Mercury Systems Inc · NASDAQ:MRCY

Mercury Systems — Cowen 37th Annual A&D Conference (February 2016)

38 slides from Mercury Systems's conference presentation, Feb 3, 2016

1. Slide 1: Cowen 37th Annual A&D Conference

   © 2016 Mercury Systems, Inc. Cowen 37th Annual A&D Conference Mark Aslett President and CEO Gerry Haines Executive Vice President and CFO February 3, 2016

2. Slide 2: Forward-looking safe harbor statement

   2 © 2016 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 the products and services described herein. You can identif

3. Slide 3: Pioneering a next generation defense electronics company

   3 © 2016 Mercury Systems, Inc. …to address the industry's challenges and opportunities Pioneering a next generation defense electronics company… • High-tech commercial business model • Secure processing subsystems • Serving defense Prime contractor outsourcing needs • Deployed on 300+ programs with

4. Slide 4: Investor highlights

   4 © 2016 Mercury Systems, Inc. Investor highlights Successful business transformation, double-digit defense revenue growth with improved profitability Proven Management Team Pure play defense electronics company embedded on key growth programs aligned to DoD priorities Leading Market Position Pacifi

5. Slide 5: Mercury's vision

   5 © 2016 Mercury Systems, Inc. Mercury’s vision is to be the… Leading commercial provider of secure processing subsystems designed and made in the USA

6. Slide 6: Acquisitions have transformed Mercury into a pure play provider of outsourced defense electronics subsystems

   6 © 2016 Mercury Systems, Inc. …provider of outsourced defense electronics subsystems Acquisitions have transformed Mercury into a pure play… • Acquired capabilities expand total addressable market • Moved up the value chain • Facilitates greater customer outsourcing • Accelerates customer supply ch

7. Slide 7: Defense will likely remain a $500B+ industry

   7 © 2016 Mercury Systems, Inc. Defense will likely remain a $500B+ industry… …despite the ongoing political and budget uncertainty Crowding Out of Defense Spending and Investment: Rising interest rates, healthcare and social spending; MilPer expense growth, aging military platforms’ O&M costs rising

8. Slide 8: Defense budgetary environment improving

   8 © 2016 Mercury Systems, Inc. 530 495 496 496 534 547 556 564 570 500 512 460 480 500 520 540 560 580 600 2012 2013 2014 2015 2016 2017 2018 2019 2020 PBR16 2011 Budget Act 522 525 Defense budgetary environment improving Sequestration eliminated for GFY2016 & GFY2017 Sources: National Defense Autho

9. Slide 9: Prime outsourcing is our largest growth opportunity

   9 © 2016 Mercury Systems, Inc. …representing 19x addressable COTS merchant market Prime outsourcing is our largest growth opportunity… • Defense electronics is a $35 billion dollar market • Captive market is 19x COTS merchant supply • Outsourcing growth not tied to increased defense spending • Prime

10. Slide 10: How we operate as a high-tech commercial company

    10 © 2016 Mercury Systems, Inc. …serving the US defense electronics industry How we operate as a high-tech commercial company… • Internal R&D funds the development of modular, reusable open innovations • Pre-integration improves affordability, time to market • Rapid customization and adaptation to p

11. Slide 11: Business model built for speed, innovation and affordability

    11 © 2016 Mercury Systems, Inc. …as customers seek affordable outsourced pre-integrated subsystems Business model built for speed, innovation and affordability… • Traditional COTS board model broken (“Plug-n-Pray”) – Product procurement cost low – Large hidden integration costs – Lower Prime IR&D sp

12. Slide 12: From Teraflop modules and RFM subassemblies to pre-integrated sensor processing subsystems

    12 © 2016 Mercury Systems, Inc. From highly leveraged Teraflop modules and RFM subassemblies… …to secure servers and pre-integrated sensor processing subsystems Rugged Secure Teraflop Server Blade Rugged Secure Servers for the Tactical Edge ATCA Secure Blade Server Integrated Microwave Assemblies MO

13. Slide 13: Factors leading to a unique market position for Mercury

    13 © 2016 Mercury Systems, Inc. • Pre-integrated end-to-end sensor capability unique • Lower integration costs, time, risk • Facilitates Prime outsourcing • DoD mandate • Unique capabilities • Important relationships • Critical programs • 2-3 years ahead of traditional competitors • Intel server cla

14. Slide 14: Capabilities aligned to DoD investment priorities

    14 © 2016 Mercury Systems, Inc. Mercury’s capabilities and opportunity for growth… …are aligned to DoD investment priorities Pacific Pivot: Platforms need improved sensors, autonomy, electronic protection and attack, on-board exploitation. Greater demand for onboard processing Aging Platform Moderni

