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Table of Contents
Executive Summary ....................................................................... 3
Market Analysis ............................................................................. 4
Overview of Koss Corporation ....................................................... 7
Competitors................................................................................... 8
Opportunities for Private Equity.................................................... 9
Future Strategy............................................................................ 12
Uncertainties ............................................................................... 14
LBO Analysis (All data is taken from the latest 10K report).......... 15
Base case .................................................................................. 15
Sponsor Case ............................................................................ 17
Sponsor Case 2 ......................................................................... 18
Downside Case ......................................................................... 19
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Executive Summary
Headquartered in Milwaukee, WI since 1958, Koss Corporation is an American company that
invented the first high fidelity stereo headphones. Presently, Koss Corporation operates in the
audio/video segment of the home entertainment industry specializing in design, manufacture and
sale of stereo headphones and related accessories. Koss is known for its high end product design,
sound quality and offers lifetime warranty on their products. Additionally, Koss has 506
trademarks in 99 countries and 138 patents in 25 countries which adds to their existing value. The
Company also holds many design patents that protect the unique visual appearance of some of
its products. These trademarks and patents are important to differentiate the Company from its
competitors.
Superior sound quality coupled with other intangibles (patents and trademarks) has been
instrumental in their success over the past decades and helped them amass success upon then
IPO in August 1983 with an issue price of $1.62. The stock price hit an all-time high at $14.28 in
Jan 2006 due to increasing sales. However, the management became too comfortable with their
products and stopped innovating the product mix. This resulted in a loss of identity as they didn’t
know which customers to market their product to, further translating to a loss in revenue and
reflected in their stock price which is currently trading around $2 range i.e. close to the IPO price.
With an EBIT of 3% Koss holds a lot of potential for operational improvement. Additionally the
consumer technology industry has a steady growth of around 2% with its sub-industry
headphones offering projected annualized growth of 15% till 2022.
Below we discuss why Koss will make a great candidate for a private equity firm and offer a
tremendous return in various scenarios. We also discuss the different ways a PE firm can make the
aforementioned operational improvements and exit in 5 years with a healthy IRR (even in a
downside case).
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Market Analysis
Consumer Electronics (CE) Industry Overview
The electronics industry emerged in the 20th century and has now become a global industry worth
billions of dollars. Consumer electronics refers to any device containing an electronic circuit board
that is intended for everyday use by individuals. This encompasses a massive category of
electronics that includes televisions, cameras, digital cameras, PDAs, calculators, VCRs, DVDs,
clocks, audio devices, headphones, tablets, smartphones and many other home products.
“As more products connect to the Internet and to each other, the Internet of Things will create
new business opportunities. Soon we will monitor ourselves, our homes, our pets and livestock,
our plants, crops and trees, transforming consumer’s lives.”1
The average price of consumer
electronics depict falling trends in past 50 years driven by gains in manufacturing efficiency,
automation, lower labor costs as manufacturing has moved to lower-wage countries, and
improvements in semiconductor design.2
In response to the market trends and high consumer
demand for online digital content, many products are associated with (required to) having internet
connectivity using technologies such as WiFi or Bluetooth.
Looking at the U.S. consumer tech shipments shipment data, from 2011 onwards there is a steady
annualized growth of 2.3% (2011-2015) in the revenue generated from consumer tech.
1 “CEA Report 2015”
2 "China Moves to Automate Electronics Manufacturing"
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Headphone market overview
The market overview of headphone industry is as follows:
1. 2015
a. USA – 84 million units
b. Europe – 77 million units
c. Global – 310 million units
2. 2016 (projected)
a. USA – 92 million units (9.5% growth)
b. Europe – 85 million units (10.4% growth)
c. Global – 340 million units (9.7% growth)
$1.05
$3.10
$5
$0.0
$1.0
$2.0
$3.0
$4.0
$5.0
$6.0
2011 2015 2022
USA Headphone Retail Sales (billion USD) 3
CAGR = 15.24 %
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The headphone market is project to witness an annualized growth of 15.24% over the next decade.
