Industry Trends

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Investment Bank for the Manufacturing Sector ℠

Electrical ProductsMarket UpdateFebruary 2018This report provides an overview of trends in the electricalproducts industry and highlights developments in theelectric motor market and its applications in the

automotive and aircraft industries.

The InterOcean Electrical Products Indexunderperformed the overall equity markets in thefourth quarter of 2017. The Index, which iscomprised of a representative group of 24 publiclytraded manufacturing companies that are importantparticipants in the electrical products market, rose4.5% while the S&P 500 rose 6.1%. However, for theentire year of 2017, the IOA Electrical Products Indexgrew more than the S&P 500, with increases of22.0% and 18.4%, respectively. Valuation multiplesfor the Index rose from 12.2x EBITDA at year end2016 to 13.9x at year end 2017. The median EBITDAmargin for the Index, which measures operatingprofitability, was down from its recent peak in Q32016, but it has consistently remained above 2015levels.

The U.S. electrical products manufacturing industryhas combined annual revenue in excess of $125billion (First Research). It is a fragmented market,comprising about 5,700 entities (including single-

location companies and units of multi-locationcompanies). Geographically, the largest suppliers ofelectrical products are China, France, Germany,Japan, South Korea and the U.S. Electrical productdemand primarily originates in North America andEurope, but emerging market demand is growing, asa result of industrialization and urbanization.

The growth in the digitization and interconnectivityof durable goods – from appliances and capitalequipment to automobiles and aircraft – is expectedto increasingly drive demand for electronics andelectrical products that enable and support thesetechnologies. For example, as electrical content invehicles increases, compact and lightweight wiringsystems that occupy less space and connect everycomponent will be in high demand. The globalelectric vehicle wire harness market is expected togrow at a projected 46% CAGR between 2017 and2021 (Technavio).

IOA Electrical Products Index vs. S&P500

Source: S&P Capital IQ and InterOcean Advisors; data as of 12/31/2017 Source: S&P Capital IQ and InterOcean Advisors

IOA Electrical Products Index Median EBITDA Margin

95

100

105

110

115

120

125

Jan-2017 Apr-2017 Jul-2017 Oct-2017

IOA Electr ical Products Index S&P500

13.0%

13.5%

14.0%

14.5%

15.0%

15.5%

Industry Drivers

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The electrical products industry generally tracks U.S.economic cycles. Growth is largely influenced bydemand from two industries: construction andgeneral manufacturing. Capital spending growth andthe recent corporate and personal income tax ratedecreases point to renewed strength in the market.

As building construction increases, demand forelectrical products typically rises. Current indicatorspresent mixed signals for the industry. Seasonallyadjusted, housing starts remained strong in 2017,rising 2.5% over 2016 levels. However, industrialconstruction starts (which include manufacturing andwarehouse facilities) are expected to decline 5.6% in2018 after a 22.8% increase in 2017. Commercialconstruction spending is expected to increaseapproximately 4.0% in 2018, less than half thegrowth in 2017.

Demand for electrical equipment is also influencedby industrial production and consumption ofelectrical power. As manufacturing activity increases,production lines expand and demand for electricalproducts increases. The Purchasing Managers Index,which casts light on the economic health of themanufacturing sector, has been trending upwardsince January 2016, remaining above 50 (thethreshold indicating manufacturing expansion) sinceAugust 2016. Durable goods orders, comprisingexpensive items with a life of at least three years,have been somewhat volatile over the short termbut have experienced a longer term upwardtrajectory since mid-2016. Capacity utilization, whichgrows when demand is strong, is currently at itshighest level since September 2015.

Purchasing Managers Index

Source: Institute for Supply Management

Housing Starts, seasonally adjusted (in thousands)

Source: U.S. Census Bureau

One of the most rapidly changing subsectors of theelectrical products market is electric motors, drivenby technological advancements and increaseddemand for energy efficiency. The electric motor’sfavorable characteristics of high endurance, lowmaintenance, low energy consumption and longeroperating life have and will continue to contribute toits increasing usage in equipment, appliances andvehicles throughout the world. IHS Markit estimatedthat 39.8 million electric motors were shipped in2017, with ABB, Siemens and WEG as the top threeglobal suppliers. Over the next few years, thesubsector is expected to achieve increased growthrates.

