•

•

•

•

•

•

•

•

$4,368

$1,563

$4,833

$7,049 $6,818

$10,631

$4,032

77

115 119 114

158

213

117

0

50

100

150

200

250

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

2010 2011 2012 2013 2014 2015 2016 YTD

75, 64%

31, 27%

11, 9%

Strategic Add-On Sponsor-Owned Strategic Add-On Platform Investment

25 25

12

109

87

4 4 4 43

2

Building

Products

Broadline

Industrial

Flu id Power /

ProcessControl

Auto /

Transportation

Electric &

Wiring

Power

Transmission

Safe ty JanSan /

Foodservice

Chemicals Lubricants Packaged

Gas / Welding

Packag ing Miscellaneous

/ Specia lty

Current M&A Market Perspectives for DistributorsThe current environment for middle-market distribution M&A remains strong

[1] Includes transactions with both disclosed and undisclosed multiples (2011 depressed value due to a high number of transactions with undisclosed data); YTD as of August 2016 (multiple not illustrated due to high

number of transactions with undisclosed data)

Distribution M&A Activity [1]

Valuations remain at or near all-time highs

Financing markets have improved significantly since a slowdown in 4Q

2015 and 1Q 2016

Premium assets trading for high multiples with compressed deal

timelines and favorable contract terms

Transaction Value Transaction Volume

($ in millions, volume actuals)

8.4x 7.9x 9.3x 8.7x 9.4x 10.4xEV / EBITDA

Multiple

M&A Market Sentiment M&A Activity Summary

Uninvested private equity capital at peak levels

YTD August 2016 Distribution M&A Activity by Type

YTD August 2016 Distribution M&A Activity by Sector

Increase in independent, privately-held businesses evaluating sale or

private equity partnership transactions (number of transactions)

Key Value Drivers for Industrial Distribution M&AFinancial partners are paying increasingly more attention to (and higher valuation multiples for) companies exhibiting

many of the key value drivers that are applicable to industrial distributors

Reasons for Sponsor

Interest in Distribution

Countercyclical working

capital / free cash flow

Key Value Drivers Attractive to Sponsors

High industry

fragmentation

Multi-pronged growth

strategies

Highly scalable

business models

Experienced

management teams

Minimal risk of import

competition

Leadership position in specific product categories and/or distribution model

Demonstrable, tangible value proposition for customers and suppliers

Diversity of end-market, geography, customers, suppliers

Robust line card consisting of leading brands; private label often a plus

Meaningful MRO / aftermarket content

Aftermarket services / support capability

Multi-channel capability field, catalog, tele, e-commerce, etc.

Minimal exposure to commodity price volatility (i.e., lack of inventory de-valuation risk)

Organic and acquisition growth story (fragmented industry)

Highly scalable business model

Strong free cash flow performance through downcycles

Company size caters to a broad cross-section of prospective buyers

Operating performance metrics at higher end of comparables same day / next day delivery, fill rates,

customer wallet share, supplier product share, purchasing power, national account penetration, etc.

Financial metrics at higher end of comparables growth, margins, inventory turns, ROIC/RONA, etc.

Strong systems CRM / MIS, customer interface, established e-commerce platform, etc.

Highly experienced management team

(30%)

(20%)

(10%)

0%

10%

20%

30%

(3.0%)

(2.0%)

(1.0%)

0.0%

1.0%

2.0%

3.0%

2Q '14 3Q '14 4Q '14 1Q '15 2Q '15 3Q '15 4Q '15 1Q '16 2Q '16

Qo

Q %

Ch

ang

e in F

ree Cash

Flo

wQ

oQ

% C

han

ge

in R

even

ue

Free Cash Flow Revenue

(60%)

(40%)

(20%)

0%

20%

40%

60%

(60%)

(40%)

(20%)

0%

20%

40%

60%

2Q '10 2Q '11 2Q '12 2Q '13 2Q '14 2Q '15 2Q '16

% C

han

ge in

Free C

ash F

low

% C

han

ge

in R

even

ue

Free Cash Flow Revenue

Distribution Free Cash Flow Dynamics

Source: SEC Filings, Capital IQ

Note: Analysis based on broad industrial distribution group comprised of AIT, AXE, DXPE, ESND, FAST, GPC, GWW, KAMN, MSM, MRC, PKOH, WSO and WCC (excludes HDS and DNOW due to limited data available prior to IPO); [1] Free Cash Flow =

Cash Flow from Operations – Capex

Revenue vs. Free Cash Flow Analysis (QoQ Change in Revenue and Free Cash Flow) [1]

As sales have started to decline, distributors begin to destock existing inventory

Revenue vs. Free Cash Flow Analysis (Indexed to 2Q 2010 Revenue and Free Cash Flow) [1]

Strong free cash

flow generated

during period of

depressed

revenue

Executive Commentary: M&A Remains a Core Focus

With a robust M&A, pipeline, we will stay active

in extending our business reach and expanding

Applied's capabilities to serve industrial

customers in our geographic markets.

