Note 2—Restatement of consolidated financial statements

We have restated our Consolidated Balance Sheets at September 30, 2011, 2010 and 2009 and our Consolidated Statements of Income, Changes in Shareholders' Equity and Cash Flows for the years then ended including the cumulative impact of corrected errors for periods prior to October 1, 2008.

The cumulative adjustments to correct the errors in the consolidated financial statements for all periods prior to October 1, 2008 are recorded as adjustments to retained earnings and accumulated other comprehensive income (loss) at September 30, 2008, as shown in the consolidated statements of changes in shareholders' equity. The cumulative effect of those adjustments increased previously reported retained earnings by $23.0 million and reduced previously reported accumulated other comprehensive income by $0.9 million at September 30, 2008.

The following tables present the summary impacts of the restatement adjustments on the Company's previously reported consolidated retained earnings at September 30, 2008 and consolidated net income for the years ended September 30, 2011, 2010 and 2009 (in thousands):



Retained earnings at September 30, 2008—As previously reported	$	404,868
Revenue Recognition Adjustments, net of taxes on revenue recognition adjustments		25,587
Other Adjustments		(2,619	)

Retained earnings at September 30, 2008—As restated	$	427,836

	For the years ended September 30,


	2011			2010		2009

Net Income—As previously reported	$	85,078		$	70,636	$	55,686
Revenue Recognition Adjustments, net of taxes on revenue recognition adjustments		2,321			31		9,900
Other Adjustments		(3,495	)		1,427		(2,441	)

Net Income—As restated	$	83,904		$	72,094	$	63,145

In the table above, we have separately identified the impact of errors related to revenue recognition, and the impact related to other individually immaterial errors on net income. Descriptions of the restatement adjustments related to revenue recognition matters follow:

Revenue recognition adjustments

Historically, we recognized sales and profits for development contracts using the cost-to-cost percentage-of-completion method of accounting, modified by a formulary adjustment. Under the cost-to-cost percentage-of-completion method of accounting, sales and profits are based on the ratio of costs incurred to estimated total costs at completion. We have consistently applied a formulary adjustment to the percentage completion calculation for development contracts that had the effect of deferring a portion of the indicated revenue and profits on such contracts until later in the contract performance period. The cost-to-cost percentage-of-completion method as described in ASC 605-35 (formerly SOP 81-1) does not support the practice of using a formulary calculation to defer a portion of the indicated revenue and profits on such contracts. Instead, sales and profits should have been recognized based on the ratio of costs incurred to estimated total costs at completion, without using a formulary adjustment. As such, revenue has been restated for development contracts using the cost-to-cost percentage-of completion-method of accounting to eliminate the formulary adjustment.

We also evaluated the Company's long-standing practice of using the cost-to-cost percentage-of-completion method to recognize revenues for many of its service contracts. Under the accounting literature the cost-to-cost percentage of completion method is acceptable for U.S. government service contracts but not for service contracts with commercial customers other governmental customers, whether domestic or foreign. As such, revenue has been restated for service contracts with non-U.S. government customers to record revenue generally on a straight-line basis. In addition, in some cases our contracts with non-U.S. government customers may also include multiple deliverables, including service deliverables. During the course of our revenue review we noted situations in which we did not historically identify the units of accounting in accordance with the appropriate authoritative guidance. For example, for certain contracts that we entered with a customer prior to the adoption of Accounting Standards Update 2010-13, Multiple-Deliverable Revenue Arrangements (ASU 2010-13), to design and build a system for the customer and to operate and maintain the system for the customer after its delivery, we inappropriately separately accounted for the unit of accounting related to the designing and building of the system and the unit of accounting related to providing services for operating and maintaining the system without having vendor specific objective evidence, which was a requirement for separating units of accounting prior to the adoption of ASU 2010-13. In these cases, in connection with our restatement, we considered the multiple-element revenue recognition guidance in existence at the time that the transaction was entered into or materially modified and revenue was restated to recognize revenue based upon either the individual elements of the arrangement or the combined unit of accounting when the elements were not separable.

