Long TOWR

Post-Restructuring Auto Parts Manufacturer with Stable Barriers to Entry, Secular Trend

Growth, Strong 19.4% ROIC, Hidden Earnings Value, Misunderstood Exposure, and

Asymmetric Return Payoff Structure

NYSE:TOWR

Jonathan Chang

[email protected]

Queen’s School of Business

Stephen Peng

[email protected]

Queen’s School of Business

Image Source: Sigma Recruitment

Why is this company worth your attention? Towers International is a quality business priced at asymmetric payoffs

2 |

Source: Various.

Growing industry secular trends of outsourced

auto parts work from OEMs.

Stable industry position with high barriers to

entry and customer captivity.

Minimal Chinese market exposure where

volatility is unattractive feature.

Falling oil prices and booming American

economy to help car sales.

Decrease in steel price means cheaper cost

input for auto part manufacturers.

Post-restructuring auto parts manufacturer with stable barriers to entry, secular trend growth, strong 19.4% ROIC,

hidden earnings/NOL value, misunderstood exposure, and asymmetric return payoff structure

Post restructuring / special situation with

opportunity for value creation (bankruptcy

overhang).

Misunderstood exposure to Asia. Recent sell-off

provides cheap entry point.

Longer-term investments skewing short-term

results in EPS. Hidden earnings value.

Competent management focused on capital

allocation and transparency.

ROIC generation in high teens.

Diversified customer mix suggesting higher

supplier power for TOWR.

Deleveraging of operations to create value from

debt pay down and risk-averse investors.

Hidden NOL balance sheet asset.

MACROECONOMIC MICROECONOMIC

VALUATION

MARKET MISPRICING

UNIQUE BUSINESS MODEL

Trading at non-adjusted discount in ~25% range.

Worst cast scenario provides 30% upside

threshold while best case provides 146%.

Suggested base upside is ~83% (27% CAGR).

3 |

Source: Company filings, ThomsonOne Reuters, Capital IQ, Wikipedia, Forbes

Post-restructuring auto parts manufacturer with stable barriers to entry, secular trend growth, strong 19.4% ROIC,

hidden earnings/NOL value, misunderstood exposure, and asymmetric return payoff structure

PRODUCT OFFERINGS FINANCIAL OVERVIEW

Founded in 1993 in Michigan as “Tower Automotive,” this

easy-to-understand business IPO’d in 2010B

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BUSINESS EXPLANATION

Manufactured at 27 facilities strategically located

near customers.

Supported by 7 engineering and sales

locations.

Manufactures vehicle body structures and chassis

systems.

Tower International is a leading global manufacturer of

engineered automotive structural metal components

and assemblies primarily serving original equipment

manufacturers (“OEMs”)

Mkt Cap $517.3m

Cash $136.0m

Debt $459.8

Minority Interest $57.2

Preferred Equity $0.0

EV $898.30

2014 Revenue 2067.8

2014 EBIT 105

15E EV / EBITDA 4.8x

15E P/E 7.7x

Capitalization

Key Statistics

Mkt Cap $517.3m

Cash $136.0m

Debt $459.8

Minority Interest $57.2

Preferred Equity $0.0

EV $898.30

2014 Revenue 2067.8

2014 EBIT 105

15E EV / EBITDA 4.8x

15E P/E 7.7x

Capitalization

Key Statistics

KEY STATISTICSCAPITALIZATION

FORBES’ ‘MOST TRUSTWORTHY COMPANY’

Ranking Company Kaplan Rating

1 Tower International 100

Con-way Inc 100

Equity Lifestyle Properties 100

Stepan Company 100

5 Buffalo Wild Wings 99

Comfort Systems USA 99

Kimball International 99

Magna International 99

“In general, companies that make this list can be relied upon to

accurately report financial outcomes. The majority of the

companies here are financially sound, demonstrating strong

stock performance, and providing shareholders with greater

levels of transparency.”

Tower International (NYSE:TOWR)

INDUSTRY OVERVIEW

Source: Demand - Bureau of Labor Statistics, RBC Economics Research, Bloomberg, IHS Automotive Sales Forecasts, Capital IQ

Supply - How Stuff Works, Automobile Engineering Partners, Market Realist, Capital IQ

“Auto sales are being helped by an expanding U.S. economy, rising consumer

spending, a steadily improving housing sector and low oil prices.”

AUTO SALES GROWTH

SUPPLY

Auto parts industry to be driven by both supply and demand:

Secular growth in auto sales and positive tailwind in cost drivers

10.411.6

12.7

14.415.5

16.4 16.817.5

2009 2010 2011 2012 2013 2014 2015E 2016E

US Light Motor Vehicle Unit Sales

DEMAND

CRUDE OIL PRICE DECLINE

0.00m

0.25m

0.50m

0.75m

1.00m

$30

$50

$70

$90

Sep-'14 Nov-'14 Jan-'15 Mar-'15 May-'15 Jul-'15 Sep-'15

Volume Crude Oil Price

Millennials accounted for 27% of new car sales in 2014 up

from 18% in 2010 (larger than Gen X).

Positive wage growth and employment rates.

Long-term, low-interest loans making cars more affordable.

“MILLENNIALS EMBRACE CARS, DEFYING PREDICTIONS OF SALES IMPLOSION”

1090

1360

1360

1810

Car

Truck/SUV Steel Weight

Total Weight

Materials, 47%

Direct Labor,

21%

Administration,

10%

Other, 7%

Depreciation, 6%R&D, 6% Logistics, 3%

$500

$700

$900

$1,100

$1,300

$1,500

Sep-'14 Dec-'14 Mar-'15 Jun-'15 Sep-'15

STEEL USED IN AVERAGE VEHICLE

COST DRIVERS IN AUTO INDUSTRY

FALLING STEEL PRICES MEANS REDUCED PRICE OF INPUTS

Tower International (NYSE:TOWR)

THESIS OVERVIEW

Cheaper

Labor Cost

Advantage

Auto OEMS competitors have

struggled with unions. TOWR

has ~20% lower labor cost/hr.

