{"type":"DocxDocument","pageSize":"a4","metadata":{"title":"Project Falcon — Red-Flag Due Diligence Summary","author":"Ashworth Transaction Advisory LLP","subject":"Buy-side diligence on Halvorsen Precision Components AS","language":"en-GB"},"theme":{"preset":"minimal"},"watermark":{"text":"DRAFT — PRIVILEGED","opacity":0.12},"header":{"text":"Project Falcon — Strictly private and confidential"},"footer":{"text":"Ashworth Transaction Advisory LLP","includePageNumber":true},"pages":[{"elements":[{"type":"heading","level":1,"text":"Project Falcon: Red-Flag Due Diligence Summary"},{"type":"paragraph","runs":[{"text":"Prepared for Bergfalk Capital Partners Fund IV — 14 July 2026. Draft subject to completion of confirmatory procedures listed in Appendix C. This report is addressed solely to the deal team under our engagement letter of 18 May 2026 and may not be relied upon by any other party.","style":{"fontSize":9.5,"fontStyle":"italic"}}]},{"type":"heading","level":2,"text":"Deal snapshot"},{"type":"table","tableStyle":"minimal","rows":[{"cells":[{"text":"Target","style":{"fontWeight":"bold"}},{"text":"Halvorsen Precision Components AS (\"HPC\"), Kongsberg, Norway; CNC-machined flight-critical and subsea components; 412 employees across two Norwegian plants and one Polish plant"}]},{"cells":[{"text":"Structure","style":{"fontWeight":"bold"}},{"text":"100% share purchase from founder family (62%) and Fjellvind Industrier ASA (38%); locked-box mechanism, box date 31 December 2025"}]},{"cells":[{"text":"Headline price","style":{"fontWeight":"bold"}},{"text":"NOK 2,150m enterprise value, implying 9.2x management FY2025 adjusted EBITDA of NOK 234m"}]},{"cells":[{"text":"Diligence basis","style":{"fontWeight":"bold"}},{"text":"FY2023-FY2025 audited accounts (unqualified, Revisjon Nord AS), management accounts to May 2026, data room of 3,184 documents, management sessions 2-19 June 2026"}]},{"cells":[{"text":"Our view on multiple basis","style":{"fontWeight":"bold"}},{"text":"Diligence-adjusted FY2025 EBITDA of NOK 204m implies 10.5x at the headline price — 1.3x above the multiple the deal team underwrote"}]}]},{"type":"heading","level":2,"text":"Overall assessment"},{"type":"paragraph","text":"We identified no findings that would cause us to recommend withdrawing from the transaction. We identified three red flags that in our view must be resolved through price, structure or SPA protection before signing: the quality-of-earnings adjustments summarised below (aggregate NOK 30m, 12.8% of management adjusted EBITDA); an unprovided Polish VAT exposure of NOK 18-31m; and customer concentration that has increased rather than decreased since the information memorandum was drafted — the top customer, Nordvik Aerospace, now represents 34% of FY2025 revenue and holds unpriced re-opener rights triggered by this change of control."},{"type":"paragraph","text":"The operational story otherwise supports the investment thesis. Order backlog stands at NOK 1.9bn (2.1 years of revenue) with 71% in framework agreements running to 2029 or later. Machine utilisation, scrap rates and on-time delivery all sit in the top quartile of our machining benchmark set, and the Polish plant's unit economics genuinely deliver the labour arbitrage described in the IM."},{"type":"heading","level":2,"text":"Quality of earnings — summary bridge"},{"type":"table","tableStyle":"corporate","tableCaption":"FY2025 EBITDA bridge, management adjusted to diligence adjusted (NOK m)","rows":[{"isHeader":true,"cells":[{"text":"Ref"},{"text":"Adjustment"},{"text":"NOK m"},{"text":"Basis"}]},{"cells":[{"text":"—"},{"text":"Management adjusted EBITDA, FY2025","style":{"fontWeight":"bold"}},{"text":"234","style":{"textAlign":"right","fontWeight":"bold"}},{"text":"Management IM basis"}]},{"cells":[{"text":"A1"},{"text":"Reverse one-off COVID-era energy subsidy recognised in other income"},{"text":"(9)","style":{"textAlign":"right"}},{"text":"Non-recurring; scheme closed 2025"}]},{"cells":[{"text":"A2"},{"text":"Normalise founder family remuneration to market CEO/CTO packages"},{"text":"(6)","style":{"textAlign":"right"}},{"text":"Two family members below market by NOK 6m aggregate"}]},{"cells":[{"text":"A3"},{"text":"Reverse capitalised development labour failing IAS 38 criteria"},{"text":"(8)","style":{"textAlign":"right"}},{"text":"37% of capitalised hours lacked project documentation"}]},{"cells":[{"text":"A4"},{"text":"Reverse release of excess inventory provision into FY2025 margin"},{"text":"(11)","style":{"textAlign":"right"}},{"text":"Provision methodology changed in FY2025; restated