DCF Valuation

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Diedrich Industrial Solutions

Diedrich Industrial Solutions (DIS) was created over a decade ago when friends Alaina Tibshrany and Alex Paquin pooled their resources to start a business together in Cleveland, Ohio. Prior to business school, Alex had worked for Eaton as a mechanical engineer. After getting his MBA he went into consulting, then switched to an operating role at Coeur Capital Partners (CCP), where he met Alaina. Alaina had taken quite a different career path than Alex, working as an analyst at MSGS Consulting on supply chain restructuring for six years prior to business school.1 After finishing her MBA, she pivoted into investing by joining CCP as an associate. Alaina spent almost a decade at CCP as an investment partner before launching DIS.

Both Alex and Alaina wanted to strike out on their own but appreciated the challenge of

starting an investment firm: raising the first fund, building a team, sourcing and executing deals, and managing the portfolio companies. It is an enormous undertaking. The more they talked, the more they realized that neither was enamored with the marketing required to raise a fund. What they loved was fixing, building, and operating businesses. So instead of starting an investment firm, they decided to purchase an operating business. They felt they could raise sufficient capital by using personal connections in combination with the networks they had built at CCP and business school. They looked for a business that was “boring” but essential to its customers, which required a level of understanding of the customer and production expertise that was not easily replicated, and one where a lack of scale would not doom them. After researching a dozen industries, they focused on the industrial packaging space and then the rigid packaging space specifically.

Alaina and Alex spent the next six months canvasing their network and searching for assets

to purchase. Their first acquisition was Akron Barrels and Pails, which had a line of specialized shipping drums, a set of loyal customers, and a dysfunctional family who owned the assets. The family was unable to agree on how to invest and grow the business, so their sales had begun to stagnate. Although lukewarm on the idea of selling the firm their grandparents had built, as they got to know Alaina and Alex and realized they had a better understanding of the business than most, the family came around to the idea. Optimistically, Alaina and Alex set up Diedrich Industrial Solutions (DIS) at 8806 Grue Avenue in Cleveland, where they began finalizing the financing for the purchase.

1 A graduate of the Princeton School of Public and International Affairs, she had expected to take a government job and focus on environmental regulation. Her senior thesis examined the inconsistency in regulation governing the transportation of hazardous materials across rail, trucks, and pipelines. When MSGS came to campus, however, the offer was too good to pass up.

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Most of their investors were passive and owned small but not insignificant fractions of DIS (between 2.4% and 8.3% of the equity). Their most significant investor was Eric Blair, whom Alex had met while diligencing possible investments for CCP. Eric had run, purchased, and sold several manufacturing businesses. He was comfortably semi-retired, but when he heard Alex and Alaina were seeking investors, he called and informed them he wanted to be involved and, he noted, they could use his help. He eagerly offered to invest and ended up owning slightly more than Alaina and Alex. He also offered to be an unpaid consultant on an as-needed basis.

Unfortunately Alex, Alaina, and Eric were not the only ones interested in investing in the rigid packaging space. At the same time they were in talks with Akron Barrels and Pails, a number of large industrial packaging firms decided to expand capacity and capture market share. A private German packaging firm, Mauser Industrial Packaging, also decided to enter the US market by purchasing existing assets. What was supposed to be a simple purchase turned into a bidding war between DIS and several much larger firms. According to feedback from the family, DIS’s offer was in the middle of the bids submitted in the initial round. DIS was able to remain competitive by leveraging its relationship with the family and moving faster, but they had to increase its bid by 38%. Since they had not anticipated the higher purchase price and their investors were uncomfortable contributing the additional capital, Alex and Alaina convinced the family to lend them 40% of the purchase in the form of a note.2

Although they won the battle, their competitors invested significant capital in green-field production capacity most of it in the eastern half of the US. The expansion of capacity, especially in the commodity side of the business, drove prices well below long-term profitability. This created financial challenges for DIS, and it had to negotiate a delay on interest and principal payments for a year at the cost of 200 basis points of extra interest for the life of the loan. The pain lasted for almost three years, by which time a German and Japanese firm withdrew from the US market. The domestic firms did not follow through completely on their announced expansion plans, as it became clear that there was too much capacity in the least specialized side of the market. The damage was too late for many, however; some smaller regional players declared bankruptcy and others decided to sell rather than face an uncertain future.