Source: Company filings, Jeremy Raper, Seeking Alpha, Alpha Architect, David Foulke, Bruce Greenwald, Chrysler, 27 Gen

Share of outsourced supply chain production for major American OEMS have risen to ~40% range up from ~20% in 1990s.

“Another possible cost advantage is access to cheap resources

such as labor and capital.” – Greenwald

Structural competitive advantage presence allows TOWR to

generate “franchise value”

“Transportation costs and government barriers to trade may be

high, and distribution may be fragmented and hard to penetrate”

– HBR

“There are only a limited number of ways in which customer

behaviour leads to captivity. Habit, usually associated with high

purchase frequency, is probably the most powerful.” – Greenwald

“High switching costs are the third and probably most common

source of customer captivity.” – Greenwald

5%

18%

18%

28%

31%

Other

Light Trucks

NA Framed

Vehicles

Large Cars

Small Cars

6%3%

4%

5%

6%

7%

8%

9%14%

15%

22%

Tier 2

Honda

BMW

Chery

Toyota

Daimler

Fiat

Nissan

Volvo

Chrysler

VW

Ford

Contract Nature of

Business

Natural for industry to have

longevity of relationships.

Provides visibility into future

business streams. Habits are

like the gravitational pull of

familiar coffee brands.

Lack of Foreign

Competitors

Heavy merchandise

are difficult to

transport. They must

be manufactured

close to an OEM

plant or within a

facility.

Customer

Proximity ->

HIGH SWITCHING

COSTS

Unusual for OEM

to switch suppliers.

High degree of

integration in

supply chain and

strong

efficiencies.

Product

Mix

Customer

Mix

Source: Company filings, JP Morgan North American Equity Research, 10K Filing. McKinsey Measuring and Managing Value of Companies.

Tower’s ROIC of almost 20% illustrates competitiveness in an industry limited by poor margins; its

return on invested capital has also increased by an annualized rate of 17 percent since 2010

ROIC HAS BEEN IMPROVING ON INCREASING MARGINS

Gradually increasing ROIC levels validate past qualitative

structural competitive advantages and management expertise

MANAGEMENT

MARK MALCOLM, CEO/PRESIDENT SINCE ’07 (AGE 61)

Joined Tower from Cerberus

Worked 28 years with Ford in a variety of

senior financial positions

Highly incentivized to orchestrate a move to

a sustained $40.6 share price before

retirement in FY16

Twenty years of experience

Concurrently serves as treasurer of Vista

Maria, a charity organization

Recognized for his work to make Tower the

“Most trustworthy company in North

America” by Forbes

JAMES GOUIN, CFO AND EXECUTIVE VP (AGE 55)

TRACK RECORD OF SHAREHOLDER VALUE CREATION

New Business Awards and Accretive Acquisition in 2014/2015

3contracts worth a total of $340 million on $130 million CapEx

spending (yielding an acquisition multiple of 2.6x) granted to the

company; projected ongoing annual adj. EBITDA of $50 million

Accretive acquisition of stamping supplier in Mexican market for 4x

EV/EBITDA; EPS accretion of ~10 cents/share

Planned sale of 2/3 JV in China for 6.3x EV/EBITDA in 2H15

Sale at large premium to TOWR and is a strategic move to jettison

non-core, lower value proposition businesses in difficult regions.

The move lowers Tower’s debt to just north of 1.5x EBITDA.

2014 2013 2012 2011 2010

EBITDA Margin 8.8% 9.3% 9.0% 8.2% 9.5%

Operating Income 95.014 93.219 83.875 65.188 57.516

Operating Margin 4.6% 4.7% 4.4% 3.2% 3.3%

Operating WC 208.40 133.79 168.65 99.56 99.58

Invested Capital 510.97 548.51 627.86 632.26 576.74

ROIC 19.4% 20.1% 14.0% 10.8% 10.4%

ROIC DRIVERS TREE – FY2014

19.4%

4.6%

11.1%

2.3%

4.2%

4.5x10.1%

21.8%

ROIC (excluding

intangibles)

Operating Margin

Revenue/Invested

Capital

Gross Margin

SG&A excl. D&A

/Revenue

D&A / Revenue

Operating Working

Capital/ Revenue

Net PPE / Revenue

Outputs Key Drivers Inputs

Operating working capital defined as operating current assets - (current liabilities - ST debt - current portion of capital leases). Invested Capital defined as non-cash operating working capital plus net property, plant and equipment.

Return on invested capital defined as NOPAT + operating lease interest divided by non-cash working capital plus net property, plant and equipment excluding goodwill and acquired intangibles.

Tower International (NYSE:TOWR)

MISPRICING IDENTIFICATION

Source: Demand - Bureau of Labor Statistics, RBC Economics Research, Bloomberg, IHS Automotive Sales Forecasts, Capital IQ

Supply - How Stuff Works, Automobile Engineering Partners, Market Realist, Capital IQ

Early 2015: TOWR announced sale of 2/3 China JV at a premium multiple of 6.3 EV / EBITDA.

Expect 43m in after-tax proceeds for deal close in 2H 2015 to be used for debt paydown.

YTD (2015) PEAK VOLATILTY

MARKET INCORRECTLY CORRELATING TOWR’S PERFORMANCE WITH ASIA

Misunderstood exposure to China, a market we view

negatively, has triggered mispricing

52%North

America

37%Europe

7%Brazil

4%China

2014 Revenue

To decrease below 4% for 2015

28x 27x23x

38x

32x 32x

47x

58x55x

46x

22x19x

17x 15x 15x 15x20x

41x

31x

25x

Jan Feb Mar Apr May Jun Jul Aug Sep Shiller P/E

China Volatility IndexOVERLY COMPETITIVE CHINESE MARKET

Average industry profit in China is expected

to be 7.4% of revenue in 2015. These profits

are projected to decline as competition

between assembly plants and parts

manufacturers intensifies.

