Operating Segment, Geographic Information and Significant Customers

3 Months Ended

Sep. 30, 2012

Operating Segment, Geographic Information and Significant Customers

K. Operating Segment, Geographic Information and Significant Customers

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 Digital Radio Frequency Memory (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 an additional basis for decision making and assessing segment performance than income (loss) from operations prior to stock compensation expense which was used prior to March 31, 2012.

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
THREE MONTHS ENDED SEPTEMBER 30, 2012
Net revenues to unaffiliated customers	$	37,808		$	9,916	$	1,704		$	49,428
Intersegment revenues		4,908			8		(4,916	)		—
Net revenues	$	42,716		$	9,924	$	(3,212	)	$	49,428
Adjusted EBITDA	$	(438	)	$	1,452	$	624		$	1,638
THREE MONTHS ENDED SEPTEMBER 30, 2011
Net revenues to unaffiliated customers	$	45,397		$	4,171	$	(446	)	$	49,122
Intersegment revenues		1,932			—		(1,932	)		—
Net revenues	$	47,329		$	4,171	$	(2,378	)	$	49,122
Adjusted EBITDA	$	8,155		$	508	$	66		$	8,729

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

	Three Months Ended September 30,
(In thousands)	2012			2011
(Loss) income from continuing operations	$	(7,200	)	$	2,653
Interest expense, net		6			3
Income tax (benefit) expense		(3,651	)		1,314
Depreciation		2,211			1,855
Amortization of acquired intangible assets		1,788			816
Restructuring and other charges		4,984			—
Acquisition costs and other related expenses		230			25
Fair value adjustments from purchase accounting		925			23
Stock-based compensation expense		2,345			2,040
Adjusted EBITDA	$	1,638		$	8,729

The geographic distribution of the Company’s revenues is summarized as follows:

	US		Europe		Asia Pacific		Eliminations			Total
THREE MONTHS ENDED SEPTEMBER 30, 2012
Net revenues to unaffiliated customers	$	47,635	$	345	$	1,448	$	—		$	49,428
Inter-geographic revenues		1,177		49		26		(1,252	)		—
Net revenues	$	48,812	$	394	$	1,474	$	(1,252	)	$	49,428
THREE MONTHS ENDED SEPTEMBER 30, 2011
Net revenues to unaffiliated customers	$	46,877	$	792	$	1,453	$	—		$	49,122
Inter-geographic revenues		2,182		257		20		(2,459	)		—
Net revenues	$	49,059	$	1,049	$	1,473	$	(2,459	)	$	49,122

Foreign revenue is based on the country in which the Company’s legal subsidiary is domiciled.

The geographic distribution of the Company’s long-lived assets is summarized as follows:

	U.S.		Europe		Asia Pacific		Eliminations		Total
September 30, 2012	$	19,707	$	29	$	2	$	—	$	19,738
June 30, 2012	$	15,895	$	32	$	2	$	—	$	15,929

Identifiable long-lived assets exclude goodwill and intangible assets.

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

	Three Months Ended September 30,
	2012			2011
Sierra Nevada Corporation		14	%		*
Raytheon Company		12	%		21	%
Northrop Grumman Corporation		12	%		18	%
		38	%		39	%

* Indicates that the amount is less than 10% of the Company’s revenues for the respective period.

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 three months ended September 30, 2012, the Gorgon Stare program individually comprised 14% of the Company’s revenues. For the three month period ended September 30, 2011, only the Joint Strike Fighter program at 16% comprised 10% or more of the Company’s revenues.