Mercury Systems Inc · NASDAQ:MRCY

Mercury Systems — Drexel Hamilton 4th Annual Aerospace & Defense Institutional Investor Conference (June 2017)

37 slides from Mercury Systems's conference presentation, Jun 15, 2017

1. Slide 1: Drexel Hamilton 4th Annual Aerospace & Defense Institutional Investor Conference

   Drexel Hamilton 4th Annual Aerospace & Defense Institutional Investor Conference Gerry Haines Executive Vice President and CFO June 15, 2017 © 2017 Mercury Systems, Inc.

2. 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 2017 business performance and beyond and the Company’s plans for growth and improve

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

   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 25+ Prime contractors • LTM 3/31/17(1) $378M revenue; Growth YoY: – 52% revenue – 30% G

4. Slide 4: Investor highlights

   Investor highlights Proven Management Successful business transformation. Team Double-digit revenue growth with strong profitability Leading Positions on Pure play aerospace and defense electronics company. Well-funded Platforms Embedded on key growth programs aligned to DoD priorities Aligned with

5. Slide 5: We are deployed on 300+ programs with 25+ Primes

   We are deployed on 300+ programs with 25+ Primes F-16 F-35 Triton Patriot Aegis RADAR F-15 AH-64 Apache Global Hawk Badger/Buzzard SEWIP EW F-16 Reaper/Gorgon Stare F-35 P-8 MMA KC-46 EO/IR – C4I SDB II PGK MALD-J Paveway SM2/3/6 MISSILES & MUNITIONS © 2017 Mercury Systems, Inc. 5

6. Slide 6: Mercury's vision is to be the leading commercial provider

   Mercury’s vision is to be the… Leading commercial provider of secure sensor and mission processing subsystems © 2017 Mercury Systems, Inc. 6

7. Slide 7: Acquisitions have transformed Mercury into a commercial provider

   Acquisitions have transformed Mercury into a commercial… • Acquired capabilities Defense Electronic Subsystem significantly expand MISSION PROCESSING addressable market MISSION PROCESSING • Moved up the value chain SENSOR PROCESSING SENSOR PROCESSING * DIGITIZATION • Model facilitates greater DIGITI

8. Slide 8: Five major trends shaping the defense industry

   Five major trends shaping the defense industry Political Dysfunction: Sequestration-driven cuts and repeated Continuing Resolutions disrupting DoD budget process and spending Crowding Out of Defense Spending and Investment: Rising interest rates, healthcare and social spending; MilPer expense growth

9. Slide 9: Defense budget outlook improved

   Defense budget outlook improved Topline Base Authorization Budget vs. BCA Caps & Bipartisan Budget Act Agreement ($B) 2011 Budget Act 2015 Budget Agreement Authorization Budget Totals PBR18 (Base + OCO) PBR18 (Base) Consolidated Appropriations Act of 2017, Base Consolidated Appropriations Act of 201

10. Slide 10: Mercury's capabilities and opportunity for growth

    Mercury’s capabilities and opportunity for growth… Pacific Pivot & Third Offset: Platforms need improved sensors, autonomy, electronic protection and attack, on-board exploitation. Greater demand for onboard processing Aging Platform Modernization: Port customer software to available state-of-the-ar

11. Slide 11: Captive outsourcing by Defense prime contractors

    Captive outsourcing by Defense prime contractors… • 2017 A&D electronics is Global A&D Electronics Systems Market ($B) $97 billion market $120 $108 $106 • US Defense is nearly half $97 $100 $103 Global Aerospace & Defense $100 of total market at $43B Electronic Systems Market • Global Tier 2 compute

12. Slide 12: Mercury's addressable market increased ~8x

    Mercury’s addressable market increased ~8x supporting continued… Mercury's Tier 2 Addressable Market ($B) Compute RF 35 $30.5 30 Global Tier 2 Compute & RF 25 $9.1 20 15 $17.5 U.S. Defense Tier 2 10 $13.5 Compute & RF 5 $3.9 0 Historic Mercury Current Addressable Market Addressable Market Expansion

13. Slide 13: Business model built for speed, innovation and affordability

    Business model built for speed, innovation and affordability… • Traditional COTS board model Mercury Pre-integrated broken (“Plug-n-Pray”) Traditional COTS Model Secure Sensor and Mission – Product procurement cost low “Plug-n-Pray” Processing Subsystems – Large hidden integration costs – Lower Prim

14. Slide 14: Only high-tech commercial company with the technology

    Only high-tech commercial company with the technology… Safe and Secure Sensor and Mission Processing Solutions ACQUIRE DIGITIZE PROCESS STORAGE EXPLOIT DISSEMINATE Highest SPEED SAFETY Highest Safety Performance Design Assurance Processing Levels (DAL) SWaP SECURITY SOFTWARE Industry-leading Best Si

