Operating Segment, Significant Customers and Geographic Information

12 Months Ended

Jun. 30, 2012

Operating Segment, Significant Customers and Geographic Information

O. Operating Segment, Significant Customers and Geographic Information

Operating segments are defined as components of an enterprise evaluated regularly by the Company’s senior management in deciding how to allocate resources and assess performance. The Company is presently organized in two operating segments. These reportable segments were determined based upon the nature of the products offered to customers, the market characteristics of each operating segment and the Company’s management structure:

• Advanced Computing Solutions: this operating segment is focused on specialized, high-performance embedded, real-time digital signal and image processing solutions that encompass signal acquisition, including microwave front-end, digitalization, digital signal processing, exploitation processing, high capacity digital storage and communications, targeted to key market segments, including defense, communications and other commercial applications. With the addition of KOR, the ACS segment also designs and develops DRFM units for a variety of modern EW applications, as well as radar environment simulation and test systems for defense applications.

• Mercury Federal Systems: this operating segment is focused on services and support work with the Department of Defense and federal intelligence and homeland security agencies, including designing, engineering, and deploying new ISR capabilities to address present and emerging threats to U.S. forces. With the addition of PDI, the MFS segment also provides sophisticated analysis and exploitation, multi-sensor data fusion and enrichment, and data processing services for the U.S. intelligence community.

The accounting policies of the reportable segments are the same as those described in “Note B: Summary of Significant Accounting Policies.” Beginning with the three months ended March 31, 2012, the profitability measure employed by the Company and its chief operating decision maker (“CODM”) as the basis for allocating resources to segments and assessing segment performance is adjusted EBITDA, The Company believes the adjusted EBITDA financial measure assists in providing an enhanced understanding of its underlying operational measures to manage its business, to evaluate its performance compared to prior periods and the marketplace, and to establish operational goals. The Company believes that adjusted EBITDA provides a more comprehensive basis for decision making and assessing segment performance than income (loss) from operations prior to stock compensation expense which was used in prior reporting periods.

Adjusted EBITDA is defined as earnings from continuing operations before interest income and expense, income taxes, depreciation, amortization of acquired intangible assets, restructuring, impairment of long-lived assets, acquisition costs and other related expenses, fair value adjustments from purchase accounting and stock-based compensation costs. Prior year’s amounts have been presented to reflect the current profitability measures for comparative purposes. Additionally, asset information by reportable segment is not reported because the Company and its CODM utilize consolidated asset information when making business decisions. The following is a summary of the performance of the Company’s operations by reportable segment:

	ACS		MFS			Eliminations			Total
YEAR ENDED JUNE 30, 2012
Net revenues to unaffiliated customers	$	215,899	$	28,670		$	360		$	244,929
Intersegment revenues		12,208		3			(12,211	)		—
Net revenues	$	228,107	$	28,673		$	(11,851	)	$	244,929
Adjusted EBITDA	$	43,802	$	4,913		$	159		$	48,874
YEAR ENDED JUNE 30, 2011
Net revenues to unaffiliated customers	$	217,423	$	11,415		$	(128	)	$	228,710
Intersegment revenues		6,260		52			(6,312	)		—
Net revenues	$	223,683	$	11,467		$	(6,440	)	$	228,710
Adjusted EBITDA	$	42,304	$	(914	)	$	(507	)	$	40,883
YEAR ENDED JUNE 30, 2010
Net revenues to unaffiliated customers	$	188,967	$	10,735		$	128		$	199,830
Intersegment revenues		4,779		336			(5,115	)		—
Net revenues	$	193,746	$	11,071		$	(4,987	)	$	199,830
Adjusted EBITDA	$	30,454	$	(641	)	$	43		$	29,856

The following table reconciles the Company’s net income, the most directly comparable GAAP financial measure, to its adjusted EBITDA:

	Year Ended June 30,
(In thousands)	2012			2011			2010
Net income	$	22,619		$	18,442		$	28,358
(Loss) income from discontinued operations, net of income taxes		—			(65	)		289
Income from continuing operations		22,619			18,507			28,069
Interest expense (income), net		27			45			(151	)
Income tax expense (benefit)		9,152			8,060			(9,377	)
Depreciation		7,859			6,364			5,147
Amortization of acquired intangible assets		3,799			1,984			1,710
Restructuring		2,821			—			231
Impairment of long-lived assets		—			150			211
Acquisition costs and other related expenses		1,219			412			—
Fair value adjustments from purchase accounting		(5,238	)		(219	)		—
Stock-based compensation cost		6,616			5,580			4,016
Adjusted EBITDA	$	48,874		$	40,883		$	29,856

The geographic distribution of the Company’s revenues and long-lived assets from continuing operations is summarized as follows:

	US		Europe		Asia Pacific		Eliminations			Total
YEAR ENDED JUNE 30, 2012
Net revenues to unaffiliated customers	$	235,292	$	4,983	$	4,654	$	—		$	244,929
Inter-geographic revenues		5,511		747		175		(6,433	)		—
Net revenues	$	240,803	$	5,730	$	4,829	$	(6,433	)	$	244,929
Identifiable long-lived assets	$	15,895	$	32	$	2	$	—		$	15,929
YEAR ENDED JUNE 30, 2011
Net revenues to unaffiliated customers	$	219,435	$	3,665	$	5,610	$	—		$	228,710
Inter-geographic revenues		5,637		2,277		243		(8,157	)		—
Net revenues	$	225,072	$	5,942	$	5,853	$	(8,157	)	$	228,710
Identifiable long-lived assets	$	15,390	$	24	$	704	$	—		$	16,118
YEAR ENDED JUNE 30, 2010
Net revenues to unaffiliated customers	$	180,103	$	9,960	$	9,767	$	—		$	199,830
Inter-geographic revenues		13,916		789		198		(14,903	)		—
Net revenues	$	194,019	$	10,749	$	9,965	$	(14,903	)	$	199,830
Identifiable long-lived assets	$	13,384	$	21	$	716	$	—		$	14,121

Foreign revenue is based on the country in which the Company’s legal subsidiary is domiciled. Identifiable long-lived assets exclude goodwill and intangible assets.

Customers comprising 10% or more of the Company’s revenues for the fiscal years shown below are as follows:

	Year Ended June 30,
	2012			2011			2010
Raytheon Company (ACS)		22	%		17	%		20	%
Northrop Grumman Corporation (ACS)		17			21	%		*
Lockheed Martin Corporation (ACS)		15			13			17
		54	%		51	%		37	%

Although the Company typically has several customers from which it derives 10% or more of its revenue, the sales to each of these customers are spread across multiple programs and platforms. For the fiscal years ended June 30, 2012 and 2010, the AEGIS Program individually comprised 11% and 15% of the Company’s revenues, respectively. For the fiscal year ended June 30, 2011, no single program comprised 10% or more of the Company’s revenues.