The Company's historical policy has been to allocate and capitalize general and administrative (G&A) costs on its U.S. government units-of-delivery type contracts, as permitted by SOP 81-1 and the AICPA Audit and Accounting Guide for Federal Government Contractors. During our review of revenue recognition for the issues identified above it was determined that from fiscal 2007 through March of 2012 this policy was inconsistently applied so that G&A costs were not inventoried on certain U.S. government contracts in accordance with the policy. As such, inventory and cost of sales have been restated for these types of contracts with the U.S. government to include G&A costs in inventory until sales are recognized.

Historically the Company has allocated G&A costs to all of its contracts with the U.S. government and with other domestic or foreign governmental agencies. These costs were included in the calculation of percentage completion as well as the measurement of losses on contracts. SOP 81-1 generally does not permit G&A costs to be included as contract costs which are used to measure progress towards completion on percentage-of-completion contracts and to estimate losses, though it does include an exception for government contractors. The Company has historically considered itself to be a government contractor and followed this exception for virtually all of its contracts accounted for on a cost-to-cost percentage-of-completion basis. However, we now recognize that this exception was intended to apply only to contracts with the U.S. federal government and not to contracts with other governmental entities, such as governmental transit agencies and foreign governments. Consequently, for contracts with customers other than the U.S. federal government, revenue is being restated to reflect the impact of excluding general and administrative costs from the calculation of the percentage-of-completion and projected losses on long-term development projects.

We determined the amounts of the revenue recognition adjustments on a contract-by-contract basis and did not calculate or accumulate the errors by type of revenue error because certain errors are interrelated and the adjustments to many contracts were impacted by more than one of the types of revenue recognition error described above. The aggregate impact of these revenue adjustments and the related adjustments made to income tax expense as a result of the revenue recognition adjustments described above are included in the "Revenue Recognition Adjustments" columns in the following tables for the Consolidated Statements of Income.

Other adjustments

In addition to the errors related to revenue recognition described above, we also made adjustments related to other individually immaterial errors including certain corrections that had been previously identified but not recorded because they were not material, individually or in the aggregate, to the Company's consolidated financial statements. These corrections included certain accrued liabilities and reserves and miscellaneous reclassification entries; entries to correct errors in the treatment of return-to-provision income tax reconciliation items; adjustments to various income tax and indirect tax accrual accounts; adjustments to participant compensation used in computing pension liability; and adjustments related to the impact of exchange rates on our U.S. dollar denominated investments held by our wholly-owned subsidiary in the U.K., that has the British pound as its functional currency.

Reclassifications

In the first quarter of fiscal year 2012, we revised our method of categorizing sales and the related cost of sales between products and services. We reconsidered whether certain projects related predominantly to product or service sales. The "Reclassifications" column in the following tables includes the reclassifications of sales and cost of sales for products and services in the consolidated statements of income in order to conform to the current year presentation, and to correct certain errors in classification of cost of sales between products and services. For the year ended September 30, 2011 $13.9 million of costs were erroneously classified as product costs. As such, these costs were reclassified to service costs.

Goodwill impairment assessment date disclosure error

In our consolidated financial statements for the year ended September 30, 2011 and previous years we had disclosed that we evaluated goodwill for potential impairment annually as of June 30, or when circumstances indicate that the carrying value may not be recoverable. However, our annual goodwill impairment evaluation date is July 1 of each year rather than June 30. This was an error in disclosure only and had no impact on our assessment of goodwill impairment, our financial condition, results of operations or cash flows.

The following tables present the impact of the restatement on the our previously issued consolidated balance sheets as of September 30, 2011, 2010 and 2009, and our consolidated statements of income and cash flows for the years then ended:

	Consolidated balance sheet September 30, 2011									Consolidated balance sheet September 30, 2010									Consolidated balance sheet September 30, 2009


(in thousands)	Previously reported			Adjustments			As restated			Previously reported			Adjustments			As restated			Previously reported			Adjustments			As restated

ASSETS
Current assets:
Cash and cash equivalents	$	329,148		$	—		$	329,148		$	295,434		$	—		$	295,434		$	244,074		$	—		$	244,074
Short-term investments		25,829			—			25,829			84,081			—			84,081			8,127			—			8,127
Accounts receivable:
Trade and other receivables		20,259			—			20,259			11,594			—			11,594			12,833			—			12,833
Long-term contracts		204,120			3,306			207,426			199,353			2,545			201,898			223,186			(477	)		222,709
Allowance for doubtful accounts		(395	)		—			(395	)		(663	)		—			(663	)		(4,558	)		—			(4,558	)

