Mercury Systems Inc · NASDAQ:MRCY

Mercury Systems — KeyBanc 2016 Industrial, Automotive and Transportation Conference

41 slides from Mercury Systems's conference presentation, Jun 1, 2016

1. Slide 1: KeyBanc 2016 Industrial, Automotive and Transportation Conference

   © 2016 Mercury Systems, Inc. KeyBanc 2016 Industrial, Automotive and Transportation Conference Mark Aslett President and CEO Gerry Haines Executive Vice President and CFO June 1, 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 Proven Management Team Pure play defense electronics company. Embedded on key growth programs aligned to DoD priorities Leading Positions on Well-funded Platforms Pacific pivot, aging platform modernization, foreign and international military sales,

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 capability expands total addressable market • Moved up the value chain • Facilitates greater customer outsourcing • Accelerates customer supply cha

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. 530 495 496 496 534 547 556 564 570 581 500 512 525 537 551 524 585 522 480 500 520 540 560 580 600 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 PBR16 2011 Budget Act PBR17 FY16 Enacted 2015 Budget Act Defense budgetary environment improving PBR17 adjusts FY17 to

9. Slide 9: Representing ~19x addressable existing COTS merchant market

   9 © 2016 Mercury Systems, Inc. …representing ~19x addressable existing COTS merchant market Mercury is benefitting from Primes’ outsourcing… • Defense electronics is a $37 billion dollar market • Captive market is ~19x Commercial-Off-The-Shelf (COTS) merchant supply • Outsourcing trend not tied to i

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 secure servers and 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: Mercury's 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: Company growth drivers we are pursuing

    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: Microsemi carve-out strategic rationale

    19 © 2016 Mercury Systems, Inc. Highly aligned with our existing strategy and business Microsemi carve-out strategic rationale • Creates Defense industry’s largest commercial embedded secure processing company • Adds secure solid-state storage to Mercury’s industry-leading pre-integrated sensor proc

20. Slide 20: Financial Overview

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

21. Slide 21: Microsemi carve-out transaction overview

    21 © 2016 Mercury Systems, Inc. Microsemi carve-out transaction overview Acquired 3 defense-oriented businesses from Microsemi Corporation Embedded Security, RF and Microwave, Custom Microelectronics Delivers growth, increased profitability, and strong cash flow generation Acquired businesses ~$100

22. Slide 22: Pioneering a next-generation business model

    22 © 2016 Mercury Systems, Inc. We are pioneering a next-generation business model… …creating an opportunity for growth and strong returns Mercury Model Characteristics Implications and Benefits Merchant supplier of secure processing subsystems Minimal competition at the subsystem level Commercially

23. Slide 23: Strong revenue growth and operating leverage

    23 © 2016 Mercury Systems, Inc. 194 209 235 218 243 5% 9.9 11% 23.5 19% 44.4 15% 33.7 21% 50.1 0 50 100 150 200 250 FY13 FY14 FY15 LTM Q2 FY15 LTM Q2 FY16 Mercury Revenue ($M) Mercury Adj. EBITDA (%, $M) Strong revenue growth and operating leverage… …yielded dramatic growth in adjusted EBITDA Notes:

24. Slide 24: Revenue, gross margin and opex trends

    24 © 2016 Mercury Systems, Inc. 46 46 50 52 51 51 53 54 54 57 60 64 111 119 42% 36% 42% 41% 43% 48% 46% 46% 44% 47% 47% 49% 46% 47% 67% 52% 46% 48% 50% 51% 48% 46% 43% 41% 37% 36% 42% 39% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 0 10 20 30 40 50 60 70 80 90 100 Q1 FY13 Q2 FY13 Q3 FY13 Q4 FY13 Q1

25. Slide 25: Adjusted EBITDA growth

    25 © 2016 Mercury Systems, Inc. 1.2 0.6 4.7 3.5 3.3 5.2 7.8 7.2 8.0 10.7 11.5 14.2 18.7 24.4 3% 1% 9% 7% 7% 10% 15% 13% 15% 19% 19% 22% 17% 21% 0% 5% 10% 15% 20% 25% 30% 0 5 10 15 20 25 Q1 FY13 Q2 FY13 Q3 FY13 Q4 FY13 Q1 FY14 Q2 FY14 Q3 FY14 Q4 FY14 Q1 FY15 Q2 FY15 Q3 FY15 Q4 FY15 H1 FY15 H1 FY16 Ad

