Mercury Systems Inc · NASDAQ:MRCY
Mercury Systems — BofA Securities 2020 Transportation & Industrials Virtual Conference
46 slides from Mercury Systems's conference presentation, May 11, 2020
Slide 1: BofA Securities 2020 Transportation & Industrials Virtual Conference
BofA Securities 2020 Transportation & Industrials Virtual Conference Mark Aslett President and CEO Michael Ruppert Executive Vice President and CFO May 11, 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 1,140 MARKET CAPITALIZATION BETWEEN $1B - $7B INDEX MEDIAN LTM EBITDA Margin 16% 22% >20% Margin 405 Revenue CAGR 4% 28% >10% 5-Year Growth 137 LTM Revenue Growth
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: 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: Replicating sensor processing integration 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: New modular IP library enables rapid affordable customization
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: Our COVID-19 response
Our COVID-19 response • Created COVID-19 response team with four key goals to guide decision-making 1. Protect the health, safety and livelihoods of employees 2. Reduce and mitigate operational and financial risks in business 3. Continue to deliver on commitments to customers and shareholders 4. Con
Slide 15: Business conditions remain robust
Business conditions remain robust • COVID-19 not expected to have near-term impact on defense spending • Brief delays in order approval and flow; no fundamental demand change • Benefiting from significant wave of sensor and C4I modernization • Healthy demand in weapons, space, avionics, mission comp
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: A&D electronics systems market over $125B; TAM ~$40B
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 ($17.4B)* Platform & C2I Comms EW Radar EO/IR Acoustics Weapons Mission Mgmt Command & Avio
Slide 18: Capabilities and growth dimensions well-aligned
Our capabilities and growth dimensions are well-aligned… • Addressable market growing GROWTH DIMENSIONS faster than DoD budget • Content per system increasing Content due to greater outsourcing, share gains and threat driven system complexity Geography Market • Acquisitions adding new capabilities,
Slide 19: Acquisitions and investments driving opportunity growth
Acquisitions and investments driving significant opportunity growth... • Total potential value grew Top 30 Programs & Pursuits Estimated Lifetime Value ($M) >5.2x to $10.6B in 6 years Radar EW C4I Weapons EO/IR Other • Significant Radar, EW, C4I, 12,000 8,572 10,6175,717 EO/IR and Weapons 288 opport
Slide 20: Business model built for speed, innovation and affordability
Business model built for speed, innovation and affordability... Mercury Pre-integrated Prime Traditional COTS Less Trusted and Secure Product Integration Time Computer Subsystem I Classified Prime/Gov’t IP Classified Prime/Gov’t IP N T Less E Risk Open Middleware & APIs G Proprietary Middleware R Tr
Slide 21: Making mission-critical technologies profoundly more accessible
Innovating and making mission-critical technologies profoundly... Trusted and Secure Mission-Critical Technologies and Subsystems ACQUIRE DIGITIZE PROCESS STORAGE EXPLOIT DISSEMINATE Leading conduit for SILICON SAFETY commercial silicon innovation Highest Safety Design into A&D market Assurance Leve
Slide 22: Glassdoor current employee ratings
Glassdoor current employee ratings Validates Mercury’s destination employer and acquirer of choice status Tier 2 Defense Mercury Glassdoor Proxy Company Systems Average Peer Group(1) Index(2) Overall Rating 4.6 3.5 3.5 3.6 Culture & Values 4.7 3.3 3.3 3.5 Work-Life Balance 4.1 3.4 3.5 3.6 Senior Man
Slide 23: Disciplined and focused M&A strategy
We have executed on a disciplined and focused M&A strategy 2019 Tier 2* Market ($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: Mercury 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. LTM Q3 FY15 LTM Q3 FY20 Change Market Capitalization(1,2) $477 $4,816 10x Valuation Enterprise Value(1,2) $411 $4,609 11x Revenue(2) $224 $756 3x Adj. EBITDA(2) $37 $165 4x % Margin 16% 22% +~600 bps Operational Adj.