		223,984			3,306			227,290			210,284			2,545			212,829			231,461			(477	)		230,984
Recoverable income taxes		20,725			4,192			24,917			8,320			(1,510	)		6,810			—			249			249
Inventories		36,729			1,630			38,359			32,820			7,833			40,653			49,107			8,498			57,605
Deferred income taxes		13,778			(4,295	)		9,483			17,825			(3,535	)		14,290			22,132			(1,941	)		20,191
Prepaid expenses and other current assets		20,452			628			21,080			25,893			234			26,127			29,957			—			29,957

Total current assets		670,645			5,461			676,106			674,657			5,567			680,224			584,858			6,329			591,187

Long-term contract receivables		23,700			—			23,700			28,080			—			28,080			13,400			—			13,400
Property, plant and equipment—net		48,467			—			48,467			47,469			—			47,469			48,895			—			48,895
Deferred income taxes		11,318			1,506			12,824			18,570			718			19,288			14,082			422			14,504
Goodwill		146,355			—			146,355			64,142			—			64,142			59,433			—			59,433
Purchased intangibles		54,139			—			54,139			26,295			—			26,295			28,618			—			28,618
Other assets		4,216			717			4,933			5,196			825			6,021			7,029			507			7,536

Total assets	$	958,840		$	7,684		$	966,524		$	864,409		$	7,110		$	871,519		$	756,315		$	7,258		$	763,573

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable	$	38,870		$	5,114		$	43,984		$	33,638		$	5,447		$	39,085		$	28,626		$	3,916		$	32,542
Customer advances		183,845			(49,529	)		134,316			139,723			(41,208	)		98,515			123,458			(39,480	)		83,978
Accrued compensation		49,513			—			49,513			48,994			—			48,994			49,134			—			49,134
Other current liabilities		53,826			3,180			57,006			60,041			1,050			61,091			60,402			(758	)		59,644
Income taxes payable		7,902			10,814			18,716			20,107			7,112			27,219			3,491			8,608			12,099
Current portion of long-term debt		4,541			—			4,541			4,545			—			4,545			4,554			—			4,554

Total current liabilities		338,497			(30,421	)		308,076			307,048			(27,599	)		279,449			269,665			(27,714	)		241,951

Long-term debt		11,377			—			11,377			15,949			—			15,949			20,570			—			20,570
Accrued pension liability		38,223			2,943			41,166			37,015			2,840			39,855			32,214			1,548			33,762
Deferred compendation		7,884			—			7,884			8,508			—			8,508			7,902			—			7,902
Income taxes payable		4,479			7,650			12,129			3,382			6,579			9,961			5,119			5,882			11,001
Other long-term liabilities		6,582			—			6,582			4,748			—			4,748			—			—			—
Shareholders' equity:
Preferred stock, no par value:
Authorized—5,000 shares
Issued and outstanding—none		—			—			—			—			—			—			—			—			—
Common stock, no par value:
Authorized—50,000 shares
2011 and 2010—Issued 35,682 shares, outstanding—26,736 shares, 2009—Issued 35,677 shares, outstanding—26,732 shares		12,574			—			12,574			12,574			—			12,574			12,530			—			12,530
Retained earnings		598,849			30,711			629,560			521,567			31,885			553,452			455,743			30,427			486,170
Accumulated other comprehensive loss		(23,294	)		(3,199	)		(26,493	)		(9,745	)		(6,595	)		(16,340	)		(11,357	)		(2,885	)		(14,242	)
Treasury stock at cost
2011 and 2010—8,945 shares		(36,078	)		—			(36,078	)		(36,074	)		—			(36,074	)		(36,071	)		—			(36,071	)

Shareholders' equity attributable to Cubic		552,051			27,512			579,563			488,322			25,290			513,612			420,845			27,542			448,387
Noncontrolling interest in variable interest entity		(253	)		—			(253	)		(563	)		—			(563	)		—			—			—

