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Confidential & Proprietary 1

Private Equity Investing in Middle Market Manufacturing Companies

Confidential & Proprietary

Matt Guenther Partner, GenNx360 Capital Partners

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March 27, 2014

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Agenda


US Manufacturing Snapshot

Resurgence of US Manufacturing

M&A Activity in Manufacturing Sector and Valuation Considerations

GenNx360 Capital Partners Overview

Gennx360 Value Creation at Manufacturing Portfolio Companies

Conclusion

Q&A


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2008 2009 2010 2011 2012 2013

US Manufacturing – A Snapshot


Source: BLS, BEA, US Department of Commerce, National Association of Manufacturing

Monthly Net Job Growth in the Manufacturing Sector In thousands

• Manufacturing sector continues to be a mainstay of US economic productivity, generating $2.0 trillion in GDP in 2012

• For every $1.00 spent in manufacturing, another $1.32 is added to the economy, the highest multiplier effect of any economic sector

• Manufacturing supports an estimated 17.4 million jobs in the United States

Manufacturing as % of US GDP

615,000 jobs In manufacturing added since February 2010


US Manufacturing in Context


Source: US Department of Treasury

Manufacturing is Responsible for

Recent Trends in Manufacturing


Resurgence of US Manufacturing



The Return of Manufacturing to United States


Mac Pro series to be designed and manufactured in Texas

Manufacturing of appliances and heaters back from China to new facility in Kentucky

MotoX, first smartphone to be assembled in US

New factory in Texas to make excavators and small tractors

2013 Ford Fusion manufacturing at Flat Rock, Michigan

Source: WSJ, TIME, Company News Releases


Made in America – More Companies Investing in US Manufacturing


Source: Dow Chemical


Competitive Advantages for US Based Manufacturing


• Human Capital - Narrowing Wage Gap Between China and US

• Improving Trends - Signs of Competitive US Labor Force

• Lower Transportation Costs and Supply Chain Risks

• Innovation in US – R&D Engine of the World

• Availability of Capital

• Favorable Currency Trends

• Domestic Market Demand

• Abundance of US Shale Gas Development


Human Capital - Narrowing Wage Gap Between China and US


• Wage and benefit increases of 15-20% per year at average Chinese factory reducing China labor cost advantage over US

Source: BCG: Why Manufacturing will Return to the US


Improving Trends - Signs of Competitive US Labor Force


Source: Bureau of Labor Statistics

Manufacturing productivity has grown

15% since 2009

Labor Productivity (Output/ hour) 2009 = 100

Real Manufacturing Output 2009 = 100

Real manufacturing output has improved

18% since 2009

97

112

95

105

115

125

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2009 2010 2011 2012 2013


Lower Transportation Costs and Supply Chain Risks


• Given expected growth in global demand for energy (especially in Asia and in India and China particularly), transportation costs are expected to remain at least elevated, which makes production closer to a customer base much more attractive.

• Production closer to customer base helps cutting down on lead times, reduce inventory levels and reduce supply chain risks

• Production closer to customer base helps cutting down on lead times, reduce inventory levels and reduce supply chain risks

Source: EIA

Transportation energy prices (Indexed to January 2001 Price at 100)


Innovation in US – R&D Engine of the World


• Research and development spending in the U.S. comprises 31% of the total global outlay

• Manufacturers in the US perform two-thirds of all private-sector R&D in the nation, driving more innovation than any other sector

• Synergies of keeping their R&D operations close to their production facilities will give domestic manufacturing further momentum

Source: Battelle, R&D Magazine, IMF, World Bank, CIA

Size of circle indicates relative amount of annual R&D by indicated nation


Availability of Capital


• United States credit picture has shown consistent signs of healing since the inception of the 2009 financial crisis

• Commercial and industrial lending demand largely has recovered

• Credit standards have come back down, from extreme levels reached during the financial crisis

• In addition, there is evidence that borrowing in China has become more difficult, due to increased capital requirements for banks

Source: Federal Reserve Board

Senior loan officer survey, bank lending practices for commercial and industrial loans Net Percentage of Domestic Respondents Reporting Stronger Demand for Commercial and Industrial Loans


Favorable Currency Trends


Source: Oanda.com

• The United States dollar has generally depreciated over the last decade, and China’s currency has risen moderately, which narrows the cost gap between producing in the United States and importing from China for domestic consumption

• Appreciation of Chinese Yuan relative to the US dollar seems likely to continue longer term as China’s economy grows, which should be favorable for US manufacturers.

