McCoy

Global
2Q 2016 Review

Back in April of 2015 the headline for the original write-up of McCoy Global was Rock Solid
Balance Sheet. While this is still the case, not much else has gone right for McCoy.
Revenue, particularly in the most recent quarter, has fallen off a cliff, FCF has turned
negative, and McCoy has undertaken a massive restructuring to remove about $12 million
from its cost structure.

On the revenue side, McCoys customers have proven more resilient by getting the most out
of their current equipment, and McCoys after-market replacement sales have not increased
as a percent of revenue as much as I had forecast. This along with the decline in capital
goods sales has pushed revenue below a sustainable level given the amount of fixed costs in
their system. Operating leverage can be a great thing when it works for you, unfortunately
with McCoy were on the flip side of those positive effects. Really the only positive to come
out of the 2Q earnings call as far as revenue is concerned is the remark that quoting has
picked up a bit. With the newly initiated restructuring, McCoy will need about $10 million
in revenue per quarter to break even, so an increase in revenue from the improved 2Q
quoting is something Ill be looking for in 3Q.

McCoys FCF used to be one of the attributes that I liked about the stock, unfortunately it has
turned negative during 2Q 2016. Revenues are just not high enough to cover the excess
manufacturing capacity. McCoy is addressing this overcapacity issue, as Ill discuss below,
but for now they are in a cash burn situation to the turn of about $7 million per quarter,
after backing out the one-time restructuring costs. Fortunately they have been able to
liquidate working capital so that their cash balance is still strong, and for second half 2016
they plan to liquidate more excess inventory (perhaps $10 million) and collect on corporate
tax refunds in the U.S. and Canada (about $5 million). This should help offset the estimated
cash burn of about $8 million and leave McCoy with between $20 and $25 million at end of
year 2016.

In light of the drastic decrease in revenue, management has instituted a large restructuring
to right size the company. They believe they can remove $12 million of costs over the next 6
months. $8 million will be removed from COGS and $4 million will be removed from SG&A.
Plant closures and right sizing of staff will accomplish this. Also helping them lower costs is
the liquidation of higher cost inventory, as this inventory is used up, lower cost inventory
will replace it and eventually will produce lower COGS. $12 million over 6 months seems
like a lot, however given the drastic reduction in production needs, McCoy should have a lot
of low hanging fruit to go after.

Current Valuation
Given McCoys current state, its tough to put a solid valuation on the company. Once oil
prices return to a sustainable level, production will pick up and McCoy could be selling for

multiples of where its at today. Its selling below its Net/Net value, which is a plus, but is
burning cash, which is a big negative. In aggregate, cash flow negative Net/Nets have
historically out performed cash flow positive ones, but the risk that any individual company
could go bankrupt is higher. I will refrain from attempting to put a specific valuation on the
company other than to say if it survives this downturn it will be much higher than it is
selling for today, if it doesnt survive, itll obviously be worth much less. For this reason Ill
be watching the companys cash levels closely in the quarters to come.

What to Look for in 2016 Q3 Earnings Report
The most important metric to monitor thru the end of the year is, by far, the cash
level
o $20-$25 million of cash, by my own forecasts
Management hitting the expected savings from restructuring of $12 million by end
of year
o Based off 2Q numbers
o $8 million from Cost of Sales
o $4 million from SG&A
Quoting activity
I project McCoy will need approximately $10 million/quarter in revenue to
breakeven, is this still the case and are they close

Summing it up
Compared to Dawson, my most recent write-up, McCoy is more concerning because of the
differences in operating leverage of their business models. They both still have very strong
balance sheets, a requirement for investing in cyclical companies during a downturn, but
McCoy is burning a good chunk of change. I have no clue of the timeframe, but I still believe
oil prices and production levels will have to increase in order to fulfill the worlds
requirements of oil and I believe McCoy will be there to service the companies providing the
drilling and extraction. Should either of these beliefs change, I will look to liquidate my
position. Until then I will closely monitor and have a hold rating on my position in McCoy
Global.