15. Slide 15: Disciplined and focused M&A strategy

    We will continue to execute on a disciplined and focused M&A strategy Aerospace & Defense Platform Electronics Content Mission Systems Platform Systems C4I C4I / Mission Systems Mission Systems Sensor / EW Mission Sensor/EW Mission Systems Systems Platform Mission Comms EW Radar EO/IR Acoustics Mana

16. Slide 16: Strategy and investments have positioned Mercury well

    Strategy and investments have positioned Mercury well • Pioneering a next-generation defense electronics business model • Unique technology and capabilities on key production programs • Substantial total addressable market expansion enabling future growth • Low-risk content expansion growth strategy

17. Slide 17: Financial Overview

    Financial Overview Gerry Haines Executive Vice President & CFO © 2017 Mercury Systems, Inc.

18. Slide 18: The evolution of Mercury Systems

    The evolution of Mercury Systems In millions, except percentage and per share data. % Increase / One Year Ago(2) Today(3) (Decrease) Share price $20.30 $39.05 92% Valuation Market Capitalization $813 $1,872 130% Enterprise Value $728 $1,788 146% Revenue(1) $249 $378 52% Operational Adj. EBITDA(1) $5

19. Slide 19: Mercury's financial profile puts it in a unique category

    Mercury’s financial profile puts it in a unique category ALL NYSE AND NASDAQ COMPANIES WITH MARKET 899 CAPITALIZATION BETWEEN $750mm - $3bn Companies EBITDA Margin ~21% 22% >20% CY16 Adj. EBITDA Adj. EBITDA CY15 CY16 205 Companies Revenue CAGR ~10% 18% >10% CY13-16 CY13-15 CY13-16 75 Companies LTM 1

20. Slide 20: Strong revenue growth and operating leverage

    Strong revenue growth and operating leverage… 20% revenue and 74% Adj. EBITDA CAGR FY13-FY17E Revenue to Adjusted EBITDA trends Mercury Revenue ($M) Mercury Adj EBITDA (%, $M) 450 40% 405-409 400 378 350 30% 300 270 249 250 235 194 209 22%-23% 20% 200 21% 22% $91.0M- 19% $57.3M $84.4M $92.9M 21% 150

21. Slide 21: FY13-FY16 backlog CAGR of 28%

    FY13-FY16 backlog CAGR of 28%... Mercury Ending Backlog ($M) 12-Month Ending Backlog > 12-Month Backlog Fwd Revenue Coverage Ratio⁽¹⁾ 1.1 Book to Bill L4Q(3) 64% - 65% 350 Estimate(2) 318 300 288 47 62% 49 250 61% 208 200 52% 174 41 136 30 150 271 27 239 100 109 144 166 50 0 FY13 FY14 FY15 FY16 Q3 F

22. Slide 22: Acquisitions and investments driving significant opportunity growth

    Acquisitions and investments driving significant opportunity growth… • Acquired businesses brought Top 30 Programs Estimated Lifetime Value ($M) 5,000 wide array of programs and 4,500 Compute RF capabilities 4,000 2,207 3,800 3,500 • Content expansion drives 3,000 1,133 2,030 Possible outsized growt

23. Slide 23: Strong LTM performance

    Strong LTM performance 52% revenue and 59% adjusted EBITDA growth YoY In millions, except percentage and per share data LTM Q3FY16 LTM Q3FY17 Change Backlog $219.7 $318.0 45% Revenue $248.8 $378.4 52% Gross Margin 48.5% 46.5% (2) pts Operating Expenses $96.5 $143.7 49% (2) Adjusted OpEx (% of revenu

24. Slide 24: Q3 FY17 vs. Q3 FY16

    Q3 FY17 vs. Q3 FY16 In millions, except percentage and per share data Q3FY16⁽¹⁾ Q3FY17⁽¹⁾ Change Revenue $66 $107 63% Gross Margin 48% 47%(2) (1)pt Operating Expenses $24.6 $39.1 59% GAAP Income $4.4 $7.0 62% GAAP EPS $0.13 $0.16 23% Weighted-average diluted shares outstanding 34.0 44.8 32% Adjusted

25. Slide 25: Q4 FY17 guidance vs. Q4 FY16 actual

    Q4 FY17 guidance vs. Q4 FY16 actual In millions, except percentage and per share data Q4FY16 Q4FY17⁽¹⁾ Change Revenue $85 $112 - $116 31% - 36% Gross Margin (%) 45% (2) 45% - 46%(2) 0pt - 1pt Operating Expenses $30.5 $38.8 - $39.8 27% - 30% GAAP Income $7.5 $6.5 - $7.7 (13%) - 3% GAAP EPS $0.19 $0.1