2 The sale was structured as an installment sale, which allowed the family to postpone realizing the total gain on the sale and possibly even more favorable tax treatment in the event that a family member passed away before the loan was due. The loan had quarterly principal payments and the final principal would be due at maturity. The loan could not be called but could be paid off early with no penalty after five years.

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Production Facilities, Equipment, and Process Finally current on its loan, DIS used the good relationship with the family to generate

introductions. DIS expanded its production facilities by purchasing manufacturing and warehouse assets from banks that had repossessed them or from other operators that no longer wanted to compete in a consolidating market, faced labor strife, or were just tired. DIS purchased the assets of eight different firms or firm remnants over the next four years, often financed in part from the very banks that were eager to have the distressed asset off their books. DIS now produces drums and pails in five locations across the north central and south central United States. In addition to the production facilities in Akron and its largest facility southeast of Cleveland, DIS also operates production facilities and warehouse systems in Watertown, New York; St. Louis, Missouri; and New Orleans.3

Warehouse spaces accommodate the raw materials (mostly steel) and the drums awaiting purchase or shipment. Steel and other inputs are purchased on an as-needed basis. Raw material inventory is as lean as possible while still keeping the chance of a stock out very low, as this can lead to production lines being shut down. Inventory at the Cleveland and Akron facilities is lower than at the other locations because their proximity to each other allows them to share materials. DSI sources its steel from a number of firms and purchases are made at the current market (spot) price, with the exception of purchases from a suppliers with whom DIS has long-term legacy agreements. The production workforce is non-unionized at all of its facilities. Turnover among the skilled workers is low, as the firm has a locally competitive compensation plan (wages and benefits). This is necessary to retain a production line that can respond to variable customer demand and maintain the required technical skills on the production line.

DIS’s locations are in industrial areas outside of the cities’ main business area. All five locations have room to support continued expansion for at least seven years. Most investments in

3 The choice of locations was opportunistic; assets were available at reasonable prices. After being seduced by the excitement of their first purchase and then overpaying, DIS was forced to write off the goodwill as the true value of the business became apparent. They were more cautious on the next purchases. The business assets and locations they acquired were not just driven by price, although low price was part of their strategy. They had been investing long enough to not blindly trust a spreadsheet. The purchases had to make economic sense as well. The subsequent purchases were in geographically important locations where sufficient demand and growth justified the investment. Watertown is on Interstate 81 and on the St. Lawrence River, which gives the facility access to cost-effective transport for raw material and finished product as well as access to the industrial corridor in southern Canada. St. Louis is both a rail hub and an inland port within 500 miles of a large number of manufacturing facilities in the upper Midwest and thus is a transit point for significant bulk shipments. Both St. Louis and New Orleans have access to the Mississippi River. New Orleans is a port city used for export by many of DIS’s customers. The fracking boom and the growth of inexpensive hydrocarbons has generated tremendous growth in the petrochemical industry along the coast, which has fueled increasing sales from this facility. Plus, New Orleans has amazing food and excellent jazz.

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equipment have been to replace aging equipment or to upgrade the equipment early if the technology has advanced sufficiently. Most developments in the manufacturing equipment are incremental. DIS’s policy is to replace equipment when the maintenance costs and expected downtime justify replacement. In addition to replacing aging equipment, it expects to continue to expand capacity by adding extra production lines to existing buildings or build additional facilities as necessary to meet its expected growth in shipments. The objective is to build capacity in advance of when it is needed, but not build excessive capacity. DIS does not run their equipment to the breaking point. Customers, Product Line, and Sales Channels