Wages have increased at an annualized

rate of 14.5%.

The industry still uses relatively backward

technologies. Economies of scale have yet

to be captured. Volatility within Asian markets are unattractive feature for investment.

PRICE PERFORMANCE VS. ASIAN/AMERICAN MARKETSMARKET MISPRICING

-50%

-40%

-30%

-20%

-10%

0%

10%

Jun-'15 Jun-'15 Jun-'15 Jul-'15 Jul-'15 Aug-'15 Aug-'15 Sep-'15

TOWR SHCOMP S&P500“Absolute revenue number for China, … was actually a little bit better

through the first half. We don’t see that continuing – it’s not going to be

a dramatic and material effect on us overall.” – TOWR Management

Approximately 8% of the S&P500’s revenue in 2013 stem from the

Asia Pacific region according to Goldman’s Amanda Sneider. This

figure has grown since due to the increased technological capabilities

in China converging with North American requirements.

TOWR only has a 4% exposure to Asia in terms of revenues, yet

its share price fell 20% since the Chinese market correction

Source: Company filings, JP Morgan North American Equity Research, 10K Filing. McKinsey Measuring and Managing Value of Companies.

Company is forgoing short-term free cash flow for longer-term value.

ONE-TIME CHARGES SKEWING EPS RESULTS

With bankruptcy overhang still prevalent in the form of

restructurings, strong earnings power has been hidden

RESTRUCTURING OVERVIEW

2007: TOWR emerged from bankruptcy after being taken over by

Cerberus Capital Management.

2012: Sale of Korean subsidiary for $47m. Cash used for debt

repayment.

2013: Closed Defense & Aerospace, a non-core business. Action

incurred $15m in restructuring costs during 2013 2Q.

2013: Cerberus finally exits Tower. Its past failures have likely led to the

company’s depressed multiple.

Feb 2015: Announced selling of 2/3 China JVs at premium to TOWR’s

own EBITDA multiple. $43m in after-tax proceeds expected to be used

on debt repayment.

MARKET VIEW: 5YR RELATIVE EBIT, EBITDA, FCF, AND NI

($1.67)

$1.23 $1.08

$2.28 $3.02

($3.43)

($1.20)

$0.90

($0.99)

$1.04

2010 2011 2012 2013 2014

EPS (Adjusted)

EPS

$163.7 $145.6

$157.1 $162.4 $168.0

$49.1 $43.0

$64.3

$73.5 $80.8

$19.9 ($0.4)

($29.0)

$75.3

$22.7

($36.9)($23.3)

$18.0

($20.3)

$21.5

2010 2011 2012 2013 2014

EBITDA Operating Income FCF Net Income

5 5.1x 6 6 6 6 6 6 7 7 7 7 8 89

10 11 11 1212

15

23

CP

S

MO

D

TO

WR

GT

DA

N

AX

L

MP

G

TEN

STR

T

MR

E

LEA

LNR

SU

P

MG

A

SR

I

FD

ML

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TX

BW

A

DLP

H

JCI

HA

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TH

RM ST

VC

8.4 x Average

TOWR 15E EV / EBITDA AT LOW END OF AUTO SUPPLIERS

• Current FCF yield of 3.75% from 4.3% in 2014 and 17.26% in 2013.

• Capex increased from $78.0m in 2013 to $98.4m in 2014.

• Market is overreacting to short-term results skewed by one-time charges

With future stabilization, value creation should come from two ways:

1. EPS/EBITDA growth

2. multiple expansion.

Source: Company 10K, 2015 2Q Earnings Presentation, Sterne Agee CRT, Jermalism, 2015 EC Investor Presentation, Jeremy Raper, Seeking Alpha

Tower’s management has made it a priority to pay down debt. The company’s leverage ratio of 4.2x in

2009 is projected to fall to 0.53x by the end of 2017, drastically reducing the probability of default.

TREMENDOUS DEBT PAY DOWN OPPORTUNITY

Lingering reminiscence of past bankruptcy has lead to

overblown fear of a leveraged balance sheet

REMNANTS OF TORONTO CLOSED PLANT

“A drug den for addicts and junkies and a

shelter for hobos and squatters” - Blogger

STRONG LOAN SYNDICATE EASY ACCESS TO CAPITALNET LEVERAGE VS. EBITDA MARGIN

0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

3.0x

3.5x

4.0x

4.5x

$0

$50

$100

$150

$200

$250

2009 2011 2013 2015E 2017E

EBITDA Leverage Ratio

Net leverage decrease from

4.2x in ‘09 to 1.7x in ‘15

The $43 million sale of joint ventures in China is being used to

pay down debt. Through the repayment of debt, value will be

created from the equity portion of EV increasing.

Due to the company’s excellent relationship with its loan

syndicate, Tower has immediate future disbursements available

in the form of:

North American Revolving Loan: $190.2 million

European Revolving Credit Facility: $30.4 million

Debt Schedule

(USD in Millions, except ratio data) 2015A 2016A 2017A

Cash $556.3 $599.3 $628.5

Debt $1,869.3 $1,683.4 $1,403.4

Net Debt $1,313.0 $1,084.1 $774.9

1 Year EBITDA $733.2 $775.1 $826.7

Leverage Ratio 1.79x 1.40x 0.94x

Adjusted Leverage Ratio 1.65x 1.31x 0.88x

Tower International (NYSE:TOWR)

RECOMMENDATION

Source: Capital IQ, Company Filings

It is unclear why TOWR deserves such significant discount. Magna and Martinrea are larger, but trade at

~2x turn premium on adjusted basis. They yield far less on FCF basis and many other profitability metrics.

