Midwest Shocks Consolidated Income Statement (Sin 000) Actual Actual Actual Plan 12/31/2017 12/31/2018 12/31/2019 12/30/2020 Net Sales Cost of Sales Gross Profit Margin 628,800 474,831 544,111 548,500 356,435 397,386 80,300 118,396 146,725 580,000 386,800 193,200 50,100 13,600 14,400 55,971 7,687 SG&A Expense Depreciation Expense Other expenses Restructuring Management Fees Total Operating Expenses 92,205 12,654 5,280 9,431 1,591 121,161 134,502 13,100 3,000 2,598 5,000 158,200 19,764 3,976 87,398 78,100 Net Operating Profit 2,200 30,998 25,564 35,000 (2,100) (4,620) 857 (4,000) Interest Expense Interest Income Dividend on Preferred Stock FX Exchange Loss/Restructuring/Other Profit Before Tax Income Tax Expense (2,588) 620 (1,099) (4,772) 23,159 9,468 1,500 1,600 10,200 (2,307) 19,494 (1,500) 29,500 7,375 7,902 11,592 22,125 Profit Before Extraordinary Item Bargain Purchase Gain (after tax) Net Profit (8,600) 13,691 147,220 (8,600) 160,911 11,592 22,125 Dividends - Common (34,400) (45,000) (40,000) 1 Midwest Shocks was owned by After M on 12/31/2017 Balances from consolidating statements. Midwest Shocks Consolidated Balance Sheets (Sin 000) Actual Actual Actual 12/31/2017 12/31/2018 12/31/2019 Assets Plan 12/30/2020 Cash A/R Net Inventory Other Curr. Assets TOTAL CURRENT ASSETS 38,349 75,654 174,066 14,828 302,897 24,224 69,829 157,134 16,721 267,908 27,913 72,703 153.172 33,314 287,102 Land and improvements Buildings Equipment Accum. Depreciation PP&E - Net Intangibles Other LIT Assets Total Non-Current Assets TOTAL ASSETS 20,067 43,842 40,644 7,360 97,193 18,486 37,805 61,162 19,450 98,003 3,088 7,541 108,632 376,540 18,486 37,805 81,264 32,550 105,005 2,779 1,307 109,091 396,193 6,527 103.720 406,617 Liabilities and Equity Accounts Payable Accrued Compensation Other Accrued Expenses Taxes Payable CMLTD TOTAL CURRENT LIABILITIES 58,626 15,593 40,550 10,200 54,431 15,333 50.701 912 62,858 18,941 49,246 7,576 124,969 121,377 138,621 50,000 11,928 35,122 ABL - Revolving Lean Senior Debt (foreign) Senior Debt (61) Senior Debt (#2) Other Long-Term Liab's. Deferred Income Taxes TOTAL NON-CURRENT LIAN'. TOTAL LIABILITIES 4,434 2,537 104,021 228,990 43,000 11,928 32,976 20,981 2,722 4,831 116,438 237,815 67,247 11,928 32,976 20,981 1,820 3,589 138,541 277,162 EQUITY Common Stock Additoninal Paid-In Capital Retained Earnings Accum. Other Comp. (Loss)/Income Total Shareholder's Equity 29 37,870 136,521 3,207 177,627 29 38,232 103,242 (2.778) 138,725 29 38,232 85,238 (4,468) 119,031 TOTAL LIABILITIES AND EQUITY 406,617 376,540 396,193 1 Midwest Shocks was owned by After Mon 12/31/2017 Balance Sheet not available Midwest Shocks Statement of Cash Flows (s is 000) Actual Actual Plan 12/31/2018 12/31/2019 12/30/2020 160,911 7,687 11,592 12,654 143 22,125 13,100 (147,220) 1,453 (901) 692 2,294 (1,242) ASH FLOWS FROM OPERATING ACTIVITIES Net Income Depreciation Loss On Sale of PP&E Bargain Purchase Option Other Non-Cash Items Deferred Income Tax Changes in Assets/Liabilities Accounts Receivable Inventories Prepaid Expenses and Other Accounts Payable and accruals Income Taxes Payable Accrued Compensation Other Current Other Long-Term Assets Net Cash Provided by Operations CASH FLOWS FROM INVESTING ACTIVITIES Capital Expenditures Proceeds From Sales of PP&E Other Net Cash Used In Investing Activities 17,259 16,681 7,105 18,938 3,180 3,406 5,825 16,932 (1,893) 5,956 19,288) (260) (2,874) 3,962 (16,593) 6,972 6,664 3,608 2,509 91,008 (2.726) 41,921 5,641 41,363 (20,102) (11,451) (16,157) 6,785 2,550 (37,602) 14,102) (42.268) (17,709) (20,102) (31,000) (7,000) 24,247 ASH FLOWS FROM FINANCING ACTIVITIES ABL Revolver Senior Debt (foreiga) Senior Debt #1 Senior Debt N2 Capital Contributions Dividends Repayment of Preferred Stock Other Net Cash Used in Financing Activities 35,122 12,146) 20,981 37,602 (34,400) (45,000) (31,099) (418) (3,433) (24.193) (36,598) (40,000) (1,819) (17,572) (1119) (1,739) Effect of Foreign Currency Exchange Rate Changes CHANGE IN CASH 23,428 (14,125) 3,689 History Midwest Shocks was founded by the Lamar brothers in 1925. In the roaring *20's, James and William Lamar began making shock parts in central California to be used in the agricultural industry and for passenger automobiles in what appeared to be a burgeoning