Mercury Systems Inc · NASDAQ:MRCY

Mercury Systems — Jefferies 12th Annual Industrials Conference (August 2016)

38 slides from Mercury Systems's conference presentation, Aug 10, 2016

1. Slide 1: Jefferies 12th Annual Industrials Conference

   © 2016 Mercury Systems, Inc. Jefferies 12th Annual Industrials Conference Mark Aslett President and CEO Gerry Haines Executive Vice President and CFO August 10, 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: Deployed on 300+ programs with 25+ Primes

   5 © 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

6. Slide 6: Mercury's vision

   6 © 2016 Mercury Systems, Inc. Mercury’s vision is to be the… Leading commercial provider of secure processing subsystems designed and made in the USA

7. Slide 7: Acquisitions have transformed Mercury into a pure play provider

   7 © 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

8. Slide 8: Defense will likely remain a $500B+ industry

   8 © 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

9. Slide 9: Defense budget outlook improved

   9 © 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 budget outlook improved Expect continuing resolution i

10. Slide 10: Captive market ~19x addressable COTS merchant market

    10 © 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

11. Slide 11: How we operate as a high-tech commercial company

    11 © 2016 Mercury Systems, Inc. …serving the US defense electronics industry How we operate as a high-tech commercial company… • Start with commercially available technology • Internal R&D funds the development of modular, reusable open innovations • Pre-integration improves affordability, time to m

12. Slide 12: Business model built for speed, innovation and affordability

    12 © 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

13. Slide 13: From Teraflop modules to pre-integrated sensor processing subsystems

    13 © 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

14. Slide 14: Factors leading to a unique market position

    14 © 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

15. Slide 15: Capabilities aligned to DoD investment priorities

    15 © 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

16. Slide 16: Company growth drivers

    16 © 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

17. Slide 17: Acquisitions and investments driving growth opportunity

    17 © 2016 Mercury Systems, Inc. Acquisitions and investments driving significant growth opportunity • Low-risk content expansion growth strategy • Key production programs • Total potential value grew 2.4x to $3.8B in 4 years • Converted 1.1x of possible to probable value in 3 years • After 4 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: Pioneering a next-generation business model

    20 © 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 Little competition at the subsystem level Commercially

21. Slide 21: Revenue to Adjusted EBITDA trends

    21 © 2016 Mercury Systems, Inc. 194 209 235 270 5% $9.9M 11% $23.5M 19% $44.4M 21% $57.3M 0 50 100 150 200 250 300 FY13 FY14 FY15 FY16 Revenue to Adjusted EBITDA trends Mercury Revenue ($M) Mercury Adj EBITDA (%, $M) Strong revenue growth and operating leverage… …yielded dramatic growth in adjusted

22. Slide 22: FY13-FY16 revenue CAGR of 12%

    22 © 2016 Mercury Systems, Inc. FY13-FY16 revenue CAGR of 12%... …with steady gross margin expansion, expense reduction R ev en u e ($ M ) GM / O p ex (% ) Notes: • FY13-16 figures are reported in the Company’s Form 10-Ks, Form 10-Qs and the Company’s earnings release issued on August 2, 2016. 46 46

23. Slide 23: FY13-FY16 Adjusted EBITDA CAGR of 79%

    23 © 2016 Mercury Systems, Inc. FY13-FY16 Adjusted EBITDA CAGR of 79% Notes: • FY13-16 figures are reported in the Company’s Form 10-Ks, Form 10-Qs and the Company’s earnings release issued on August 2, 2016. • Adjusted EBITDA as income from continuing operations before interest income and expense,

24. Slide 24: FY13-FY16 backlog CAGR of 28%

    24 © 2016 Mercury Systems, Inc. FY13-FY16 backlog CAGR of 28%... …yielded record backlog and revenue coverage exiting FY16 Notes: (1) Revenue Coverage Ratio = 12-month ending backlog/Next 12 months Revenue (or initial revenue estimate for current/future year). (2) Organic only; omits impact of Micro

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  209 504 Processing Expansion FRP: FY19-25 Won  29 59 RFM FRP: FY16-25 Won/Bid  46 168 SEWIP Block 2 FRP: FY1

26. Slide 26: Strong performance in FY16

    26 © 2016 Mercury Systems, Inc. Strong performance in FY16 15% revenue and 29% adjusted EBITDA growth YoY In millions, except percentage and per share data FY15⁽¹⁾ FY16⁽¹⁾ Change Backlog $208 $288 38% Revenue $235 $270 15% Gross Margin 47% 46% (1)Pt Operating Expenses $91.9 $100.8 9.7% Adjusted OpEx

27. Slide 27: Q1 FY17 guidance vs. Q1 FY16 actual

    27 © 2016 Mercury Systems, Inc. Q1 FY17 guidance vs. Q1 FY16 actual 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

28. Slide 28: FY17 annual guidance

    28 © 2016 Mercury Systems, Inc. FY17 annual guidance In millions, except percentage and per share data FY16(1) FY17(2) Change Revenue $270 $368-$376 36%-39% GAAP Income(3) $19.7 $15.5-$18.1 (21%)-(8%) GAAP EPS $0.56 $0.39-$0.45 (20%)-(30%) Adjusted EPS(4) $0.96 $0.96-$1.02 0%-6% Adj. EBITDA(4) $57.3

29. Slide 29: New target business model beginning FY17

    29 © 2016 Mercury Systems, Inc. New target business model beginning FY17 Notes: (1) FY15-16 figures are reported in the Company’s Form 10-Ks and the Company’s earnings release issued on August 2, 2016. (2) The guidance included herein is from the Company’s most recent earnings release and is as of t

30. Slide 30: Conservative balance sheet and flexible capital structure

    30 © 2016 Mercury Systems, Inc. Conservative balance sheet and flexible capital structure Ample liquidity, unused $100M revolver, $400M Universal Shelf capacity Notes: (1) Discontinued operations numbers are Mercury Intelligence Systems, which was divested in January 2015. (2) $200 Term Loan A facil

31. Slide 31: Poised for continued, profitable growth

    31 © 2016 Mercury Systems, Inc. © 2016 Mercury Systems, Inc. Poised for continued, profitable growth • Recent acquisition transforms top and bottom lines • Substantial cost synergies and revenue opportunities • Above average growth & profitability driven by strong, well-established programs • Record

32. Slide 32: Appendix

    © 2016 Mercury Systems, Inc. Appendix

33. Slide 33: Q1 FY17 guidance (as of August 2nd)

    33 © 2016 Mercury Systems, Inc. Q1 FY17 guidance (as of August 2nd) 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

34. Slide 34: FY17 guidance (as of August 2nd)

    34 © 2016 Mercury Systems, Inc. FY17 guidance (as of August 2nd) In millions, except percentage and per share data FY16 FY17(1) YoY Change Actual Est. Range Revenue $270 $368-$376 36%-39% GAAP Income from continuing operations $19.7 $15.5-$18.1 (21%)-(8%) Adj. EBITDA(2) $57.3 $82.0-$86.0 43%-50% Adj

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 Q3 FY16 Q4 FY16 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

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 Q3 FY16 Q4 FY16 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 $ 8,463 $ 19,742 Inte

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 ADAP Advanced Decoy Architecture Payloads EMD Engineering and Manufacturing Development OpenVPX System-level specification for VPX, initiated by Mercury AEGIS Aegis Ballistic Missile Defense System EO/IR Electro-optical / Infrared PBR President's Budget Reque

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