Mercury Systems Inc · NASDAQ:MRCY
Mercury Systems — Jefferies Virtual Industrials Conference 2020
45 slides from Mercury Systems's conference presentation, Aug 6, 2020
Slide 1: Jefferies Virtual Industrials Conference
Jefferies Virtual Industrials Conference Mark Aslett President and CEO Michael Ruppert Executive Vice President and CFO August 6, 2020 © 2020 Mercury Systems, Inc.
Slide 2: Forward-looking safe harbor statement
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 fiscal 2020 business performance and beyond and the Company’s plans for growth and improve
Slide 3: Pioneering a next-generation defense electronics company
Pioneering a next-generation defense electronics company... • Unique business model at the intersection of high-tech and Defense • Make commercial technology profoundly more accessible • Provide all trusted and secure computers for A&D • Deployed on 300+ programs - serving defense Prime contractor o
Slide 4: Investment highlights
Investment highlights Spent $1.3B since fiscal 2014 creating a unique business and model for A&D industry • Innovative growth company at the intersection of high-tech and defense – Focused on large, growing and well-funded addressable markets • Proven transformational business model for A&D industry
Slide 5: Mercury's financial profile demonstrates our unique strategy
Mercury’s financial profile demonstrates our unique strategy # of Companies ALL NYSE AND NASDAQ U.S. LISTED COMPANIES WITH TIER 2 DEFENSE 1,176 MARKET CAPITALIZATION BETWEEN $1B–$7B INDEX MEDIAN LTM EBITDA Margin 16% 22% >20% Margin 367 Revenue CAGR 4% 28% >10% 5-Year Growth 102 FY Revenue Growth 22
Slide 6: Strategy delivering above-average growth and profitability
Strategy delivering above-average growth and profitability Invest to grow organically 1 Invest in our people, processes, systems and trusted manufacturing assets to support continued organic growth Expand capabilities, market access and penetration through M&A 2 Create value through disciplined M&A
Slide 7: Acquisitions initially transformed Mercury
Acquisitions initially transformed Mercury into a... • Acquired capabilities Sensor Processing Sensor Processing significantly expanded addressable market • Moved up the value chain • Model facilitates greater customer outsourcing • Accelerates customer supply chain transformation • Disintermediate
Slide 8: Our overarching strategy is to provide all types of processing subsystems
Our overarching strategy however is to provide all types... Platform & Mission Management C3I Sensor Processing M ...of processing subsystems requiring trusted, secure computing © 2020 Mercury Systems, Inc. 8
Slide 9: Sensor processing subsystem integration strategy at chip scale
Our goal is to also uniquely replicate our sensor... Sensor Processing Trusted and Secure Solutions Chip-Scale Application-Specific Customization ...processing subsystem integration strategy at chip scale © 2020 Mercury Systems, Inc. 9
Slide 10: Game-changing capability enabling new applications
This game-changing capability will enable new applications... New Modular IP Library Enables Rapid Affordable Customization Open systems at chip scale allows unprecedented configurability and flexibility Chiplets Trusted and Secure Solutions Best-of-breed Ecosystem from Multiple Vendors Application-
Slide 11: Expanding our content footprint
We are simultaneously expanding our content footprint… Up to a 12x increase in content per system as customers outsource more due to secure computing requirements and as system complexity grows 1 C4I Tier 2 market SEMS Tier 2 market $22.6B Trusted and $17.4B 4.1% CAGR 3 Secure 2 4.6% CAGR Computing
Slide 12: Deployed on 300+ programs with 25+ Primes
We are deployed on 300+ programs with 25+ Primes Aerospace & Defense Platform and Systems Electronics Content JLTV WIN-T KC-46 A330 MRTT Aegis C4I F-16 Reaper/Gorgon Stare Triton LTAMDS Aegis F-35 C-130 Global Hawk Badger/Buzzard SEWIP Stormbreaker PGK MALD-J Paveway SM2/3/6 Sensor & Effector Missio
Slide 13: Six major trends shaping the defense industry
Six major trends shaping the defense industry Political Dysfunction: 2019 Budget Control Act positive. Repeated Continuing Resolutions disrupting DoD budget process and spending. 2020 election. Pentagon attrition Increased Defense Spending Cycle: Rising interest rates, healthcare and social spending