USD Vs. Chinese Yuan (CNY) Trends

US

D/

CN

Y


Domestic Market Demand


• Disparity in wealth, as measured by real GDP per capita, is expected to persist, with the US dwarfing China and other emerging markets

• Difference in the relative standard of living, as well as the size of the US market, supports decisions to invest in new domestic production of goods targeted for US consumption

Real GDP growth and real GDP per capita growth

Source: PWC: US Manufacturing Resurgence


US Shale Gas Developments


• Shale gas development is a major factor that can drive further manufacturing investment in the United States

• Technical progress in extracting natural gas from shale has created new investment opportunities for manufacturers in the United States across several subsectors, particularly in chemicals and metals

• High shale gas recovery and low prices could impact United States manufacturing industries By adding one million workers reduce natural gas expenses by as much as $11.6 billion annually through 2025

Electricity generation by fuel, 2011, 2025, and 2040 (billion kilowatthours)

Source: EIA, Annual Energy Outlook 2013, PWC

Natural gas production by source, 1990-2040 (trillion cubic feet)


Prospects for Manufacturing Sub-sectors


• Chemical and primary metal subsectors stand to benefit the most from changing cost dynamics in the United States and have large opportunities and cost incentives to re-shore

• Agriculture and heavy machinery within the machinery subsector and auto within the transportation equipment subsectors are more advantaged than others

Source: PWC: US Manufacturing Resurgence

Prospects for selected subsectors


Manufacturing Sector – M&A Trends and Valuation Considerations



US Middle Market M&A Activity


Source: William Blair Merger Tracker

US Middle Market M&A Activity

$ billions

• A look at recent trends illustrate a broader trend in the middle market—an increasingly fewer number of transactions at higher deal values per transaction.

Median EV/EBITDA Multiples


US Private Equity M&A Activity


Source: Pitchbook 2014 Annual US PE Breakdown Report, William Blair Merger Tracker

US Private Equity M&A Activity by Year

$ billions

• Capital investments by PE firms continue to rise, reaching a post-crisis high of $426 billion in 2013

• The outlook for investment in 2014 is strong, as PE firms continue to sit on mountains of dry powder and the fundraising environment improves, which has created a real need for investors to put capital to work


US Private Equity M&A Valuation Trends


Median EBITDA Multiples for PE Buy-outs

Source: Pitchbook 2014 Annual US PE Breakdown Report

• The high level of valuations for both public and private businesses has been a boon for PE investors looking to exit in recent years

• PE firms incorporated more debt in their deals in 2013, both as a percentage of the purchase price and as a multiple of EBITDA, given that interest rates remained low throughout the year


Private Equity Exits Expected to Accelerate in 2014


Source: CapitalIQ, GenNx Proprietary data

• The inventory of U.S.-based companies under majority ownership by PE firms surpassed 7,500 in 2013

• There remains a significant bulge in the company inventory for companies acquired in the boom years of 2006 to 2008

• As PE firms focus on exits for companies acquired in this boom period – the rate of exits are expected to be significantly higher in coming years

Current portfolio inventory by investment year


Deal Activity in Manufacturing Sector


Source: PWC Industrial Manufacturing Mergers Acq

Deal valuation by median value/sales Deal valuation by median value/sales by sub-sectors

Value/sales for deals worth $50 million or more value/sales for deals worth $50 million or more

• Financial investors remained active with the number of leveraged buyouts almost doubling from the prior year.


Manufacturing Companies – Valuation Trends


Source: GF Data

Total Enterprise Value (TEV)/EBITDA - Manufacturing

• Valuation for middle market manufacturing companies has remained range-bound with 10 year mean valuation point at 5.9x EV/EBITDA

Deal Count 443 33 71 86 91 63


Drivers for M&A Activity in Manufacturing Sector


Source: Deloitte Manufacturing and Industrial M&A Predictions

• Key recent obstacles to M&A such as the cost, availability and access to debt finance, have been removed

Deloitte Survey on Maine Drivers for M&A Activity in next 12 months


GenNx360 Overview



GenNx360 Overview


• GenNx360 Capital Partners is a differentiated organization with significant operational expertise which we leverage to enhance our sourcing and portfolio investments

• Manage multiple funds with over $1 billion in committed capital

• Investment Focus Area: industrial B2B companies in the middle market

• 14 transactions:

8 platform investments, 6 add-on acquisitions

11 of the 14 transactions were non-auction situations

• As front-line operating executives at General Electric, several of our senior partners led and transformed diverse industrial businesses; generating billions in operating profits, including:

• Former GE Vice Chairman and President & CEO of GE Industrial, a $33 billion business segment

• Former SVP, President & CEO GE Equipment Services, a $7 billion business segment

• Former VP and Corporate Officer; President & CEO GE Sensing

• GenNx 360 operating leaderships brings:

• Fortune 50 Experience to the Middle Market

• Metric driven tool-kit approach to apply best operating practices of GE businesses at portfolio companies

• Leverage C-Suite relationships to garner new sales opportunities


GenNx360 Industries of Interest


• GenNx360 focuses on investments in business-to-business, industrial-based manufacturing companies

Industrial manufacturing

Specialty chemicals Infrastructure products and

services

Oil and gas services

Aerospace and defense

Agriculture products and services


GenNx360 Megatrends Process and Criteria


• Manufacturing

• Chemical Processing

• Industrial Services

Demographics

The New Middle Class

Capital Availability

Technology Natural

Resources

Energy Shortages

Infrastructure Deficit

Strategy: Focus Deal Activity on Industries and

Businesses where:

Megatrends point towards sustained growth

Component has high value, and low cost relative to

the end product

Timing is favorable

Intersection with GenNx360 expertise

Key Success Factors:

Megatrend tailwinds & acceptable timing?

Do we understand and like the industry?

What is the Self Funded Reinvestment (“SFR”)

potential - Can we add value?

Do the financials make sense?

What does it do for our portfolio risks?

What are the other risks?

GenNx360 Expertise

GenNx360’s detailed and proprietary Megatrends Review has identified a number

of leading trends, driving our sector-focused strategy


GenNx360 Portfolio Companies


• Specializes in providing BPO services, consulting services, IT application services and products, debt management and special servicing, billing and customer care services

• Major industries include Utilities, Public Sector, Retail and Financial Services

• A global asset-light provider of outsourced specialized logistics and supply chain solutions ("3PL") to a broad and diverse customer base

• Major industry verticals are technology, automotive and telecommunications.

• Manufacturer of precision machined components and complex subassemblies;

• Applications include natural gas turbines, compressors, automated teller machines, industrial document insertion machines, digital cinema projectors, aerospace, defense optics, and general commercial industries.

• Manufacturer of precision components with capabilities and services including precision machining, sub-assembly and assembly, kitting, supply chain integration and project management

• Value-added service capabilities include a Class 1000 Clean Room, rapid response engineering, and prototyping

• End markets include defense, oil & gas, and semiconductor industries

http://www.syncreon.com/index.php?id=1


GenNx360 Portfolio Companies


• Manufacturer of mobile land based drilling rigs used in a variety of demanding applications including oil & gas drilling, mineral exploration and water and geothermal well drilling.

• Airdrill (Schramm's Australian subsidiary) manufactures high quality hammers and drill bits used in “reverse circulation” (RC) drilling.

• Manufactures, repairs and services highly-engineered industrial gears and mechanical gear drives, primarily large and medium gears

• Products and services are utilized in numerous end markets, including steel, mining, rail, sugar, and wind markets

• Manufacturer of farm equipment utilized in niche tillage, seeding and fertilizing applications

• Sells patented products known for superior design and performance in the North American and European farm machinery market

• Supplier of precision machine components and assemblies to aerospace/defense, optics, commercial, and medical surgical tool industries

• Key capabilities include CNC Milling, CNC Multitasking, CNC EDM, CNC turning, CNC grinding, CNC programming and engineering services


GenNx360 Strategy – Transferring Corporate Best Practices to

Middle Market Businesses

• Tools like 6-sigma and process mapping used in portfolio

• Results in substantial operational and cost improvements

• Institutionalized strategic plan evaluation with ongoing reviews

• Rhythm and rigor around financials to track progress

Industry Best Practices GenNx360 Middle Market Transferability

• Metric driven tool used to apply best practices at GE businesses

• Applicable to GenNx360 portfolio

• +/-100 day plan for each transaction with both operations and finance focus

• Retained advisors involved from day-1 after deal introduction

Trotter Matrix

Acquisition De-risking

Lean Operations

Good Book / Bad Book

Leadership Development • Quarterly management review to assess leadership pipeline

• Bonuses used as an incentive for the next rung of leaders to step-up

Leveraging Learnings from a Top 50 Global Organization


Precision Machining - Industry Snapshot and Trends


Source: PMPA, NTMA

INDEX OF SALES OF PRECISION MACHINED PRODUCTS

• The US precision machining industry generates sales in excess of $40 billion a year. • Over 2,000 specialized manufacturers engaged in design and manufacture of special tools,

dies, jigs, fixtures, gages, special machines, and precision machined parts.