After the acquisitions, integration, and restructuring, 78% of sales were direct to customers, with the rest of sales going through distributors. The advantage of direct-to-customer sales is that the sales department becomes familiar with the customer’s shipping needs and can work with them consultatively to select drums that are best suited to their needs. This personal connection leads to more loyal customers, which means they are less likely to switch suppliers. It also generates ideas that can motivate the evolution of the product line. The gross profit margins on direct customers can be up to 20% higher. Successfully executing the direct-to-customer strategy is not cheap, however. It requires a larger sales force—not only a customer relationship manager but also additional staffing to track and adjust orders and follow up on payment. Alaina and Alex realized they needed to allocate more resources to selling expenses in order to effectively cater to this core business. Once the additional capacity had been acquired, DIS needed to grow sales to justify the investment. Growing the business at the rate management targeted (and investors expected) would be difficult if the plan relied on organically growing direct-to-customer sales. Thus, after solving the integration and production problems, management made efforts to grow sales through distributors. Distributors purchase drums from DIS, take physical possession, and store them in their own warehouses. They then sell the drums to the end customers. The distributor channel severed the direct relationship between DIS and its customers but expanded the set of customers that DIS ultimately sold to.4 Growing this channel allowed DIS to sell to smaller customers without the cost of servicing those customers. Some direct customers were (voluntarily or involuntarily) shifted to the 6 distributors that DIS worked with. Sales to distributors grew from zero to almost 50 percent of sales over five years, where they hovered until Year -2. Distributor sales were less costly to generate—as much as 20 percent cheaper—but came with correspondingly lower margins. One advantage of distributor sales is they conserve capital, which is valuable given the scarcity and cost of capital. Since distributors hold inventory to buffer uncertain demand by their customers, their demand is more predictable and DIS needs to hold less inventory to supply

4 Occasionally, a customer that started as a customer of a distributor, for example purchasing pails, would need specialized products that their distributor does not carry. If the customer approaches DIS, it will sells the customer these products directly or reach an agreement on sharing the customer’s business with the distributor. DIS has an explicit policy not to poach customers from its distributors.

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distributor sales than to supply direct-to-customer sales. DIS has negotiated more favorable terms with distributors than with their direct customers.5 Needing to continue to generate growth, Alaina and Alex have been searching for additional sales channels through which they can expand. A few years ago, Ryan Reynolds (SVP Sales) introduced Alex and Alaina to his contact at the industrial aggregator Worldwide Industrial Systems (Worldwide). This firm simplifies ordering and maintains transparency in pricing and delivery for its industrial customers when they purchase goods, including industrial packaging. Worldwide’s customers enter and track orders through the web or, increasingly, through its mobile apps. Worldwide’s platform allows customers to purchase the products they need at reasonable prices in part by finding products that are nearby. Worldwide has relationships with a large number of manufacturers and was willing to include DIS on its platform. Alex and Ryan thought this would be the firm’s best chance for rapid expansion, so DIS negotiated an agreement to sell a large percentage of its products through Worldwide’s system. This generated sales growth of over 90% over two years —a huge jump from the single-digit annual growth DIS would have achieved without this arrangement.

Part of Worldwide’s value proposition is that it assures its customers that most products will be delivered within 6 business days. It accomplishes this by sourcing the products partly based on which suppliers’ manufacturing facility or warehouse is closest to the customer. The aggregator carries limited inventory and so most inventory is sourced directly from its suppliers, e.g., DIS.6 Initially, DIS needed to make adjustment to production and inventory to accommodate the needs of Worldwide (e.g. retooling to accommodate rush orders or retool lines for short production runs), but most of these changes have worked through their system.7 To allow for more efficient production planning, DIS made the decision to carry more inventory of the products it sold to Worldwide. Sales to Worldwide are expected to generate 40% of DIS’s revenue this year. Senior management points to the growth in sales generated by Worldwide as the key to DIS’s expanding profitability (40% annualized growth in operating profit over the last two years, gross profit grew even faster).

