Mercury Systems Inc · NASDAQ:MRCY
Mercury Systems — Investor Day (November 2013)
54 slides from Mercury Systems's investor day presentation, Nov 12, 2013
Slide 1: Mercury Systems FY14 Investor Day Presentation
© 2013 Mercury Systems, Inc. Mercury Systems FY14 Investor Day Presentation November 12, 2013 New York, NY
Slide 2: Forward-looking safe harbor statement
2 © 2013 Mercury Systems, Inc. Forward-looking safe harbor statement This presentation contains certain forward-looking statements, as that term is defined in the Private Securities Litigation Reform Act of 1995, including those relating to business performance and the Company’s plans for growth and
Slide 3: Agenda
3 © 2013 Mercury Systems, Inc. Agenda • Keynote Todd Harrison Sr. Fellow, Center for Strategic and Budgetary Assessments • Strategy & Business Update • Market & Program Update • Financial Update • Closing Remarks / Q&A
Slide 4: Agenda: Strategy & Business Update
4 © 2013 Mercury Systems, Inc. Agenda • Keynote • Strategy & Business Update Mark Aslett President & CEO • Market & Program Update • Financial Update • Closing Remarks / Q&A
Slide 5: Introducing Mercury Systems
5 © 2013 Mercury Systems, Inc. Commercial outsourcing partner for sensor processing subsystems Introducing Mercury Systems • MRCY on NASDAQ • Real-time sensor processing subsystems • Commercial Item company; Prime outsourcing partner • Focused on Defense and Intelligence priorities • Deployed on ~30
Slide 6: Mercury investor highlights
6 © 2013 Mercury Systems, Inc. Leading Market Position Pure-play defense electronics company embedded on important programs and platforms aligned to DoD priorities Differentiated Capabilities Today Best-of-breed commercially developed sensor processing subsystems, software and services to defense Pr
Slide 7: Defense industry conditions remain challenging, but growth opportunities exist
7 © 2013 Mercury Systems, Inc. Defense industry conditions remain challenging… …but there are numerous growth opportunities to be exploited Political Dysfunction Crowding Out Procurement Reform Aging Platforms International Sales Pacific Pivot Challenges Opportunities Outsourcing
Slide 8: Defense will likely remain a $500B+ industry
8 © 2013 Mercury Systems, Inc. Defense will likely remain a $500B+ industry… …despite the ongoing political and budget uncertainty Crowding Out: Rising interest rates, healthcare and social spending; MilPer expense growth, aging military platforms’ O&M costs rising Procurement Reform: Firm-fixed-pri
Slide 9: Mercury has unique and differentiated capabilities today
9 © 2013 Mercury Systems, Inc. Mercury has unique and differentiated capabilities today… …that are aligned to the key industry growth drivers 2012 Pacific Pivot: Sensors going long, wide and high. Platforms need improved sensors, autonomy, electronic protection and attack, on-board exploitation Agin
Slide 10: What the major primes are telling us
10 © 2013 Mercury Systems, Inc. We work with all the major primes – they’re telling us: “As we pivot to the Pacific the threats, missions and conops are technically more challenging and costly.” “The DoD is funding less R&D and is expecting industry to invest more themselves.” Growth Costs Margin “I
Slide 11: Capabilities and strategies to drive growth and returns
11 © 2013 Mercury Systems, Inc. We have addressed these challenges and opportunities… …with capabilities and strategies to drive growth and returns Innovation Capability Scalability Affordability
Slide 12: Differentiated embedded processing product portfolio
12 © 2013 Mercury Systems, Inc. We’ve created the industry’s most differentiated and contemporary embedded processing product portfolio • State-of-the-art Intel server-class processing for next-generation sensors and mission computing • Pioneered GPU use for on-board big data exploitation • Best-in-
Slide 13: Positioned to benefit from AESA radar, EW and ISR upgrades
13 © 2013 Mercury Systems, Inc. Well positioned to benefit from AESA radar, electronic warfare, electronic countermeasure and ISR sensor upgrades • Unique end-to-end sensor processing capabilities • RF conditioning, distribution and switching • Wideband tuners, receivers, exciters and synthesizers •
Slide 14: Capabilities and assets we need to grow our business
14 © 2013 Mercury Systems, Inc. We have the capabilities and assets we need to grow our business Typical radar processing and electronic warfare subsystem • Significant expansion of addressable market • RF/Microwave 3-5x content vs. traditional processing • Faster time to money • R&D for new capabil