Slide 14: COVID-19 update
COVID-19 update • Mitigated supply chain risks with minimal impact to date • No erosion in talent attraction cadence • Adjusted workplace conditions to improve physical distancing and safety • Implemented symptom checking and temperature screening protocols • Mask usage mandatory, as well as face sh
Slide 15: Business outlook
Business outlook • Continue delivering organic revenue growth higher than industry average rate • New business conditions remain robust, much the same as last quarter • Benefiting from significant wave of radar, EW and C4I modernization • Strong balance sheet to supplement organic growth with strate
Slide 16: FY21 DoD PBR reflects 2019 BBA toplines
FY21 DoD PBR reflects 2019 BBA toplines for FY20-21… Topline Defense Budget vs. BCA Caps (Discretionary BA, Current $B) Budget Control Act 2011 (Base) Actual funding (Base) FY21 Administration Request (Base) 2019 Bipartisan Budget Act (BBA) Actual funding (Base + OCO) FY21 Administration Request (Ba
Slide 17: The A&D electronics systems market is over $125B annually
The A&D electronics systems market is over $125B annually Our total addressable market is now ~$40B Aerospace & Defense Platform and Systems Electronics Content C4I ($22.6B)* Sensor & Effector Mission Systems ($17.4B)* Platform & C2I Comms EW Radar EO/IR Acoustics Weapons Mission Mgmt Command & Avio
Slide 18: Capabilities and growth dimensions are well-aligned
Our capabilities and growth dimensions are well-aligned… GROWTH DIMENSIONS • Growth in defense spending • Defense prime contractors Content outsourcing more • Defense primes’ flight to quality suppliers Geography Market • Supply chain delayering A&D • Foreign military and Industry international sale
Slide 19: Acquisitions and investments driving opportunity growth
Acquisitions and investments driving significant opportunity growth... TOP 30 PROGRAMS & PURSUITS ESTIMATED LIFETIME VALUE ($M) • Total potential value grew >2.4x to $10B in 6 years Radar EW C4I Weapons EO/IR Other 5,900 10,005 10,000 73 • Significant Radar, EW, C4I, 824 weapons and EO/IR opportunit
Slide 20: Business model built for speed, innovation and affordability
Business model built for speed, innovation and affordability... Mercury Pre-integrated Prime Traditional COTS Less Trusted and Secure Product Integration Time Computer Subsystem I Classified Prime/Gov’t IP Classified Prime/Gov’t IP N T Less E Risk Open Middleware & APIs G Proprietary Middleware R Tr
Slide 21: Making mission-critical technologies profoundly more accessible
Innovating and making mission-critical technologies profoundly... Trusted and Secure Mission-Critical Technologies and Subsystems ACQUIRE DIGITIZE PROCESS STORAGE EXPLOIT DISSEMINATE Leading conduit for SILICON SAFETY commercial silicon innovation Highest Safety Design into A&D market Assurance Leve
Slide 22: Glassdoor current employee ratings
Glassdoor current employee ratings Validates Mercury’s destination employer and acquirer of choice status Tier 2 Defense Mercury Glassdoor Proxy Company Systems Average Peer Group(1) Index(2) Overall Rating 4.6 3.4 3.5 3.5 Culture & Values 4.6 3.4 3.5 3.4 Work-Life Balance 4.1 3.4 3.5 3.5 Senior Man
Slide 23: Disciplined and focused M&A strategy
We have executed on a disciplined and focused M&A strategy 2019 Tier 2* Market ($B) & CY’19-24 CAGR (%) Aerospace & Defense Platform and Systems Electronics Content C4I ($22.6B)* Sensor & Effector Mission Systems ($17.4B)* Platform & Mission Mgmt C2I Comms EW Radar EO/IR Acoustics Weapons Command &
Slide 24: M&A philosophy and value creation blueprint
Mercury M&A philosophy and value creation blueprint Culture & Values Assess cultural fit and rapidly enculturate the acquiree Full Integration We believe in full integration – We’re not a holding company Unify Brand One Brand – Mercury Systems Combine Like Entities Combine like businesses or product
Slide 25: A leader in trusted, secure technologies and subsystems
We’re a leader in trusted, secure technologies and subsystems Innovative growth company at intersection of high tech and defense Proven transformational business model for A&D industry Low-risk content expansion strategies with substantial headroom Successful M&A strategy targeting new capabilities
Slide 26: Financial Overview
Financial Overview Michael Ruppert Executive Vice President & CFO © 2020 Mercury Systems, Inc.