Neil Schrimsher (CEO)

August 12, 2016

”

…to do some acquisitions that create value and

expand our capabilities or expand our footprint,

whether that be in the JanSan space or the office

products space or automotive or industrial...I

expect you’ll see us take some of those

opportunities.

Earl Shanks (CFO)

July 21, 2016

”

“ “

…we will continue to seek additional acquisition

opportunities across all of our distribution

businesses to further enhance our prospects for

future growth. We’ll continue to target those bolt-on

acquisitions of companies with annual revenues in

the $25 million to $150 million range.

Carol Yancey (CFO)

July 19, 2016

”

…our posture over the several quarters on M&A

has been – were open. We’re looking, but we’re also

very selective. And I would say our posture is no

different than it has been.

Erik Gershwind (CEO)

July 06, 2016

”

“ “

We bought 12 companies even in this

downturn…And we’ll continue to be

acquisitive…we’re going to continue to be an

acquisition company, that’s in our DNA.

Dan Molinaro (CFO)

September 7, 2016

”

We’re doing acquisitions in conjunction with our

organic initiatives. It’s to increase our scale and

scope in all our served markets. As we do that, I

believe benefits accrued to the strongest players in

all markets clearly for distribution that’s true.

John Engel (CEO)

July 28, 2016

”

“ “

8.7x

9.2x

10

.4x

9.2x

6.6x

10

.9x

11.8

x

9.0x

8.1x

7.

5x

9.6x

8.0x

5.2x

8.

8x 9.

5x

5.6x

7.3x

13.8

x

8.5x

14.8

x 8.

5x 9.

2x

9.5x

9.0x

7.

0x

8.4x

7.1x

12.5

x

8.0x

7.1x

9.2x

7.5x

8.

9x

10.0

x

8.3x

7.7x

9.2x

10.0

x

9.7x

7.

9x

12.3

x

8.1x

11

.1x

10.9

x

9.4x

10

.9x

13.6

x

8.4x

8.8x

7.3x

7.4x

9.5x

10

.7x 11

.3x

6.7x

8.

7x

8.1x

11.7

x

7.0x

6.

2x

8.8x

10.0

x 8.

6x

10.9

x

10.6

x 11

.7x

14.4

x

10.5

x

10.0

x 11

.0x

11.4

x 13

.2x

7.8x

9.6x

11.2

x

7.9x

10.4

x

15.5

x 10

.5x

10.4

x 11.0

x

10.0

x 8.

9x

8.5x

A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

AA

AB

AC

AD

AE

AF

AG

AH AI

AJ

AK AL

AM AN

AO AP

AQ

AR

AS

AT

AU

AV

AW AX

AY

AZ

BA

BB

BC

BD

BE

BF

BG

BH BI

BJ

BK BL

BM BN

BO BP

BQ

BR

BS

BT

BU

BV

BW BX

BY

BZ

CA

CB

CC

CD

CE

CF

Strategic 9.2x

Sponsor 9.0x

2014 - 2016 YTD 10.4x

Overall 9.2x

Median

M&A Transaction ValuationsM&A valuation multiples are driven by a number of factors, including type of acquirer, transaction timing, transaction size and growth / margin / ROIC profile

Note: Acquirers who are owned by financial sponsors are considered to be Sponsor Acquirers

‘04

Strategic Acquirer Sponsor Acquirer

‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 ‘15 ’16

14

Anatomy of a Deal: Considerations for Business Owners

Evaluate Alternatives1

Preparation2

The Process3

Partner Selection and Structuring4

Post-Closing Considerations5

15

Evaluate Alternatives1

Successful business owners and operators have several strategic options available to them at any given point in time…

…and several factors can influence the decision to migrate from status quo

Status

Quo

Minority Equity or

Subordinated Debt

Partner with

Private Equity

Outright

Sale

Continue to operate ‘as is’ Expensive capital for growth

or shareholder liquidity

Monetize a portion of

ownership (>50%),

diversifying wealth and

aligning with a partner for your

next phase of growth

Sell 100% (or close to 100%)

of your business to a strategic

or financial buyer

Market-Related Business-Related Shareholder-Related

Are companies with my profile, in my

sector in favor?

Are today’s M&A and debt financing

markets attractive?

Would I benefit from aligning with a

partner to grow?

Is the industry consolidating and I

don’t want to be left behind?

Is a substantial portion of my wealth

invested in the business?

Would I or my fellow shareholders

benefit from liquidity?