Total shareholders' equity		551,798			27,512			579,310			487,759			25,290			513,049			420,845			27,542			448,387

Total liabilities and shareholders' equity	$	958,840		$	7,684		$	966,524		$	864,409		$	7,110		$	871,519		$	756,315		$	7,258		$	763,573



	Consolidated statement of income Year ended September 30, 2011															Consolidated statement of income Year ended September 30, 2010															Consolidated statement of income Year ended September 30, 2009
(amounts in thousands, except per share data)	Previously reported			Revenue recognition adjustments			Other adjustments			Reclassifications			As restated			Previously reported			Revenue recognition adjustments			Other adjustments			Reclassifications			As restated			Previously reported			Revenue recognition adjustments			Other adjustments			Reclassifications			As restated

Net sales:
Products	$	618,924		$	(10,844	)	$	1,357		$	(8,504	)	$	600,933		$	636,739		$	239		$	147		$	(29,369	)	$	607,756		$	526,879		$	(7,505	)	$	(992	)	$	(10,215	)	$	508,167
Services		666,279			19,215			650			8,504			694,648			557,450			1,971			1,646			29,369			590,436			489,778			21,549			(3,785	)		10,215			517,757

		1,285,203			8,371			2,007			—			1,295,581			1,194,189			2,210			1,793			—			1,198,192			1,016,657			14,044			(4,777	)		—			1,025,924
Costs and expenses:
Products		437,992			4,164			1,047			(24,924	)		418,279			457,651			678			(90	)		(27,822	)		430,417			394,478			(2,004	)		(839	)		(13,583	)		378,052
Services		539,973			1,195			646			22,248			564,062			484,343			1,306			—			25,365			511,014			411,038			1,850			(2,139	)		7,543			418,292
Selling, general and administrative		154,962			—			2,153			2,676			159,791			120,848			—			1,001			2,457			124,306			111,828			—			1,240			6,040			119,108
Research and development		25,260			—			—			—			25,260			18,976			—			—			—			18,976			8,173			—			—			—			8,173
Amortization of purchased intangibles		14,681			—			—			—			14,681			6,846			—			—			—			6,846			6,432			—			—			—			6,432

		1,172,868			5,359			3,846			—			1,182,073			1,088,664			1,984			911			—			1,091,559			931,949			(154	)		(1,738	)		—			930,057

Operating income		112,335			3,012			(1,839	)		—			113,508			105,525			226			882			—			106,633			84,708			14,198			(3,039	)		—			95,867
Other income (expense):
Interest and dividend income		2,568			—			—			—			2,568			1,590			—			—			—			1,590			1,664			—			—			—			1,664
Interest expense		(1,461	)		—			—			—			(1,461	)		(1,755	)		—			—			—			(1,755	)		(2,031	)		—			—			—			(2,031	)
Other income (expense)—net		4,205			(171	)		(2,372	)		—			1,662			561			(95	)		3,171			—			3,637			899			(20	)		(218	)		—			661

Income before income taxes		117,647			2,841			(4,211	)		—			116,277			105,921			131			4,053			—			110,105			85,240			14,178			(3,257	)		—			96,161
Income taxes		32,569			520			(716	)		—			32,373			35,285			100			2,626			—			38,011			29,554			4,278			(816	)		—			33,016

Net income		85,078			2,321			(3,495	)		—			83,904			70,636			31			1,427			—			72,094			55,686			9,900			(2,441	)		—			63,145
Less noncontrolling interest in income of VIE		310			—			—			—			310			—			—			—			—			—			—			—			—			—			—

Net income attributable to Cubic	$	84,768		$	2,321		$	(3,495	)	$	—		$	83,594		$	70,636		$	31		$	1,427		$	—		$	72,094		$	55,686		$	9,900		$	(2,441	)	$	—		$	63,145

Basic and diluted net income per common share	$	3.17		$	0.09		$	(0.13	)	$	—		$	3.13		$	2.64		$	—		$	0.06		$	—		$	2.70		$	2.08		$	0.37		$	(0.09	)	$	—		$	2.36

