MHS Holdings, Inc. An ESOP Success Story September 21, 2017 Presented by: Brian Johnson, CFO, MHS Holdings, Inc. Kyle Wishing, Material Handling Systems
Presentation Overview Introduction Overview of MHS Discuss Business Timeline of Key Events ESOP Installation Restructuring Sale/Termination Observations 1
Kyle Wishing, CFA Kyle Wishing is a manager with. Kyle performs the following types of valuation and economic analysis assignments: merger and acquisition, business and stock, forensic analysis, transfer pricing, estate tax, intellectual property, marital dissolution, lost profits/economic damages, and appraisal reviews. Kyle prepares these valuation and economic analyses for the following purposes: taxation planning and compliance (federal income, gift, and estate tax; state and local property tax; international transfer tax), forensic analysis and dispute resolution, and strategic information and corporate planning, ESOP transaction and financing, and ESOP-related litigation. He performs these analyses for the following types of business entities and securities: closely held corporation business enterprises, closely held corporation noncontrolling ownership interests, various classes of common/preferred stock, general and limited partnership interests, professional service corporations, professional practices, and LLCs. PREVIOUS EXPERIENCE Prior to joining, Kyle was a valuation consultant at Crosslin & Associates, PC, in Nashville, Tennessee. Kyle worked in the valuation and litigation support division, primarily valuing companies for gift and estate purposes. On the litigation support side, Kyle worked with a Fortune 500 company to uncover fraud damages. He also worked in health care consulting, assisting management with improving billing and collections procedures and exposing other financial deficiencies. EDUCATION Bachelor of Business Administration, business finance, Middle Tennessee State University PROFESSIONAL AFFILIATIONS Kyle holds the chartered financial analyst ( CFA ) charter of the CFA Institute. Kyle serves as an executive committee member of the New South chapter of the ESOP Association. Kyle is also a member of the CFA Institute, the Atlanta Society of Finance and Investment Professionals ( ASFIP ), and the National Center for Employee Ownership ( NCEO ), and the Turnaround Management Association ( TMA ). 2
Brian Johnson Brian is the chief financial officer of Material Handling Systems, Inc. Brian is originally from Southern Indiana and earned his Bachelors of Science from Indiana University. Upon graduation, he began his career in public accounting as an associate at PricewaterhouseCoopers, LLP in their Louisville, KY office. Upon leaving public accounting, he held various accounting and finance roles at Churchill Downs, Inc., Wal-Mart Stores, Inc. and Brown-Forman, Inc., prior to joining Material Handling Systems, Inc. (MHS) as the company s first CFO in 2012. During his tenure at MHS, annual sales have grown 10 times 2011 levels. Headcount has risen 4 times from that level. Much of this was aided by the convergence of automation technology and the rapid growth in e-commerce. MHS prides itself on being the vendor of choice for its industry by providing cutting edge solutions to its core customer group, which includes the likes of logistics companies such as Federal Express, UPS and DHL along with e-commerce giant Amazon. In early 2017, Brian led MHS through an acquisition by private equity firm Thomas H. Lee Partners (THL). Selling an ESOP company is a complex process, but one that has proven to be very beneficial to both the employee-owners as well as the company. The financial and human capital backing that THL brings to MHS will allow the company to continue along, and even accelerate, its growth curve while maintaining its position as vendor of choice in the parcel industry. 3
MHS Business Overview Founded in 1999 and headquartered in Louisville, Kentucky, MHS is recognized as one of the leading automated courier sortation systems integrators in North America. MHS provides a full range of capabilities for courier sortation facilities. These services include systems design and engineering, project management, equipment manufacturing, equipment installation, software and controls, and research and development. Customers include: FedEx Ground UPS DHL Amazon 4
Founders leave Northrop to make MHS a stand-alone systems integrator 2002 MHS is founded as a labor provider to support systems integration projects at Northrop Grumman 1999 Santa Rosa Systems (SRS) is founded to provide manufacturing support on MHS projects 2004 ESOP acquires MHS from the founders 2008 MHS Canada is founded 2009 Brian Johnson joins MHS as the company's first CFO 2012 MHS is reorganized into a holding company structure 2009 Seller debt is restructured 2010 MHS begins work for Amazon 2014 MHS competitor 1 is acquired 2016 MHS engages investment banker to begin sale/marketing process 2016 MHS competitor 2 is acquired 2017 PE firm acquires MHS; ESOP is wound down 2017 1999 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2018 Today 5
ESOP Installation Three founders with one-third interests Company status ESOP acquired 100 percent of the MHS stock in July 2008 Motivation Issues that needed to be addressed Alternatives Why an ESOP? Structure Seller debt Warrants 25-year loan between ESOP and the company 6
MHS Performance ESOP Installation to Restructuring Historical MVIC (2008-11) 30% 20% 10% 0% -10% -20% -30% -40% -50% -60% -70% Q3-08 Q4-08 Q4-09 Q4-10 Q4-11 250% Historical EBITDA and Revenue (2008-11) 200% 150% 100% 50% 0% Q2-08 Q4-08 Q4-09 Q4-10 Q4-11 EBITDA Revenue 7
MHS Restructuring Great Recession Corporate Restructuring in 2009 Seller Debt Restructuring in 2010 o Exchanged notes with a 6 percent interest rate for: Notes with approximately 1/3 of the outstanding principal balance carrying 4 percent interest over a longer term Warrants that vested in 5 tranches based on various EBIT targets 8
MHS Performance Restructuring to Sale Discussions 300% Historical MVIC (2010-15) 250% 200% 150% 100% 50% 0% -50% -100% Q4-10 Q4-11 Q4-12 Q4-13 Q4-14 Q4-15 Historical EBITDA and Revenue (2010-15) 800% 700% 600% 500% 400% 300% 200% 100% 0% Q4-10 Q4-11 Q4-12 Q4-13 Q4-14 Q4-15 EBITDA Revenue 9
MHS Sale Transaction Sale Process Motivation Trustee Selecting an investment banker Setting up the plan for the sale transaction How was the buyer selected? o Synergies? o Best deal vs. getting a deal done o Educating the acquirer Valuation/fiduciary/administrative issues Post-transaction/plan termination What happens to the money and the ESOP Converting a plan to another qualified retirement plan 10
MHS Performance During the Life of the ESOP Historical MVIC (2008-17) 1800% 1600% 1400% 1200% 1000% 800% 600% 400% 200% 0% -200% Q3-08 Q4-08 Q4-09 Q4-10 Q4-11 Q4-12 Q4-13 Q4-14 Q4-15 Q2-17 Historical EBITDA and Revenue (2008-17) 1000% 900% 800% 700% 600% 500% 400% 300% 200% 100% 0% Q2-08 Q4-08 Q4-09 Q4-10 Q4-11 Q4-12 Q4-13 Q4-14 Q4-15 Q4-16 Q2-17 EBITDA Revenue 11
MHS as an ESOP Company Lessons Learned Best Practices Observations How did the ESOP structure affect the business? o Growth o Talent acquisition o Talent retention o Culture o Client interaction Did the ESOP structure (1) accomplish its intended purpose and (2) support the overall goals of the company? 12