TOWR’s multiples are unjustified at such depressed levels while

intrinsic value validates significant free cash flow generation

PUBLIC COMPANY COMPARABLES (NON-ADJUSTED)

DISCOUNTED CASH FLOW OUTPUT (IMPLIED SHARE PRICE)ILLUSTRATIVE DISCOUNT

PUBLIC COMPSPRECEDENT

TRANSACTIONS

EBITDA Exit Multiple

WACC 4.60x 4.85x 5.10x 5.35x 5.60x

8.28% 35.66 37.63 39.59 41.56 43.52

8.78% 34.78 36.70 38.63 40.56 42.48

9.28% 33.91 35.80 37.69 39.58 41.46

9.78% 33.06 34.92 36.77 38.62 40.47

10.28% 32.24 34.05 35.87 37.68 39.50

Perpetuity Growth Rate

WACC -0.50% -0.25% 0.00% 0.25% 0.50%

8.28% 45.42 46.88 48.44 50.09 51.84

8.78% 42.77 44.08 45.47 46.95 48.51

9.28% 40.38 41.56 42.82 44.14 45.53

9.78% 38.20 39.28 40.41 41.61 42.86

10.28% 36.22 37.20 38.23 39.31 40.45

Market Enterprise LT Growth TEV/Revenue TEV/EBITDA P/E

Auto Parts Company Cap Value Rate (%) LTM CY+1 CY+2 LTM CY+1 CY+2 LTM CY+1 CY+2

Magna International Inc. 20,001.2 19,894.6 13.4 0.60x 0.62x 0.57x 5.9x 6.0x 5.2x 11.1x 10.4x 8.8x

Delphi Automotive PLC 21,516.7 23,612.7 15.4 1.41x 1.54x 1.38x 9.2x 9.3x 8.1x 16.8x 14.2x 11.8x

BorgWarner Inc. 9,953.3 10,714.0 13.7 1.33x 1.35x 1.14x 7.7x 7.9x 6.8x 15.8x 14.7x 12.3x

Lear Corporation 8,071.9 9,165.7 14.0 0.51x 0.50x 0.47x 5.8x 5.7x 5.3x 11.5x 10.5x 9.3x

Martinrea International Inc 730.3 1,235.1 NA 0.44x 0.44x 0.42x 6.1x 5.4x 4.9x 10.2x 8.2x 7.0x

Median 9,953.3 10,714.0 13.9 0.60x 0.62x 0.57x 6.1x 6.0x 5.3x 11.5x 10.5x 9.3x

Tower International, Inc. 517.3 899.9 10.0 0.45x 0.46x 0.42x 5.1x 4.7x 4.2x 14.8x 10.2x 8.4x

Premium (Discount) to Median (24.4%) (26.2%) (25.4%) (15.8%) (21.4%) (21.3%) 32.5% (26.2%) (16.2%)

7x 6x6x

12x11x

10x

5x 5x 4x

15x

10x

8x

LTM FY1 FY2 LTM FY1 FY2

EV / EBITDA P / E

Blended Average TOWR

1.4x

7.9x

0.5x

5.1x

EV / Rev

LTM

EV /

EBITDA

LTM

Source: Bloomberg, Business Insider, Goldman Sachs, TOWR 10k Filing

Please see Appendix for further valuation models and NOL P/S calculation.

Tower International is a rare opportunity to buy into a great value-creating business model at bargain prices.

To conclude…

Overall recommendation and valuation summary

FOOTBALL FIELD VALUATION CHART

RETURN OPPORTUNITYFUTURE SHARE PRICE ANALYSIS

$34

$36

$37

$48

$35

$39

$30

$40

$41

$45

$63

$41

$47

$50

$10 $15 $20 $25 $30 $35 $40 $45 $50 $55 $60 $65 $70 $75 $80

Analyst Price Target

Public: Price / Earnings 15E

Public: EV / EBITDA 15E

Precedent: EV / EBITDA 15E

DCF Multiples Method

DCF Gordon Growth Method

Future Share Price Analysis

Sep. 27

Share Price:

$22.77

Target Share

Price:

$35.39Discounted Cash

Flow Analysis

Public Company

Comparables

and Precedent

Transactions

Multiple cases

based off of three

scenarios:

1. Adjusted

multiple

2. Non-adjusted

multiple

3. Blended

industry peer

group average

DCF Target Price $40.26

Base Case Target Price

(No Multiple Expansion) $35.39

NOL P/S Value $6.18

Base + NOL Implied Price $41.57

Sep. 27 Share Price $22.77

2.5YR Implied Upside 82.6%

Annualized Return 27.2%

Bear Base Bull

EV / EBITDA 4.6 x 5.1 x 6.5 x

2017E Adj. EBITDA $220.46 $220.46 $220.46

Implied Price $29.70 $35.39 $49.78

+NOL P/S Value $0.00 $6.18 $6.18

Total Implied Price $29.70 $41.57 $55.96

Current Share Price $22.77 $22.77 $22.77

2.5YR Implied Upside 30.4% 82.6% 145.8%

Annualized Return 11.2% 27.2% 43.3%

Tower International (NYSE:TOWR)

APPENDIX

Thank you for listening to our presentation!Summarizing what we discussed…

17 |

Source: Various.

Growing industry secular trends of outsourced

auto parts work from OEMs.

Stable industry position with high barriers to

entry and customer captivity.

Minimal Chinese market exposure where

volatility is unattractive feature.

Falling oil prices and booming American

economy to help car sales.

Decrease in steel price means cheaper cost

input for auto part manufacturers.

Post-restructuring auto parts manufacturer with stable barriers to entry, secular trend growth, strong 19.4% ROIC,

hidden earnings/NOL value, misunderstood exposure, and asymmetric return payoff structure

Post restructuring / special situation with

opportunity for value creation (bankruptcy

overhang).