What is my succession plan?

16

Preparation2

It is ideal to start the process to prepare for a recapitalization or a sale early, perhaps

a year or more in advance

Starting the process later makes it even more important to have qualified advisors

Plan Ahead

Corporate documentation and reports

Financials

Tax documents

Know your Company’s metrics

Calibrate your story

Get Organized

Attorney

Accountant

Investment Banker

Not a time to be penny wise and pound foolish

Pick Qualified

Advisors

17

PreparationRelevant Pre-Marketing Transaction Items Considerations

Finance &

Accounting

Consider quality of earnings report

– Adjust historical financials to eliminate unusual or non-recurring expense items

Develop projection model with detailed build-up (with and without acquisitions) validate / bridge

growth trajectory

– Revenue and margin analysis

– Product or service type / region / customer mix and related margins

Surprises that surface late in the process negatively impact value

Enables buyer analysis and increases credibility of the “growth story”

Operations

Formulate key positioning thesis / elements

Market analysis / sales pipeline / customer surveys, etc.

Develop measurable metrics for key operational items

Define historical cost savings / initiatives and future opportunities

Understand organic growth potential of the Company addressable market share, new customer

opportunities, tangible “wallet share” opportunities, expanding contracts with existing customers, etc.

Articulate acquisition opportunities process, status and potential synergy

Helps buyers better understand investment thesis

Provides support for management’s growth initiatives and plan

Supports growth success stories and strategic buyer synergy analysis

Positions additional growth-levers (aside from revenue opportunities)

Legal Diligence

& Tax

Considerations

Engage outside transaction counsel and initiate legal diligence

Complete draft of purchase agreement

Define preferred deal structure

Understand any unique tax considerations (e.g. 338(h)(10) election)

Explore potential Rep & Warranty insurance

Expedite purchase agreement negotiations

Proactively identify and define all relevant legal and tax issues

Optimize deal structure to maximize shareholder proceeds

Minimize ongoing liability exposure

Transaction

Diligence

Fully ‘scrub’ all internal documentation, removing any information that the Company isn’t willing to

provide

Complete organization and population of data room

Proactively compile all relevant documentation and data (financial, operations, legal, HR, etc.)

Allows buyers that want to expedite the process to move quickly

Corporate

Bandwidth

Need for organized internal corporate team for due diligence process

Early identification of any timing issues (union agreements, other corporate events, etc. that could

extend process)

Difficult to push buyer timing if seller is unable to fulfill diligence requests

High potential to extend timing

2

18

The ProcessBelow is a high-level example of a multi-phase process (subject to change based on the specific situation)

Organizational meeting;

preliminary banker due diligence

Determine list of potential

buyers, including “VIP” buyers

Prepare marketing materials

Finalize financials and model;

prepare supporting EBITDA

analysis, QofE and other third-

party work

Reach out to VIP and

international buyers prior to

broader marketing calls

Preview opportunity

Heightens market anticipation

Ensures proper buyer

attention

Situation Dependent

Phase I

Preparation / Pre-

Marketing

Phase II

Marketing and Buyer

Review

6 Weeks

Phase III

Mgmt. Presentations &

Due Diligence

Conduct MPs; provide limited data

room access following MPs

Facilitate initial financial and

commercial diligence

Refresh bids due; narrow the

field

Provide expanded data room

access; facilitate continued

diligence

Post draft Purchase Agreement

(“PA”) and working capital peg

Receive initial PA markups prior to

final bid date; begin negotiating

multiple PAs

Final bids (with committed

financing) and PA markups due

Stress completion of diligence

during this phase

8 – 10 Weeks

Phase IV

Negotiate and Sign

2 – 3 Weeks

Contact remaining strategic and

financial buyers; negotiate NDAs

Distribute Offering Materials

Discussions with potential

lenders

Begin drafting Management

Presentation (“MP”)

Prepare electronic data room

Banker conducts customized

“Fireside Chats” with select

VIP buyers

Indications of Interest due

Choose buyers to meet

management after diligencing

bids

Review final bids and PA

markups

Enhance finalist proposals

(economic items, terms)

Select winning party – any

exclusivity provided is

extremely limited

Execute PA; close shortly

thereafter

3

19

Partner Selection and Structuring

It is critical for your advisors to understand your goals, objectives and ultimate desires

4

Picking the Right Partner

Strategic vs. Financial?

Valuation vs. DNA Match?

Impact on employees, customers, suppliers, and other constituents?

How much control am I willing to give up (financial and operational)?

What is my succession plan?

How would the Company benefit from a well-capitalized partner?

20

Post-Closing ConsiderationsPerspectives from the trenches

5

Partnering with Private Equity?

Partnering with a Strategic Buyer?