Slide 28: Mercury has delivered strong financial results
Mercury has delivered strong financial results Revenue GAAP Income GAAP EPS 756 71.3 1.32 655 20% 62% 43% 0.96 YoY 493 YoY 46.8 YoY 0.86 409 40.9 0.56 0.58 270 24.9 0.44 209 235 19.7 14.4 FY14 FY15 FY16 FY17 FY18 FY19 LTM (4.1) Q3FY20 (0.13) FY14 FY15 FY16 FY17 FY18 FY19 LTM Q3FY20 FY14 FY15 FY16 FY
Slide 29: Content expansion from modules to subsystems
Content expansion from modules to subsystems Revenue and Growth by Content and Tier ($M) Components Modules & Subassemblies Integrated Subsystems • Components: 700 446 655 – Expansion via custom 600 microelectronics acquisition 210 from Microsemi 500 – Investment in trusted 400 73 microelectronics 3
Slide 30: Expanding into new markets
Expanding into new markets Revenue and Growth by Market ($M) Radar EW C4I Weapons Other • Continued growth in core 700 446 655 markets 62 600 63 • Expansion into adjacent 500 175 markets and leveraging 400 current capabilities 300 83 209 63 • Additional capabilities drive 200 content expansion 100 •
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 $362M Trusted and Secure Mission-Critical Capital Technologies and Subsystems $128M Expenditures Acquisition $800M Investment Trusted Domestic Manufacturing and Integration fro
Slide 32: LTM Q3 FY20 performance
LTM Q3 FY20 performance LTM LTM In $ millions, except percentage and per share data Change Q3 FY19(1) Q3 FY20(1)(4) Bookings $713.3 $917.0 29% Book-to-Bill 1.13 1.21 Backlog $558.2 $769.8 38% 12-Month Backlog $367.3 $544.8 Revenue $630.6 $756.2 20% Organic Revenue Growth(2) 16% 11% GAAP Net Income $
Slide 33: FY20 annual guidance
FY20 annual guidance In $ millions, except percentage and per share data FY19(1) FY20(2)(5) Change Revenue $654.7 $785.0 - $795.0 20% - 21% GAAP Net Income $46.8 $76.1 - $78.3 63% - 67% Effective tax rate(3) 21.4% 16.0% GAAP EPS $0.96 $1.38 - $1.42 44% - 48% Weighted-average diluted shares outstandi
Slide 34: Mercury recent acquisition history
Mercury recent acquisition history Expansion Closing Purchase Ending Company Primary Theme Date Price ($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: Committed to maintaining differentiated financial profile
Committed to maintaining differentiated and attractive financial profile 100% • Operating expense leverage Increase Adj. EBITDA • Program production mix margins • Operational improvements 37% • Full acquisition integration • Alignment with DoD priorities Grow organically at • Increased outsourcing h
Slide 36: Strategy and business model delivering financial performance
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) 3/31/19 6/30/19 9/27/19 12/27/19 3/27/20 ASSETS Cash & cash equivalents $112.5 $257.9 $161.3 $182.0 $407.1 Accounts receivable, net 170.7 176.2 177.5 193.4 214.0 Inventory, net 131.7 137.1 148.5 153.6 161.9 PP&E, net 55.9 60.0 65.9 72.7 78.7 Goodwill and intang
Slide 39: Cash flow summary
Cash flow summary For the Fiscal Quarters Ended (In $ millions)(1) 3/31/19 6/30/19 9/27/19 12/27/19 3/27/20 Net Income $14.1 $12.8 $19.2 $15.7 $23.6 Depreciation and amortization 11.6 11.6 11.4 12.5 12.7 Termination of interest rate swap - 5.4 - - - Gain on sale of investment - - - - (3.8) Other non
Slide 40: Q3 FY20 vs. Q3 FY19
Q3 FY20 vs. Q3 FY19 In $ millions, except percentage and per share data Q3 FY19 Q3 FY20(3) Change Bookings $189.7 $250.3 32% Book-to-Bill 1.09 1.20 Backlog $558.2 $769.8 38% 12-Month Backlog 367.3 544.8 Revenue $174.6 $208.0 19% Organic Revenue Growth(1) 31% 11% Gross Margin 42.3% 44.9% 2.6 pts Oper
Slide 41: Q4 FY20 guidance
Q4 FY20 guidance In $ millions, except percentage and per share data Q4 FY19(1) Q4 FY20(2)(5) Change Revenue $177.0 $205.8 - $215.8 16% - 22% GAAP Net Income $12.8 $17.6 - $19.8 37% - 55% Effective tax rate(3) (1.7)% 26.0% GAAP EPS $0.25 $0.32 - $0.36 28% - 44% Weighted-average diluted shares outsta
Slide 42: Adjusted EPS reconciliation
Adjusted EPS reconciliation Q4 FY20(2)(6) FY20(2)(6) (In thousands, except per share data) Q3 FY19 Q3 FY20 LTM Q3 FY19 LTM Q3 FY20 Low High Low High Earnings per share(1) $ 0.29 $ 0.43 $ 0.92 $ 1.32 $ 0.32 $ 0.36 $ 1.38 $ 1.42 $ - Net Income $ 14,109 $ 23,565 $ 44,072 $ 71,292 $ 17,600 $ 19,800 $ 76
Slide 43: Adjusted EBITDA reconciliation
Adjusted EBITDA reconciliation Q4 FY20(2)(3) FY20(2)(3) (In thousands) Q3 FY19 Q3 FY20 LTM Q3 FY19 LTM Q3 FY20 Low High Low High Net Income $ 14,109 $ 23,565 $ 44,072 $ 71,292 $ 17,600 $ 19,800 $ 76,100 $ 78,300 Other non-operating adjustments, net(1) (502) (3,138) (152) (2,867) - - (3,400) (3,400)
Slide 44: Free cash flow reconciliation
Free cash flow reconciliation (In thousands) Q3 FY19 Q3 FY20 LTM Q3 FY19 LTM Q3 FY20 Cash provided by operating activities $ 26,218 $ 30,082 $ 97,189 $ 112,429 Purchases of property and equipment (7,060) (10,869) (21,901) (40,617) Free cash flow $ 19,158 $ 19,213 $ 75,288 $ 71,812 © 2020 Mercury Sys
Slide 45: Organic revenue reconciliation
Organic revenue reconciliation (In thousands) Q3 FY19 Q3 FY20 LTM Q3 FY19 LTM Q3 FY20 Organic revenue(1) $ 172,159 $ 191,473 $ 619,177 $ 685,658 Acquired revenue 2,477 16,543 11,471 70,538 Net revenues $ 174,636 $ 208,016 $ 630,648 $ 756,196 Notes: (1) Organic revenue represents total company revenu
Slide 46: Glossary
Glossary AEGIS Aegis Ballistic Missile Defense System EO/IR Electro-optical / Infrared NTCD Non-traditional Defense Contractor AESA Active Electronically Scanned Array EP Electronic Protection O&M Operations & Maintenance System-level specification for VPX, initiated AMC Advanced Microelectronics Ce
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