Misunderstood exposure to Asia. Recent sell-off

provides cheap entry point.

Longer-term investments skewing short-term

results in EPS. Hidden earnings value.

Competent management focused on capital

allocation and transparency.

ROIC generation in high teens.

Diversified customer mix suggesting higher

supplier power for TOWR.

Deleveraging of operations to create value from

debt pay down and risk-averse investors.

Hidden NOL balance sheet asset.

Trading at non-adjusted discount in ~25% range.

Worst cast scenario provides 30% upside

threshold while best case provides 146%.

Suggested base upside is ~83% (27% CAGR).

MACROECONOMIC MICROECONOMIC

VALUATION

MARKET MISPRICING

UNIQUE BUSINESS MODEL

Source: Bloomberg, Business Insider, Sterne Agee, TOWR 10k Filing

How will value be recognized and what is the downside?

Catalysts and Risks

RISKSCATALYSTS

Tower’s management has been attempting to minimize risks by

downsizing its noncore operations and lowering its exposure to

foreign markets. Focus is on expansion within the U.S. and

Mexico.

Tower is positioned to benefit from a growing North American

auto market. It also tempts the possibility of increasing its stock

price through share buybacks or an outright acquisition.

Price disruption from major automakers: U.S.

dealer inventory levels have reached the highest

levels since 2004. Vehicle prices will be lowered as a

means to increase demand.

Threat of competition from OEMs: OEMs have the

capacity to create internal assembly lines as opposed

to outsourcing.

Deterioration in the U.S. and world economies:

disruptions in the credit markets could cause

difficulties for OEMs to secure capital for financing.

Continued depressed activity in Brazil and Europe:

Tower’s recovery is contingent on the recovery of

international markets.

Stricter regulations can increase input prices:

Tower will not be affected by fuel economy standards

for engines and exhaust systems since it does not

manufacture those parts.

Sale of China JVs: If the sale of the company’s two

Chinese joint ventures go through in 2H 2015, the

company is expected to net $43 million on an accretive

6.3x EV/EBITDA deal.

Disapproval of TransPacific Partnership: Congress is

headed towards an agreement to abolish Obama’s TPP

agreement. This translates to greater autonomy for

domestic manufacturing and labour.

Growing regional market: Sales to foreign OEMs have

doubled since 2009 and are expected to increase further

on increased sourcing

Share buyback: Management has clearly stated that

they believe that Tower’s stock price is undervalued. This

may signal the possibility of a buyback program to

artificially prop up share prices.

Potential acquisition target: The recent spate of M&A

deals highlights the trend of consolidating smaller

companies. Tower would make a highly accretive

acquisition to any of its larger competitors.

Bear Base Bull

EV / EBITDA 4.6 x 5.1 x 6.5 x

2017E Adj. EBITDA $220.46 $220.46 $220.46

Implied Price $29.70 $35.39 $49.78

+NOL P/S Value $0.00 $6.18 $6.18

Total Implied Price $29.70 $41.57 $55.96

Current Share Price $22.77 $22.77 $22.77

2.5YR Implied Upside 30.4% 82.6% 145.8%

Annualized Return 11.2% 27.2% 43.3%

Source: Company 10k Filings, Capital IQ, Seeking Alpha, Equity Research

Projected upside of 83% on 2.5 year basis or CAGR of 27%.

Future Share Price Analysis

Primary valuation methodology

FUTURE SHARE PRICE ANALYSIS

Worst case scenario built upon

depreciation in multiple. Base case

assumes decline in multiple from

5.1x to 4.6x. 4.6x and 6.8x are the

current adjusted multiples.

Base case scenario assumes no

change in multiple. Value comes

from increase in EBITDA,

adjustment to reduction in one-

time charges, and debt pay down.

Bull case scenario based on higher

end multiple. In EV / EBITDA, this

was industry multiple while in P /E,

this was non-adjusted current

multiple.

Multiple cases based off of

three scenarios:

1. Adjusted multiple

2. Non-adjusted multiple

3. Blended industry peer

group average

Source: Company 10k Filings, Capital IQ

Discounted Cash Flow Analysis

A summary of both methodologies

PROJECTED CASH FLOWS

CAGR

2012 2013 2014 | 2015E 2016E 2017E 2018E 2019E 2015-2019

Total Revenue 1,925.8 1,966.5 2,067.8 | 1,973.1 2,099.9 2,211.6 2,329.5 2,454.0 5.6%

Annual Growth (6.2%) 2.1% 5.2% | (4.6%) 6.4% 5.3% 5.3% 5.3%

Cost of Revenue 1,710.4 1,737.7 1,838.6 | 1,757.6 1,870.6 1,970.1 2,075.1 2,186.0

EBITDA 173.8 182.1 182.3 | 181.1 193.6 206.1 219.5 233.6 6.6%

Less: Depreciation and Amortization 89.9 88.8 87.2 | 83.8 91.5 98.7 106.4 114.7 8.2%

EBIT 83.9 93.2 95.0 | 101.9 109.2 117.2 125.8 135.0 7.3%

Less: Income Taxes 17.3% (14.5) (16.1) (16.4) | (17.6) (18.9) (20.3) (21.8) (23.4)

Unlevered Net Income 69.4 77.1 78.6 | 84.2 90.3 96.9 104.0 111.6 7.3%

Plus: Depreciation and Amortization 89.9 88.8 87.2 | 83.8 91.5 98.7 106.4 114.7

Less: Capital Expenditure (92.3) (78.0) (98.4) | (92.2) (98.2) (103.4) (108.9) (114.7) 5.6%