basis"}]},{"cells":[{"text":"A5"},{"text":"Annualise Polish plant second shift (commenced September 2025)"},{"text":"+12","style":{"textAlign":"right"}},{"text":"Run-rate benefit, verified against Jan-May 2026 actuals"}]},{"cells":[{"text":"A6"},{"text":"Full-year effect of Nordvik framework price escalation (April 2025)"},{"text":"+7","style":{"textAlign":"right"}},{"text":"Contractual; indexed to EUR steel and labour baskets"}]},{"cells":[{"text":"A7"},{"text":"Normalise FX gains on EUR/NOK hedges to policy-neutral basis"},{"text":"(15)","style":{"textAlign":"right"}},{"text":"FY2025 hedge gains 2.4x the five-year average"}]},{"cells":[{"text":"—"},{"text":"Diligence adjusted EBITDA, FY2025","style":{"fontWeight":"bold"}},{"text":"204","style":{"textAlign":"right","fontWeight":"bold"}},{"text":"Aggregate adjustment (30)"}]}]}]},{"sectionBreak":"nextPage","elements":[{"type":"heading","level":2,"text":"Findings by workstream"},{"type":"paragraph","text":"Severity ratings: Red — resolve before signing through price, structure or SPA protection. Amber — manageable post-close with a defined owner and budget. Green — noted, no action required. Only red and amber findings are itemised below; the full findings register (61 items) is at Appendix B."},{"type":"heading","level":3,"text":"1. Financial and quality of earnings"},{"type":"list","listType":"number","items":[{"runs":[{"text":"RED — EBITDA overstatement of NOK 30m. ","style":{"fontWeight":"bold","color":"B2182B"}},{"text":"Aggregate of adjustments A1-A7 above. Recommend the bid be re-based to diligence-adjusted EBITDA or the gap bridged through a deferred consideration tranche."}]},{"runs":[{"text":"AMBER — Working capital seasonality understated in the IM. ","style":{"fontWeight":"bold","color":"B8860B"}},{"text":"Peak-to-trough swing is NOK 96m (IM: NOK 60m) driven by Q4 raw-material buying ahead of the Nordvik winter build schedule. The locked-box target should be set against a monthly, not quarterly, reference profile."}]},{"runs":[{"text":"AMBER — Capex holiday in FY2025. ","style":{"fontWeight":"bold","color":"B8860B"}},{"text":"Maintenance capex ran at NOK 41m against a five-year average of NOK 58m; two five-axis machining centres (installed 2011, 2013) are past OEM-recommended overhaul. Budget NOK 35m catch-up across FY2027-FY2028."}]}]},{"type":"heading","level":3,"text":"2. Tax"},{"type":"list","listType":"number","items":[{"runs":[{"text":"RED — Polish VAT on tooling recharges, NOK 18-31m unprovided. ","style":{"fontWeight":"bold","color":"B2182B"}},{"text":"Since 2021 the Polish plant has recharged customer-owned tooling to the Norwegian parent without output VAT, relying on a ruling that on our reading covers a different supply. Exposure spans five open years including penalties and interest. Recommend a specific indemnity with a NOK 31m escrow, not a general tax warranty."}]},{"runs":[{"text":"AMBER — Transfer pricing documentation gaps. ","style":{"fontWeight":"bold","color":"B8860B"}},{"text":"The Norway-Poland cost-plus arrangement (7% markup) has no benchmarking study after 2022. Commission an updated study within 12 months of close; estimated exposure if challenged is NOK 4-9m per open year."}]}]},{"type":"heading","level":3,"text":"3. Legal and commercial"},{"type":"list","listType":"number","items":[{"runs":[{"text":"RED — Nordvik change-of-control re-opener. ","style":{"fontWeight":"bold","color":"B2182B"}},{"text":"The 2024 framework agreement (34% of revenue) grants Nordvik the right to \"review and renegotiate commercial terms\" on any change of control of HPC, exercisable within 90 days of notification. Nordvik's procurement VP indicated verbally that they intend to seek a 3-5% price reduction. Recommend pre-signing engagement with Nordvik and a price-adjustment mechanism in the SPA keyed to the outcome."}]},{"runs":[{"text":"AMBER — Export-control classification backlog. ","style":{"fontWeight":"bold","color":"B8860B"}},{"text":"14 of 61 active part numbers with potential dual-use characteristics lack current classification records under Norwegian export regulations. No evidence of actual unlicensed export. Remediation estimated at NOK 2m of specialist counsel time over six months."}]},{"runs":[{"text":"AMBER — Two employment disputes at the Polish plant. ","style":{"fontWeight":"bold","color":"B8860B"}},{"text":"Combined claimed amount PLN 1.4m relating to shift-premium calculations 2023-2024; provision of PLN 0.4m held. Local counsel assesses probable outflow at PLN 0.6-0.9m."