NOTE 2—RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS

We have restated our Consolidated Balance Sheets at September 30, 2013 and 2012 and our Consolidated Statements of Income, Comprehensive Income, Changes in Shareholders’ Equity and Cash Flows for the years ended September 30, 2013, 2012, and 2011 including the cumulative impact of corrected errors for periods prior to October 1, 2010.

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 consolidated statements of changes in shareholders’ equity. The cumulative effect of those adjustments decreased previously reported retained earnings by $1.7 million and reduced previously reported accumulated other comprehensive loss by $0.4 million at September 30, 2010.

The following tables present the summary impacts of the restatement adjustments on our previously reported consolidated retained earnings at September 30, 2010 and consolidated net income for the years ended September 30, 2013, 2012 and 2011 (in thousands):

Retained earnings at September 30, 2010 - As previously reported	$	553,452
Adjustments	(1,687		)
Retained earnings at September 30, 2010 - As restated	$	551,765

	For the Years Ended
	September 30,
	2013		2012		2011
Net Income - As previously reported	$	19,798	$	91,900	$	83,594
Adjustments	5,288		5,527		2,450
Net Income - As restated	$	25,086	$	97,427	$	86,044

Description of Adjustments

On February 20, 2014, we announced that we would be restating certain previously issued audited consolidated financial statements and unaudited condensed consolidated financial statements primarily to correct two errors in the recognition of revenue.

In 2012, we restated our financial statements for the years ended September 30, 2011, 2010 and 2009, the quarters ended March 31, 2012 and December 31, 2011 and each of the prior quarters of 2011 and 2010. This previous restatement was the result of our determination that we had made errors in the calculation of revenues for a significant number of our contracts due to incorrect application of GAAP. In the course of our financial statement closing process for the quarter ended December 31, 2013, we identified two errors related to revenue recognition for two contracts with the same customer that date back to the previous restatement period. The first error was related to the computation of revenues for a contract that was entered into in 2011. The error resulted from a miscalculation in a revenue recognition model that was created during the previous restatement activity. The second error relates to a contract entered into in 2007 and was the result of a failure to appropriately update the contract value in our revenue accounting system as well as a failure to properly account for a 2008 amendment to this contract. Upon modification of this second contract in 2008, the cost-to-cost percentage of completion method should no longer have been used, and revenue should have been recognized using a service-based model.

In addition to the errors 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 our consolidated financial statements. These corrections included certain accrued liabilities and reserves and miscellaneous reclassification entries; adjustments to various income tax and indirect tax accrual accounts; and adjustments to sales and cost of sales to correct cutoff on immaterial revenue recognition transactions.

The following tables present the impact of the restatement on the our previously issued Consolidated Balance Sheets as of September 30, 2013 and 2012, and our Consolidated Statements of Income, Comprehensive Income and Cash Flows for the years ended September 30, 2013, 2012, and 2011:

	Consolidated Statement of Income Year Ended September 30, 2013									Consolidated Statement of Income Year Ended September 30, 2012									Consolidated Statement of Income Year Ended September 30, 2011
	Previously						As			Previously						As			Previously						As
	Reported			Adjustments			Restated			Reported			Adjustments			Restated			Reported			Adjustments			Restated
	(amounts in thousands, except per share data)									(amounts in thousands, except per share data)									(amounts in thousands, except per share data)
Net sales:
Products	$	568,442		$	(6,132	)	$	562,310		$	663,287		$	14,041		$	677,328		$	600,933		$	160		$	601,093
Services	792,281			6,816			799,097			718,208			8,548			726,756			694,648			5,843			700,491
	1,360,723			684			1,361,407			1,381,495			22,589			1,404,084			1,295,581			6,003			1,301,584
Costs and expenses:
Products	429,494			(3,701		)	425,793			451,573			14,605			466,178			418,279			225			418,504
Services	629,832			(312		)	629,520			594,662			(700		)	593,962			564,062			703			564,765
Selling, general and administrative	164,876			354			165,230			163,688			501			164,189			159,791			—			159,791
Restructuring costs	8,139			—			8,139			—			—			—			—			—			—
Impairment of goodwill	50,865			—			50,865			—			—			—			—			—			—
Research and development	24,445			—			24,445			28,722			—			28,722			25,260			—			25,260
Amortization of purchased intangibles	16,680			—			16,680			14,828			—			14,828			14,681			—			14,681
	1,324,331			(3,659		)	1,320,672			1,253,473			14,406			1,267,879			1,182,073			928			1,183,001

Operating income	36,392			4,343			40,735			128,022			8,183			136,205			113,508			5,075			118,583

Other income (expense):
Interest and dividend income	1,576			—			1,576			2,994			—			2,994			2,568			—			2,568
Interest expense	(3,415		)	(12		)	(3,427		)	(1,550		)	(52		)	(1,602		)	(1,461		)	(80		)	(1,541		)
Other income (expense) - net	(367		)	1,254			887			821			(455		)	366			1,662			(799		)	863

Income before income taxes	34,186			5,585			39,771			130,287			7,676			137,963			116,277			4,196			120,473

