K. Operating Segment, Geographic Information and Significant Customers

Operating segments are defined as components of an enterprise evaluated regularly by the Company’s chief operating decision maker (“CODM”) in deciding how to allocate resources and assess performance. Prior to the third quarter of fiscal 2013, the Company’s operating segments were the same as its reporting segments: Advanced Computing Solutions and Mercury Federal Systems. Following a series of acquisitions that expanded the Company’s capabilities, the Company initiated a reorganization to group its product and service offerings in the manner which the Company’s CODM manages and evaluates the business. Therefore, the Company utilized the management approach for determining reportable segments in accordance with the authoritative guidance. Beginning with the third quarter ended March 31, 2013, the Company redefined its operating and reportable segments. The following operating 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:

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Mercury Commercial Electronics (“MCE”): this operating segment delivers innovative, commercially developed, open sensor and Big Data processing systems for critical commercial, defense and intelligence applications. MCE delivers solutions that are secure and based upon open architectures and widely adopted industry standards. MCE delivers rapid time-to-value and world-class service and support to our commercial and prime contractor customers.

•

Mercury Defense Systems (“MDS”): this operating segment delivers innovative, open sensor processing solutions to key prime contractors leveraging commercially available technologies and solutions from our MCE business. MDS leverages this technology to develop integrated sensor processing subsystems, often including classified application-specific software and intellectual property (“IP”) for the C4ISR (command, control, communications, computers, intelligence, surveillance and reconnaissance), U.S. Department of Defense agencies and EW markets.

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Mercury Intelligence Systems (“MIS”): this operating segment delivers cutting edge and technologically advanced hardware and software data processing solutions and predictive analytics capabilities to address the Intelligence Community and Department of Defense mission needs. MIS provides a unique approach and solutions to facilitate the transformation of raw data into information and then to actionable intelligence.

The Company’s operating segments were evaluated in accordance with FASB ASC 280— “Segment Reporting” in order to determine which operating segments qualified as reportable segments. The Company considered qualitative factors, including the economic characteristics of each operating segment to determine if any of its three operating segments qualified for aggregation into fewer reportable segments.

The Company’s evaluation of the economic characteristics of its operating segments included comparisons of revenues and applicable growth rates, gross margins, operating margins, future projections, and additional non-GAAP financial measurements which indicate that MDS and MIS have similar economic characteristics. The Company also evaluated the following qualitative factors in accordance with FASB ASC 280 paragraph 10-50-11: the nature of products and services, the corresponding production processes, the types of customers, distribution methods for products and services and the nature of the corresponding regulatory environment associated with its operating segments. The Company determined each of these factors are similar for both the MDS and MIS operating segments and supports the aggregation of MDS and MIS into one reportable segment, Mercury Defense and Intelligence Systems (“MDIS”).

The Company analyzed quantitative thresholds of each reportable segment including but not limited to reported revenues, including sales to external customers and intersegment sales or transfers, reported profits or losses, and total assets of each operating segment. The Company determined that both MCE and MDIS met the quantitative thresholds for reporting.

The Company reclassified the segment data for the prior periods presented below to conform to the current year’s presentation.

The accounting policies of the reportable segments are the same as those described in “Note B: Summary of Significant Accounting Policies.” The profitability measure employed by the Company and its 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.

Adjusted EBITDA is defined as net income (loss) 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:


	MCE		MDIS		Eliminations			Total
THREE MONTHS ENDED MARCH 31, 2013
Net revenues to unaffiliated customers	$	41,222	$	13,006	$	(105	)	$	54,123
Intersegment revenues		2,733		—		(2,733	)		—

Net revenues	$	43,955	$	13,006	$	(2,838	)	$	54,123

Adjusted EBITDA	$	3,320	$	1,885	$	37		$	5,242
THREE MONTHS ENDED MARCH 31, 2012
Net revenues to unaffiliated customers	$	49,980	$	15,265	$	1,744		$	66,989
Intersegment revenues		4,205		—		(4,205	)		—

