Global Trade Finance: Funding a Supply Chain

Global Trade Finance: Funding a Supply Chain Supply Chain Finance International Taxation Case Study

Global Trade Finance –Funding a Supply Chain February 2017 Confidential – For Discussion & General Information Purposes Only

Supplier Finance Program s Overview • Opportunities to Optimize Working Capital • History of Supplier Finance Programs • Benefits of Supplier Finance Programs • Interest Rate Arbitrage • Sample Process Flows • Supply Chain Finance • Trade Payables Finance • YourWells Fargo Bankteam Agenda Brian Arnold Senior Vice President International Trade Services (617) 854-7282 brian.l.arnold@wellsfargo.com

Supply Chain Finance (buyer initiated) and Trade Payables Finance (supplier initiated) programsare partnershipsbetweenbuyersand their banks toallow their supplierstoreceive early payment of invoices at a discount ratebased on thebuyer’screditrating. There is zero cost to buyer. • Assoonassupplier invoices areapproved for payment bythe buyer,suppliershavethe abilitytoaccesscash: • Within1–2 daysafterpayment approval • Withoutusingtheirowncreditlines • Withoutpayinghighdiscountchargestofactoringor asset based lending companies • In exchange for offering suppliers early payment at advantageous discount rates, buyer can extend supplier payment terms to increase cash flow through extended days’ payable outstanding (DPO). • Whilesuppliersmayaccesscashimmediately afterapproval,buyerreimbursestheir bank attheend oftheextended payment term. Supplier Finance Programs Overview A Win-Win solution for buyers and their suppliers

All tied up Opportunities to Optimize Working Capital “Overall, our research findings suggest that most companies continue to have huge opportunities to improve in many areas of WC (working capital)… Initiatives have focused on streamlining manufacturing and supply chains, collaborating more closely with customers and suppliers….In addition, extending supplier payment terms and driving greater efficiency in procurement and payables processes, along with simplifying functions and processes, have made a contribution to better management of WC” A high-level comparative analysis indicates that the leading 2,000 US and European companies may have as much as US$1.3 trillion in excess WC, over and above the level they require to operate their business model efficiently and meet all their operating requirements. This figure is equivalent to nearly 7% of their combined sales. In other words, for every US$1 billion in sales, the opportunity for WC improvement is, on average, US$70 million. - Working Capital Management Report 2015, E&Y • In recent years, large public corporations with international supply chains have been lowering their COGS by eliminating Letters of Credit (moving to open account) and improving their working capital by extending their payment terms (improved DPO) • This trend is driving mid-corporate & middle market companies, both public and private, to look for similar ways to optimize working capital to remain competitive and realize the same benefits in working capital with their own supply chain

History of Supplier Finance Programs • As Supplier Finance programs have developed over time: • Program structures have simplified • Roles have been clarified • Implementation and onboarding suppliers has been streamlined • Over the past 20 years, Supplier Finance programs such as Supply Chain Finance and Trade Payables Finance have grown into mainstream trade finance/working capital solutions

Buyers get working capital enhancement and stronger supplier relationships • Helps buyer extend terms by offering suppliers a lower cost, early payment option • Extend DPO and potential reduction in COGS • Accounting neutral structure helps maintain payables status • Providing lower cost financing potential through country interbank rate arbitrage and/or through buyer/supplier credit rating arbitrage Buyer & SupplierBenefits • Suppliers get lowcost financing, increased liquidity with reduced risk • Fasterrepayment–reduceddayssalesoutstandingthrough early pay draft discounting upon buyer approval • Easyaccess tolowcostworkingcapitalfinancingbased on the creditriskof Buyerand interest rates in the United States • Increasedliquidity–viableoptiontousingoften limited or costlybanklines • Finance100 %of invoiced amount, less discountvs. 80 to 90 % of traditionalfactoringorotherlines * As of January 2017 tradingeconomics.com Lower U.S. interest rates create working capital opportunity for suppliers

Buyers Credit Rating vs. China Indicative Rates $500,000 TPF Example $500,000 China Example (90-10) ________________ 360 days 95 ________________ 360 days 2.51% 5.85% $500,000 $500,000 Days to Invoice Maturity _________360 days Days to Invoice Maturity _________360 days Invoice Amount Invoice Amount Libor + Margin Libor + Margin Discount Amount Discount Amount $2,788.61 $7,716.15 Total Savings with TPF = $4,927.54

Supply Chain Finance Transaction Flow (1) Buyer cuts a purchase order to Supplier (2) Supplier submits invoice to buyer Supplier Buyer (7) Bank is reimbursed for full amount of invoice at maturity date (5) Supplier accepts discount offer and submits draft to bank • Bank makes invoice available to supplier for discounting; • Buyer submits invoice details to bank Bank (Processing Agent) (6) Bank pays supplier less applicable discount charge • Buyer cuts a purchase order to Supplier • Supplier submits invoice to Buyer • Buyer submits invoice details to Bank • Bank makes invoices available to suppliers for discounting • Supplier accepts offer to discount • Bank remits payment, less discount , to Supplier’s bank • Bank receives reimbursement for full amount of invoice at maturity

Trade Payables Finance Transaction Flow (1) Buyer cuts a purchase order to Supplier Supplier Buyer (3) and (4) Supplier presentation reviewed by buyer and payment decision communicatedto the Bank (2) Supplier submits documents and draft with Request to Discount (5) Processing agent remits payment, less discounted interest, to Supplier’s bank (6) Bank Debits Buyer’ DDA for Full Amount of Shipment at Maturity. Bank (Processing Agent) • Buyer cuts a purchase order to Supplier • Supplier submits documents and draft with request to discount • Buyer reviews supplier request • Buyer provides pay/no pay instructions • Bank remits payment, less discount, to Supplier’s bank • Bank debits Buyer’ DDA for full amount of invoice at maturity

Potential Tax Reform Overview February 2017 • This document has been prepared pursuant to an engagement between PricewaterhouseCoopers LLP (“PWC”) and the Client and is intended solely for the use and benefit of such client and not for reliance by any other person. This document is limited to the issues specifically addressed herein, and unless otherwise indicated, has been prepared for discussion purposes only and should not be construed as an opinion of PwC. This document may be superseded by subsequent written advice from PwC once additional analysis of the issues identified herein has been performed.

