SAN DIEGO, Calif. - August 1, 2012 - Cubic Corporation (NYSE: CUB) today announced that the Audit Committee of the Board of Directors of Cubic Corporation, after consultation with Ernst & Young LLP, the company’s independent registered public accounting firm, determined that Cubic’s financial statements for the fiscal 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 can no longer be relied upon as being in compliance with generally accepted accounting principles. Accordingly, the company will restate such financial statements.
Similarly, related press releases, Ernst & Young’s reports on the financial statements, including the effectiveness of internal control over financial reporting, and shareholder communications describing the company’s financial statements for these periods should no longer be relied upon.
The Audit Committee’s decision to restate these financial statements follows a recommendation by management that revenues in these previously issued financial statements should be adjusted due to errors in calculating revenues on certain long-term fixed-price development type contracts (“development contracts”) and on certain long-term service contracts with non-U.S. Government customers (“service contracts”).
Preliminary indications from the company’s evaluation are that the changes described below will result in an increase in revenues and net income cumulatively over the period of the restatement and an increase in retained earnings as of March 31, 2012. Cubic Corporation is continuing to evaluate the total amount of the adjustments and the specific impact on each period covered by the restatement, which may result in an increase or decrease in previously reported amounts for individual periods.
Cubic has historically 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. Cubic has 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.
Cubic believed that this methodology was an acceptable variation of the cost-to-cost percentage-of-completion method as described in Accounting Standards Codification (“ASC”) 605-35. The company now believes that generally accepted accounting principles do not support the practice of using a formulary calculation to defer a portion of the indicated revenue and profits on such contracts. Instead, Cubic believes that 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. The company is in the process of evaluating the differences resulting from this change but has not yet completed this evaluation.
While evaluating its revenue recognition for development contracts, Cubic also evaluated its 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 contracts but not for contracts with other governmental customers, whether domestic or foreign.
Cubic believed the cost-to-cost percentage completion method used for its non-U.S. Government contracts approximated the pattern of performance over the contract terms for these service contracts. In addition, in some cases these contracts may also include multiple deliverables or a revenue stream that is variable from period to period. The company is in the process of evaluating the differences between the cost-to-cost percentage-of-completion accounting and the revenue recognition based on the pattern of performance of the services, as well as the specific guidance outlined in multiple element arrangement guidance of ASC 605-25 (and prior guidance under EITF 00-21, for contracts entered into prior to fiscal 2010) but has not yet completed this evaluation.
Cubic intends to amend its annual and quarterly SEC filings, as appropriate, as soon as reasonably practicable after this filing. Management has considered the effect of the restatement on the company’s prior conclusions of the adequacy of its internal control over financial reporting and disclosure controls and procedures as of the end of each of the applicable restatement periods. As a result of the errors described above, management has concluded that the company’s internal control over financial reporting and disclosure controls and procedures were not effective to a reasonable assurance level as of the ends of each of the periods covered by the restatement. The company will amend any disclosures pertaining to its evaluation of such controls and procedures as appropriate in connection with the amended filings.
About Cubic Corporation
Cubic Corporation is the parent company of three major business segments: Cubic Defense Systems, Mission Support Services and Cubic Transportation Systems. Cubic Defense Systems is a leading provider of realistic combat training systems and defense electronics. Mission Support Services is a leading provider of training, operations, maintenance, technical and other support services for U.S. and allied military and security forces. Cubic Transportation Systems is the world’s leading provider of automated fare collection systems and services for public transit authorities. For more information about Cubic, see the company's Web site at www.cubic.com.
Cautionary Statement Regarding Forward-Looking Statements
Certain statements contained herein constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are indicated by words or phrases such as “anticipates,” “estimates,” “projects,” “believes,” “intends,” “expects,” and similar words and phrases. These statements are based on beliefs and assumptions by the Company’s management, and on information currently available to management. These statements involve risks and uncertainties.
Such risks and uncertainties include, but are not limited to: the timing and nature of the final resolution of the accounting issues discussed in this press release; any delay in the filing of required periodic reports with the SEC; the timing and results of the review of the effectiveness of internal control over financial reporting (and related internal controls) and disclosure controls and procedures; whether the review is expanded to additional matters beyond internal controls and disclosure controls and procedures; changes in the ranges of estimates and adjustments in this press release due to the audit of the Company’s annual financial statements; the SAS 100 review of quarterly financial statements or as a result of the Company’s responses to comments from the SEC Staff or otherwise; whether a restatement of financial results will be required for other accounting issues for the same or other periods in addition to the restatement currently expected by management; additional uncertainties related to accounting issues generally; adverse effects on the Company’s business as a result of the restatement process or the review of the effectiveness of internal control over financial reporting and disclosure controls and procedures or the reactions to such event by customers or suppliers, or increased regulatory, media or financial reporting issues and practices, rumors or otherwise; any adverse developments in existing legal proceedings or the initiation of new legal proceedings; and volatility of the Company’s stock price.
Actual outcomes and results may differ materially from what is expressed, estimated or implied in any guidance, preliminary revenue estimate or any other forward-looking statement. These and other risks and uncertainties are detailed from time to time in the Company’s SEC filings, including Cubic’s Form 10-K for the year ended September 30, 2011. The Company undertakes no obligation to update or correct any forward-looking statement made herein due to the occurrence of events after the issuance of this press release, except as required under applicable federal securities law.