26. Slide 26: Record backlog and revenue coverage

    26 © 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

27. Slide 27: Acquired business enhances financial profile

    27 © 2016 Mercury Systems, Inc. 94 87 99 99 41% 40% 47% 48% 0 20 40 60 80 100 120 140 FY13 FY14 FY15 LTM Q1 FY16 Carve-Out Business Revenue ($M) Carve-Out Business Gross Margin (%) Acquired business enhances financial profile (1) FY13 ended 9/29/13; FY14 ended 9/28/14; FY15 ended 9/27/15; LTM Q1FY16

28. Slide 28: Program focus driving substantial growth potential

    28 © 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:

29. Slide 29: Q3 FY16 vs. Q3 FY15

    29 © 2016 Mercury Systems, Inc. Q3 FY16 vs. Q3 FY15 Notes: (1) Includes $0.1M and $2.0M of acquisition and restructuring costs in Q3 of fiscal 2015 and fiscal 2016, respectively. GAAP ($M) Q3FY15 Q3FY16 Change Backlog $190 $220 16% Revenue $60 $66 11% Gross Margin (%) 47% 46% (1)pt Operating Expense

30. Slide 30: Q4 FY16 vs. Q4 FY15

    30 © 2016 Mercury Systems, Inc. Q4 FY16 vs. Q4 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

31. Slide 31: FY16 vs. FY15

    31 © 2016 Mercury Systems, Inc. FY16 vs. FY15 GAAP ($M) FY15 FY16⁽¹⁾ Change Revenue $235 $250-$253 6.5%-8% Gross Margin (%) 47% ~47% - Operating Expenses $91.9 ~$95 ~3% Adjusted EPS $0.82 $0.87-$0.89 $0.05-$0.07 Adj. EBITDA $44.4 $51.0-$52.5 15%-18% Notes: (1) The guidance included herein is from th

32. Slide 32: Achievement of target business model for FY16

    32 © 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

33. Slide 33: Conservative balance sheet

    33 © 2016 Mercury Systems, Inc. Conservative balance sheet Ample liquidity, unused $100M credit facility, $400M Universal Shelf capacity Notes: (1) Discontinued operations numbers are Mercury Intelligence Systems, which was divested in January 2015. (2) $200 Term Loan A facility entered into on May

34. Slide 34: Poised for continued, profitable growth

    34 © 2016 Mercury Systems, Inc. © 2016 Mercury Systems, Inc. Poised for continued, profitable growth • Recent acquisition transforms top and bottom line • Substantial cost synergies and revenue opportunities • Above average growth & profitability driven by strong, well-established programs • Record

35. Slide 35: Appendix

    © 2016 Mercury Systems, Inc. Appendix

36. Slide 36: Q4 FY16 guidance (as of April 26th)

    36 © 2016 Mercury Systems, Inc. Q4 FY16 guidance (as of April 26th) 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

37. Slide 37: FY16 guidance (as of April 26th)

    37 © 2016 Mercury Systems, Inc. FY16 guidance (as of April 26th) 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 ob

38. Slide 38: Adjusted EPS reconciliation

    38 © 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 Q3 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 $ 0.13 Income

39. Slide 39: Adjusted EBITDA reconciliation

    39 © 2016 Mercury Systems, Inc. Adjusted EBITDA reconciliation (000'S) FY13 FY14 Q1 FY15 Q2 FY15 Q3 FY15 Q4 FY15 FY15 Q1 FY16 Q2 FY16 Q3 FY16 Income (loss) from continuing operations $(13,782) $ (4,072) $ 717 $ 2,886 $ 4,694 $ 6,132 $ 14,429 $ 1,960 $ 4,793 $ 4,526 Interest expense (income), net 31

40. Slide 40: Sales-related definitions

    40 © 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

41. Slide 41: Glossary

    41 © 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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