5 With the exception of some specialty drums, distributors pay in 4 weeks. Historically many of the direct customers did not have specific terms in their contracts; they were simply asked to pay at the end of the month. As management has invested in technology for tracking payments and begun to write explicit contracts with customers, a large fraction of DIS’s customers have been moved to 4-week terms for consistency. But a number of large and important customers are still on 45- and, in a few cases, 60-day terms. Customers do not always pay on time, so the finance staff is diligent in following up with customers and encouraging timely payment. 6 Worldwide has its own trucks or, more often, third-party shippers pick up the drums at DIS’s warehouses and deliver them directly to its customers. 7 This also led to a temporary rise in work-in-process inventory as the floor managers adjusted to the new variability in orders.

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Customers and Product Lines DIS’s product line encompasses a large variety of steel drums and pails. Its products are

constructed from both stainless steel and carbon steel drums. What sets the product line apart is its quality, variety, and additional features (e.g., liners, fittings, and sizes).

Steel Pails Steel pails are the simplest item in the DIS product line. They are a sentimental favorite and a core of the product line. Steel pails come in 15 different shapes and sizes ranging from 1 to 12 gallons. Customers use them to hold and transport a variety of fluids and flowable material such as paint, agro-chemical, asphalt, lubricants, and detergents. With the appropriate linings, they can also hold hazardous materials. They are simple and thus relatively inexpensive to make, but the margins are low. Since they are a product needed by many customers, the sales force believes they generate continued business and loyalty to DIS. Standard Steel Drums The standard carbon steel drum is the workhorse of the industry, and the 55-gallon drum is the bestselling product across the industry. Although relatively cheap to make, the gross margins on standard steel drums are lower than other products, as competition from regional players with excess capacity, and more importantly, the large national drum manufacturers, keep prices competitive. The largest competitors’ raw material and manufacturing costs are lower, so it is challenging to compete with them.8 Senior management repeatedly debates whether to eliminate these product lines. A number of customers purchase the standard steel drum (and pails) as part of larger orders and the sales department feels eliminating them could disrupt some of their key relationships. The financial goal is to not lose money on these standard steel drums. Overpack Drums

An overpack drum is a large drum that holds one or more smaller drums or other packages. It is used when the inner package has not been breached and the performance of the entire packaging still meets DOT requirements. The overpack drums provide additional cushioning and absorption, which is useful for some materials. Overpack drums also can reduce handling costs. Salvage and Recovery Drums Salvage or recovery drums are a larger outer container into which a smaller drum is placed. Unlike overpack drums, they are designed to be a safe way to store or transport drums or other containers that are damaged, leaking, or non-compliant and contain hazardous substances. It can be dangerous or expensive to transfer the contents out of the leaking container, so salvage drums are often the most technologically feasible and economically viable solution. Certain state and 8 Although every drum manufacturer sells standard steel drums, DIS is the only manufacturer in the U.S. to use an expander to work-harden each of our steel drums. This achieves the strength and performance of higher-gauge steel at a lower cost.

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federal agencies, or firms that contract with them, are an important source of demand for salvage drums.9 Salvage drums are required by DOT regulations for shipping compromised containers. DIS’s steel salvage drums typically meet or exceed industry standards and can be certified to UN, DOT, and DOD specifications as well as DOE 7A Type A radioactive and special requirements packaging. Mil-Spec Drums

Military specification drums are steel drums that are manufactured to higher standards specified by the military. The drums are standardized by material, reliability, durability, and dimensions to ensure compatibility with current storage and transportation systems. These drums may require highly specified gaskets, closure rings, barcodes, RFID labels, and pallets. The standards are specified in great detail, do not change quickly, and are very exacting. Thus, once DIS’s drums had been certified to meet the military specifications, their customers (the military contractors) know they are purchasing a product that will meet the government’s standards. Liners and Absorbent Pillows

Inert contents can be shipped and stored in standard steel drums. DIS’s standard drums (unlined) have a painted exterior. Materials that react with bare steel must be placed in a lined drum. DIS offers a wide selection of liners for its steel drums.10 Depending upon the customers’ needs, these range from removable liners to materials that are permanently affixed to the interior of the drum. Some of DIS’s insertable drum liners are manufactured from high-barrier Mylar laminate and have a flat round bottom that conforms to the drum, maximizing volume. This liner protects the contents from water, moisture, vapor, light, and oxygen, converting any drum or pail into a food-safe storage container. In addition to protecting the contents, the liner also protects the drums, leading to a greater economic life.

