements of income, shareholders’ equity, and cashflows for each of the three years in the period ended September 30, 2009.These financial statements are the responsibility of the company’s management.Our responsibility is to express an opinion on these financial statements basedon our audits.

 

We conducted our audits in accordance withthe standards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statementsreferred to above present fairly, in all material respects, the consolidatedfinancial position of Cubic Corporation at September 30, 2009 and 2008,and the consolidated results of its operations and its cash flows for each ofthe three years in the period ended September 30, 2009, in conformity withU.S. generally accepted accounting principles.

 

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, 2009, based on criteriaestablished in Internal Control-Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission and our report dated December 9,2009 expressed an unqualified opinion thereon.

 
|                  | /s/ ERNST & YOUNG LLP |
|-----------------------|-------------------------------------|
|                  |                                |
| San Diego, CA         |                                |
| December 9, 2009 |                                |

 

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

 

None.

 

**Item 9a.   CONTROLSAND PROCEDURES**.

 

***Evaluation of Disclosure Controls and Procedures*** —We conducted anevaluation, under the supervision and with the participation of our ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of thedesign and operation of our disclosure controls and procedures as of September 30,2009. Based on thisevaluation, our management, including the Chief Executive Officer and ChiefFinancial Officer, concluded that our disclosure controls andprocedures are effective in providing reasonable assurance that informationrequired to be disclosed in the reports we file and submit under the SecuritiesExchange Act of 1934 is recorded, processed, summarized and reported as andwhen required.

 

In designing and evaluating our disclosure controls and procedures, werecognize that any controls, no matter how well designed and operated, canprovide only reasonable assurance of achieving the desired control objectives.

 

***Management’sReport on Internal Control over Financial Reporting***

 

We are responsible for establishing andmaintaining adequate internal control over financial reporting for the company.In order to evaluate the effectiveness of internal control over financialreporting, as required by Section 404 of the Sarbanes-Oxley Act, weconducted an assessment, including testing, using the criteria in InternalControl — Integrated Framework, issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). Our system of internal controlover financial reporting is designed to provide reasonable assurance regardingthe reliability of financial reporting and the preparation of financialstatements for external purposes in accordance with generally acceptedaccounting principles. Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

 

Based on our assessment, we concluded that wemaintained, in all material respects, effective internal control over financialreporting as of September 30, 2009, based on criteria in Internal Control —Integrated Framework, issued by COSO. Our internal control over financialreporting as of September 30, 2009, has been audited by Ernst &Young, LLP, an independent registered public accounting firm, as stated intheir report which follows.

 

***Changes in Internal Controls Over Financial Reporting*** — There wereno changes in our internal control over financial reporting that occurredduring the fourth fiscal quarter of 2009 that have materially affected, or arereasonably likely to materially affect our internal control over financialreporting.

 

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

The Board of Directors and Stockholders ofCubic Corporation

 

We have audited Cubic Corporation’s internalcontrol over financial reporting as of September 30, 2009, based oncriteria established in Internal Control—Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission (the COSOcriteria). Cubic Corporation’s management is responsible for maintaining effectiveinternal control over financial reporting, and for its assessment of theeffectiveness of internal control over financial reporting included in theaccompanying Management’s Report on Internal Control Over Financial Reporting.Our responsibility is to express an opinion on the company’s internal controlover financial reporting based on our audit.

 

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, assessing the riskthat a material weakness exists, testing and evaluating the design andoperating effectiveness of internal control based on the assessed risk, andperforming such other procedures as we considered necessary in thecircumstances. We believe that our audit provides a reasonable basis for ouropinion.

 

A company’s internal control over financialreporting is a process designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accountingprinciples. A company’s internal control over financial reporting includesthose policies and procedures that (1) pertain to the maintenance ofrecords that, in reasonable detail, accurately and fairly reflect thetransactions 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.

 

Because of its inherent limitations, internalcontrol over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods aresubject to the risk that controls may become inadequate because of changes inconditions, or that the degree of compliance with the policies or proceduresmay deteriorate.

 

In our opinion, Cubic Corporation maintained,in all material respects, effective internal control over financial reportingas of September 30, 2009, based on the COSO criteria.

 

We also have audited, in accordance with thestandards of the Public Company Accounting Oversight Board (United States), theconsolidated balance sheets of Cubic Corporation as of September 30, 2009and 2008, and the related statements of income, shareholder’s equity, and cashflows for each of the three years in the period ended September 30, 2009of Cubic Corporation and our report dated December 9, 2009 expressed an unqualified opinion thereon.

 
|                  | /s/ ERNST &  YOUNG LLP |
|-----------------------|--------------------------------------|
|                  |                                 |
| San Diego, California |                                 |
| December 9, 2009 |                                 |

 

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**PART III**

 

**Item 10.   DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT**.

 

Certain informationregarding directors and executive officers is incorporated herein by referencefrom our definitive Proxy Statement, which will be filed no later than 30 daysprior to the date of the Annual Meeting of Shareholders.

 

We have adopted a code ofethics that applies to our principal executive officer, principal financialofficer, and principal accounting officer. Such code of ethics appears on our web site at: http://www.cubic.com/corp1/invest/governance.html.

