Contract analysis

I. Executive Summary This memorandum analyzes the deductibility of interest expense on the proposed $1,400,000,000 senior secured Term Loan B facility (the "Term Loan B" or the "Facility") under Internal Revenue Code ("IRC" or the "Code") Section 163(j) for Nexford Industrial Holdings Inc. (the "Borrower" or "Nexford"), a Delaware corporation headquartered in Schaumburg, Illinois, with a fiscal year ending December 3

II. Background and Transaction Overview A. The Borrower and Corporate Structure Nexford Industrial Holdings Inc. is a corporation organized and existing under the laws of the State of Delaware, federal employer identification number ("EIN") 36-4178552, with its principal executive offices located at 1400 Industrial Parkway, Schaumburg, Illinois 60173. Nexford is a diversified industrials and specialty manufacturing p

1. Nexford Precision Components, Inc. (Delaware corporation)

2. Nexford Engineered Systems, LLC (Delaware limited liability company)

3. Nexford Coatings & Surface Technologies, Inc. (Delaware corporation)

4. Nexford Manufacturing Services, LLC (Delaware limited liability company)

5. Nexford Properties, LLC (Delaware limited liability company)

6. Nexford International Holdings, Inc. (Delaware corporation; CFC holding company)

7. Clearfield Tool & Die, Inc. (Pennsylvania corporation; acquired 2021)

8. Summit Industrial Fabrication Co. (South Carolina corporation; acquired 2022)

9. Ridgepoint Specialty Coatings, LLC (Texas limited liability company; acquired 2023)

10. Lakeshore Precision Engineering, Inc. (Michigan corporation; acquired 2024) In addition, Nexford maintains two foreign subsidiaries: Nexford Canada Holdings ULC, an unlimited liability company organized under the laws of British Columbia, and Nexford Canada Manufacturing, Inc., a corporation organized under the Canada Business Corporations Act. These foreign entities are not included in the U.S. consolidated fede

III. Applicable Legal Framework — IRC Section 163(j) A. Overview of the Section 163(j) Limitation Under IRC Section 163(j)(1), as substantially amended by the Tax Cuts and Jobs Act of 2017 (the "TCJA," Pub. L. No. 115-97) and further modified by the Coronavirus Aid, Relief, and Economic Security Act of 2020 (the "CARES Act," Pub. L. No. 116-136), the deduction allowed under Section 163(a) for "business interest expen

Section 163(j)(5) defines "business interest" as any interest paid or accrued on indebtedness that is properly allocable to a trade or business. Treasury Regulation § 1.163(j)-1(b)(3) further clarifies that "business interest expense" includes any amount that is treated as interest for purposes of the Code, including items that are economically equivalent to interest or that are treated as interest under specific Cod

Section 163(j)(8) defines ATI as the taxable income of the taxpayer, computed with the following adjustments: (i) Add back: any business interest expense for the taxable year (i.e., the interest deduction limitation does not circularly reduce ATI); (ii) Add back: any business interest income for the taxable year; (iii) Exclude: any item of income, gain, deduction, or loss that is not properly allocable to a trade or

Section 163(j)(3) provides an exemption from the business interest expense limitation for taxpayers that meet the "small business" threshold. Specifically, the Section 163(j) limitation does not apply to any taxpayer that meets the gross receipts test of Section 448(c) for the taxable year, which requires that the taxpayer's average annual gross receipts for the three preceding taxable years not exceed $29,000,000 (a

Section 163(j)(7) provides two elective exemptions from the Section 163(j) limitation. Under Section 163(j)(7)(A), an "electing real property trade or business" (as defined in Section 163(j)(7)(B)) may irrevocably elect to be exempt from the limitation, in exchange for being required to use the alternative depreciation system ("ADS") under Section 168(g) for certain real property and qualified improvement property. S

IV. Computation of Section 163(j) Limitation for Nexford — Pro Forma Year 1 (FY 2025) This section sets forth the estimated computation of Nexford's Section 163(j) limitation for fiscal year 2025, the first year in which the Term Loan B will be outstanding. Because the target closing date is March 28, 2025, the Term Loan B will be outstanding for approximately nine months of FY 2025 (from March 28 through December 31

1. Term Loan B Interest The Term Loan B will be funded at closing in the aggregate principal amount of $1,400,000,000. Quarterly amortization payments of $3,500,000 are scheduled to commence on June 30, 2025, with subsequent quarterly payments on September 30, 2025 and December 31, 2025 (for the partial fiscal year). Accordingly, for FY 2025, three quarterly amortization payments will be made, totaling $10,500,000 in

2. Senior Unsecured Notes Interest The $250,000,000 Senior Unsecured Notes bear a fixed annual interest rate of 7.250%, payable semi-annually. The notes are outstanding for the full fiscal year 2025 and are not affected by the Term Loan B transaction. Accordingly, annual interest expense on the Senior Unsecured Notes is: $250,000,000 × 7.250% = $18,125,000