Similarly, the global earphone/headphone market is poised for high growth resulting from:
Recent technological advancements and improved design along with emergence of active
noise cancellation techniques leading to a better listening experience
Increasing consumer disposable income, especially in developing countries (India, China
and Brazil)
Increasing demand for higher fidelity sound and stylish headphones
Growing popularity and adoption of smartphones, tablets, laptops, portable music players
and other mobile devices
Prominent industry analyst Rasika Iyer (Futuresource Consulting) said that, “We’re seeing nothing
short of a headphones renaissance. With prices ranging from less than $5 to more than $200 and
a gamut of features, consumers have now started to purchase different sets of headphones for
different applications, including commuting, sport and in-home listening. In Europe and North
America, we’re seeing headphone ownership reaching three to four pairs on average, though this
includes headphones bundled with smartphones.” 3
3 “Earphones And Headphones Market Analysis By Product (In-ear, Over-ear), By Technology (Wired, Wireless) And Segment Forecasts To 2022”
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Overview of Koss Corporation
Headquartered in Milwaukee, WI since 1958, Koss Corporation is an American company that
invented the first high fidelity stereo headphones. Presently, Koss Corporation operates in the
audio/video segment of the home entertainment industry specializing in design, manufacture and
sale of stereo headphones and related accessories. Approximately 85% of the company’s revenue
resulted from the sale of stereo headphones in fiscal year 2015. 4
Koss uses two different strategies to obtain finished headphones.
1. By sourcing completed stereo headphones manufactured to its specifications from various
manufacturers in Asia
2. By obtaining raw materials and finish assembling the final products at its plant in
Milwaukee, Wisconsin.
Koss relies upon its superior sound quality, workmanship, brand identification, engineering skills,
and customer service to maintain its competitive position. The price range of Koss headphones is
from $4.99 to $999.
The product of the highest price in $999 is the Koss ESP950, the pinnacle of audio
reproduction. The Koss ESP950 Electrostatic headphone system sets the standard for
electrostatic headphones. Not only do these professional headphones provide extremely
low distortion, they also offer unbeatable sound quality and reproduction for an utterly
unique listening experience.
BT540i (priced at $199.99) wireless headphones with Bluetooth hardware and software
integrated with APT-X codec technology, is the most advanced Bluetooth headphone
offered by Koss. 5
4 Koss_Corporation_-_Form_10-K(Aug-28-2015)
5 https://www.koss.com/headphones/over-ear-headphones/esp950
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Competitors
Drawing industrywide comparison among various brands in April 24, 2014, Ben Taylor of TIME
magazine scored every headphone product out of 100 wherein 18 headphone brands were ranked
based on 75% expert reviews and 25% specifications and features. The top three positions were
awarded to Shure, Grado and Klipsch, whereas Skullcandy, Beats by Dre and Plantronics ranked at
the bottom. Koss is ranked #15 out of 18 with score of 68 (the highest grade being Shure, 99). 6
Analysts at peoplepeople.se have broken the headphone market into four distinct
categories/positions – Audio Heritage; Quirky and Complex; Stylish and Simple and Youth and
Color. As seen in the graphic below, different companies have a clear brand identity and serve a
niche market. For instance, Bose concentrates on “audio heritage” and focuses on delivering
superior sound quality whereas Beats creates products that are “stylish and simple” and appeal
to the youth. However, Koss is struggling to find a clear identity and tried to cover all of the
directions instead of appealing to a niche market.
Source: www.peoplepeople.se
6 http://time.com/74886/best-headphones/
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Opportunities for Private Equity
Market Acceptance
As discussed in the market analysis above, people love to listen music through Hi-Fi (high fidelity)
headphones. Koss headphones offer superior sound quality and can leverage this differentiating
factor to charge customers a premium price.
Technology
The headphones produced by Koss are better than its competitors like Skullcandy, Beats and
Creative in sound quality. As reflected in the “market positing” chart above, they are experiencing
an identity crisis. However, Koss products can be moved to the “Golden position” by simply making
their products stylish leading to an increased consumer appeal while maintaining the existing
superior sound quality.
Mismanagement
Overall, Koss is nearing an unhealthy financial situation due to poor operating performance (3%
net income which is further declining) resulting from decisions made by current management
team. A change of control will help in replacing the management which holds 64.5% of the
common stock.
