Restatement of Condensed Consolidated Financial statements

9 Months Ended

Jun. 30, 2012

Restatement of Condensed Consolidated Financial statements

Restatement of Condensed Consolidated Financial statements

Note 2—Restatement of Condensed Consolidated Financial statements

We have restated our Condensed Consolidated Balance Sheet at September 30, 2011 and our Condensed Consolidated Statements of Income and Cash Flows for the three and nine-month periods ended June 30, 2011.

The cumulative adjustments to correct the errors in the consolidated financial statements for all periods prior to October 1, 2010 are recorded as adjustments to retained earnings and accumulated other comprehensive income (loss) at September 30, 2010, as shown in the table below. The cumulative effect of those adjustments increased previously reported retained earnings by $31.9 million and reduced previously reported accumulated other comprehensive income by $6.6 million at September 30, 2010.

The following tables present the summary impacts of the restatement adjustments on the Company’s previously reported consolidated retained earnings at September 30, 2010 and consolidated net income for the three and nine months ended June 30, 2011 (in thousands):

Retained earnings at September 30, 2010 - As previously reported	$	521,567
Revenue Recognition Adjustments, net of taxes on revenue recognition adjustments	35,518
Other Adjustments	(3,633		)
Retained earnings at September 30, 2010 - As restated	$	553,452

	For the Nine			For the Three
	Months Ended			Months Ended
	June 30,			June 30,
	2011			2011
Net Income - As previously reported	$	60,668		$	20,814
Revenue Recognition Adjustments	10,166			1,246
Other Adjustments	(1,865		)	(10		)
Net Income - As restated	$	68,969		$	22,050

In the table above, we have separately identified the impact of errors related to revenue recognition, and 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 or 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, 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 accrual accounts; 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 Condensed 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 both the nine and three month periods ended June 30, 2011 $8.9 million of costs were erroneously classified as product costs. As such, these costs were reclassified to service costs in the following tables.

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 our previously issued unaudited Condensed Consolidated Balance Sheet as of September 30, 2011, and our Condensed Consolidated Statements of Income and Cash Flows for the three- and nine-month periods ended June 30, 2011:

	Condensed Consolidated Balance Sheet
	September 30, 2011
	Previously						As
	Reported			Adjustments			Restated
	(in thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	329,148		$	—		$	329,148
Short-term investments	25,829			—			25,829
Accounts receivable - net	223,984			3,306			227,290
Recoverable income taxes	20,725			4,192			24,917
Inventories	36,729			1,630			38,359
Deferred income taxes and other current assets	34,230			(3,667		)	30,563
Total current assets	670,645			5,461			676,106
Long-term contract receivables	23,700			—			23,700
Property, plant and equipment - net	48,467			—			48,467
Goodwill	146,355			—			146,355
Purchased intangibles	54,139			—			54,139
Other assets	15,534			2,223			17,757
Total assets	$	958,840		$	7,684		$	966,524
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Trade accounts payable	$	38,870		$	5,114		$	43,984
Customer advances	183,845			(49,529		)	134,316
Accrued compensation and other current liabilities	103,339			3,180			106,519
Income taxes payable	7,902			10,814			18,716
Current portion of long-term debt	4,541			—			4,541
Total current liabilities	338,497			(30,421		)	308,076
Long-term debt	11,377			—			11,377
Other long-term liabilities	57,168			10,593			67,761
Shareholders’ equity:
Common stock	12,574			—			12,574
Retained earnings	598,849			30,711			629,560
Accumulated other comprehensive loss	(23,294		)	(3,199		)	(26,493		)
Treasury stock at cost	(36,078		)	—			(36,078		)
Shareholders’ equity attributable to Cubic	552,051			27,512			579,563
Noncontrolling interest in variable interest entity	(253		)	—			(253		)
Total shareholders’ equity	551,798			27,512			579,310
	$	958,840		$	7,684		$	966,524