Income taxes	14,205			297			14,502			38,183			2,149			40,332			32,373			1,746			34,119

Net income	19,981			5,288			25,269			92,104			5,527			97,631			83,904			2,450			86,354

Less noncontrolling interest in income of VIE	183			—			183			204			—			204			310			—			310

Net income attributable to Cubic	$	19,798		$	5,288		$	25,086		$	91,900		$	5,527		$	97,427		$	83,594		$	2,450		$	86,044

Net income per share attributable to Cubic:
Basic	$	0.74		$	0.20		$	0.94		$	3.44		$	0.20		$	3.64		$	3.13		$	0.09		$	3.22
Diluted	$	0.74		$	0.20		$	0.94		$	3.44		$	0.20		$	3.64		$	3.13		$	0.09		$	3.22

Weighted average shares used in per share calculations:
Basic	26,736			—			26,736			26,736			—			26,736			26,736			—			26,736
Diluted	26,760			—			26,760			26,736			—			26,736			26,736			—			26,736

	Consolidated Statement of Comprehensive Income September 31, 2013									Consolidated Statement of Comprehensive Income September 31, 2012								Consolidated Statement of Comprehensive Income September 31, 2011
	Previously						As			Previously					As			Previously						As
	Reported			Adjustments			Restated			Reported			Adjustments		Restated			Reported			Adjustments			Restated
	(in thousands)									(in thousands)								(in thousands)
Net income	$	19,981		$	5,288		$	25,269		$	92,104		$	5,527	$	97,631		$	83,904		$	2,450		$	86,354
Other comprehensive income:
Adjustment to pension liability, net of taxes	13,501			(395		)	13,106			(5,585		)	—		(5,585		)	(3,285		)	—			(3,285		)
Foreign currency translation	494			480			974			10,688			189		10,877			(1,250		)	(79		)	(1,329		)
Net unrealized gains/losses from cash flow hedges, net of tax	3,777			—			3,777			242			—		242			(5,618		)	—			(5,618		)
Net unrealized gain (loss) on available-for-sale securities, net of tax	(2		)	—			(2		)	—			—		—			—			—			—
Total other comprehensive income (loss)	17,770			85			17,855			5,345			189		5,534			(10,153		)	(79		)	(10,232		)
Total comprehensive income (loss)	37,751			5,373			43,124			97,449			5,716		103,165			73,751			2,371			76,122

	Consolidated Balance Sheet September 30, 2013									Consolidated Balance Sheet September 30, 2012
	Previously						As			Previously						As
	Reported			Adjustments			Restated			Reported			Adjustments			Restated
	(in thousands)									(in thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	203,892		$	—		$	203,892		$	212,267		$	—		$	212,267
Restricted cash	69,381			—			69,381			68,749			—			68,749
Marketable securities	4,055			—			4,055			—			—			—
Accounts receivable - net	376,143			2,859			379,002			350,697			(1,726		)	348,971
Recoverable income taxes	7,885			—			7,885			7,083			—			7,083
Inventories - net	54,400			5,346			59,746			52,366			(10,271		)	42,095
Deferred income taxes	8,354			—			8,354			7,587			382			7,969
Prepaid expenses and other current assets	10,284			—			10,284			13,977			—			13,977
Total current assets	734,394			8,205			742,599			712,726			(11,615		)	701,111

Long-term contract receivables	19,249			(228		)	19,021			22,070			(152		)	21,918
Long-term capitalized costs	75,520			(6,557		)	68,963			26,875			—			26,875
Property, plant and equipment - net	56,305			—			56,305			55,327			—			55,327
Deferred income taxes	19,322			—			19,322			16,364			—			16,364
Goodwill	134,851			—			134,851			146,933			—			146,933
Purchased intangibles - net	57,542			—			57,542			39,374			—			39,374
Other assets	9,772			—			9,772			6,648			—			6,648
	$	1,106,955		$	1,420		$	1,108,375		$	1,026,317		$	(11,767	)	$	1,014,550
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Trade accounts payable	$	39,016		$	1,294		$	40,310		$	47,917		$	1,154		$	49,071
Customer advances	103,187			(18,880		)	84,307			100,764			(24,813		)	75,951
Accrued compensation and other current liabilities	43,394			—			43,394			52,680			—			52,680
Other current liabilities	62,693			1,923			64,616			55,988			101			56,089
Income taxes payable	8,076			4,655			12,731			20,733			4,014			24,747
Current portion of long-term debt	557			—			557			4,561			—			4,561
Total current liabilities	256,923			(11,008		)	245,915			282,643			(19,544		)	263,099

Long-term debt	102,363			—			102,363			6,942			—			6,942
Accrued pension liability	20,785			—			20,785			46,382			—			46,382
Deferred compendation	9,792			—			9,792			8,619			—			8,619
Income taxes payable	6,769			(335		)	6,434			4,862			382			5,244
Other long-term liabilities	5,396			610			6,006			6,527			615			7,142