Source: CapitalIQ
Low Stock Price
Looking at the historical stock price trend for Koss we see that the stock price for Koss has dropped
dramatically from an all-time high of $14 in 2006 to $2 in 2016 currently due to poor operating
performance. This makes for a great buying opportunity for a private equity firm as Koss can be
bought for a bargain price (IPO was $1.62) even with a high control premium of up to 50%. 7
7 “Yahoo finance”
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Value in the Industry
Our analysis show that Koss’s stock price is appropriately valued as per their operating
performance. However, with a change in management and improvement in operating
performances, Koss has a potential to reach a better financial situation with a dramatically high
enterprise value.
Below we have a few charts depicting the revenue and operating metrics of Koss (KOSS) compared
with Skullcandy (SKUL), Emerson Radio (MSN), VOXX International (VOXX), Vuzix Corporation
(VUZI) and Creative Technology (C76). However, based on stock performance and operating
metrics, we have identified Skullcandy as our closest competitor as it has similar trending stock
price and comparable operating margins. We will use Skullcandy to make the appropriate
comparisons and all other companies (including KOSS and SKUL) will represent the industry. 8
8 “Yahoo finance”
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Future Strategy
Cut the Costs
After we take control of Koss, we are going to improve the profit margin by a few actions.
1. Consolidate all manufacturing to the facility in Milwaukee, Wisconsin from Koss Holdings,
LLC, which is wholly-owned by the former chairman
2. Retailers to bear all shipping costs
3. Use cheaper materials (plastic/metal without compromising the audio quality) to cut the
COGS (target COGS 55%) of our product line
4. Shift our sale mix to a higher margin product mix thereby increasing the operating margins
Change the Product Mix
Koss must leverage its superior sound quality along with an improved design to move to the
“golden position” in the market positioning chart. This will be well received by customers who are
willing to pay a premium as suggested by customer reviews on amazon.com
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Changes to Management Team and Compensation
Koss has been performing poorly due to poor management decisions. The management is reacting
to the decline in revenue instead of being proactive about finding a niche target market to appeal
to. We propose a strategy wherein the management team is replaced by a new team with a new
compensation mechanism with 2/3 current base salary and hefty bonuses for meeting and/or
exceeding KPI targets for sales and costs. This will help the bottom line immediately and also open
up room for future improvement. We propose a target COGS of 55% and SG&A 25% over the next
5 years in a base case scenario.
Shorten Warranty and Increase Marketing Expense
Koss offers its customers lifetime warranty which amounts to an average annual warranty cost of
$1.5 million USD (6% of revenue). This model was good to push sales during early stages of the
company but is not sustainable in the long run. However, the warranty time period can be reduced
to 10 years which still indicates confidence in the product. The savings from this new program can
be reinvested as marketing expenses to get additional brand exposure.
Product Pricing
We suggest leveraging our superior product quality and a newly enhanced design to obtain a
higher premium price. Koss will stop selling the $20 headphones and set the price range for new
products from $100 to $300. In the meantime, we will continue to sell the $999 headphone as a
flagship product as a memento representing our highest and best technology.
Exit Strategy
We plan to sell KOSS to Samsung Group as the exit strategy. Samsung serves as a great strategic
buyer since they lack a headphone business unit in their portfolio. Samsung can also leverage the
158 patents Koss has and can use their immense buying power to further reduce the COGS for
Koss. Samsung can further integrate Koss’s proprietary technology in their existing and future
product line. Additionally, their main competitor Apple bought Beats Headphones to integrate the
technology into their earbud for iPhones. We expect that within our five years of operation in
KOSS, we will be able to build a better reputation than Beats.
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Uncertainties
New Products and Price
This strategy offers the most uncertainty and risk to the proposed program. There is always a
chance that the new premium pricing strategy might not succeed as forecasted. Also there will be
a backlash from the customers who seek our cheaper $20 headphones and would get
disappointed. This might result in a short term decline in topline sales.
Cost Cutting
There are some uncertainties associated with the cost cutting strategy as they focus on an
overhaul of the management and also discusses operational streamlining. In a downside scenario,
there is always a possibility that the customers might not like the change to the warranty system
and the additional marketing might not translate into additional sales.