Draft - for discussion purposes only Key Components of House Blueprint and HR 1 (Camp Tax Reform)

Draft - for discussion purposes only Border adjustable system – key components • Corporate tax rate of 20%, repeal of corporate AMT • Income from sales to US customers taxable, income from sales to foreign customers exempt • No distinction between foreign and US corporations (treaty implications/permanent establishment threshold) • Deal with this through deductions? If not subjected to US tax is it non-deductible? • Non-taxability of foreign source income – impact on foreign deductions/application of treaties • Income includes income from sales of products, services and intangibles • 100% territorial regime going forward, dividends non-taxable (after mandatory repatriation)

Draft - for discussion purposes only Border adjustable system – General Concept US Customers (includes both related and unrelated parties) US-based Vendor (includes both related and unrelated parties) Taxable Sales Revenue US Corporation Deductible COGS Non-Deductible COGS Non- Taxable Sales Revenue Non US-based Vendor (includes both related and unrelated parties) Non- US Customers (includes both related and unrelated parties)

Draft - for discussion purposes only Border adjustable system – Numerical Illustration Non-US Vendor US Vendor D-COGS $45 ND-COGS $90 US Manufacturing Division NT-Sale $200 OUS Manufacturing Division ND-COGS $250 US Corporate Sales US Customer T-Sale $350

Draft - for discussion purposes only Border adjustable system – Numerical Illustration

Border adjustable system • Likely challenges: • Classified as a VAT? Does Transfer Pricing apply? • WTO • Other jurisdictions • Treaty and permanent establishments • Deductions (hybrid rules) • Treaty relief for royalties, etc. • Similar rules for US MNCs overseas?

ULVAC Technologies, Inc. • Utilizes an overseas supply chain • Manufacturer and distributor of capital equipment for the semiconductor market & • Certifications in ISO, Customs Trade Partnership Against Terrorism(CTPAT) and International Traffic in Arms Regulations (ITAR) • Subject to Transfer Price Adjustments if necessary • Free Cash Flow (FCF) is an important KPI

ULVAC’s Global Supply Chain – partners including 60 sister company subsidiaries overseas Customs-Trade Partnership Against Terrorism (CTPAT) Subject to Transfer Price Adjusting ¥ JPY Nippon Express (freight broker) ULVAC China Expeditors International (freight broker) $ USD ULVAC, Inc. (Parent) ULVAC Korea International Traffic in Arms Regulations (ITAR) ULVAC Taiwan

Source: http://www.ariba.com/solutions/buy/supply-chain-collaboration

ULVAC’s Supplier Chain Financing • Certain Japanese banks offer us very low loan rates ( ~1% per year ) due to our Japanese parent’s loan guarantee in Japan (e.g.Mizuho Corporate Bank) • We have excess cash on our balance sheet so loans are not currently required to finance our raw material purchases (e.g. working with Curran Investment Counsel for highly liquid, short-term, risk-free cash investment for interest income)

Global Supply Chain Risk • Buying products in one currency and selling in another opens up currency exchange risk • Currency rates can have a big impact on profitability based on the size of the order. We can have deals in the $5M to $20M USD range. Unfortunate market swings can wipe out our profit if the risk is not managed. • Natural disasters and other risks can stop or delay production overseas, delay shipments and delay payments from customers

Foreign Currency Risk Mitigation • Utilizing forward currency contracts (Mizuho Bank) • Receiving daily news content on USD/JPY rate changes delivered via e-mail (e.g. Google Alerts) • Negotiating JPY only transactions with certain customers • Strategic purchasing and selling of USD/JPY • Reviewing customer pricing due to currency fluctuations • Using an ERP system capable of foreign currency transactions (e.g. Visibility.net)

Trends in Global Supply Chain Finance • Customer portal vendors – Ariba, Tungsten(Buyer initiated) (get paid earlier if invoices are discounted, cash flow visibility) • Customers are pushing more inventory holding costs back on suppliers (e.g. supplier-owned consignment to counter long lead times) (Buyer initiated) • Suppliers and customers are holding on to more excess cash • Longer net terms are being requested by customers (e.g. 60 days, 120 days) ~ putting pressure on supplier, opportunity for supplier chain finance programs (Buyer initiated) • Third party vendor to finance our customer’s purchases from us (e.g. First American Vendor Finance) (Supplier initiated) • Electronic A/P and A/R is more common (e.g. EDI, e-mail) to improve cash flow in our supply chain

Sample marketing support that we send to our customers to promote the use of supplier financing. This is from our Leasing/financing partner First American Vendor Finance.

Example document via a Supply Chain Finance Solution (Tungsten) We have the option to accept payment early, but we give up more in the discount than the benefit of having better cash flow to invest

Global Trade Finance: Funding a Supply Chain