Shareholders’ equity:
Common stock	15,825			—			15,825			12,574			—			12,574
Retained earnings	728,424			11,578			740,002			715,043			6,290			721,333
Accumulated other comprehensive loss	(3,378		)	575			(2,803		)	(21,148		)	490			(20,658		)
Treasury stock at cost	(36,078		)	—			(36,078		)	(36,078		)	—			(36,078		)
Shareholders’ equity related to Cubic	704,793			12,153			716,946			670,391			6,780			677,171
Noncontrolling interest in variable interest entity	134			—			134			(49		)	—			(49		)
Total shareholders’ equity	704,927			12,153			717,080			670,342			6,780			677,122
	$	1,106,955		$	1,420		$	1,108,375		$	1,026,317		$	(11,767	)	$	1,014,550

	Consolidated Statement of Cash Flows September 30, 2013									Consolidated Statement of Cash Flows September 30, 2012									Consolidated Statement of Cash Flows September 30, 2011
	Previously						As			Previously						As			Previously						As
	Reported			Adjustments			Restated			Reported			Adjustments			Restated			Reported			Adjustments			Restated
	(in thousands)									(in thousands)									(in thousands)
Operating Activities:
Net income	$	19,981		$	5,288		$	25,269		$	92,104		$	5,527		$	97,631		$	83,904		$	2,450		$	86,354
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization	25,359			—			25,359			22,857			—			22,857			22,341			—			22,341
Share-based compensation expense	3,251			—			3,251			—			—			—			—			—			—
Inventory write-downs	2,760			—			2,760			—			—			—			—			—			—
Impairment of goodwill	50,865			—			50,865			—			—			—			—			—			—
Deferred income taxes	(7,508		)	—			(7,508		)	(1,486		)	—			(1,486		)	2,512			—			2,512
Changes in operating assets and liabilities net of effects from acquisitions:
Accounts receivable	(14,588		)	(4,403		)	(18,991		)	(118,164		)	(4,820		)	(122,984		)	3,566			(1,519		)	2,047
Inventories	(4,219		)	(15,671		)	(19,890		)	(13,636		)	13,809			173			2,442			1,726			4,168
Prepaid expenses and other current assets	3,485			382			3,867			7,574			(142		)	7,432			5,122			(240		)	4,882
Long-term capitalized contract costs	(48,645		)	6,557			(42,088		)	(26,875		)	—			(26,875		)	—			—			—
Accounts payable and other current liabilities	(27,587		)	1,950			(25,637		)	8,525			1,105			9,630			(1,547		)	80			(1,467		)
Customer advances	3,006			5,984			8,990			(37,999		)	(17,770		)	(55,769		)	37,143			(4,483		)	32,660
Income taxes	(19,027		)	(87		)	(19,114		)	11,929			2,290			14,219			(23,713		)	1,569			(22,144		)
Other items	(409		)	0			(409		)	494			1			495			(2,676		)	417			(2,259		)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES	(13,276		)	—			(13,276		)	(54,677		)	—			(54,677		)	129,094			—			129,094

Investing Activities:
Acquisition of businesses, net of cash acquired	(63,691		)	—			(63,691		)	—			—			—			(126,825		)	—			(126,825		)
Net additions to property, plant and equipment	(9,052		)	—			(9,052		)	(14,226		)	—			(14,226		)	(8,728		)	—			(8,728		)
Purchases of short-term investments	(4,050		)	—			(4,050		)	—			—			—			—			—			—
Proceeds from maturities of short-term investments	—			—			—			25,829			—			25,829			58,252			—			58,252
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES	(76,793		)	—			(76,793		)	11,603			—			11,603			(77,301		)	—			(77,301		)

Financing Activities:
Proceeds from short-term borrowings	70,000			—			70,000			—			—			—			—			—			—
Principal payments on short-term borrowings	(70,000		)	—			(70,000		)	—			—			—			—			—			—
Proceeds from long-term borrowings	100,000			—			100,000			—			—			—			—			—			—
Principal payments on long-term debt	(8,543		)	—			(8,543		)	(4,549		)	—			(4,549		)	(4,555		)	—			(4,555		)
Contingent consideration payments related to acquisitions of	(7,842		)	—			(7,842		)	—			—			—			—			—			—
Dividends paid to shareholders	(6,417		)	—			(6,417		)	(6,417		)	—			(6,417		)	(7,486		)	—			(7,486		)
Change in restricted cash	(158		)	—			(158		)	(68,584		)	—			(68,584		)	—			—			—
Purchases of treasury stock	—			—			—			—			—			—			(4		)	—			(4		)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES	77,040			—			77,040			(79,550		)	—			(79,550		)	(12,045		)	—			(12,045		)

Effect of exchange rates on cash	4,654			—			4,654			5,743			—			5,743			(6,034		)	—			(6,034		)

NET INCREASE (DECREASE) IN CASH AND CASH	(8,375		)	—			(8,375		)	(116,881		)	—			(116,881		)	33,714			—			33,714

Cash and cash equivalents at the beginning of the year	212,267			—			212,267			329,148			—			329,148			295,434			—			295,434

CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR	$	203,892		$	—		$	203,892		$	212,267		$	—		$	212,267		$	329,148		$	—		$	329,148

Financial information in the accompanying footnotes to the consolidated financial statements reflects the effects of the preceding discussions and tables.