15. Slide 15: Defense industry growth drivers translate into company growth drivers

    15 © 2016 Mercury Systems, Inc. Defense industry growth drivers translate into specific… …company growth drivers that we are pursuing Outsourced Secure Processing Subsystems: Grow blade-server processing applications. Expand into other mission- critical secure compute applications beyond the sensor

16. Slide 16: Deployed on 300+ programs with 25+ Primes

    16 © 2016 Mercury Systems, Inc. We are deployed on 300+ programs with 25+ Primes RADAR EW EO/IR – C4I Triton; NATO AGS Global Hawk Aegis Aegis Ashore Patriot F-16 F-35 Global Hawk SEWIP Badger/Buzzard F-15 AH-64 Apache F-35 Fury P-8 F-16 Reaper/Gorgon Stare

17. Slide 17: Acquisitions and investments driving significant opportunity growth

    17 © 2016 Mercury Systems, Inc. Acquisitions and investments driving significant opportunity growth • Low-risk content expansion growth strategy • Key production programs • Total potential value grew 2.3x to $3.7B in 3 years • Converted 1.3x of possible to probable value in 3 years • After 3 years,

18. Slide 18: Strategy and investments have positioned Mercury well

    18 © 2016 Mercury Systems, Inc. © 2016 Mercury Systems, Inc. Strategy and investments have positioned Mercury well • Pioneering a next-generation defense electronics business model • Unique technology and capabilities on key production programs • Low-risk content expansion growth strategy with demon

19. Slide 19: Financial Overview

    © 2016 Mercury Systems, Inc. Financial Overview Gerry Haines Executive Vice President & CFO

20. Slide 20: Next-generation business model creating growth and strong returns

    20 © 2016 Mercury Systems, Inc. …creating a unique opportunity for growth and strong returns Pioneering a next-generation business model… • Few subsystem competitors • High barriers to entry • Annuity revenue streams • Primes outsource to lower cost & risk • Value-based innovation, modular design fo

21. Slide 21: Strong revenue growth and operating leverage

    21 © 2016 Mercury Systems, Inc. Strong revenue growth and operating leverage… …yielded dramatic growth in adjusted EBITDA 194 209 235 5% $9.9M 11% $23.5M 19% $44.4M 0 50 100 150 200 250 FY13 FY14 FY15 Revenue to Adjusted EBITDA trends Revenue ($M) Adj. EBITDA (%, $M)

22. Slide 22: FY13-FY15 revenue CAGR of 10%

    22 © 2016 Mercury Systems, Inc. FY13-FY15 revenue CAGR of 10%... …with steady gross margin expansion, expense reduction Notes: • All numbers based on continuing operations. 46 46 50 52 51 51 53 54 54 57 60 64 42% 36% 42% 41% 43% 48% 46% 46% 44% 47% 47% 49% 67% 52% 46% 48% 50% 51% 48% 46% 43% 41% 37%

23. Slide 23: FY13-FY15 Adjusted EBITDA CAGR of 111%

    23 © 2016 Mercury Systems, Inc. FY13-FY15 Adjusted EBITDA CAGR of 111% Notes: • FY13-15 figures are reported in the Company’s fiscal 2015 Form 10-K. • Adjusted EBITDA is income from continuing operations, less interest income and expense, income taxes, depreciation, amortization of acquired intangib

24. Slide 24: FY11-FY15 backlog CAGR of 24%

    24 © 2016 Mercury Systems, Inc. FY11-FY15 backlog CAGR of 24%... …yielded record backlog and revenue coverage exiting FY15 Notes: (1) Revenue Coverage Ratio = 12-month ending backlog/Next 12 months Revenue (or initial revenue estimate for current/future year). (2) Estimate based upon YoY revenue gro

25. Slide 25: Program focus driving substantial growth potential

    25 © 2016 Mercury Systems, Inc. FY15 FY16 FY17 Production Years Probable Bid vs. Won Expansion Probable Possible Process RFM Total ($M) Total ($M) Aegis Sensor Processing FRP: FY14-25 Won  302 504 Processing Expansion FRP: FY19-25 Won/Bid  47 95 RFM FRP: FY16-25 Won/Bid  46 168 SEWIP Block 2 FRP:

26. Slide 26: Q2 FY16 vs. Q2 FY15

    26 © 2016 Mercury Systems, Inc. Q2 FY16 vs. Q2 FY15 Notes: (1) Includes $1.2M and $0.3M of impairment, acquisition and restructuring and other costs in Q2 of fiscal 2015 and fiscal 2016, respectively. GAAP ($M) Q2FY15 Q2FY16 Change Backlog $192 $205 7% Revenue $57 $60 6% Gross Margin (%) 47% 47% 0 p