Slide 15: Significant opportunity to grow RF/M revenues
15 © 2013 Mercury Systems, Inc. We have a significant opportunity to grow RF/M revenues … …from existing customers on new and existing programs Processing 66% RF/M 28% Other 6% Raytheon Processing 68% RF/M 30% Other 2% Lockheed Processing 99.8% RF/M 0.2% Northrop Processing 7% RF/M 93% BAE Processin
Slide 16: The case for a new model in RF and microelectronics
16 © 2013 Mercury Systems, Inc. The case for a new model in RF and microelectronics Mercury is uniquely positioned to address these challenges Lack of scope Many suppliers lack advanced engineering design, automated manufacturing and test capabilities to effectively onboard outsourced development an
Slide 17: Creating a new model in RF and microelectronics
17 © 2013 Mercury Systems, Inc. We’re creating a new model in the RF and microelectronics industry and a better alternative for our customers • Building second world-class microelectronics facility; Leverages ~$10-$20m investment by prior owner • Built-in plant redundancy from a single supplier simp
Slide 18: Substantial changes occurring within our customers
18 © 2013 Mercury Systems, Inc. Despite record earnings, high yields and large buy-backs… … there are substantial changes occurring within our customers “Reducing costs is another element of our approach to affordability… includes reduction of $1.2B in annual cost over the past two years, while rema
Slide 19: Prime contractors outsourcing more to commercial companies
19 © 2013 Mercury Systems, Inc. Defense procurement reform and slower defense spending are causing prime contractors to outsource more to commercial companies like Mercury • State-of-the-art sensor processing capabilities today mean less customer or government R&D required • Experience and scale imp
Slide 20: Outsourcing by Primes increasing our addressable market
20 © 2013 Mercury Systems, Inc. Defense Electronics $33.7B 80% COTS $4.2B 10% Additional Commercial Outsourcing $3.8B 10% Defense Electronics $37.5B 90% COTS $4.2B 10% Outsourcing by Primes is increasing our addressable market 10% additional outsourcing could double our market opportunity Sources: T
Slide 21: Key program update: phase, timing and possible value
21 © 2013 Mercury Systems, Inc. FY13 FY14 FY15 FY16 Production Years Relevance Possible Pivot Upgrade FMS Total ($M) SEWIP Block 2 FRP: FY15-23 200-230 SEWIP Expansion FRP: FY15-23 130-150 SEWIP Deriv.** FRP: FY17-23 110-230 SEWIP Block3** LRIP: FY16 FRP: FY18-26 150-250 Buzzard/Ba
Slide 22: Program summary
22 © 2013 Mercury Systems, Inc. Program summary • RF and microwave expected to be fastest growing business area driven by Pacific pivot, outsourcing and ability to take share • Existing SEWIP Block 2, future content expansion and derivative opportunity provide largest short term growth potential • S
Slide 23: Strategy, acquisitions and investments positioned us well
23 © 2013 Mercury Systems, Inc. Strategy, acquisitions and investments positioned us well… …to drive growth and improved returns Innovation: We’ve invested in innovations that drive sensor processing upgrades for the Pacific pivot, aging platforms, foreign sales and competitive displacement Capabili
Slide 24: Agenda: Market & Program Update
24 © 2013 Mercury Systems, Inc. Agenda • Keynote • Strategy & Business Update • Market & Program Update Didier Thibaud President, Mercury Commercial Electronics (MCE) • Financial Update • Closing Remarks / Q&A
Slide 25: Electronic warfare and radar shaped by Pacific pivot
25 © 2013 Mercury Systems, Inc. • New EW threats range from irregular warfare to complex integrated air defense (IAD) systems • Anti-Access/Area Denial (A2/AD) driving complex jamming solutions • Control of electromagnetic spectrum requires platform upgrades • Budget reality is driving cost pressure
Slide 26: FY13 defense market growth drivers
26 © 2013 Mercury Systems, Inc. FY13 defense market growth drivers FY13 Total Defense Revenue by Funding ($M,%) Total $189M FY13 Total Defense Revenue by Market ($M,%) Total $189M Radar 73.8 39% EW 62.1 33% EO/IR 21.9 11% C4I 24.0 13% Sonar 3.6 2% Other Def 3.7 2% Domestic 147.5 78% FMS/ Internation
Slide 27: Deployed on 300+ programs with 25+ Primes