Many of DIS’s drum linings are created from FDA-approved polyethylene or a combination of epoxy and phenolic resin, and are designed to fit steel drums of various sizes. Phenolic resin is added to the lining material for products with high pH levels (e.g., cleansers, certain food additives, and industrial coatings).11 Coatings are sprayed on and heat cured. Drum liners come in a variety of styles, including straight-sided liners, pleated (accordion style) drum liners, flat-bottom drum liners, round-bottom drum liners, and anti- static drum liners. Anti-static drum liners help reduce static buildup in volatile applications. Available in various sizes, liners help minimize drum cleaning and replacement, reducing waste, and prevent product contamination.

9 Customers of salvage drums have very low tolerance for failure. A failure not only can put people and property in danger but also pose significant reputational and public relations risks. 10 A liner is an inserted item; a lining is sprayed on. 11 Perfecting the recipe for mixing and applying the resin linings took time to perfect. Mixing and application requires precision and thus each new employee must be trained in the process. This training is time consuming. This is one reason that low employee turnover is valuable.

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DIS also sells absorbent pillows in a range of sizes. These trap free liquids in the bottom of drums. The pads absorb liquids that accumulate inside a drum from oily parts, shop rags, spent filters, wipers, and other solid industrial wastes that contain oils, coolants, and solvents. These pads help customers comply with disposal and shipping regulations when dealing with hazardous or recycled waste liquids. Colors DIS offers drums in 14 standard colors (see color palette below). Colors help the end customer track the contents of drums without complicated inventory systems. This is particularly useful in environments where the shipping staff needs to quickly identify which drums need to be shipped out without having to open drums or check the labeling codes. Additional colors are available at an additional cost.

Diedrich Industrial Solutions Color Palette

Black

Gray White

Gray

Sunny Yellow

Golden Yellow

Harvest Gold

Strong Blue

Bright Blue

Blue

Vivid Red

Red Orange

White

Brilliant Green

Durable Green

Customer Focus DIS serves a wide variety of industries, including agriculture, automotive, basic chemicals, specialty chemicals, construction, cosmetics, energy, pharma/healthcare, lubricants, military

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contracting, manufacturing, paints & industrial coatings, and petrochemicals. DIS has three sales channels, the largest of which is sales to Worldwide, the aggregator. Sales to Worldwide generated 41.4% of sales in the current fiscal year. No other single customer generates a large fraction of DIS’s sales. Management, Ownership Structure, and Financing

DIS has never had a board, but in the early years it established an advisory panel that included Alaina, Alex, Eric, and the two most active investors. As the outside investors lost interest, the time spent preparing for the meetings became unproductive, and the meetings were abandoned. No one noticed. Although Alex serves as CEO, most major strategic decisions are made by Alaina and Alex together, in consultation with the two other members of their senior team. Not having formal advisory meetings means they can move faster and it is less likely that Eric will be involved in the discussion. Alaina and Alex could make decisions more effectively when it was only the two of them. Alaina now serves as CFO and Owen Boyd serves as Treasurer.12 Owen ran the billing and collections group in one of the firms DIS acquired during their acquisition spree. The final three members of the management team include Ryan Reynolds (SVP Sales), who oversees the sales team and is the main point of contact with the largest distributors, Mickey DiFucci (Product Development), and Gladys Dusenberry, VP for operations. Mickey has worked across both sales and manufacturing prior to joining DIS and like Owen joined DIS through one of their acquisitions. At DIS he first worked in Gladys group and then in Ryan’s. He is now responsible for developing new products and thus works closely with both groups. Gladys has 19 years of experience in manufacturing and quality assurance. She is one of the longest serving employees having joined DIS as part of the Akron Barrels and Pails acquisition. At the time of the acquisition, she was a floor manager but had also picked up responsibility for regulatory certification.13 She is a key member of the management team, and as DIS’s corporate brochure says:

“Her deep experience in quality, safety, and production make her an ideal

partner for our customers, who rely on her wide-ranging expertise to find or create 12 For the first 15 months, they hired an interim CFO, with the title of Head of Finance, from DLC Group, a finance outsourcing firm. Alaina’s decade as an investment partner prepared her well when it came to analyzing investments. She was good at quickly getting a strategic sense of why an investment made sense (or not) and generating a roadmap for digging into the details. This is not the same as building the required financial functions and controls (e.g., financial planning and analysis, AP/AR management systems, the treasury/cash management function, the tax function, and internal audit/risk management systems) necessary to run a firm. The firms DIS purchased had their own processes, but they did not play nicely together and in several cases they did not exist. 13 When Alex first met Gladys at Akron Barrels and Pails office, he found her to be very competent but unpleasant. Gladys was ISO certified. She had previously held the position of environmental quality control coordinator at Phillips Brothers Metals, and was incredibly knowledgeable when it came to the UN regulations. When she moved Akron, she couldn’t find any other jobs and so accepted the floor management position at Akron Barrels and Pails. Three years later she was given the certification responsibilities with a promise of a promotion and a title, which never came. Alaina and Alex realized the importance of retaining her and only discovered she was searching for a new job when a head hunter gave them her resume as a possible hire after they had submitted their letter of intent (LOI) to Akron Barrels and Pails. Their purchase of the company depended upon bringing her to DIS. She ended up quitting her job at Akron and taking 8 weeks of severance (and vacation) before joining DIS.

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custom-tailored solutions to their packaging needs, as well as meet tight deadlines for shipping product.”

The original ownership structure has changed slightly over time. Several of the original

partners have been suffering investment fatigue.14 These investors did not expect to be invested and illiquid for so long. Additionally, dividends have not been what some investors had anticipated, as cash flow had been used to invest in the business and service DIS’s debt. Alaina and Alex bought out a few of the investors, thus increasing their ownership stakes. Eric Blair has maintained his ownership stake. The equity purchases were financed with personal loans and Alaina and Alex’s share of a special dividend that was paid when DIS refinanced its original note to the Akron Barrels and Pails family. DIS’s new loan from Krivista Bank raised enough capital to pay off the original debt to the Akron family, pay a special dividend, and fund a cash buffer.15 The loan had an original maturity of nine years. The loan has interest and principal payments due each quarter and a final balloon payment that is due at maturity.

The firm is projected to invest over $16M in capital this year. To continue the impressive growth in profits, Alex and Alaina must find additional sources of capital. Their current investor base, except for Eric Blair, is an unwilling source. The other investors are more interested in selling than buying. Eric Blair may be a source of growth capital, but his current intentions are unclear.

Eric’s initial offer to be actively involved as a sounding board at the beginning was invaluable. Unlike Eric, neither Alaina nor Alex had ever purchased a business (due diligencing was challenging enough) nor actually operated a firm and met payroll. In the first four years, Eric’s knowledge about the purchase process, how to restructure operations, and how to strong-arm suppliers was invaluable. Over the years, however, as Alaina and Alex learned the intricacies of the business, their need for Eric’s advice has declined. Being semi-retired, Eric is now in Florida at least seven months a year. Although he has no official role at DIS, he has an office at DIS and served on the advisory panel when it used to meet. Alaina and Alex make most of the decisions and sponsor an investors’ day once a year. Attendance at this event has declined to the point that they are considering eliminating it completely. Most investors have seen the factory and don’t want another tour.

14 As this had been Alex and Alaina’s first time raising investment capital, they did not appreciate at the time the importance of setting expectations on investment horizons. In some cases, they did not ask. In other cases, the investors were not clear or outright incorrect in how long they were willing to be invested. This was compounded by some unexpected reasons for investors to demand liquidity (e.g., divorce or college expenses). 15 Krivista Bank, headquartered in Akron, operates 38 locations in northern, central, and southwestern Ohio, southeastern Indiana, and northern Kentucky. It is a wholly owned subsidiary of Krivista Bancshares, Inc., a $1.9B financial holding company located in Sandusky, Ohio. Krivista Bank has been helping businesses grow for over 130 years. Borrowers have access to executive leaders with a broad range of industry knowledge and financial expertise. They are active members of the business community and interested in learning about your business and the challenges you may be facing. Their team is committed to building life-long relationships.