Slide 27: The evolution of Mercury Systems
The evolution of Mercury Systems In millions, except percentage and per share data. FY15(1) FY20(1) Change Market Capitalization(2) $504 $4,373 9x Valuation Enterprise Value(2) $426 $4,165 10x Revenue $235 $797 3x Adj. EBITDA(3) $44 $176 4x % Margin 19% 22% +~320 bps Operational Adj. EPS(3) $0.80 $2
Slide 28: Mercury continues to deliver strong financial results
Mercury continues to deliver strong financial results Revenue ($M) GAAP Income GAAP EPS 85.7 797 1.56 22% 83% 63% 655 YoY YoY YoY 493 46.8 0.96 409 40.9 0.86 270 0.56 0.58 235 24.9 19.7 0.44 14.4 FY15 FY16 FY17 FY18 FY19 FY20 FY15 FY16 FY17 FY18 FY19 FY20 FY15 FY16 FY17 FY18 FY19 FY20 Backlog ($M) A
Slide 29: Content expansion from modules to subsystems
Content expansion from modules to subsystems REVENUE AND GROWTH BY PRODUCT TYPE ($M) Integrated Subsystems Modules & Subassemblies Components • Components: 900 562 797 800 Expansion via custom microelectronics acquisition 700 210 from Microsemi 600 93 500 Investment in trusted 400 microelectroni
Slide 30: Expanding into new markets
Expanding into new markets REVENUE AND GROWTH BY MARKET ($M) Other C4I EW Radar Weapons • Continued growth in core 900 800 562 797 markets 65 700 90 • Expansion into adjacent 600 110 500 markets and leveraging 206 current capabilities 400 300 235 90 • Additional capabilities drive 200 content expans
Slide 31: Taking market share due to significant investments
Taking market share due to significant investments Focused on core markets, technologies and scale Markets C4I and SEMS R&D $390M Trusted and Secure Mission-Critical Capital Technologies and Subsystems $140M Expenditures Acquisition $800M Investment Trusted Domestic Manufacturing and Integration fro
Slide 32: FY20 vs. FY19
FY20 vs. FY19 In $ millions, except percentage and per share data FY19 FY20(3) Change $782.9 $954.3 Bookings 22% Book-to-Bill 1.20 1.20 $625.4 $831.1 Backlog 33% 12-Month Backlog 451.2 567.7 $654.7 $796.6 Revenue 22% Organic Revenue Growth(1) 12% 14% Gross Margin 43.7% 44.8% 1.1 pts Operating Expens
Slide 33: FY21 annual guidance
FY21 annual guidance In $ millions, except percentage and per share data FY20(1) FY21(2)(5) Change Revenue $796.6 $860.0 – $885.0 8% – 11% GAAP Net Income $85.7 $68.5 – $74.4 (20%) – (13%) Effective tax rate(3) 8.8% 26% GAAP EPS $1.56 $1.23 – $1.34 (21%) – (14%) Weighted-average diluted shares outst
Slide 34: Mercury recent acquisition history
Mercury recent acquisition history Expansion Closing Purchase Ending Company Primary Theme Date Price ($M) Debt Balance Funding Security Dec-2015 $ 10 $ 0 Cash on Hand (1) Weapons, EW, Term Loan May-2016 $ 300 - Security Cash on Hand April 2016 ($ 93) $ 200 Equity Offering Equity Offering Platform/M
Slide 35: Maintaining differentiated and attractive financial profile
Committed to maintaining differentiated and attractive financial profile 100% • Operating expense leverage Increase Adj. EBITDA • Program production mix margins • Operational improvements 31% • Full acquisition integration • Alignment with DoD priorities Grow organically at • Increased outsourcing h
Slide 36: Strategy and business model delivering financial performance above industry average
Strategy and business model delivering financial performance well above industry average Track record of strong organic growth, profitability and strategic M&A Significant investment over last 5 years competitive differentiator Poised for continued organic growth and margin expansion Well positioned
Slide 37: Appendix
Appendix © 2020 Mercury Systems, Inc.