27. Slide 27: Q3 FY16 vs. Q3 FY15

    27 © 2016 Mercury Systems, Inc. Q3 FY16 vs. Q3 FY15 Notes: (1) The guidance included herein is from the Company’s most recent earnings release and is as of the date of that release. The Company is neither reconfirming such guidance as of the date of this presentation nor assuming any obligations to

28. Slide 28: FY16 vs. FY15

    28 © 2016 Mercury Systems, Inc. FY16 vs. FY15 GAAP ($M) FY15 FY16⁽¹⁾ Change Revenue $235 $249-$254 6%-8% Gross Margin (%) 47% 46%-47% (1)pt-0pt Operating Expenses $91.9 $94-$96 2%-4% Adjusted EPS $0.82 $0.81-$0.84 ($0.01)-$0.02 Adj. EBITDA $44.4 $48.5-$50.0 9%-13% Notes: (1) The guidance included he

29. Slide 29: Achievement of target business model for FY16

    29 © 2016 Mercury Systems, Inc. Achievement of target business model for FY16 Notes: (1) The guidance included herein is from the Company’s most recent earnings release and is as of the date of that release. The Company is neither reconfirming such guidance as of the date of this presentation nor as

30. Slide 30: Solid balance sheet with zero debt

    30 © 2016 Mercury Systems, Inc. Solid balance sheet with zero debt Ample liquidity, unused $200M credit facility, $500M Universal Shelf Notes: (1) Discontinued operations numbers are Mercury Intelligence Systems, which was divested in January 2015. FYE14 FYE15 Q2 FY16 (In millions) Actual Actual Act

31. Slide 31: Poised for continued, profitable growth

    31 © 2016 Mercury Systems, Inc. © 2016 Mercury Systems, Inc. Poised for continued, profitable growth • Strategy, operational discipline, integration, yielded significant operating leverage • Growth and profitability above industry averages • Record backlog enhances forward visibility, facilitates op

32. Slide 32: Appendix

    © 2016 Mercury Systems, Inc. Appendix

33. Slide 33: Q3 FY16 guidance

    33 © 2016 Mercury Systems, Inc. Q3 FY16 guidance (as of January 26th) Q3 FY15 Quarter Ending YoY Change March 31, 2016(1) Actual Range Revenue $60 $63-$67 5% - 12% Adjusted EPS $0.22 $0.19-$0.22 ($0.03) to $0.00 Adjusted EBITDA $11.5 $11.3-$12.6 (2%) - 10% Adj EBITDA Adjustments: Income (loss) from

34. Slide 34: FY16 guidance

    34 © 2016 Mercury Systems, Inc. FY16 guidance (as of January 26th) FY15 Year Ending YoY Change June 30, 2016(1) Actual Range Revenue $235 $249-$254 6% - 8% Adjusted EPS $0.82 $0.81-$0.84 ($0.01) to $0.02 Adjusted EBITDA $44.4 $48.5-$50.0 9% - 13% Adj EBITDA Adjustments: Income (loss) from continuing

35. Slide 35: Adjusted EPS reconciliation

    35 © 2016 Mercury Systems, Inc. Adjusted EPS reconciliation Notes: (1) Numbers shown are in cents. (000's) FY13 FY14 Q1 FY15 Q2 FY15 Q3 FY15 Q4 FY15 FY15 Q1 FY16 Q2 FY16 Diluted net earnings (loss) per share ⁽¹⁾ $ (0.46) $ (0.13) $ 0.02 $ 0.09 $ 0.14 $ 0.18 $ 0.44 $ 0.06 $ 0.14 Income (loss) from co

36. Slide 36: Adjusted EBITDA reconciliation

    36 © 2016 Mercury Systems, Inc. Adjusted EBITDA reconciliation (000'S) FY13 FY14 Q1 FY15 Q2 FY15 Q3 FY15 Q4 FY15 FY15 Q1 FY16 Q2 FY16 Income (loss) from continuing operations $(13,782) $ (4,072) $ 717 $ 2,886 $ 4,694 $ 6,132 $ 14,429 $ 1,960 $ 4,793 Interest expense (income), net 31 40 5 4 1 3 13 (2

37. Slide 37: Sales-related definitions

    37 © 2016 Mercury Systems, Inc. Sales-related definitions Design Win A design win means that the customer has selected us to provide services, products, or intellectual property for a program of record or equivalent. In addition, the customer has won the program and we have an initial purchase order

38. Slide 38: Glossary

    38 © 2016 Mercury Systems, Inc. Glossary AEGIS Aegis Ballistic Missile Defense System EDM Engineering Development Model MOSA Modular Open Systems Architecture AESA Active Electronically Scanned Array EMD Engineering and Manufacturing Development O&M Operations & Maintenance AGS Alliance Ground Surve

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