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Financial Statements for Diedrich Industrial Solutions The following sections contain the consolidated statements of income, balance sheet, and enterprise-level cash flows and cash flows available to equity. The reports cover the past two years of historical data as well as the current fiscal year. The first three quarters of the current year have been reviewed by DIS’s accounting firm. The fourth quarter numbers are forecasted based on prior years’ seasonality. Notes to Financial Statements

Selling expenses include compensation of the salespeople, travel and entertainment

expenses, trade show fees, advertising (brochures and website production and maintenance), auto expenses for salespeople, and training expenses. Selling expenses are allocated across sales channels based on intensity of use of sales department’s resources.

General and administrative expenses include the cost of running the manufacturing and

warehouse facilities. These include customer service costs, telephone expenses, office supplies, and travel, entertainment, and auto expenses. Some of these expenses are run out of the main office and are included in general and administrative costs, as they are operating costs.

DIS pays state taxes in the four states in which it operates. The state income tax rate ranges

from 6.25% in Missouri to 7.6% in Louisiana. Ohio does not have a state corporate income tax, but instead has the Ohio Commercial Activity Tax (CAT), a tax on gross receipts (revenue). The CAT is assessed at a rate of 0.26% corporate revenue above $1M. For DIS, this is equivalent to a tax rate on pretax income of approximately 2.4%.

Corporate expenses include costs attributable to running the main office. These include

corporate staff compensation, telephone expenses, office supplies, association dues and expenses, as well as the administrative office’s travel, entertainment, auto expenses, and legal fees. Financing fees are netted against the proceeds from debt issues.

Goodwill was generated in the initial acquisition and was valued at $10.4M following the

last acquisition. DIS is required to value goodwill reflected on its balance sheet annually when circumstances indicate a potential impairment. If it is determined that the goodwill is impaired, DIS would be required to write off a portion or all of the goodwill. Based on the advice of its accountants, DIS took a write-down of $6.25M in Year -2 and $3.75M in Year -1. This amortization of goodwill is expensed in the year the goodwill was written off but is not a tax- deductible expense.

The appraised value of DIS’s land was $8.88M in Year -2, $9.56M in Year -1, and $9.79M

in Year 0, the current year.

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Consolidated Statements of Income (US$ in Millions) Year -2 Year -1 Year 0 Year 1 Year 2 Year 3 Year 4 Sales direct to customer 25.41 26.81 27.99 Sales to distributors 24.4 26.67 28.14 Sales to aggregator 16.65 39.64 Total net sales 49.81 70.13 95.76 CoGS (direct to customer) 14.02 15.11 15.17 CoGS (sales to distributors) 16.91 18.75 20.29 CoGS (sales to aggregator) 0.00 14.30 36.11 Costs of goods sold 30.93 48.16 71.57 Gross profit 18.88 21.97 24.20 Selling expense (direct to customer) 2.84 3.16 2.94 Selling expense (sales to distributors) 1.81 2.12 2.15 Selling expense (sales to aggregator) 0.00 1.52 3.53 Selling expense 4.64 6.80 8.62 General and administrative expenses 1.66 2.55 3.03 Goodwill impairment charges 6.25 3.75 0.00 Operating profit 6.33 8.88 12.55 Interest income 0.38 0.24 0.22 Interest expense 1.80 1.64 1.58 Corporate expenses 1.19 1.18 1.24 Income before income tax expense 3.72 6.30 9.95 Income tax expense 2.41 2.47 2.44 Net income 1.31 3.82 7.51 Notes: Depreciation (included in costs) 2.91 4.28 6.83 EBITDA 9.24 13.16 19.38