• According to Precision Machined Products Association (PMPA), the precision machining industry is generating strong sales and positive prospects going into calendar year 2014.

• Positive levels of hours worked, shipments, overtime and profitability are great leading indicators for improved industry performance in near future


Precision Manufacturing – Valuation Trends


Source: CapitalIQ, GenNx Proprietary data

Precision Manufacturing Valuation Trends (EV/EBITDA)

• Precision manufacturing businesses command premium valuation vs broader manufacturing industry due to the following:

Greater capabilities, know-how, innovation, and expertise Serving high growth end markets (for example, commercial aerospace, auto) Mission critical nature of products with high cost to value preposition Often command better margins than the broader industry


Precision Manufacturing - GenNx360 Investment Thesis


Megatrends tailwinds

North American manufacturing comeback

Diversified manufacturing capabilities

Broad range of components for multiple industries

Process know-how

Mission critical components

Complex materials

Lost cost to value preposition

Difficult to off shore

High barriers to entry and switching costs

Stringent customer specifications

Detailed qualification process

Up-front investment requirements


Trimaster HPG Hoppe Technologies MMPCO

Acquisition Date

July 2009 July 2009 November 2011 July 2010

Location Ontario, Canada Ontario, Canada Chicopee, Massachusetts South Paris, Maine

Primary End-Markets

• ATM hardware • Document handling

machines • Precision lab equipment • Digital projection • Optics • Defense

• Power generation • Complex turbine

components

• Aerospace, defense • Medical • Optics • Energy

• Aerospace, defense • Oil & gas • Semiconductors • Power generation

Selected Customers

• Pitney Bowes • Diebold • NCR

• GE • Siemens • Mitsubishi

• Raytheon • Honeywell • Triumph

• Lam Semiconductor • Textron • Schlumberger

GenNx360 Portfolio of Precision Machining Companies


• Leading diversified manufacturer of high tolerance precision machined components and assemblies


GenNx360 Value Creation in Precision Machining Portfolio


• Business model transformation of the precision machining platform by deconstruction and reconstruction revenue mix to achieve repeatable and sustainable growth

• Sales Council driving sales growth – expanded commercial team, C-Suite relationships, and new end-market participation

• Manufacturing Council on standardizing processes across the platform – showing robust results

• Best practices sharing imitative on on-time delivery, lead times, and cycle time reduction

Right Side Initiatives (Operational) Left Side Initiatives (Sales)

Leadership upgrade

• Upgraded top leadership across all businesses with strong commercial focus

Sales force upgrade

• Upgraded sales force and processes which is resulting in stronger sale momentum

• Expanded sales rep network

New customers / end-markets focus

• Focus on megatrend supported end markets poised for long term growth

• Increased cross selling opportunities

On-time delivery performance

• Root cause analysis discipline and get-well plans established

Productivity

• Developed productivity program • Annual 5% target savings on cost base • Direct labor efficiency improvements

Lead Time Reduction

• Reduced order to shipment cycle time • Lead times improved to market leading 8 weeks or less


Successful Operating Efficiency Initiatives


Summary Backlog/ Repeat orders

Current quotes outstanding

Hoppe Maine Trimaster

$ millions

New business pipeline


$ millions

• Current new business pipeline : 2X over 2012 levels

• Current pending quotes: 4X over 2012 levels

• High probability sales: 33% over 2012 levels

$ millions

13.5 11.0

FY'12 FY'13

11.1

23.6

FY'12 FY'13

40.3

48.2

FY'12 FY'13



Successful Operating Efficiency Initiatives


Lead time reductions

On-Time Delivery


Productivity savings


$ millions

Summary

• 40% improvement in lead time

• Consistent 96%+ On-time delivery performance

• Being price competitive while staying profitable with 5% annual productivity related savings

Hoppe Maine Trimaster In days


Conclusion


• Manufacturing companies are rethinking their United States strategy, whether it makes economic sense in the long term to produce abroad and import back to United States buyers

• A number of factors are making the United States more competitive for manufacturing expansion

• Middle market manufacturing companies will continue to be an active investment avenue for Private Equity investors

• The key to generating greater value from investments in manufacturing companies will be through operational improvements, rather than just financial re-engineering

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