Use of electric motors in automobiles is wellestablished and growing. Improved performance andshrinking cost will continue to enhance the overallvalue proposition of electric vehicles, making themfully competitive with internal combustion enginevehicles within two to three years. These advancesare based on improvements in the efficiency andprice of energy storage, fewer moving parts withlonger life expectancies, greater power efficiency ofelectricity over that of fossil fuel, and growing use ofsolar and wind by electric utilities. Further, theintroduction of autonomous vehicles has spurredgrowth opportunities for automotive electricalproducts, in general, and electric motors inparticular.

Electric Motor Market (Automotive)

35

40

45

50

55

60

65

2013 2014 2015 2016 2017

800

900

1,000

1,100

1,200

1,300

1,400

2013 2014 2015 2016 2017

Electric Motor Market (Aircraft)

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In addition, applications for electric motors in theaviation market are gaining traction. With thegrowth in air travel, airlines have added routes andincreased flight frequency, requiring an increase infleet size. Operators are directing efforts to increasemargins and reduce operating costs, particularlythrough the application of new electric technologiesinto their aircraft systems. Over the period 2017 to2022, the aircraft electrical systems market isprojected to grow at a CAGR of 6.45% (ReportLinker).

The weight associated with batteries presents asignificant challenge to adoption of electric aviation.Currently, fossil fuels generate about 100 times asmuch energy as a lithium-ion battery. As such, due totheir low power-to-weight ratio, the most feasiblenear-term, gas-free aviation product would be oneand two-seater training craft. Many experts agreethat small, regional electric airplanes are a fewdecades away from reality. A more realistic scenario,estimated for commercial launch in 2030,contemplates a hybrid-electric aircraft that uses

today’s battery technology to provide power forspecific phases of the flight.

The industry is taking short-term steps toincorporate more electric energy into non-propulsion areas of airplanes to reduce operatingcosts and achieve a quieter operationalenvironment. The industry is increasingly usingelectric systems in aircraft actuators and taxiingsystems. Actuators are used in many airplaneoperations including landing gear, flight control andwheel brakes. Currently, hydraulic actuatorsdominate the market, but there has been a shifttoward electric actuators, which have benefited fromtechnological advancements by providing increasedpower density, superior performance, reducedweight and reduced cost. For its aircraft taxiingsystem, pilots conventionally use auxiliary powerunits (APUs), which are mainly unused back-uppower during flight. Converting to an electric taxiingsystem would allow zero fuel consumption andremove the in-flight dead weight of the APU.

Select Electric Aircraft Initiatives

› In November 2017, Siemens, Airbus and Rolls-Royce announced a joint initiative to build and test a hybrid-electricpropulsion system in a demo version of a 100-seat regional airliner

‒ The project contemplates initially replacing one of the plane’s four jet turbines with a 2-megawatt electricpropulsion system, with first flight in 2020

‒ If successful, a second engine could be swapped out for an electric motor

› Seattle-based startup Zunum Aero, supported by Boeing and JetBlue Technology Ventures, are planning a hybrid-electric 12-seater plane able to fly up to a regional-route distance of 700 miles, with initial test flights planned for2019

› UK airline EasyJet has formed a partnership with U.S.-based Wright Electric, which is developing a battery-propelled aircraft for flights under two hours

‒ The aircraft is envisioned for short-haul European routes under 335 miles: from London to Paris andAmsterdam, and Edinburgh to Bristol

‒ The partners anticipate a fully-electric commercial aircraft in the next decade

› Eviation Aircraft, an Israeli startup, has developed a 9-passenger, self-piloted, all-electric aircraft to fly in the 100-600 mile range, with the first flight planned for late 2018

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M&A Activity and ValuationsThe electrical products industry has seen robustmerger and acquisition activity in the past 12months, influenced by strong economicfundamentals and increased valuation multiples:

• Strength in the public equity markets, with thelargest strategic buyers enjoying high valuationmultiples

• Renewed investor interest in the manufacturingsector

• A fragmented electric equipment market• Financial buyers with plenty of cash• Positive lending environment characterized by

low interest rates and flexible debt structures

Median Enterprise Value/LTM EBITDA MultiplesFor IOA Electrical Products Index

Select Recent Electrical Products M&A TransactionsClosed Date Acquirer Name Target Name Target Description

Dec-17 OMV AG SMATRICS GmbH & Co KG Provides charging stations for electric cars

Nov-17 Discover Energy Corp. Discover MIXTECH Manufacturing CO., LTD.