27 © 2013 Mercury Systems, Inc. We are deployed on 300+ programs with 25+ Primes RADAR EW EO/IR – C4I BAMS; NATO AGS Global Hawk SEWIP AEGIS AEGIS Ashore F-15 Patriot AH-64 Apache Reaper Gorgon Stare F-16 Badger/Buzzard Shadow Global Hawk F-35 F-35 F-16 P-8
Slide 28: Aegis ballistic missile defense: SPY-1 BMD Radar
28 © 2013 Mercury Systems, Inc. Mercury’s largest single program in production to date Aegis ballistic missile defense: SPY-1 BMD Radar Countering rogue nations’ ballistic missile threats • Mercury’s franchise program • Highest performance radar processor Application Ready Subsystem • $30M booked in
Slide 29: Patriot missile defense: next-generation ground radar
29 © 2013 Mercury Systems, Inc. Program in production; FMS and US Army upgrade driving growth Patriot missile defense: Next-generation ground radar Services-led design win – Prime outsourcing example • Sophisticated radar processor Application Ready Subsystem • Production awards received to date: $4
Slide 30: F-16 SABR AESA radar upgrade
30 © 2013 Mercury Systems, Inc. Mercury part of the highest volume fighter Radar upgrade F-16 SABR AESA radar upgrade Scalable Agile Beam Radar (SABR) • History of success with Northrop Grumman fighter radars F-16, F-22, B1B, F-35 • Northrop awarded Taiwan & USAF F-16 AESA radar upgrade • Market siz
Slide 31: Gorgon Stare Increment 2
31 © 2013 Mercury Systems, Inc. Increased production units and improvements planned Gorgon Stare Increment 2 Nation’s premier EO/IR wide area surveillance system • Increment 2 – New onboard processor and storage for advanced wide-area sensors – Quick-reaction: delivered 7 systems in 24 months – $28M
Slide 32: Filthy Badger/Buzzard
32 © 2013 Mercury Systems, Inc. Filthy Badger/Buzzard Electronic attack systems for Navy/AF vulnerability assessment and tactics training • Received $12M extension to existing contract; awaiting $65M Filthy Badger IDIQ renewal • Next-generation DRFM, Filthy Buzzard in final stages of development • R
Slide 33: Electronic warfare system upgrade for F-15 C/D
33 © 2013 Mercury Systems, Inc. Acquisition strategy driving growth in EW and enabling access to new customers and programs Electronic warfare system upgrade for F-15 C/D Advanced radar warning and countermeasure capabilities • F-15 electronic upgrades for FMS and USAF • RF & microwave content • Con
Slide 34: SEWIP: Countering new emerging peer threats
34 © 2013 Mercury Systems, Inc. Franchise program moving into production SEWIP: Countering new emerging peer threats Naval surface fleet EW upgrade: 100+ ships • Block 2: – Received LRIP 10 shipsets ($12M-$13M) FY13 – Expect additional shipsets H2FY14 – Opportunity for additional RF/microwave conten
Slide 35: SEWIP has become our largest program
35 © 2013 Mercury Systems, Inc. Since November 2012, SEWIP has become our largest program Possible program value almost doubled in 12 months FY13 FY14 FY15 FY16 Production Years Possible Total ($M) SEWIP Block 2 FRP: FY15-23 200-230 SEWIP Expansion FRP: FY15-23 130-150 SEWIP Deriv.** FRP: FY17-23 11
Slide 36: Summary: well positioned for industry growth drivers
36 © 2013 Mercury Systems, Inc. Summary – Well positioned for industry growth drivers • Well positioned on key programs and platforms • Pacific pivot changing EW needs, driving new jammer and radar upgrades • New capabilities in RF driving market and content expansion • Acquisitions and AMC investme
Slide 37: Agenda: Financial Update
37 © 2013 Mercury Systems, Inc. Agenda • Keynote • Strategy & Business Update • Market & Program Update • Financial Update Kevin Bisson CFO • Closing Remarks / Q&A
Slide 38: Revenue summary by market
38 © 2013 Mercury Systems, Inc. Revenue summary by market Defense revenue CAGR of 15% FY08-FY12 Notes: • FY08-10 figures adjusted for discontinued operations. 130 145 158 181 230 60 44 42 48 15 0 50 100 150 200 250 FY08 FY09 FY10 FY11 FY12 Revenue ($M) Defense Commercial 190 189 200 229 245
Slide 39: Adjusted EBITDA more than doubled FY08-FY12
39 © 2013 Mercury Systems, Inc. Adjusted EBITDA more than doubled FY08-FY12 Notes: • FY08-FY09 figures are as reported in the Company’s fiscal 2010 Form 10K. FY10-12 figures are as reported in the Company’s fiscal 2012 Form 10K. • Adjusted EBITDA excludes interest income and expense, income taxes, d
Slide 40: Achieved historic target business model in FY12
40 © 2013 Mercury Systems, Inc. Achieved historic target business model in FY12 GAAP FY08 FY09 FY10 FY11 FY12 Historic Target Business Model Revenue 100% 100% 100% 100% 100% 100% Gross Margin 58% 56% 56% 57% 56% 54+% SG&A and other OPEX(1) 37% 29% 27% 26% 25% Low-mid 20’s R&D 24% 22% 21% 19% 19% Hig