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Consolidated Balance Sheets (US$ in Millions) Year -2 Year -1 Year 0 Year 1 Year 2 Year 3 Year 4 Current assets Cash and cash equivalents 23.92 21.43 11.49 Accounts receivable (direct to customer) 2.65 2.74 3.08 Accounts receivable (sales to distributors) 2.17 2.30 2.53 Accounts receivable (sales to aggregator) 3.62 8.70 Trade accounts receivable 4.82 8.66 14.31 Raw materials 1.99 2.96 4.29 Work-in-process 0.23 0.76 0.55 Finished goods (direct to customer) 0.75 0.72 0.70 Finished goods (sales to distributors) 0.57 0.61 0.71 Finished goods (sales to aggregator) 0.00 2.55 8.16 Finished goods 1.31 3.88 9.57 Inventories 3.53 7.60 14.41 Prepaid expenses and other current assets 2.17 3.01 4.30 Total current assets 34.44 40.69 44.51 Long-term assets Land 4.76 4.76 4.76 Buildings, machinery, and equipment 9.49 14.35 22.11 Properties, plants and equipment 14.25 19.11 26.87 Goodwill 3.75 0.00 0.00 Other long-term assets 0.00 0.00 0.00 Total long-term assets 18.00 19.11 26.87 Total assets 52.45 59.80 71.38

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Year -2 Year -1 Year 0 Year 1 Year 2 Year 3 Year 4 Current liabilities Accounts payable 5.64 8.97 12.72 Accrued expenses 1.87 3.07 4.39 Current portion of long-term debt 1.00 1.00 1.00 Short-term borrowings 0.00 0.00 0.00 Total current liabilities 8.51 13.04 18.11 Long-term liabilities Long-term debt 25.50 24.50 23.50 Other long-term liabilities 0.00 0.00 0.00 Total long-term liabilities 25.50 24.50 23.50 Total shareholders’ equity 18.44 22.26 29.77 Total liabilities and shareholders’ equity 52.45 59.80 71.38

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Cash Flows: Assets and Equity Year -2 Year -1 Year 0 Year 1 Year 2 Year 3 Year 4 Operating profits (pre-tax) 8.88 12.55 Non-operating expenses (excluding interest) 1.18 1.24 Taxes 2.47 2.44 Net income (EBIT-taxes) 5.23 8.88 - Investments in PPE (Capital expenditure - depreciation) -4.86 -7.76 - Investment in net working capital (excluding cash) -4.21 -8.69 - Investments in other long-term assets 3.75 0.00 + Increases in other long-term (non-financial) liabilities 0.00 0.00 Cash flow from assets -0.09 -7.58 + Interest income 0.24 0.22 - Interest expense -1.64 -1.58 - Net debt repayments -1.00 -1.00 Cash flow available for equity -2.49 -9.94 - Payments to equity holders 0.00 0.00 - Increase in cash -2.49 -9.94

Additional Calculations Year -2 Year -1 Year 0 Year 1 Year 2 Year 3 Year 4 PPE (net) 14.25 19.11 26.87 Net working capital (excluding cash) 3.01 7.22 15.91 Depreciation (included in costs) 2.92 4.28 6.83 Other long term assets 3.75 0.00 0.00 Other long-term (non-financial) liabilities 0.00 0.00 0.00 Long-term and short-term debt balances 26.50 25.50 24.50 Cash balances 23.92 21.43 11.49

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Loan Schedule Year -4 Year -3 Year -2 Year -1 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Loan balance (BOY) 30.00 29.00 26.50 25.50 24.50 23.50 22.50 21.50 20.50 Interest payment 1.86 1.80 1.64 1.58 1.52 1.46 1.40 1.33 1.27 Principal payment 1.00 2.50 1.00 1.00 1.00 1.00 1.00 1.00 20.50 Loan balance (EOY) 30.00 29.00 26.50 25.50 24.50 23.50 22.50 21.50 20.50 0.00 Total payment 2.86 4.30 2.64 2.58 2.52 2.46 2.40 2.33 21.77