Exit Strategy
The sale to Samsung Group might not materialize if Samsung buys a different headphone company
before the proposed 5 year exit plan. Koss management might have to remain vigilant of this fact
and foster early relations with Samsung in order to capitalize on the exit opportunity whenever it
arises (even before the 5 year plan).
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LBO Analysis (All data is taken from the latest 10K report)
The idea is to lever an all equity public traded company, which has a steady cash generation and
potential growth opportunity.
Base case
IRR (base case) = 27%
Revenue
The investment analysis is based on a 2.0% revenue growth, which is conservative. As per 2015
10-K, “Net sales for 2015 increased primarily due to increases in sales volume to distributors in
the U.S. offsetting declines in several export markets. In the domestic market, net sales were up
approximately $1,265,000 over last year with U.S. distributors showing strong increases.”
Returns Analysis
Projection Period
Pro forma Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026
Entry EBITDA Multiple 7.9x
Initial Equity Investment $14.5
EBITDA $2.8 $3.4 $4.0 $4.6 $5.5 $5.6 $5.7 $5.8 $5.9 $6.1
Exit EBITDA Multiple 7.9x
Enterprise Value at Exit $22.1 $26.7 $31.4 $36.3 $43.5 $44.4 $45.3 $46.2 $47.1 $48.1
Less: Net Debt
Revolving Credit Facility $7.0 $5.5 $3.6 $1.3 - - - - - -
Term Loan A - - - - - - - - - -
Term Loan B - - - - - - - - - -
Term Loan C - - - - - - - - - -
Existing Term Loan - - - - - - - - - -
2nd Lien - - - - - - - - - -
Senior Notes - - - - - - - - - -
Senior Subordinated Notes - - - - - - - - - -
Other Debt - - - - - - - - - -
Total Debt $7.0 $5.5 $3.6 $1.3 - - - - - -
Less: Cash and Cash Equivalents - - - - 1.7 4.5 7.4 10.3 13.3 16.3
Net Debt $7.0 $5.5 $3.6 $1.3 ($1.7) ($4.5) ($7.4) ($10.3) ($13.3) ($16.3)
Equity Value at Exit $15.2 $21.2 $27.8 $35.0 $45.2 $48.9 $52.7 $56.5 $60.4 $64.4
Cash Return 1.0x 1.5x 1.9x 2.4x 3.1x 3.4x 3.6x 3.9x 4.2x 4.5x
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
2017 2018 2019 2020 2021 2022 2023 2024 2025 2026
Initial Equity Investment ($14.5) ($14.5) ($14.5) ($14.5) ($14.5) ($14.5) ($14.5) ($14.5) ($14.5) ($14.5)
Equity Proceeds $15.2 - - - - - - - - -
$21.2 - - - - - - - -
$27.8 - - - - - - -
$35.0 - - - - - -
$45.2 - - - - -
$48.9 - - - -
$52.7 - - -
$56.5 - -
$60.4 -
$64.4
IRR 5.0% 21.0% 24.3% 24.7% 25.6% 22.5% 20.3% 18.6% 17.2% 16.1%
Income Statement Assumptions
Sales (% YoY growth) NA (33.3%) 1.6% NA 2.7% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%
Cost of Goods Sold (% margin) 62.5% 90.2% 65.1% 65.3% 64.2% 64.0% 62.0% 60.0% 58.0% 55.0% 55.0% 55.0% 55.0% 55.0% 55.0%
SG&A (% sales) 33.3% 39.6% 32.6% 31.2% 24.5% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0%
Other Expense / (Income) (% of sales) - % - % - % - % - % - % - % - % - % - % - % - % - % - % - %
Depreciation (% of sales) - % - % - % - % - % - % - % - % - % - % - % - % - % - % - %
Amortization (% of sales) - % - % - % - % - % - % - % - % - % - % - % - % - % - % - %
Interest Income - % - % - % - % - % - % - % - % - % - % - %
Tax Rate 37.0% 37.0% 37.0% 37.0% 37.0% 37.0% 37.0% 37.0% 37.0% 37.0%
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COGS
The essential factor of return is the cost cutting strategy.