Less: Increase in Working Capital 4.5 27.7 (9.1) | 6.6 7.0 7.4 7.8 8.2 5.6%

Unlevered Free Cash Flow 71.5 115.6 58.3 | 82.4 90.6 99.6 109.3 119.8 9.8%

Annual Growth 112.3% 61.7% (49.6%) | 41.4% 9.9% 9.9% 9.8% 9.6%

PV of 2015 Free Cash Flow Stub 25.0

PV of 2016-2019 Free Cash Flows 339.9

PV of Terminal Value 921.4

Enterprise Value 1,286.3

Less:

Total Debt (461.4)

Preferred Stock 0.0

Minority Interest (57.2)

Plus:

Cash and Equivalents 136.0

Equity Value 903.7

Shares Outstanding 21.1

Implied Per Share Value 42.82

Current Price 24.51

Premium/(Discount) to Current Price 74.7%

WACC CALCULATIONMULTIPLES METHOD

PV of 2015 Free Cash Flow Stub 25.0

PV of 2016-2019 Free Cash Flows 339.9

PV of Terminal Value 813.1

Enterprise Value 1,178.0

Less:

Total Debt (461.4)

Preferred Stock 0.0

Minority Interest (57.2)

Plus:

Cash and Equivalents 136.0

Equity Value 795.5

Shares Outstanding 21.1

Implied Per Share Value 37.69

Current Price 22.77

Premium/(Discount) to Current Price 65.5%

GORDON GROWTH METHOD

Market Risk Premium (Rm - Rf) 5.75%

Multiplied by: NYSE:TOWR Bottom-Up Beta 1.439

Adjusted Market Risk Premium 8.3%

Add: Risk-Free Rate of Return (Rf) 2.2%

Add: Size Premium 2.5%

Cost of Equity 13.0%

Multiplied by: NYSE:TOWR E/(D+P+E) 52.9%

Cost of Equity Portion 6.9%

NYSE:TOWR Cost of Debt (Rd) 6.3%

NYSE:TOWR Tax Rate 17.3%

After-Tax Cost of Debt 5.2%

Multiplied by: NYSE:TOWR D/(D+P+E) 47.1%

Cost of Debt Portion 2.5%

WACC 9.3%

Source: Capital IQ

Precedent Transaction Analysis

Acquisitions of Auto Parts Manufacturers with close between 2013 – 2015

SUMMARY OF RELATED TRANSACTIONS

TOWR International - Comparable M&A Transactions Transaction Transaction Operating Metrics Valuation Multiples

Closed Equity Enterprise EV / EV /

Acquirer Name Target Name Date Value Value Revenue EBITDA Revenue EBITDA

Pall Corporation Danaher Corp. 08/31/2015 13,565.26 13,644.98 2,851.39 670.16 4.8x 20.4x

Veyance Technologies, Inc. ContiTech AG 01/30/2015 1,910.09 1,910.09 2,046.52 267.56 0.9x 7.1x

Schrader International, Inc. Sensata Technologies B.V. 10/14/2014 - 1,004.7 455.43 51.4 2.2x 19.6x

Autocam Corporation, Inc. NN Inc. 08/29/2014 271.32 325.37 248.53 42.57 1.3x 7.6x

Johnson Controls Inc., Automotive Electronics Business Visteon Corporation 07/01/2014 265.0 265.0 1,300.0 58.0 0.2x 4.6x

Jason Incorporated Jason Industries, Inc. 06/30/2014 538.65 538.65 680.8 79.8 0.8x 6.8x

Professional Pow er Products, Inc. Pow er Solutions International, Inc. 04/01/2014 46.0 70.62 40.27 8.58 1.8x 8.2x

Sport Truck USA, Inc. Fox Factory Holding Corp 03/31/2014 39.47 78.01 35.08 4.37 2.2x 17.9x

Titan International Inc. (NYSE:TWI) MHR Fund Management LLC 02/20/2014 434.99 928.7 2,163.6 184.45 0.4x 5.0x

FCA US LLC Fiat North America LLC 01/21/2014 8,803.67 7,760.67 72,144.0 5,924.0 0.1x 1.3x

Westport Axle Corp. Universal Truckload Services Inc. 12/20/2013 112.5 169.47 84.33 19.65 2.0x 8.6x

Johnson Controls Inc., HomeLink Product Line Gentex Corp. 09/27/2013 700.0 700.0 143.19 76.79 4.9x 9.1x

Danfoss Pow er Solutions Inc. Danfoss A/S 04/11/2013 2,833.04 3,024.69 1,916.09 399.38 1.6x 7.6x

Wescast Industries Inc. Sichuan Bohong Industry Co. Ltd. 03/27/2013 142.94 153.73 295.46 12.99 0.5x 12.2x

Median 435 619 568 67 1.4x 7.9x

TOWR $517.3 $899.9 $1,986.9 $175.7 0.5x 5.1x

Premium (Discount) to Median (69%) (36%)

Source: Bloomberg, 10k Company Filing

Net Operating Loss Analysis

Value on existing 2014 end balance sheet

NOLS AND TAXATION EXPLANATION

Tower International - NOL Value

(USD in millions, unless otherwise

stated)

Consolidated I/S 2015E 2016E 2017E 2018E 2019E

Revenue $2,002.0 $2,176.0 $2,283.6 $2,442.7 $2,564.8

EBIT $103.1 $112.5 $120.4 $105.8 $108.4

Interest Payments $21.6 $18.5 $14.5 $13.0 $11.6

US EBT (Pre-Tax Income) $81.5 $94.0 $105.9 $92.8 $96.8

NOLs

Beginning NOL Balance $438.7 $357.2 $263.2 $157.3 $64.4

NOL Carryforward Usage ($81.5) ($94.0) ($105.9) ($92.8) ($64.4)

Ending US NOL Balance $357.2 $263.2 $157.3 $64.4 $0.0

Tax Savings $28.53 $32.90 $37.07 $32.50 $22.55

Annualized Tax Savings $10.97 $12.66 $14.26 $12.50 $8.67

Statutory Tax Rate 35%

Discount Rate 9.3%

NPV of NOLs $130.35

At the end of 2014, Tower’s domestic and foreign

NOLs totaled $438.7 million, expiring between 2020

- 2033.