26. Slide 26: FY17 annual guidance

    FY17 annual guidance In millions, except percentage and per share data FY16(1) FY17(2) Change Revenue $270 $405 - $409 50% - 51% GAAP Income(3) $19.7 $22.6 - $23.8 14% - 21% GAAP EPS $0.56 $0.52 - $0.55 (7%) - (2%) Weighted-average diluted shares outstanding 35.1 43.1 23% Adjusted EPS(3) $0.96 $1.08

27. Slide 27: New target business model beginning FY17

    New target business model beginning FY17 New Target FY15⁽¹⁾ FY16⁽¹⁾ FY17(2) Business Model Revenue 100% 100% 100% 100% Gross Margin(3) 47% 47% 45% - 50% SG&A 21% 20% 16% - 18% R&D(3) 14% 13% 11% - 13% Amortization 3% 3% ~5% 4% - 5% GAAP Income(4) 6% 7% 5% - 6% NA Adj. EBITDA(5) 19% 21% 22% - 23% 22%

28. Slide 28: Conservative balance sheet

    Conservative balance sheet Ample liquidity, unused $100M credit facility, $172M Universal Shelf capacity FY15 FY16 Q3 FY17 (In millions) Actual Actual Actual(3) ASSETS Acquired Delta Microwave Cash & cash equivalents 78 82 270(1) for $40.5 million in cash on 4/3/17 Accounts receivable, net 54 96 97

29. Slide 29: We actively develop potential acquisition targets across all channels

    We actively develop potential acquisition targets across all channels ~$390mm of capital deployed in 18 months * Acquisition Jan 2011 Dec 2011 Aug 2012 Dec 2015 May 2016 Nov 2016 Apr 2017 Close Date Size $31mm $70mm $75mm $10mm $300mm $39mm $40.5mm Strong Strategic Rationale        Expand Add

30. Slide 30: Poised for continued, profitable growth

    Poised for continued, profitable growth • Improved defense environment, fast-moving streams enhance opportunities • Acquisitions have transformed top and bottom lines • Broader base of larger, more diversified programs • Record backlog enhances forward visibility, facilitates operational execution •

31. Slide 31: Appendix

    Appendix © 2017 Mercury Systems, Inc.

32. Slide 32: Q4 FY17 guidance (as of April 25th)

    Q4 FY17 guidance (as of April 25th) YoY In millions, except percentage and per share data Q4 FY16 Q4 FY17⁽¹⁾ Change Actual Est. Range Revenue $85 $112 - $116 31% - 36% GAAP Income $7.5 $6.5 - $7.7 (13%) - 3% Adj EBITDA⁽³⁾ $18.3 $24.8 - $26.7 36% - 46% Adj EBITDA Adjustments: Income (loss) $7.5 $6.5

33. Slide 33: FY17 guidance (as of April 25th)

    FY17 guidance (as of April 25th) YoY In millions, except percentage and per share data FY16 FY17⁽¹⁾ Change Actual Est. Range Revenue $270 $405 - $409 50% - 51% GAAP Income $19.7 $22.6 - $23.8 14% - 21% Adj EBITDA⁽²⁾ $57.3 $91.0 - $92.9 59% - 62% Adj EBITDA Adjustments: Income (loss) $19.7 $22.6 - $2

34. Slide 34: Adjusted EPS reconciliation

    Adjusted EPS reconciliation (000's) FY13 FY14 FY15 Q1 FY16 Q2 FY16 Q3 FY16 Q4 FY16 FY16 Q1 FY17 Q2 FY17 Q3 FY17 Diluted net earnings (loss) per share⁽¹⁾⁽²⁾ $ (0.46) $ (0.13) $ 0.44 $ 0.08 $ 0.15 $ 0.13 $ 0.19 $ 0.56 $ 0.10 $ 0.13 $ 0.16 Income (loss) from continuing operations $(13,782) $ (4,072) $

35. Slide 35: Adjusted EBITDA reconciliation

    Adjusted EBITDA reconciliation (000'S) FY13 FY14 FY15 Q1 FY16 Q2 FY16 Q3 FY16 Q4 FY16 FY16 Q1 FY17 Q2 FY17 Q3 FY17 Income (loss) from continuing operations⁽¹⁾ $(13,782) $ (4,072) $ 14,429 $ 2,856 $ 5,040 $ 4,357 $ 7,489 $ 19,742 $ 3,819 $ 5,204 $ 7,048 Interest expense (income), net 31 40 13 (22) (2

36. Slide 36: Sales-related definitions

    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 from the customer. Possible Pos

37. Slide 37: Glossary

    Glossary System-level specification for VPX, AEGIS Aegis Ballistic Missile Defense System ECM Electronic Countermeasures OpenVPX initiated by Mercury AESA Active Electronically Scanned Array EO/IR Electro-optical / Infrared PBR President's Budget Request Advanced Integrated Defensive Electronic AIDE

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