industry. The Lamars continued to make auto parts and built a successful, thriving business for almost 50 years. In 1975, the Lamar brothers sold to Nadra, a manufacturer of auto parts equipment with deep ties into the auto industry. Nadra considered this acquisition wildly successful as it allowed the company to deepen its relationships with both auto manufacturers and distributors in the aftermarket space. Nadra weathered several business cycles in the highly cyclical auto industry. However, the company was highly levered. Shortly after the recession that lasted much of 2001, Nadra entered bankruptcy. The causes of the bankruptcy were primarily tied to financial distress. As part of the restructuring. Nadra sold its aftermarket businesses including shocks to AfterM Auto, a privately held manufacturer of aftermarket auto parts. The purchase agreement was executed in June of 2003 and, at close, After named this new subsidiary "Midwest Shocks". Nadra was widely recognized as a manufacturing specialist. The shock absorber manufacturing process that AfterM inherited was remarkably efficient and required no immediate enhancements. AfterM's strategy was to lever its aftermarket distribution network to increase volume and enjoy the ensuing cash flow improvements. And lever their distribution network they did, growing sales at almost 8% annually for the past decade. During this period, AfterM had also initiated the process of reducing manufacturing costs. It began by moving part of the manufacturing process to China to enjoy reduced labor costs. In doing so, it purchased controlling interests in two small manufacturing facilities there. The company understood that reducing manufacturing costs was critical for its long-term survival and planned to continue this initiative by purchasing other cross-border manufacturing companies. The company examined alternative locations not only in China, but also in Mexico and Brazil. While continued sales growth was expected, in mid-2016 it was not clear the historic pace of revenue growth could be maintained. The company knew that to improve cash flow, sales growth alone was not enough. During this period, AfterM approached an investment bank to discuss strategic alternatives. Over the remainder of 2017, AfterM worked with its financial advisors to examine opportunities to continue to reduce manufacturing costs and to grow sales at above market rates. During this period, AfterM also entertained bids from potential suitors. The executive team decided that if they found a bidder willing to pay an attractive price, they would consider a sale. Then, in 192018, the company accepted a bid from Tung Capital. Tung was founded by US based Chinese investors with experience and business relationships within the manufacturing community throughout China. Tung was impressed with Midwest Shocks' management team and wanted to retain them to continue to enjoy solid performance. Hence, Tung's bid included capital contributions from select members of Midwest Shocks' existing management team. The overarching strategy was to continue to identify manufacturing efficiencies to improve cash flow and to extend the sales reach in both existing and new markets. The Sale Transaction Tung Capital (including select members of AfterM's management team) agreed to purchase Midwest Shocks for $152 million. Funding for the acquisition included the assumption of senior debt, preferred stock offered by the sellers and common stock as follows: v Assumption of existing revolver: $82mm v Assumption of note payable S12mm The Sale Transaction Tung Capital (including select members of AfterM's management team) agreed to purchase Midwest Shocks for $152 million. Funding for the acquisition included the assumption of senior debt, preferred stock offered by the sellers and common stock as follows: V Assumption of existing revolver: $82mm Assumption of note payable $12mm v Preferred stock $30mm Common stock S28mm Total S152mm The existing revolver and note were assumed by Tung. After provided seller financing in the form of preferred stock. However, the preferred was essentially bridge financing. It carried a 12-month tenor after which it was expected to be refinanced. The sellers offered this to allow Tung one year to soek additional