During 2013, the Company had an ownership

change that limits the annual utilization of the

federal and some state NOLs. The annual federal

limitation is based on the value of the Company at

the time of the change times the long-term tax

exempt rate.

The total amount of tax savings is divided across the

12 years until the NOLs expire. By doing this, Tower

is ensuring that it limits its exposure to high

corporate tax brackets. As such, the annualized tax

savings are limited to roughly 40% of the statutory

tax rate. Future taxes are estimated to be anywhere

from 17 - 22%.

TOWR possesses deferred tax assets in the form of NOLs worth $130 million. This hidden asset translates to a 14% upside to

enterprise value and adds $6.18 per share.

DISCOUNTED NOL VALUE

GROWTH DRIVERS

Consolidated Income Statement

Assumptions

Tower International - Consolidated Income Statement

(USD in Millions, except ratio data)

Q1 2015A Q2 2015A Q3 2015E Q4 2015E Q1 2016E Q2 2016E Q3 2016E Q4 2016E Q1 2017E Q2 2017E Q3 2017E Q4 2017E

Revenue $497 $490 $495 $491 $515 $522 $528 $535 $542 $549 $556 $564

Organic $497 $490 $485 $480 $487 $493 $500 $506 $513 $520 $527 $534

Ford: $70 million Contract $18 $18 $18 $18 $18 $18 $18 $18

Herrajes y Acabados: Acquisition $10 $10 $11 $11 $11 $12 $12 $12 $12 $13

Adjusted Revenue $540 $541 $536 $530 $565 $573 $580 $588 $596 $603 $611 $619

EBITDA Margin 9.0% 10.3% 8.7% 8.7% 9.1% 10.3% 8.8% 8.8% 9.2% 10.3% 8.9% 8.9%

EBITDA $44.7 $50.5 $43.14 $42.76 $46.8 $53.5 $46.3 $47.0 $49.8 $56.6 $49.4 $50.2

Adjusted EBITDA Margin 9.7% 10.9% 9.4% 9.4% 9.7% 10.9% 9.4% 9.4% 9.8% 11.0% 9.5% 9.6%

Adjusted EBITDA $48.2 $53.4 $46.36 $45.95 $50.13 $56.91 $49.71 $50.52 $53.34 $60.18 $53.03 $53.90

Depreciation & Amortization $19.90 $19.70 $19.91 $19.73 $20.70 $20.97 $21.24 $21.52 $21.80 $22.08 $22.37 $22.66

Operating Income $24.83 $30.77 $23.22 $23.03 $26.08 $32.55 $25.03 $25.52 $28.02 $34.53 $27.05 $27.57

Interest Expense $7.85 $4.00 $4.95 $4.95 $4.90 $4.80 $4.65 $4.46 $4.26 $4.11 $3.97 $3.77

Taxes $2.10 $2.40 $6.56 $6.50 $4.84 $6.04 $4.64 $4.73 $5.59 $5.66 $5.74 $5.81

Earnings $14.00 $18.60 $11.71 $11.58 $16.34 $21.71 $15.74 $16.33 $18.17 $24.75 $17.34 $17.99

Adjusted Earnings $17.60 $22.50 $14.93 $14.77 $19.69 $25.10 $19.17 $19.81 $21.69 $28.32 $20.96 $21.65

The three latest business contracts (worth $340 million in annual

revenue) all have EBITDA margins of ~15%. Tower’s acquisition of

Mexican stamp supplier is also accretive with growth potential of

10% as opposed to the Mexican industry standard of 8%. North

American auto sales have been increasing by ~5.5% per annum,

while the European markets have recently reversed their trend of

falling automobile demand. As such, we projected a 5% organic

growth in revenues from 2016 onward. This is in line with

management expectations.

5.4% organic growth in 2016 and 2017

No further acquisitions and business contracts

Because of 15% EBITDA NA business wins and acquisition of

Mexican stamper, NA growth projected at ~10-12%

Consistent 4% depreciation and amortization

EBITDA margins are comparable to previous years in terms of

seasonality (i.e. Q1 and Q2 margins are higher due to increased

business vs. fixed costs)

Debt paydown through FCF alone

Taxes remain consistent around 17-22% due to DTAs

Source: Company 10K Filing, Sterne Agee, Capita IQ, Company 2Q Presentation

ASSUMPTIONS

Tower’s revenue is projected to rise amidst a secular trend of

increasing global auto sales

IBIS World, Sterne Agee, Tower International 10K, Wall Street Journal.

+5.4%

+8.6%

-20.3%

-14.7%

+1.6%

National unemployment is expected to decline. As unemployment falls, consumers are more likely to purchase big-ticket items, such as cars,

and demand for auto parts will increase as a result. The financing costs of such vehicles is also cheap due to precipitously low interest rates.

In North America, GM and Fiat Chrysler’s respective restructuring are expected to benefit the industry. Demand for part development will likely

increase, costs will decrease, and overall, the major automakers will become more stable customers. The global recession forced automakers to

cut costs, including labor and increase the quality of product offerings, causing them to become more profitable moving forward. Sales in

Europe and Brazil denominated in USDs are expected to pick up in the next few years once the US dollar momentum subsides.