For COGS cutting strategy, we propose 4 action:
Stop all the manufacturing facilities outside of America.
Transfer the shipping cost to our retailers.
Switching to cheaper materials to manufacture headphones (such as switching
materials from metal to plastic)
Shift our sales mix to higher margin products by simplifying our product line.
SG&A
For my assumption, the SG&A will stay roughly the same for the rest of the year. As per 2015 10-
K, “The Company reduced spending on the development of the STRIVA product line resulting in a
decrease of approximately $941,000 for the fiscal year ended June 30, 2015 . Legal fees and
outside service fees declined by approximately $425,000 due to changes in the scope of work as
well as price discounts. The 401(k) match was lower by approximately $340,000 resulting from a
reduced match percentage during the fiscal year ended June 30, 2015. Endorsement fees
decreased by approximately $180,000. The Company did not participate in the Consumer
Electronics Show (CES) in fiscal 2015 which reduced expenses by approximately $167,000. The
sales office in Switzerland was closed in fiscal year 2014, and fiscal year 2015 expenses were lower
by approximately $131,000. Sales for Europe are now supported from an office in Ireland. Sales
for Asia and Latin America are supported by U.S.-based personnel.”
As we can see above, those are one-time reduction. However, by taking KOSS private, we can save
the cost of staying in public. The average annual cost of staying public (filling to SEC, etc.) is 1.5
million. That reduce the SG&A of pro-forma B/S 2016 to 25%. And we assume it stays the same
for the following years. For balance sheet assumption, we assume the situation will stay the same
as what it already is.
Capital Expenditure
We assume the CAPEX injecting will be 1.6% of sales and will be used to purchase machinery for
increasing headphone production.
Debt Schedule
Base case is to borrow $10 million revolving credit loan, ideally at the previous revolving rate that
KOSS has been using (300 bp plus LIBOR) and will use extra cash to pay down debt.
Entry and Exit Multiple
Entry Multiple as calculated in the model is 7.9x
In base case, we simply match the exit multiple with entry multiple.
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Sponsor Case
The idea is increase our advertisement expense in order to increase our revenue growth. The
advertisement expense will occur in the following 3 years, and will resume to current levels.
Year 5 IRR for this case is 28%.
Revenue
We chose the highest growth rate within the last 10 years. With the following 3 years’
advertisement expense, we expect the revenue will grow at 6% for the same time period. And will
affect the next year, after it, the revenue will go back to a normal rate.
COGS and SG&A
COGS forecast is the same as base case.
Advertisement expense and design improvement (R&D expense) will be recorded in the SG&A, we
intend to increase these two from $0.15 million (roughly 0.62%) to 1$ million for 2017, $1.5 million
for 2018 and $2 million for 2019. And it will return to normal rate.
Capital Expenditure
As the revenue growth comes from the advertisement expense which is recorded in SG&A, the
capex will stay the same as base case. The rest of the assumption stays the same.
Returns Analysis
Projection Period
Pro forma Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026
Entry EBITDA Multiple 7.9x
Initial Equity Investment $14.5
EBITDA $2.6 $3.4 $4.1 $5.0 $6.1 $6.4 $6.7 $6.9 $7.2 $7.5
Exit EBITDA Multiple 7.9x
Enterprise Value at Exit $20.9 $26.6 $32.9 $39.5 $48.7 $50.7 $52.7 $54.8 $57.0 $59.3
Less: Net Debt
Revolving Credit Facility $7.4 $6.3 $4.6 $2.4 - - - - - -
Term Loan A - - - - - - - - - -
Term Loan B - - - - - - - - - -
Term Loan C - - - - - - - - - -
Existing Term Loan - - - - - - - - - -
2nd Lien - - - - - - - - - -
Senior Notes - - - - - - - - - -
Senior Subordinated Notes - - - - - - - - - -
Other Debt - - - - - - - - - -
Total Debt $7.4 $6.3 $4.6 $2.4 - - - - - -
Less: Cash and Cash Equivalents - - - - 0.9 3.9 7.0 10.3 13.7 17.2
Net Debt $7.4 $6.3 $4.6 $2.4 ($0.9) ($3.9) ($7.0) ($10.3) ($13.7) ($17.2)
Equity Value at Exit $13.5 $20.3 $28.3 $37.1 $49.6 $54.6 $59.7 $65.1 $70.7 $76.5
Cash Return 0.9x 1.4x 2.0x 2.6x 3.4x 3.8x 4.1x 4.5x 4.9x 5.3x
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
2017 2018 2019 2020 2021 2022 2023 2024 2025 2026
Initial Equity Investment ($14.5) ($14.5) ($14.5) ($14.5) ($14.5) ($14.5) ($14.5) ($14.5) ($14.5) ($14.5)
Equity Proceeds $13.5 - - - - - - - - -
$20.3 - - - - - - - -
$28.3 - - - - - - -
$37.1 - - - - - -
$49.6 - - - - -
$54.6 - - - -
$59.7 - - -
$65.1 - -
$70.7 -
$76.5
IRR (6.5%) 18.6% 25.0% 26.6% 27.9% 24.8% 22.5% 20.7% 19.3% 18.1%
18. 18 | P a g e
Sponsor Case 2
For Sponsor case 2, the idea is to reduce SG&A and COGS together.