Net revenues	$	54,185	$	15,265	$	(2,461	)	$	66,989

Adjusted EBITDA	$	8,499	$	3,118	$	390		$	12,007
NINE MONTHS ENDED MARCH 31, 2013
Net revenues to unaffiliated customers	$	110,369	$	42,899	$	87		$	153,355
Intersegment revenues		10,880		12		(10,892	)		—

Net revenues	$	121,249	$	42,911	$	(10,805	)	$	153,355

Adjusted EBITDA	$	797	$	7,080	$	11		$	7,888
NINE MONTHS ENDED MARCH 31, 2012
Net revenues to unaffiliated customers	$	159,438	$	24,628	$	4		$	184,070
Intersegment revenues		8,134		—		(8,134	)		—

Net revenues	$	167,572	$	24,628	$	(8,130	)	$	184,070

Adjusted EBITDA	$	34,650	$	4,791	$	131		$	39,572

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


	Three Months Ended March 31,						Nine Months Ended March 31,
(In thousands)	2013			2012			2013			2012
Net income (loss)	$	788		$	5,245		$	(11,196	)	$	16,943
Interest expense, net		5			5			24			14
Tax (benefit) provision		(2,232	)		2,380			(8,075	)		8,522
Depreciation		2,068			1,970			6,470			5,730
Amortization of intangible assets		2,356			1,143			6,374			2,651
Restructuring and other charges		228			—			5,429			—
Acquisition costs and other related expenses		32			145			304			763
Fair value adjustments from purchase accounting		96			(223	)		2,293			(245	)
Stock-based compensation expense		1,901			1,342			6,265			5,194

Adjusted EBITDA	$	5,242		$	12,007		$	7,888		$	39,572

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


	US		Europe		Asia Pacific		Eliminations			Total
THREE MONTHS ENDED MARCH 31, 2013
Net revenues to unaffiliated customers	$	50,708	$	1,144	$	2,271	$	—		$	54,123
Inter-geographic revenues		2,313		103		3		(2,419	)		—

Net revenues	$	53,021	$	1,247	$	2,274	$	(2,419	)	$	54,123

THREE MONTHS ENDED MARCH 31, 2012
Net revenues to unaffiliated customers	$	62,751	$	2,906	$	1,332	$	—		$	66,989
Inter-geographic revenues		1,627		165		56		(1,848	)		—

Net revenues	$	64,378	$	3,071	$	1,388	$	(1,848	)	$	66,989

NINE MONTHS ENDED MARCH 31, 2013
Net revenues to unaffiliated customers	$	144,296	$	2,572	$	6,487	$	—		$	153,355
Inter-geographic revenues		6,240		290		47		(6,577	)		—

Net revenues	$	150,536	$	2,862	$	6,534	$	(6,577	)	$	153,355

NINE MONTHS ENDED MARCH 31, 2012
Net revenues to unaffiliated customers	$	176,086	$	4,046	$	3,938	$	—		$	184,070
Inter-geographic revenues		4,571		600		87		(5,258	)		—

Net revenues	$	180,657	$	4,646	$	4,025	$	(5,258	)	$	184,070

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
March 31, 2013	$	16,597	$	34	$	—	$	—	$	16,631
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 March 31,						Nine Months Ended March 31,
	2013			2012			2013			2012
Lockheed Martin Corporation		26	%		11	%		13	%		13	%
Raytheon Company			*		19			11			24
Northrop Grumman Corporation			*		13			11			20

		26	%		43	%		35	%		57	%

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

While the Company typically has 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. Programs comprising 10% or more of the Company’s revenue for the periods shown below are as follows:


	Three Months Ended March 31,						Nine Months Ended March 31,
	2013			2012			2013			2012
Aegis		15	%		10	%			*		11	%
Patriot			*		11	%			*			*
Joint Strike Fighter			*			*			*		12	%

		15	%		21	%		0	%		23	%

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