Slide 38: Balance sheet
Balance sheet As of (In $ millions)(1) 6/30/19 9/27/19 12/27/19 3/27/20 7/3/20 ASSETS Cash & cash equivalents $257.9 $161.3 $182.0 $407.1 $226.8 Accounts receivable, net 176.2 177.5 193.4 214.0 210.7 Inventory, net 137.1 148.5 153.6 161.9 178.1 PP&E, net 60.0 65.9 72.7 78.7 87.7 Goodwill and intangi
Slide 39: Cash flow summary
Cash flow summary For the Fiscal Quarters Ended FY19 FY20 (In $ millions)(1) 9/27/19 12/27/19 3/27/20 7/3/20 Net Income $46.8 $19.2 $15.7 $23.6 $27.2 $85.7 Depreciation and amortization 46.4 11.4 12.5 12.7 12.8 49.3 Termination of interest rate swap 5.4 - - - - - Gain on investment - - - (3.8) (2.0)
Slide 40: Q4 FY20 vs. Q4 FY19
Q4 FY20 vs. Q4 FY19 In $ millions, except percentage and per share data Q4 FY19 Q4 FY20(3) Change Bookings $241.3 $278.6 15% Book-to-Bill 1.36 1.28 Backlog $625.4 $831.1 33% 12-Month Backlog 451.2 567.7 Revenue $177.0 $217.4 23% Organic Revenue Growth(1) 4% 17% Gross Margin 45.1% 44.4% (0.7 pts) Ope
Slide 41: Q1 FY21 guidance
Q1 FY21 guidance In $ millions, except percentage and per share data Q1 FY20(1) Q1 FY21(2)(5) Change Revenue $177.3 $190.0 – $205.0 7% – 16% GAAP Net Income $19.2 $10.1 – $12.3 (47%) – (36%) Effective tax rate(3) (12%) 26% GAAP EPS $0.35 $0.18 – $0.22 (49%) – (37%) Weighted-average diluted shares ou
Slide 42: Adjusted EPS reconciliation
Adjusted EPS reconciliation Notes (1) Per share information is presented on a fully diluted basis. (2) Rounded amounts used. (3) Effective as of the third quarter of fiscal 2020, the Company has revised its definition of adjusted income and adjusted earnings per share to incorporate other non-operat
Slide 43: Adjusted EBITDA reconciliation
Adjusted EBITDA reconciliation Notes (1) As of July 1, 2018, the Company has revised its definition of adjusted EBITDA to incorporate other non-operating adjustments, net, which includes gains or losses on foreign currency remeasurement, investments and fixed asset sales or disposals among other adj
Slide 44: Free cash flow and organic revenue reconciliation
Free cash flow reconciliation Organic revenue reconciliation Notes (In thousands) Q4 FY19 Q4 FY20 FY19 FY20 (1) Organic revenue represents total company revenue excluding net revenue from acquisitions for the first four full (1) quarters since the entities’ acquisition Organic revenue $ 174,899 $ 20
Slide 45: Glossary
Glossary API Application Programming Interface BCA Budget Control Act C4I Command, Control, Communications, Computers COTS Commercial off-the Shelf CPU Central Processing Unit EO/IR Electro-optical / Infrared EW Electronic Warfare FPGA Field Programmable Gate Array GPU Graphics Processing Unit I/O I
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