Slide 41: Healthy balance sheet with sufficient liquidity
41 © 2013 Mercury Systems, Inc. Healthy balance sheet with sufficient liquidity No debt and expanded credit facility • $500M Shelf Registration • $200M senior unsecured revolving line of credit (no drawdowns) Other financing sources available 163 39 (70) 116 (3) (74) 1 40 0 20 40 60 80 100 120 140 1
Slide 42: Defense industry headwinds in FY13
42 © 2013 Mercury Systems, Inc. Defense industry headwinds in FY13 • Adversely impacted bookings and revenue levels • Restructuring actions lead to more than $25M of annualized savings • Forecasted revenue more conservatively; emphasis on building backlog • Focused on managing expenses and working c
Slide 43: Second half FY13 recovery
43 © 2013 Mercury Systems, Inc. Second half FY13 recovery GAAP ($M) FY13 H1 FY13 H2 % Change FY13 Bookings 103.9 116.7 12% 220.6 Revenue 99.2 109.6 10% 208.8 Gross Margin % 38% 41% 3 pts 40% EPS (0.40) (0.04) 90% (0.44) Adj. EBITDA 2.7 9.0 242% 11.7 Operating Cash Flow (8.4) 6.5 N/A (1.9)
Slide 44: Entered FY14 with record backlog
44 © 2013 Mercury Systems, Inc. Entered FY14 with record backlog Significant growth in FY13 98 105 87 105 140 0 20 40 60 80 100 120 140 160 FY09 FY10 FY11 FY12 FY13 Mercury Ending Backlog ($M)
Slide 45: Q2 FY14 guidance
45 © 2013 Mercury Systems, Inc. Q2 FY14 guidance (as of October 29th)(1) Notes: (1) The guidance included herein is from the Company’s earnings release and is as of the date of the earnings release. The Company is neither reconfirming such guidance as of the date of this presentation nor assuming an
Slide 46: Guidance: strong performance track record
46 © 2013 Mercury Systems, Inc. Guidance: Strong performance track record Notes: (1) The guidance included herein is from the Company’s earnings release and is as of the date of the earnings release. The Company is neither reconfirming such guidance as of the date of this presentation nor assuming a
Slide 47: Current target business model
47 © 2013 Mercury Systems, Inc. GAAP FY12 FY13 Revenue 100% 100% 100% Gross Margin 56% 40% 45-50% SG&A and other OPEX (1) 25% 31% Low 20’s R&D 19% 16% 11-13% Amortization (2) 0% 4% 2-3% Operating Income 12% (11%) 12-13% Adj EBITDA 20% 6% 18-22% Current Target Business Model Increased Adj. EBITDA wit
Slide 48: Committed to timely achievement of target business model
48 © 2013 Mercury Systems, Inc. Committed to timely achievement of target business model • Challenging DOD budgetary environment requires consideration of all profitability drivers • Realistic revenue assumptions, combined with optimizing cost structure, accelerates attainment of target model • Rele
Slide 49: Agenda: Closing Remarks / Q&A
49 © 2013 Mercury Systems, Inc. Agenda • Keynote • Strategy & Business Update • Market & Program Update • Financial Update • Closing Remarks / Q&A Mark Aslett President & CEO
Slide 50: Strategy and investments have positioned Mercury well
50 © 2013 Mercury Systems, Inc. Strategy and investments have positioned Mercury well • State-of-the-art, differentiated product portfolio available today • Targeted R&D yields faster time to money • Processing innovations are key enablers to displace competitors – Driven by Pacific pivot, aging pla
Slide 51: Appendix
TM © 2013 Mercury Systems, Inc. Appendix
Slide 52: Adjusted EBITDA reconciliation
52 © 2013 Mercury Systems, Inc. Adjusted EBITDA reconciliation (000'S) 2008 2009 2010 2011 2012 2013 $ (4,437) $ 7,909 $ 28,069 $ 18,507 $ 22,619 $ (13,208) (3,129) 492 (151) 45 27 31 3,710 109 (9,377) 8,060 9,152 (9,954) 7,372 5,640 5,147 6,364 7,859 8,492 5,146 2,414 1,710 1,984 3,799 8,717 4,454
Slide 53: Free cash flow reconciliation
53 © 2013 Mercury Systems, Inc. 2008 2009 2010 2011 2012 2013 Cash flows from operating activities $ 13,726 $ 11,199 $ 15,708 $ 31,474 $ 31,869 $ (1,871) Capital expenditures (4,625) (4,126) (7,334) (8,825) (9,427) (3,880) Free cash flow $ 9,101 $ 7,073 $ 8,374 $ 22,649 $ 22,442 $ (5,751) Years Ende
Slide 54: Glossary
54 © 2013 Mercury Systems, Inc. Glossary AEGIS Aegis Ballistic Missile Defense System DRFM Digital Radio Frequency Memory MIS Mercury Intelligence Systems AESA Active Electronically Scanned Array EMD Engineering and Manufacturing Development MMA Multimission Maritime Aircraft AF Air Force EO/IR Elec