3. OID Amortization The Term Loan B is issued at a price of 99.50 (50 basis points of OID), resulting in $7,000,000 of aggregate original issue discount. Under IRC Sections 1272 through 1275 and the accompanying Treasury Regulations, OID is accrued and deductible by the borrower over the term of the debt obligation using the constant yield method. Over the 7-year term of the Term Loan B (maturing March 28, 2032), the

4. Debt Issuance Cost Amortization Total capitalized transaction fees and expenses are estimated at approximately $38,625,000. Of this amount, $7,000,000 represents the OID (accounted for separately above) and $7,000,000 represents the arrangement fee paid to Crescent Harbor. The remaining $24,625,000 consists of legal fees, advisory fees, syndication costs, and other closing-related expenses that are properly charac

5. Existing Facility Interest (Pre-Closing, FY 2025) The existing $875,000,000 first lien term loan with Atlas Meridian Bank, N.A. bears interest at a SOFR-based floating rate and will remain outstanding from January 1, 2025 through the closing date of March 28, 2025 (approximately 87 days). Assuming a similar all-in interest rate to the Term Loan B (approximately 8.00%–8.50%, reflecting the SOFR-based pricing on the

6. Total Estimated Business Interest Expense — FY 2025 Aggregating all components of business interest expense for FY 2025: This estimate excludes any minor items such as interest on short-term working capital borrowings (none anticipated), late payment charges, or default interest, which are not expected to apply under normal circumstances. B. Estimated Business Interest Income Nexford is a manufacturing company, no

1. Starting Point: Estimated Taxable Income Before Interest The computation of ATI begins with Nexford's taxable income for the fiscal year, before application of the Section 163(j) limitation. Because the Section 163(j) analysis is being performed on a prospective basis prior to the close of FY 2025, we must estimate taxable income based on available financial data and reasonable assumptions. Nexford's LTM Adjusted

2. Estimated Depreciation and Amortization Nexford's tax depreciation and amortization is a critical input to the ATI computation because, under the post-2021 rules, these amounts are not added back in determining ATI. Nexford's D&A is substantially elevated relative to its ongoing capital expenditure requirements due to the acquisition basis step-ups created in the following transactions: (a) 2019 Leveraged Buyout b

3. ATI Estimate For estimation purposes, we approximate ATI using the following simplified approach: Step 1: Start with LTM Reported EBITDA: $357,000,000 Step 2: Subtract estimated tax depreciation and amortization: ($140,000,000) Step 3: This yields an approximate EBIT of: $217,000,000 ATI is then computed by making the statutory adjustments to taxable income (which itself approximates EBIT after the interest deduct

V. Full-Year Analysis — FY 2026 (First Full Year Post-Closing) To provide a complete picture of the ongoing Section 163(j) limitation impact, this section presents the estimated computation for FY 2026, the first full 12-month fiscal year in which the Term Loan B will be outstanding for the entire period. A. Estimated Business Interest Expense — FY 2026 For FY 2026, the principal components of business interest expen

VI. Consolidated Group Considerations A. Consolidated Federal Tax Return Nexford Industrial Holdings Inc., as the common parent, and its eleven eligible domestic subsidiaries are expected to file a consolidated federal income tax return for FY 2025 and subsequent taxable years. The domestic subsidiaries included in the consolidated group are Nexford Precision Components, Inc., Nexford Engineered Systems, LLC, Nexford

Section 163(j) applies at the consolidated group level for taxpayers filing consolidated federal income tax returns. Under Treasury Regulation § 1.163(j)-4(d), the Section 163(j) limitation is computed for the entire consolidated group on a combined basis, meaning that all business interest expense and business interest income of the group members are aggregated in determining whether the limitation applies and in co

Section 163(j) Applied to CFC Level. Section 163(j) also applies separately at the CFC level for purposes of computing tested income under Section 951A. If the Canadian subsidiaries have their own third-party borrowings, those interest expenses would be subject to a separate Section 163(j) analysis at the CFC level. Based on the information provided, the foreign subsidiaries do not have material third-party indebtedn

VII. Treatment of OID and Transaction Costs A. Original Issue discount (OID) The Term Loan B is being issued at a price of 99.50, resulting in $7,000,000 of original issue discount (representing the 50 basis point discount from the par amount of $1,400,000,000). Under IRC Sections 1272 through 1275 and the Treasury Regulations promulgated thereunder, OID is included in the income of the holder (i.e., the syndicate le

VIII. Interaction with the Credit Agreement Provisions A. EBITDA Definition and Tax ATI — Key Differences The credit agreement's definition of "Adjusted EBITDA" (also sometimes referred to as "Consolidated EBITDA" or "Consolidated Adjusted EBITDA" in the defined terms of the credit agreement) is a financial covenant metric that differs materially from ATI as computed for purposes of Section 163(j). Understanding this