funding. The preferred stock carried 10% PIK interest (Payment-in-Kind" capital does not require interest dividend payments to remain current). If the preferred stock were not refinanced in one year, it would convert to common and would represent a controlling interest. Tung provided $24mm of the new equity and the existing management team provided an additional S4mm. Manufacturing Strategy Even though the Midwest Shocks US based manufacturing plants were non-union, the cost of manufacturing in the US significantly exceeded the cost of manufacturing in other countries primarily due to labor costs. In the US, Midwest Shocks' hourly labor costs (fully loaded including benefits) exceeded $20. Hourly costs in both China and Mexico were approximately or slightly less than $S (USD equivalent). When factoring in transportation costs, significant savings could still be realized by continuing to move manufacturing outside of the US. The new buyers understood without question that they had to continue to reduce manufacturing costs. While AfterM had moved some manufacturing to China, the process had to be accelerated Tung had strong cross-border manufacturing relationships and meaningful experience in this process, the product of prior experience in similar situations. In consideration of this specific transaction, Tung connected with partners in both China and in Mexico. Before closing the Midwest Shocks acquisition, Tung reached agreement with a Mexican entity to begin the process of moving coilover manufacturing to Juarez. They had reached a separate agreement with a Chinese manufacturing company to move pneumatics to China after the transaction was complete. Shortly after closing the transaction, Tung planned on moving over 2,000 US jobs to China and Mexico Sales Growth Strategy Since the Lamar brothers began making shock absorbers over 85 years ago, Midwest Shocks had developed long standing, meaningful client relationships. In 2018, Midwest Shocks was the North American market share leader in mono and twin tube pneumatic shocks and the number two market share leader in coilover with 98% of their revenues generated in aftermarket sales. Their key client list included household names such as Nana Auto Parts ACDelco Cancuest O'Reilly Auto Parts The Sale Transaction Tung Capital (including select members of AfterM's management team) agreed to purchase Midwest Shocks for $152 million. Funding for the acquisition included the assumption of senior debt, preferred stock offered by the sellers and common stock as follows: Assumption of existing revolver: $82mm v Assumption of note payable $12mm v Preferred stock: $30mm v Common stock: S28mm Total S152mm The existing revolver and note were assumed by Tung. After provided seller financing in the form of preferred stock. However, the preferred was essentially bridge financing. It carried a 12-month tenor after which it was expected to be refinanced. The sellers offered this to allow Tung one year to seek additional funding. The preferred stock carried 10% PIK interest (Payment-in-Kind" capital does not require interest dividend payments to remain current). If the preferred stock were not refinanced in one year, it would convert to common and would represent a controlling interest. Tung provided $24mm of the new equity and the existing management team provided an additional S4mm. Manufacturing Strategy Even though the Midwest Shocks US based manufacturing plants were non-union, the cost of manufacturing in the US significantly exceeded the cost of manufacturing in other countries primarily due to labor costs. In the US, Midwest Shocks' hourly labor costs (fully loaded including benefits) exceeded $20. Hourly costs in both China and Mexico were approximately or slightly less than $S (USD equivalent). When factoring in transportation costs, significant savings could still be realized by continuing to move manufacturing outside of the US. The new buyers understood without question that they had to continue to reduce manufacturing costs. While AfterM had moved some manufacturing to China, the process had to be accelerated. Tung had strong cross-border manufacturing relationships and meaningful experience in this process, the product of prior experience in similar situations. In consideration