2014 GROWTH/DECLINE IN GLOBAL AUTO SALES

2014 GROWTH/DECLINE IN GLOBAL AUTO SALES

Stress test in the event of a severe recession

Assumptions

U.S. 2015 CCAR, U.S. Federal Reserve, Capital IQ, Tower International 10K

-8.00%

-4.00%

0.00%

4.00%

8.00%

12.00%

$0.00

$250.00

$500.00

$750.00

$1,000.00

2005E 2007E 2009E 2011E 2013E 2015E 2017E

Revenue GDP 1 Yr Growth Rate Unemployment Rate

In the event of a severe recession, Tower is able to sustain cash flows by tapping its line of credit. Revenues are aided by the

continued need for pedestrian vehicles. Corporate vehicle sales are expected to decline in the event of a recession.

In the worst months of the recession,

Tower’s quarterly revenue would plummet

to ~$350 million. The graph to the left

suggests a figure closer to $250 million, but we

applied a multiple of 1.4x since the company

has secured a large number of business

contracts which it did not have in 2007.

In terms of expenses, the majority of Tower’s

costs are variable. Fixed costs include

operating leases and capital leases totaling

$24 million in 2015 and $20 million in 2016.

The company would also experience

impairment charges on its Mexican stamping

acquisition equal to roughly $10 million.

Finally, Tower would be required to satisfy

interest payments in the amount of $14 - $20

million.

The company would remain solvent because of

its $220.6 million in available funds. Assuming

the worst, the company would need to burn

through its entire LOC and borrow an

additional $100 million to retire poor

performing segments.

Stress test figures were pulled from the U.S. Comprehensive Capital Analysis and Review data

published in 2015. A regression analysis was performed to assess the correlation between

Tower’s revenue and the U.S. GDP growth and unemployment rate. This correlation ceofficient,

0.84, was applied to the stress case.

FY2018E STRESS TESTING ACCESS TO CAPITAL

26 |

Source: Yahoo Finance, Lex Financial Times, Business Insider

Volkswagen emissions rigging affect on Tower as VW takes

15% of revenue

‘Michael Steel, an environmental lawyer at Morrison

Foerster, believes VW and the EPA will most likely end up

with a settlement that could include a civil penalty of

around $1 billion.’ $1b derived by looking at historical

expenses in comparison to initial fine amounts.

6%3%

4%

5%

6%

7%

8%

9%14%

VW,

15%

22%

Tier 2

Honda

BMW

Chery

Toyota

Daimler

Fiat

Nissan

Volvo

Chrysler

VW

Ford

0.0m

0.5m

1.0m

1.5m

2.0m

€100

€150

€200

€250

Sep-'14 Mar-'15 Sep-'15

Volume VW Price

170.5166.7 164.4 161.15

169.6 167.4

133.7

0.0m

0.5m

1.0m

1.5m

2.0m

€100

€120

€140

€160

€180

Aug-28 Sep-1 Sep-5 Sep-9 Sep-13 Sep-17 Sep-21

Volume VW Price

The US Environmental Protection Agency (EPA) found

software in VW and Audi’s 2-litre diesels that make cars

cleaner in emission tests than on the roads. The fine could

be as much as $18bn (if the full fine of $37,500 is levied for

each of the 0.5m diesel cars VW sold in the US since 2009).

Further costs include recalls, customer compensation and

potential lawsuits. VW was the standard bearer for clean

diesel in the US, so reputational damage must be totted up

too. Including recalls and compensation, Bernstein

estimates a low-end $2bn fine would take €4 off the share

price, while a top-of-the-range $18bn fine would cost €35

per share.

This reckoning includes only the US — at 13% of the total

VW sales last year.

$162 (Sep 18) -> $106 (Sep 22)

~35% decrease in price after CEO admits rigged tests.

Considering 15% of revenues from VW, if price is basic

proxy of revenues, ~5% (0.35*0.15) of TOWR revenues will

be affected in short-term. In best case scenario, loss of VW

sales will be redistributed to other auto manufactures that

TOWR services. No material impact to consumer demand.

VW Effect on TOWR Volkswagen AG Stock Price (XETRA:VOW)

Tower International – Cash Flow Schedule

(USD in Millions)

Cash Flow Schedule Q1 2015A Q2 2015A Q3 2015E Q4 2015E Q1 2016E Q2 2016E Q3 2016E Q4 2016E Q1 2017E Q2 2017E Q3 2017E Q4 2017E

Net Income from Cont. Operations $135.4 $136.0 $121.3 $145.9 $131.7 $118.1 $123.7 $135.2 $113.9 $104.4 $122.8 $147.1

Depreciation & Ammortization $487.4 $462.4 $462.4 $457.1 $447.1 $432.1 $412.1 $392.1 $377.1 $362.1 $342.1 $322.1

Pension $352.0 $326.4 $341.1 $311.2 $315.4 $314.0 $288.4 $256.9 $263.2 $257.7 $219.3 $175.0

Stock Based Comp $189.0 $182.1 $177.7 $181.1 $183.1 $186.2 $189.3 $193.6 $196.7 $199.7 $202.9 $206.1

Changes in Working Capital

Net Cash from Operating Activities 1.86 1.79 1.92 1.72 1.72 1.69 1.52 1.33 1.34 1.29 1.08 0.85

1.75 1.64 1.73 1.60 1.61 1.58 1.42 1.24 1.25 1.21 1.01 0.79

CapEx $135.4 $136.0 $121.3 $145.9 $131.7 $118.1 $123.7 $135.2 $113.9 $104.4 $122.8 $147.1

Free Cash Flow $487.4 $462.4 $462.4 $457.1 $447.1 $432.1 $412.1 $392.1 $377.1 $362.1 $342.1 $322.1

Debt Paydown $352.0 $326.4 $341.1 $311.2 $315.4 $314.0 $288.4 $256.9 $263.2 $257.7 $219.3 $175.0

Cash Flow $189.0 $182.1 $177.7 $181.1 $183.1 $186.2 $189.3 $193.6 $196.7 $199.7 $202.9 $206.1

Cash Flow Schedule

Quarterly Data

Source: Company Filings, Management Guidance, Equity Research