Average number of common shares outstanding		26,736			—			—			—			26,736			26,735			—			—			—			26,735			26,731			—			—			—			26,731

	Consolidated statement of cash flows September 30, 2011									Consolidated statement of cash flows September 30, 2010									Consolidated statement of cash flows September 30, 2009


(in thousands)	Previously reported			Adjustments			As restated			Previously reported			Adjustments			As restated			Previously reported			Adjustments			As restated

Operating Activities:
Net income	$	85,078		$	(1,174	)	$	83,904		$	70,636		$	1,458		$	72,094		$	55,686		$	7,459		$	63,145
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		22,341			—			22,341			14,469			—			14,469			15,586			—			15,586
Deferred income taxes		4,048			(1,536	)		2,512			(164	)		1,294			1,130			3,346			1,974			5,320
Provision for doubtful accounts		—			—			—			(3,889	)		—			(3,889	)		3,038			—			3,038
Changes in operating assets and liabilities net of effects from acquisitions:
Accounts receivable		4,219			(653	)		3,566			28,565			(3,340	)		25,225			36,211			4,866			41,077
Inventories		(3,760	)		6,202			2,442			16,638			666			17,304			(4,275	)		(3,459	)		(7,734	)
Prepaid expenses and other current assets		5,516			(394	)		5,122			4,401			(234	)		4,167			5,141			610			5,751
Accounts payable and other current liabilities		(3,387	)		1,840			(1,547	)		(27,498	)		3,357			(24,141	)		14,175			908			15,083
Customer advances		45,517			(8,374	)		37,143			20,672			(2,210	)		18,462			48,663			(14,044	)		34,619
Income taxes		(24,205	)		492			(23,713	)		(14,614	)		986			(13,628	)		(2,890	)		2,215			(675	)
Other items—net		(2,779	)		103			(2,676	)		2,507			1,292			3,799			1,352			262			1,614

NET CASH PROVIDED BY OPERATING ACTIVITIES		132,588			(3,494	)		129,094			111,723			3,269			114,992			176,033			791			176,824

Investing Activities:
Acquisition of businesses, net of cash acquired		(126,825	)		—			(126,825	)		(8,250	)		—			(8,250	)		(19,965	)		—			(19,965	)
Consolidation of variable interest entity		—			—			—			38,264			—			38,264			—			—			—
Proceeds from sales or maturities of short-term investments		58,252			—			58,252			82,992			—			82,992			—			—			—
Purchases of short-term investments		—			—			—			(158,946	)		—			(158,946	)		(8,127	)		—			(8,127	)
Purchases of property, plant and equipment		(8,728	)		—			(8,728	)		(6,878	)		—			(6,878	)		(5,332	)		—			(5,332	)
Other items		—			—			—			—			—			—			41			—			41

NET CASH USED IN INVESTING ACTIVITIES		(77,301	)		—			(77,301	)		(52,818	)		—			(52,818	)		(33,383	)		—			(33,383	)

Financing Activities:
Principal payments on long-term debt		(4,555	)		—			(4,555	)		(4,541	)		—			(4,541	)		(5,970	)		—			(5,970	)
Proceeds from issuance of common stock		—			—			—			44			—			44			45			—			45
Purchases of treasury stock		(4	)		—			(4	)		(3	)		—			(3	)		—			—			—
Dividends paid to shareholders		(7,486	)		—			(7,486	)		(4,812	)		—			(4,812	)		(4,811	)		—			(4,811	)

NET CASH USED IN FINANCING ACTIVITIES		(12,045	)		—			(12,045	)		(9,312	)		—			(9,312	)		(10,736	)		—			(10,736	)

Effect of exchange rates on cash		(9,528	)		3,494			(6,034	)		1,767			(3,269	)		(1,502	)		(536	)		(791	)		(1,327	)

NET INCREASE IN CASH AND CASH EQUIVALENTS		33,714			—			33,714			51,360			—			51,360			131,378			—			131,378
Cash and cash equivalents at the beginning of the year		295,434			—			295,434			244,074			—			244,074			112,696			—			112,696

CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR	$	329,148		$	—		$	329,148		$	295,434		$	—		$	295,434		$	244,074		$	—		$	244,074