Goodwill

The following table sets forth the changes in the carrying amount of goodwill prior to the internal reorganization for the six months ended December 31, 2012:



	ACS			MFS		Total
Balance at June 30, 2011	$	79,558		$	—	$	79,558
Goodwill arising from the KOR acquisition	33,913			19,150		53,063
Balance at June 30, 2012	113,471			19,150		132,621
Goodwill arising from the Micronetics acquisition	46,509			—		46,509
Goodwill adjustment for the KOR acquisition	(701		)	—		(701		)
Balance at December 31, 2012	$	159,279		$	19,150	$	178,429

The goodwill adjustment for the KOR acquisition is the result of changes in fair value estimates derived from additional information obtained during the measurement period which ended December 30, 2012.

Following a series of acquisitions that expanded the Company’s capabilities, the Company initiated a reorganization to group its product and service offerings in order to align itself with the way management currently manages its business. The following reporting units were determined based upon the nature of the products offered to customers and the market characteristics of each reporting unit: MCE, MDS and MIS. As defined by FASB ASC 350—“Intangibles—Goodwill and Other” “FASB ASC 350”, goodwill is tested on an interim basis at the occurrence of certain triggering events. Events affecting reporting units such as a change in the composition or carrying amount of its net assets constitute a triggering event and require interim testing of goodwill. The Company performed interim testing on the ACS and MFS reporting units prior to the reorganization.

The Company determined the fair values of the ACS and MFS reporting units as of January 1, 2013. Consistent with prior years, the valuation was based upon a discounted cash flow analysis and corroborated by two market-based analyses: one comparing the trading multiples of public companies in similar lines of business and another based on exchange prices in actual business combinations. The results of the Company’s step one interim goodwill impairment test indicated that the fair values of both the ACS and MFS reporting units were in excess of its book values. As such, step two of the goodwill impairment testing was not required and no impairment charge was recorded. The Company acknowledges that the assumptions used during its fair value analysis are subject to management judgment and have a direct impact to the valuation results. The discount rate utilized in the discounted cash flow analysis was increased from historical measures due to the current economic uncertainty in the defense industry, including current government fiscal year federal budget sequestration and the potential for a continuing budget resolution for the next government fiscal year. The Company’s updated financial projections were used in the discounted cash flow analysis in consideration of current economic factors. The Company believes that the assumptions and projections used in its analyses for ACS and MFS were reasonable; however, using different assumptions could lead to different results. For example, a 1% increase in the discount rate used in the discounted cash flow analysis of the ACS reporting unit, would have resulted in the failure of the step one interim goodwill impairment test.

The Company reviewed its analysis of its internally reorganized business in order to determine its reporting units in accordance with FASB ASC 350. A reporting unit is considered to be an operating segment or one level below an operating segment also known as a component. The Company’s operating segments subsequent to the internal reorganization are MCE, MDS and MIS.

MCE has three components with discrete financial information available which are reviewed by their segment manager; however, those three components are economically similar in nature and thus have been aggregated into a single reporting unit at the operating segment level. MDS and MIS each have sole components and the reporting units are at the operating segment level.

The Company allocated the total carrying value of goodwill to each of the new reporting units based on the relative fair value of the reporting units calculated using a discounted cash flow analysis and in accordance with FASB ASC 350. There was no impairment of goodwill indicated subsequent to the allocation.

The following table summarizes the changes in goodwill for the six months ended June 30, 2013, after reallocation:



	MCE			MDS		MIS		Total
Balance at January 1, 2013	$	135,691		$	33,768	$	8,970	$	178,429
Subsequent recognition of deferred tax assets from the Micronetics acquisition	(376		)	—		—		(376		)
Subsequent decrease of deferred tax liabilities from the Micronetics acquisition	(414		)	—		—		(414		)
Other goodwill adjustments from the Micronetics acquisition	(1,118		)	—		—		(1,118		)
Balance at June 30, 2013	$	133,783		$	33,768	$	8,970	$	176,521

The Company performs its annual goodwill impairment test in the fourth quarter of each fiscal year. The Company follows FASB ASC 350 to determine whether the fair value of a reporting unit is less than its carrying amount. As of June 30, 2013, MCE, MDS, and MIS had goodwill balances; as such, the annual impairment analysis was performed for each reporting unit in the fourth quarter of fiscal 2013. The valuation was based upon a discounted cash flow analysis and corroborated by two market-based analyses: one comparing the trading multiples of public companies in similar lines of business and another based on exchange prices in actual business combinations. The results of the Company's step one interim goodwill impairment test indicated that the fair values of the MCE, MDS and MIS reporting units were in excess of its book values. As such, no impairment charge was recorded for fiscal 2013.

The Company also evaluated its market capitalization as of June 30, 2013 which approximated the fair value of the Company at that time when considering an appropriate control premium. The Company's market capitalization and stock price have steadily increased since the third quarter of fiscal 2013 providing objective evidence that the previous decline in these metrics were temporary and the decline of its market capitalization to be a temporary reaction to the uncertainty that federal budget sequestration was having on the defense industry. The projections used by the Company in determining the fair values of its reporting units did not include cash flows from any recent cancellations of any key defense programs in which it participates. While the Company has seen delays in certain programs, it believes these delays are temporary. Furthermore, the Company believes a short term decline in its market capitalization is not indicative of a permanent trend.