Note 2—Restatement of Condensed Consolidated Financial Statements

As is more fully described in our Annual Report on Form 10-K/A for the year ended September 30, 2013, on May 12, 2014 we restated our Condensed Consolidated Balance Sheet at September 30, 2013 and our Condensed Consolidated Statements of Income, Comprehensive Income, and Cash Flows for the three- and nine-month periods ended June 30, 2013.

The cumulative adjustments to correct the errors in the consolidated financial statements for all periods prior to October 1, 2012 are recorded as adjustments to retained earnings and accumulated other comprehensive income (loss) at September 30, 2012. The cumulative effect of those adjustments increased previously reported retained earnings by $6.3 million and reduced previously reported accumulated other comprehensive loss by $0.5 million at September 30, 2012.

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

Retained earnings at September 30, 2012 - As previously reported	$	715,043
Adjustments	6,290
Retained earnings at September 30, 2012 - As restated	$	721,333

	Nine Months Ended		Three Months Ended
	June 30,		June 30,
	2013		2013
Net Income - As previously reported	$	57,968	$	18,364
Adjustments	4,304		17
Net Income - As restated	$	62,272	$	18,381

Description of Adjustments

On February 10, 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 Condensed Consolidated Balance Sheet as of September 30, 2013, and our Condensed Consolidated Statements of Income, Comprehensive Income and Cash Flows for the three and nine months ended June 30, 2013:

	Condensed Consolidated Balance Sheet September 30, 2013
	Previously Reported			Adjustments			As Restated
	(in thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	203,892		$	—		$	203,892
Restricted cash	69,381			—			69,381
Marketable securities	4,055			—			4,055
Accounts receivable - net	376,143			2,859			379,002
Recoverable income taxes	7,885			—			7,885
Inventories - net	54,400			5,346			59,746
Deferred income taxes and other current assets	18,638			—			18,638
Total current assets	734,394			8,205			742,599

Long-term contract receivables	19,249			(228		)	19,021
Long-term capitalized costs	75,520			(6,557		)	68,963
Property, plant and equipment - net	56,305			—			56,305
Deferred income taxes	19,322			—			19,322
Goodwill	136,094			—			136,094
Purchased intangibles - net	57,542			—			57,542
Other assets	9,772			—			9,772
	$	1,108,198		$	1,420		$	1,109,618

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Trade accounts payable	$	39,016		$	1,294		$	40,310
Customer advances	103,187			(18,880		)	84,307
Accrued compensation and other current liabilities	107,330			1,923			109,253
Income taxes payable	8,076			4,655			12,731
Current portion of long-term debt	557			—			557
Total current liabilities	258,166			(11,008		)	247,158

Long-term debt	102,363			—			102,363
Other long-term liabilities	42,742			275			43,017

Shareholders’ equity:
Common stock	15,825			—			15,825
Retained earnings	728,424			11,578			740,002
Accumulated other comprehensive loss	(3,378		)	575			(2,803		)
Treasury stock at cost	(36,078		)	—			(36,078		)
Shareholders’ equity related to Cubic	704,793			12,153			716,946
Noncontrolling interest in variable interest entity	134			—			134
Total shareholders’ equity	704,927			12,153			717,080
	$	1,108,198		$	1,420		$	1,109,618

	Condensed Consolidated Statement of Income									Condensed Consolidated Statement of Income
	Nine Months Ended June 30, 2013									Three Months Ended June 30, 2013
	Previously						As			Previously						As
	Reported			Adjustments			Restated			Reported			Adjustments			Restated
	(amounts in thousands, except per share data)									(amounts in thousands, except per share data)

Net sales:
Products	$	432,226		$	(2,790	)	$	429,436		$	131,557		$	(3,875	)	$	127,682
Services	585,895			5,300			591,195			208,888			656			209,544
	1,018,121			2,510			1,020,631			340,445			(3,219		)	337,226

Costs and expenses:
Products	311,964			(1,921		)	310,043			93,946			(2,935		)	91,011
Services	462,075			(406		)	461,669			164,458			(180		)	164,278
Selling, general and administrative	126,447			(54		)	126,393			44,130			—			44,130
Restructuring costs	6,198			—			6,198			114			—			114
Research and development	19,346			—			19,346			6,426			—			6,426
Amortization of purchased intangibles	12,192			—			12,192			4,362			—			4,362
	938,222			(2,381		)	935,841			313,436			(3,115		)	310,321

Operating income	79,899			4,891			84,790			27,009			(104		)	26,905
Other income (expense):
Interest and dividend income	1,279			—			1,279			530			—			530
Interest expense	(2,438		)	(9		)	(2,447		)	(922		)	(3		)	(925		)
Other income (expense) - net	(764		)	—			(764		)	(813		)	—			(813		)