All the assumption stays the same. Except for SG&A will achieve a lower percentage of 21% and
stay the same for the rest of the years. IRR = 31% (year 5)
Returns Analysis
Projection Period
Pro forma Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026
Entry EBITDA Multiple 7.9x
Initial Equity Investment $14.5
EBITDA $2.8 $3.6 $4.5 $5.4 $6.6 $6.7 $6.9 $7.0 $7.1 $7.3
Exit EBITDA Multiple 7.9x
Enterprise Value at Exit $22.1 $28.7 $35.6 $42.7 $52.3 $53.3 $54.4 $55.5 $56.6 $57.7
Less: Net Debt
Revolving Credit Facility $7.0 $5.3 $3.0 $0.2 - - - - - -
Term Loan A - - - - - - - - - -
Term Loan B - - - - - - - - - -
Term Loan C - - - - - - - - - -
Existing Term Loan - - - - - - - - - -
2nd Lien - - - - - - - - - -
Senior Notes - - - - - - - - - -
Senior Subordinated Notes - - - - - - - - - -
Other Debt - - - - - - - - - -
Total Debt $7.0 $5.3 $3.0 $0.2 - - - - - -
Less: Cash and Cash Equivalents - - - - 3.6 7.1 10.7 14.4 18.1 21.9
Net Debt $7.0 $5.3 $3.0 $0.2 ($3.6) ($7.1) ($10.7) ($14.4) ($18.1) ($21.9)
Equity Value at Exit $15.2 $23.4 $32.6 $42.5 $55.9 $60.4 $65.1 $69.8 $74.7 $79.6
Cash Return 1.0x 1.6x 2.3x 2.9x 3.9x 4.2x 4.5x 4.8x 5.2x 5.5x
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
2017 2018 2019 2020 2021 2022 2023 2024 2025 2026
Initial Equity Investment ($14.5) ($14.5) ($14.5) ($14.5) ($14.5) ($14.5) ($14.5) ($14.5) ($14.5) ($14.5)
Equity Proceeds $15.2 - - - - - - - - -
$23.4 - - - - - - - -
$32.6 - - - - - - -
$42.5 - - - - - -
$55.9 - - - - -
$60.4 - - - -
$65.1 - - -
$69.8 - -
$74.7 -
$79.6
IRR 5.0% 27.3% 31.1% 31.0% 31.0% 26.9% 24.0% 21.8% 20.0% 18.6%
Sales (% YoY growth) NA (33.3%) 1.6% NA 2.7% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%
Cost of Goods Sold (% margin) 62.5% 90.2% 65.1% 65.3% 64.2% 64.0% 62.0% 60.0% 58.0% 55.0% 55.0% 55.0% 55.0% 55.0% 55.0%
SG&A (% sales) 33.3% 39.6% 32.6% 31.2% 24.5% 25.0% 24.0% 23.0% 22.0% 21.0% 21.0% 21.0% 21.0% 21.0% 21.0%
Other Expense / (Income) (% of sales) - % - % - % - % - % - % - % - % - % - % - % - % - % - % - %
Depreciation (% of sales) - % - % - % - % - % - % - % - % - % - % - % - % - % - % - %
Amortization (% of sales) - % - % - % - % - % - % - % - % - % - % - % - % - % - % - %
Interest Income - % - % - % - % - % - % - % - % - % - % - %
Tax Rate 37.0% 37.0% 37.0% 37.0% 37.0% 37.0% 37.0% 37.0% 37.0% 37.0%