Manufactures automotive and commercial batteries

Nov-17 EVE Energy Co., Ltd. Wuhan Fanso Technology Co., Ltd.

Manufactures lithium primary batteries

Oct-17 EnerNOC, Inc. Electric Motor Werks, Inc. Manufactures charging solutions for electric vehicles

Oct-17 CMR GmbH Rofin-Sinar UK Ltd Manufactures sealed carbon dioxide lasers and powersupply components for marking applications and processing

Oct-17 Schneider Electric S.E. ASCO Power Technologies Provides emergency and standby power transfer solutions

Aug-17 Ishikawa Seisakusho, Ltd.

Kanto Aircraft Instrument Co., Ltd.

Manufactures electrical equipment for aircraft, flyingobject, ocean vessel, and special-mission vehicles

Jul-17 Nidec Corporation LGB ELETTROPOMPE S.r.l. Manufactures pumps and motors

May-17 High Road Capital Partners

Storage Battery Systems, LLC

Manufactures and markets direct current products andservices

May-17 Legrand SA BORRI S.p.A. Manufactures electric equipment for industrial markets

Apr-17 Beijing PhilisenseElectronic Technology

Suzhou TianyidaTechnology Co., Ltd.

Manufactures electrical equipment

Mar-17 Genstar Capital, LLC Power Products, LLC Manufactures diversified electrical products

Jan-17 Knorr-Bremse Systemefur Schienenfahrzeuge

Vossloh Kiepe GmbH Manufactures electrical equipment for monitoring andcontrolling conveyor systems and bucket elevators

Jan-17 Stontronics Ltd. Cable Power Ltd. Manufactures and distributes electrical products

Jan-17 Schneider Electric S.E. Luminous Power Technologies Limited

Provides packaged power, diversified generation, electricalcontrol, and safety and energy optimization solutions

Source: S&P Capital IQ and InterOcean Advisors

11.8x11.2x

12.2x

13.9x

0.0x

2.0x

4.0x

6.0x

8.0x

10.0x

12.0x

14.0x

16.0x

Dec-2014 Dec-2015 Dec-2016 Dec-2017

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Middle Market Investment BankInterOcean is one of North America’s leading specialty investment banks focused on serving the manufacturing sector.InterOcean advises corporations, private business owners, private equity groups and management teams, offering thefollowing services:

To learn more about InterOcean, please visit our website at: www.ioadvisors.com

▪ Mergers & Acquisitions▪ Sale / Divestiture Advisory

▪ Private Capital Sourcing (Debt and Equity)▪ Financial Advisory

InterOcean is dedicated to providing solutions for the aerospace & defense, automotive, building products, capitalequipment, distribution & business services, electrical products, flow control, metals and plastics & packaging segmentsof the economy. Our deep experience in these industries facilitates the identification of important industry and markettrends, a company’s key value drivers and qualified buyers, lenders and investors, thereby improving the likelihood of atransaction closing at a premium value and on a timely basis.

InterOcean is the sole U.S. member of the TerraCorporate Finance Alliance, a growinginternational alliance of investment banks withoperations in North America, South America,Europe, the Middle East, Africa and Asia.Through this network, InterOcean has aplatform for offering enhanced identification of,and access to, potential transaction partiesaround the globe. Collectively, over the pastfew years, the Terra network has advised onmore than 200 M&A transactions with a totalvalue in excess of USD $10 billion.

InterOcean Advisors LLC

www.terra-alliance.com

William Doepke *Managing Directorwdoepke@ioadvisors.com+1 312 698 6906

Nicholas Newlin *Managing Directornnewlin@ioadvisors.com+1 312 698 6918

Robert Wujtowicz *Managing Directorrwujtowicz@ioadvisors.com+1 312 698 6904

Mark Harvey *Managing Directormharvey@ioadvisors.com+1 312 698 6915

Manufacturing Sector Focus

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Executive Team

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