of this specific transaction, Tung connected with partners in both China and in Mexico. Before closing the Midwest Shocks acquisition, Tung reached agreement with a Mexican entity to begin the process of moving coilover manufacturing to Juarez. They had reached a separate agreement with a Chinese manufacturing company to move pneumatics to China after the transaction was complete. Shortly after closing the transaction, Tung planned on moving over 2,000 US jobs to China and Mexico Sales Growth Strategy Since the Lamar brothers began making shock absorbers over 85 years ago, Midwest Shocks had developed long standing, meaningful client relationships. In 2018, Midwest Shocks was the North American market share leader in mono and twin tube pneumatic shocks and the number two market share leader in coilover with 98% of their revenues generated in aftermarket sales. Their key client list included household names such as Nana Auto Parts ACDelco Cancuest O'Reilly Auto Parts nivers a bachelor s degree Marketing The First Two Years: The Lamar brothers began their business in the early 1920s. Both Nadra and AfterM continued the Lamar legacy building Midwest Shocks into a North American powerhouse. Now, with the support of Tung Capital, Midwest Shocks was preparing for its next phase. It wanted to expand its North American expertise and command into other countries. To accomplish this, it first needed to continue to reduce manufacturing costs. In 2018 and 2019, Midwest Shocks successfully relocated much of the North American manufacturing to China and Mexico. In the third quarter of 2019, Midwest Shocks employed roughly 2,400 individuals in China and another 900 in Mexico. That left roughly 2,000 US-based employees. And while Midwest Shocks retained some US-based manufacturing in Decatur, the US-based manufacturing FTE totaled fewer than 600. The remaining US-based team was focused on other key functions including sales, distribution, finance, marketing, R&D, and customer service. The attached financial statements for the years 2017-2019 plus the management forecast for 2020 highlight Midwest Shocks' progress in moving much of its manufacturing outside of the US. The agreements that Tung reached with partners in China and in Mexico were well executed. And while the company recognized costs to effect this transformation (see restructuring charge expenses), it was also able to quickly recognize cost savings associated with Chinese and Mexican labor markets. Midwest Shocks was also able to replace the preferred stock (offered by AfterM as part of the sale transaction) with other forms of capital in 2017. Hence, AfterM no longer retained any interest in Midwest Shocks after that point. At the start of 2020, Midwest Shocks is feeling confident of its outlook. Richard Wader shared the 2020 management forecast with you. The forecast demonstrates a meaningful increase in EBITDA stemming from the operational improvements executed since the 2018 purchase. Wader mentions the ownership group has been pleased with the transitional period and with the resulting return on its investment. The company has now shifted focus to the task of building out a global sales organization. And while that process began shortly after the acquisition, the company was largely focused on moving the manufacturing processes. Now it is ready to invest more time and capital in building out the global network. Wader also shared that he is considering the impact this will have on the firm's financial position. Financing the company for the first two years had not been difficult. Midwest Shocks was able to raise the necessary capital , albeit at a price. And the global buildout will center around the sales process, not manufacturing, so Wader expects capital demands will be limited. Still, he wonders what he should be considering that he is not. He asks you to look at his historical financial statements as well as his 2020 forecast (12/31/2020 "Plan). Given their operating strategy, he has asked you to provide thoughts/recommendations around any financial area/strategy/concern you think should be top of mind for him. Calculate financial ratios (liquidity, profitability, leverage, asset efficiency, returns) for the years included in the attached financial statements