Income before income taxes	77,976			4,882			82,858			25,804			(107		)	25,697

Income taxes	19,859			578			20,437			7,416			(124		)	7,292

Net income	58,117			4,304			62,421			18,388			17			18,405

Less noncontrolling interest in income of VIE	149			—			149			24			—			24

Net income attributable to Cubic	$	57,968		$	4,304		$	62,272		$	18,364		$	17		$	18,381

Net income per share attributable to Cubic:
Basic	$	2.17		$	0.16		$	2.33		$	0.69		$	0.00		$	0.69
Diluted	$	2.17		$	0.16		$	2.33		$	0.69		$	0.00		$	0.69

Dividends per common share	$	0.12		$	—		$	0.12		$	—		$	—		$	—

Weighted average shares used in per share calculations:
Basic	26,736			—			26,736			26,736			—			26,736
Diluted	26,745			—			26,745			26,762			—			26,762

	Condensed Consolidated Statement of Comprehensive Income									Condensed Consolidated Statement of Comprehensive Income
	Nine Months Ended June 30, 2013									Three Months Ended June 30, 2013
	Previously						As			Previously					As
	Reported			Adjustments			Restated			Reported			Adjustments		Restated
	(in thousands)									(in thousands)

Net income	$	58,117		$	4,304		$	62,421		$	18,388		$	17	$	18,405
Other comprehensive income:
Foreign currency translation	(15,185		)	(580		)	(15,765		)	(1,872		)	96		(1,776		)
Net unrealized gain (loss) on available-for-sale securities, net of tax	(5		)	—			(5		)	(5		)	—		(5		)
Change in net unrealized gains/losses from cash flow hedges:
Change in fair value of cash flow hedges, net of tax	3,557			—			3,557			4,894			—		4,894
Adjustment for net gains/losses realized and included in net income, net of tax	1,146			—			1,146			(188		)	—		(188		)
Total change in unrealized gains/losses realized from cash flow hedges, net of tax	4,703			—			4,703			4,706			—		4,706
Total other comprehensive income (loss)	(10,487		)	(580		)	(11,067		)	2,829			96		2,925
Total comprehensive income (loss)	47,630			3,724			51,354			21,217			113		21,330

	Condensed Consolidated Statement of Cash Flows									Condensed Consolidated Statement of Cash Flows
	Nine Months Ended June 30, 2013									Three Months Ended June 30, 2013
	Previously						As			Previously						As
	Reported			Adjustments			Restated			Reported			Adjustments			Restated
	(in thousands)									(in thousands)

Operating Activities:
Net income	$	58,117		$	4,304		$	62,421		$	18,388		$	17		$	18,405
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization	18,014			—			18,014			6,417			—			6,417
Share-based compensation expense	1,634			—			1,634			1,575			—			1,575
Changes in operating assets and liabilities, net of effects from acquisitions	(84,595		)	(4,304		)	(88,899		)	22,761			(17		)	22,744
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES	(6,830		)	—			(6,830		)	49,141			—			49,141

Investing Activities:
Acquisition of businesses, net of cash acquired	(60,649		)	—			(60,649		)	(7,377		)	—			(7,377		)
Net additions to property, plant and equipment	(6,209		)	—			(6,209		)	(2,348		)	—			(2,348		)
Purchases of short-term investments	(4,054		)	—			(4,054		)	(4,054		)	—			(4,054		)
NET CASH USED IN INVESTING ACTIVITIES	(70,912		)	—			(70,912		)	(13,779		)	—			(13,779		)

Financing Activities:
Proceeds from short-term borrowings	70,000			—			70,000			—			—			—
Principal payments on short-term borrowings	(70,000		)	—			(70,000		)	(25,000		)	—			(25,000		)
Proceeds from long-term borrowings	100,000			—			100,000			50,000			—			50,000
Principal payments on long-term debt	(8,407		)	—			(8,407		)	(134		)	—			(134		)
Contingent consideration payments related to acquisitions of businesses	(224		)	—			(224		)	(224		)	—			(224		)
Dividends paid to shareholders	(3,208		)	—			(3,208		)	—			—			—
Change in restricted cash	(104		)	—			(104		)	(20		)	—			(20		)
NET CASH PROVIDED BY FINANCING ACTIVITIES	88,057			—			88,057			24,622			—			24,622

Effect of exchange rates on cash	(10,131		)	—			(10,131		)	3,862			—			3,862

NET INCREASE IN CASH AND CASH EQUIVALENTS	184			—			184			63,846			—			63,846

Cash and cash equivalents at the beginning of the period	212,267			—			212,267			148,605			—			148,605

CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD	$	212,451		$	—		$	212,451		$	212,451		$	—		$	212,451

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