 

**Item 11.   EXECUTIVECOMPENSATION**.

 

Information regardingexecutive compensation is incorporated herein by reference from our definitiveProxy Statement, which will be filed no later than 30 days prior to the date ofthe Annual Meeting of Shareholders.

 

**Item 12.   SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**.

 

Information regardingsecurity ownership of certain beneficial owners and management 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.

 

**Item 13.   CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS**.

 

Information regardingcertain relationships and related transactions 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 14.   PRINCIPALACCOUNTANT FEES AND SERVICES.**

 

Information regardingprincipal accountant fees and services is incorporated herein by reference fromour definitive Proxy Statement, which will be filed no later than 30 days priorto the date of the Annual Meeting of Shareholders.

 

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**PART IV**

 

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

(a)                                  Documents filed as part of this Report:

 

(1)           The following consolidated financialstatements of Cubic Corporation, as referenced in Item 8:

 
|   | Consolidated Balance  Sheets                                     |
|--------|------------------------------------------------------------------|
|   | September 30,  2009 and 2008                                |
|   |                                                             |
|   | Consolidated  Statements of Income                               |
|   | Years ended  September 30, 2009, 2008 and 2007              |
|   |                                                             |
|   | Consolidated  Statements of Changes in Shareholders’ Equity |
|   | Years ended  September 30, 2009, 2008 and 2007              |
|   |                                                             |
|   | Consolidated  Statements of Cash Flows                           |
|   | Years ended  September 30, 2009, 2008 and 2007              |
|   |                                                             |
|   | Notes to  Consolidated Financial Statements                      |
|   | September 30,  2009                                         |

 

(2)           The following consolidated financialstatement schedules of Cubic Corporation and subsidiaries, as referenced inItem 15(d):

 
|   | None are required under the applicable accounting rules and  regulations 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. 1-8931, Exhibit 3.1.  |
|------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.2  |   | Bylaws. Incorporated by reference to Form 10-K  filed for the fiscal year ended September 30, 2004, file  No. 1-8931, Exhibit 3(ii).                              |
| 10.1 |   | 2005 Equity Incentive Plan. Incorporated by  reference from Form 10-K filed for the fiscal year ended  September 30, 2005, file No. 1-8931, 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. 1-8931, Exhibit 10.2. |
| 10.3 |   | Credit Agreement dated March 10, 2005.  Incorporated by reference from Form 10-Q for the quarter ended  March 31, 2005, file No. 1-8931, Exhibit 10.         |
| 10.4 |   | Revised Deferred Compensation Plan. Incorporated by  reference to Form 10-Q for the quarter ended March 31, 2008, file  No. 1-8931, Exhibit 10.4.                 |
| 10.5 |   | Bonus Plan for Senior Officers. Incorporated by  reference to Form 8-K filed February 5, 2009, file No. 1-8931,  Item 5.02(e).                                         |
| 21.1 |   | List of Subsidiaries                                                                                                                                                                  |
| 23.1 |   | Consent of Independent Registered Accounting Firm.                                                                                                                                    |
| 31.1 |   | Section 302 Certifications.                                                                                                                                                      |
| 32.1 |   | Section 906 Certifications.                                                                                                                                                      |

 

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**SIGNATURES**

 

Pursuant to therequirements of Sections 13 or 15(d) of the Securities Exchange Act of1934, the Registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized:

 
| (Registrant) |     | CUBIC CORPORATION          |   |
|--------------|----------|----------------------------|--------|
|         |     |                       |   |
| *12/8/09*    | * * | /s/ Walter J. Zable   |   |
| Date         |     | WALTER J. ZABLE, President |   |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the Registrant and in thecapacities and on the dates indicated:

 

| *12/8/09* | * * | /s/ Walter J. Zable                |   | *12/8/09* |   | /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 Directors |   |      |   | Chief Financial Officer                    |
|      |     |                                    |   |      |   |                                       |
| *12/8/09* | * * | /s/ Walter C. Zable                |   | *12/8/09* |   | /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) |
|      |     |                                    |   |      |   |                                       |
| *12/8/09* | * * | /s/ Raymond L.  deKozan            |   | *12/8/09* |   | /s/ John H. Warner                    |
| Date      |     | RAYMOND L. deKOZAN,                     |   | Date      |   | JOHN H. WARNER,                            |
|      |     | Director, Senior Group  Vice President  |   |      |   | Director                                   |
|      |     |                                    |   |      |   |                                       |
| *12/8/09* | * * | /s/ Raymond E. Peet                |   | *12/8/09* |   | /s/ Bruce G. Blakley                  |
| Date      |     | RAYMOND E. PEET,                        |   | Date      |   | BRUCE G. BLAKLEY,                          |
|      |     | Director                                |   |      |   | Director                                   |
|      |     |                                    |   |      |   |                                       |
| *12/8/09* | * * | /s/ Robert S.  Sullivan            |   | *12/8/09* |   | /s/ Edwin A. Guiles                   |
| Date      |     | ROBERT S. SULLIVAN,                     |   | Date      |   | EDWIN A. GUILES,                           |
|      |     | Director                                |   |      |   | Director                                   |

 

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