	Condensed Consolidated Statement of Income															Condensed Consolidated Statement of Income
	Nine Months Ended June 30, 2011															Three Months Ended June 30, 2011
	Previously			Revenue Recognition			Other						As			Previously			Revenue Recognition			Other						As
	Reported			Adjustments			Adjustments			Reclassifications			Restated			Reported			Adjustments			Adjustments			Reclassifications			Restated
	(amounts in thousands, except per share data)															(amounts in thousands, except per share data)
Net sales:
Products	$	441,162		$	(6,262	)	$	(2,376	)	$	(3,670	)	$	428,854		$	148,441		$	(3,037	)	$	321		$	(3,670	)	$	142,055
Services	497,131			22,905			—			3,670			523,706			171,464			5,598			—			3,670			180,732
	938,293			16,643			(2,376		)	—			952,560			319,905			2,561			321			—			322,787
Costs and expenses:
Products	310,922			2,116			(1,931		)	(15,017		)	296,090			114,325			487			722			(14,048		)	101,486
Services	405,688			690			—			13,227			419,605			131,424			341			—			13,227			144,992
Selling, general and administrative	111,238			—			1,603			1,790			114,631			36,831			—			329			821			37,981
Research and development	17,807			—			—			—			17,807			6,281			—			—			—			6,281
Amortization of purchased intangibles	10,607			—			—			—			10,607			4,257			—			—			—			4,257
	856,262			2,806			(328		)	—			858,740			293,118			828			1,051			—			294,997
Operating income	82,031			13,837			(2,048		)	—			93,820			26,787			1,733			(730		)	—			27,790
Other income (expense):
Interest and dividend income	1,729			—			—			—			1,729			490			—			—			—			490
Interest expense	(1,155		)	—			—			—			(1,155		)	(374		)	—			—			—			(374		)
Other income (expense) - net	524			(123		)	(863		)	—			(462		)	767			(44		)	509			—			1,232
Income before income taxes	83,129			13,714			(2,911		)	—			93,932			27,670			1,689			(221		)	—			29,138
Income taxes	22,200			3,548			(1,046		)	—			24,702			6,800			443			(211		)	—			7,032
Net income	60,929			10,166			(1,865		)	—			69,230			20,870			1,246			(10		)	—			22,106
Less noncontrolling interest in income of VIE	261			—			—			—			261			56			—			—			—			56
Net income attributable to Cubic	$	60,668		$	10,166		$	(1,865	)	$	—		$	68,969		$	20,814		$	1,246		$	(10	)	$	—		$	22,050
Basic and diluted net income per common share	$	2.27		$	0.38		$	(0.07	)	$	—		$	2.58		$	0.78		$	0.05		$	—		$	—		$	0.82
Average number of common shares outstanding	26,736			—			—			—			26,736			26,736			—			—			—			26,736

	Condensed Consolidated Statement of Cash Flows									Condensed Consolidated Statement of Cash Flows
	Nine Months Ended June 30, 2011									Three Months Ended June 30, 2011
	Previously						As			Previously						As
	Reported			Adjustments			Restated			Reported			Adjustments			Restated
				(in thousands)									(in thousands)
Operating Activities:
Net income	$	60,929		$	8,301		$	69,230		$	20,870		$	1,236		$	22,106
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	16,246			—			16,246			6,160			—			6,160
Changes in operating assets and liabilities	18,999			(9,823		)	9,176			24,915			(1,157		)	23,758
NET CASH PROVIDED BY OPERATING ACTIVITIES	96,174			(1,522		)	94,652			51,945			79			52,024
Investing Activities:
Acquisition of businesses, net of cash acquired	(126,825		)	—			(126,825		)	—			—			—
Proceeds from sale of short-term investments	57,973			—			57,973			16,180			—			16,180
Purchases of short-term investments	—			—			—			—			—			—
Purchases of property, plant and equipment	(5,601		)	—			(5,601		)	(2,026		)	—			(2,026		)
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES	(74,453		)	—			(74,453		)	14,154			—			14,154
Financing Activities:
Principal payments on long-term debt	(4,416		)	—			(4,416		)	(142		)	—			(142		)
Purchases of treasury stock	(4		)	—			(4		)	—			—			—
Dividends paid to shareholders	(5,080		)	—			(5,080		)	(5,080		)	—			(5,080		)
NET CASH USED IN FINANCING ACTIVITIES	(9,500		)	—			(9,500		)	(5,222		)	—			(5,222		)
Effect of exchange rates on cash	5,202			1,522			6,724			1,004			(79		)	925
NET INCREASE IN CASH AND CASH EQUIVALENTS	17,423			—			17,423			61,881			—			61,881
Cash and cash equivalents at the beginning of the period	295,434			—			295,434			250,976			—			250,976
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD	$	312,857		$	—		$	312,857		$	312,857		$	—		$	312,857