}]}]}]},{"sectionBreak":"nextPage","elements":[{"type":"heading","level":3,"text":"4. Operations and supply chain"},{"type":"list","listType":"number","items":[{"runs":[{"text":"AMBER — Single-source titanium bar supply. ","style":{"fontWeight":"bold","color":"B8860B"}},{"text":"83% of FY2025 titanium bar was purchased from one European mill on annual POs with no volume commitment from the supplier. Qualification of a second mill takes 9-14 months due to aerospace material certification. Start dual-sourcing qualification in the first 100 days."}]},{"runs":[{"text":"AMBER — Key-person dependence in programming. ","style":{"fontWeight":"bold","color":"B8860B"}},{"text":"Five senior CAM programmers (average tenure 19 years, average age 58) hold undocumented knowledge of legacy part programs for 212 active part numbers. No retention packages exist. Recommend retention agreements at close and a documented programming-standards project."}]},{"runs":[{"text":"GREEN — Plant condition and utilisation. ","style":{"fontWeight":"bold","color":"1B7837"}},{"text":"Independent plant walk-downs (27-28 May) confirmed machine availability of 91% and scrap rate of 1.7%, consistent with management reporting. FY2025 capex holiday noted at finding 1.3 notwithstanding."}]}]},{"type":"heading","level":3,"text":"5. IT and cybersecurity"},{"type":"list","listType":"number","items":[{"runs":[{"text":"AMBER — ERP end-of-support. ","style":{"fontWeight":"bold","color":"B8860B"}},{"text":"The Movex/M3 ERP instance runs on an OS version out of extended support since January 2026. Migration was scoped by management at NOK 24m over 18 months but is unbudgeted in the plan the deal model uses. Include in the post-close investment case."}]},{"runs":[{"text":"AMBER — No tested backup restore for shop-floor DNC server. ","style":{"fontWeight":"bold","color":"B8860B"}},{"text":"Part programs are backed up nightly but no restore test is on record since 2023. A loss event would idle both Norwegian plants for an estimated 3-5 days. Low-cost fix; assign in the 100-day plan."}]}]},{"type":"heading","level":2,"text":"Impact on deal economics"},{"type":"table","tableStyle":"bordered","tableCaption":"Findings quantified against headline enterprise value (NOK m)","rows":[{"isHeader":true,"cells":[{"text":"Item"},{"text":"Low"},{"text":"High"},{"text":"Treatment recommended"}]},{"cells":[{"text":"EBITDA re-base at 9.2x (A1-A7)"},{"text":"(276)","style":{"textAlign":"right"}},{"text":"(276)","style":{"textAlign":"right"}},{"text":"Price"}]},{"cells":[{"text":"Polish VAT exposure"},{"text":"(18)","style":{"textAlign":"right"}},{"text":"(31)","style":{"textAlign":"right"}},{"text":"Escrow + specific indemnity"}]},{"cells":[{"text":"Nordvik re-opener (3-5% on 34% of revenue, 5 years, taxed, discounted)"},{"text":"(41)","style":{"textAlign":"right"}},{"text":"(68)","style":{"textAlign":"right"}},{"text":"Price-adjustment mechanism"}]},{"cells":[{"text":"Capex catch-up and ERP migration"},{"text":"(59)","style":{"textAlign":"right"}},{"text":"(59)","style":{"textAlign":"right"}},{"text":"Deal model, not price"}]},{"cells":[{"text":"Indicated headline adjustment range","style":{"fontWeight":"bold"}},{"text":"(335)","style":{"textAlign":"right","fontWeight":"bold"}},{"text":"(375)","style":{"textAlign":"right","fontWeight":"bold"}},{"text":"—"}]}]},{"type":"heading","level":2,"text":"Recommended SPA protections"},{"type":"list","listType":"number","items":[{"text":"Specific indemnity for the Polish VAT matter, backed by a NOK 31m escrow releasing on the earlier of a clean audit closure or the fifth anniversary of closing."},{"text":"Price-adjustment clause keyed to the concluded Nordvik terms, symmetric within a defined collar, exercisable up to 120 days post-close."},{"text":"Locked-box protections: no-leakage covenant with an agreed permitted-leakage schedule (family remuneration at current contractual levels only) and NOK-for-NOK recovery."},{"text":"Warranty package to include specific warranties on capitalised development costs, inventory provisioning methodology, and export-control compliance, each surviving 24 months."},{"text":"Retention agreements for the five senior CAM programmers as a condition to closing, funded 50/50 between buyer and sellers."}]},{"type":"paragraph","runs":[{"text":"Limitations. ","style":{"fontWeight":"bold"}},{"text":"Our procedures did not constitute an audit. Environmental site investigation (Phase II) at the Kongsberg south plant remains in progress with results expected 24 July; soil findings could alter the recommendation on the industrial-legacy indemnity. Figures translated at NOK/EUR 11.42 and NOK/PLN 2.66 where applicable."}]}]}]}