2014-15 Annual Review

Reinvigorating an industry pioneer to recapture its historical market leadership position and drive margin improvement through product innovation and operational execution

Hussmann is a leading global manufacturer of refrigerated display merchandising equipment and refrigeration systems for a broad range of customer segments involved in food retailing. As a former non-core division of Ingersoll Rand (“IR”), Hussmann has significant opportunities to improve its operating and financial performance through a range of initiatives identified by CD&R and the management team. In addition, management believes the company is well positioned to capitalize on positive

secular market trends, including higher standards for energy efficiency and food safety, increased specialization of retail food displays and international and emerging market expansion.

IR chose CD&R as a partner in this transaction because of the Firm’s operating capabilities and successful track record with corporate carve-outs. CD&R Fund VIII’s preferred equity investment shares many of the key attributes that characterize the Firm’s partnership-oriented capital investments: senior equity in a low-leverage capital structure, a dividend-paying security, operational control and the ability to capture equity upside in the business through conversion to common equity.

With positive operating momentum, the company completed dividend recapitalizations in 2012 and 2014, which together with previously paid dividends, have returned approximately 95% of Fund VIII’s original investment. Fund VIII continues to own 57% of the company.

Company Profile

Hussmann is a leading global manufacturer of refrigerated display merchandising equipment and refrigeration systems for the retail food industry. Founded in 1906 in St. Louis, Missouri, Hussmann was a dominant industry leader for many decades leading to its acquisition by IR for $1.8 billion in 2000. IR subsequently integrated Hussmann into its Climate Solutions segment, but the benefits of integration did not materialize as expected. In 2011, Hussmann was sold to CD&R Fund VIII for $507 million.

Hussmann’s products include refrigerated display cases, centralized refrigeration systems, and related parts and accessories for a broad range of customer segments involved in food retailing. The company has long-standing relationships with 17 of the 20 largest food retailers in North America and operates seven manufacturing facilities and two warehouses in the United States, Mexico, Australia, New Zealand and China. Hussmann also operates 20 branches providing layout design work, installation and ongoing service and maintenance for refrigerated display and systems equipment in the United States.

CD&R Selected as a Preferred Partner

As a business that was ultimately deemed to be non-core to IR, Hussmann suffered from a number of issues related to product innovation and quality, delivery deficiencies, management talent losses and underinvestment in sales and customer relationships. As IR attempted to sell the business

through a formal auction process, CD&R quickly developed a view about the operational challenges facing the business. Fund VIII’s original bid for the business was not accepted. However, as the higher bidders began to understand the complicated nature of separating Hussmann from IR and the operational requirements necessary to execute the business plan, they began to renegotiate their proposals and eventually prompted IR to abandon those discussions. At that point, IR re-engaged with CD&R and proposed a partnership-oriented capital structure, similar to Fund VIII’s 2010 acquisition of Atkore from Tyco International. With the Atkore structure as a model, the CD&R deal team completed its diligence and subsequently consummated a transaction at CD&R’s original valuation proposal with the following terms:

• Fund VIII invested in a convertible preferred equity security with a 12% annual dividend rate paid quarterly;

• IR received upfront cash proceeds to redeploy to its share purchase program and deconsolidated Hussmann from its financials;
• Operational control of the business transferred to CD&R, with CD&R Operating Partner Jim Berges serving as Chairman and his former Emerson Electric colleague, Tom Bettcher, serving as an Operating Advisor; and
• IR retained a minority ownership stake through common equity.

Both the extensive industry experience of Operating Partner Jim Berges and CD&R’s reputation as a trusted partner with Tyco in a similarly structured investment were critical to the sourcing and negotiation of this transaction.

Value-Building Initiatives

CD&R and the Hussmann management team have identified several discrete initiatives to improve top-line growth, profitability and efficiency:

• Independent distribution sales focus. Pursuing relationships with independent distribution partners to expand geographic coverage and reach local and regional customers that do not purchase directly from OEMs.
• Manufacturing optimization. Successfully introduced two-tier wage system in Chino, CA facility to provide increased labor flexibility. Evaluating additional opportunities to optimize manufacturing and improve cost position.
• New products and technology. Redesigned key product line for Latin America to deliver greater energy efficiency, simplify production process and drive market

• share improvement. Evaluating and testing various innovative new technologies to deliver greater value to the customer and lead the industry in developing new features, capabilities and designs.
• Service branch profitability improvement. Established a new reporting and management structure for the service and installation branches that had been previously orphaned within IR. Rationalized underperforming locations and now leading system-wide quartiling effort that has achieved significant progress against a targeted 600+ basis point profitability improvement.
• Aftermarket business strategy. Opportunity to enhance aftermarket product and service offerings, including further penetration of high margin replacement door market. Implementing new go-to-market strategy and build-out of management structure and sales team, with a focus on sales of retrofit doors and lighting systems as well as energy audit services.

• General business improvement as a standalone entity. Completed IT separation from IR (Oracle system) in February 2015 (complete separation of other systems expected in 2015). Looking to drive SG&A and other cost efficiencies through optimization of the corporate organization.

Looking Forward

Management expects that the overall refrigeration equipment market will be driven by macroeconomic conditions and, to a lesser extent, specific customer remodel cycles. Hussmann redesigned a key product line for Latin America to deliver greater energy efficiency, simplify production processes and drive market share improvement that began shipping July 2014. The management team and employee base have rallied behind an internal drive to “Get It Back - And More,” referencing the overall goal to recapture lost market share with key

existing customers under Ingersoll-Rand’s ownership and grow the business with new regional accounts in the U.S. and with key international partners in Mexico, South America and the Asia Pacific region. The company believes it has a clear path to improving its operational capabilities and profitability, and is driving execution across all key initiatives.