19. 19 | P a g e
Downside Case
For downside case, all assumptions stays the same as they were in 2016 resulting in year 5 IRR of
4.1%
Returns Analysis
Projection Period
Pro forma Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026
Entry EBITDA Multiple 7.9x
Initial Equity Investment $14.5
EBITDA $2.5 $2.6 $2.6 $2.7 $2.7 $2.7 $2.8 $2.8 $2.9 $2.9
Exit EBITDA Multiple 7.9x
Enterprise Value at Exit $20.0 $20.4 $20.7 $21.0 $21.4 $21.7 $22.0 $22.4 $22.8 $23.1
Less: Net Debt
Revolving Credit Facility $7.1 $6.3 $5.4 $4.6 $3.6 $2.7 $1.7 $0.6 - -
Term Loan A - - - - - - - - - -
Term Loan B - - - - - - - - - -
Term Loan C - - - - - - - - - -
Existing Term Loan - - - - - - - - - -
2nd Lien - - - - - - - - - -
Senior Notes - - - - - - - - - -
Senior Subordinated Notes - - - - - - - - - -
Other Debt - - - - - - - - - -
Total Debt $7.1 $6.3 $5.4 $4.6 $3.6 $2.7 $1.7 $0.6 - -
Less: Cash and Cash Equivalents - - - - - - - - 0.4 1.6
Net Debt $7.1 $6.3 $5.4 $4.6 $3.6 $2.7 $1.7 $0.6 ($0.4) ($1.6)
Equity Value at Exit $13.0 $14.1 $15.2 $16.5 $17.7 $19.0 $20.4 $21.8 $23.2 $24.7
Cash Return 0.9x 1.0x 1.1x 1.1x 1.2x 1.3x 1.4x 1.5x 1.6x 1.7x
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
2017 2018 2019 2020 2021 2022 2023 2024 2025 2026
Initial Equity Investment ($14.5) ($14.5) ($14.5) ($14.5) ($14.5) ($14.5) ($14.5) ($14.5) ($14.5) ($14.5)
Equity Proceeds $13.0 - - - - - - - - -
$14.1 - - - - - - - -
$15.2 - - - - - - -
$16.5 - - - - - -
$17.7 - - - - -
$19.0 - - - -
$20.4 - - -
$21.8 - -
$23.2 -
$24.7
IRR (10.4%) (1.3%) 1.8% 3.3% 4.1% 4.7% 5.0% 5.2% 5.4% 5.5%
Sales (% YoY growth) NA (33.3%) 1.6% NA 2.7% 1.6% 1.6% 1.6% 1.6% 1.6% 1.6% 1.6% 1.6% 1.6% 1.6%
Cost of Goods Sold (% margin) 62.5% 90.2% 65.1% 65.3% 64.2% 64.0% 64.0% 64.0% 64.0% 64.0% 64.0% 64.0% 64.0% 64.0% 64.0%
SG&A (% sales) 33.3% 39.6% 32.6% 31.2% 24.5% 26.0% 26.0% 26.0% 26.0% 26.0% 26.0% 26.0% 26.0% 26.0% 26.0%
Other Expense / (Income) (% of sales) - % - % - % - % - % - % - % - % - % - % - % - % - % - % - %
Depreciation (% of sales) - % - % - % - % - % - % - % - % - % - % - % - % - % - % - %
Amortization (% of sales) - % - % - % - % - % - % - % - % - % - % - % - % - % - % - %
Interest Income - % - % - % - % - % - % - % - % - % - % - %
Tax Rate 37.0% 37.0% 37.0% 37.0% 37.0% 37.0% 37.0% 37.0% 37.0% 37.0%
