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We have updated our Management Meetings Prep Pack as we head into the fall conference season. This report includes comprehensive question banks, abridged transcripts and cheat sheets for the US Multi-Industry group.
MORGAN STANLEY RESEARCH NORTH AMERICA Morgan Stanley & Co. LLC Nigel Coe, CFA Nigel.Coe@morganstanley.com +1 212 761 5574 Michael W Sang Mike.Sang@morganstanley.com +1 212 761 7092 Jiayan Zhou, CFA September 4, 2013 Jiayan.Zhou@morganstanley.com +1 212 761 5766 Industry View Multi-Industry In-Line Fall 2013 Prep Pack Summary of Coverage Universe Stock Symbol PT Rating We have updated our Management Meetings Prep Danaher DHR 72 OW Pack as we head into the fall conference season. Dover DOV 90 OW This report includes comprehensive question Honeywell HON 88 OW Hubbell HUBb 111 OW banks, abridged transcripts and cheat sheets for the SPX Corp SPW 91 OW US Multi-Industry group. Stanley Black & Decker SWK 91 OW United Technologies UTX 110 OW Tyco International TYC 39 OW What has changed since May? We have ADT Corporation ADT 43 EW comprehensively updated our question banks for recent Ametek AME 44 EW macro trends, earnings reports and news flow. The Emerson Electric EMR 63 EW question banks have been carefully tailored for each Eaton ETN 74 EW General Electric GE 24 EW company, but there are some common themes, as follows: Ingersoll Rand IR 65 EW 3M MMM 118 EW 1) Global PMI acceleration: Surveys have shown Regal-Beloit RBC 70 EW Illinois Tool Works ITW 67 UW consistent improvement through 3Q, with all key regions Lennox International LII 65 UW back into expansion. Are companies already seeing this Rockwell Automation ROK 97 UW improvement in their backlogs and to what extent has any Source: Morgan Stanley Research OW = Overweight EW = Equal-weight UW = Underweight acceleration been reflected in 2H guidance? For valuation methodology and risks associated with any price targets above, please email firstname.lastname@example.org with a request for valuation methodology and risks on a particular stock. 2) 2014 outlook: The September YE companies will be providing FY14 guidance in November and regular cycle LTM Industry Performance 74 companies will already be a long way through their planning processes. Therefore, we start drilling deeper into the FY14 70 puts and takes: What are management teams hearing from 66 customers and seeing in front logs? What sort of 62 environment are companies assuming in their hiring and capital budgets? How does price and cost input inflation 58 trend through the back half of the year and into FY14? 54 50 3) Interest rate and currency volatility: The spike in 46 interest rates could lead to rising interest costs for some Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 May-13 Jul-13 J un-13 Aug-12 Sep-12 Apr-13 Aug-13 companies exposed to variable rates, but most will benefit from lower pension expense – what sort of pension tailwind do management teams expect? While the USD has held EE/MI Sector S&P 500 Index (Rebas ed) steady on a trade-weighted basis, there has been extreme Source: Thomson Reuters, Morgan Stanley Research. volatility in EM currencies. How exposed are companies to this volatility and has it led to any real demand destruction? Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As 4) Capital deployment: Always a key topic for the group. a result, investors should be aware that the firm may Companies have recently skewed surplus capital have a conflict of interest that could affect the deployment towards buyback at the expense of M&A. But objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a what are companies seeing in their backlogs and what are single factor in making their investment decision. the conditions that could free up deal flow? What is the For analyst certification and other important strategy for “stranded” overseas cash balances? disclosures, refer to the Disclosure Section, located at the end of this report. MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Contents Summary Tables 3 3M 5 ADT 19 Ametek 29 Danaher 41 Dover 53 Eaton 67 Emerson Electric 81 General Electric 95 Honeywell 111 Hubbell 123 Ingersoll-Rand 135 Illinois Tool Works 147 Lennox International 161 Regal-Beloit 173 Rockwell Automation 183 SPX Corporation 195 Stanley Black & Decker 209 Tyco International 221 United Technologies 233 Key Performance Indicators 247 The earnings call transcripts for each company are reprinted from previously published notes. These materials are not the official transcripts of the companies’ calls held recently. It is a summary of key points discussed on the calls. The information and opinions in these materials were prepared by the employees of the Morgan Stanley Research Department. These materials are solely for informational and discussion purposes. The material is not a research report. 2 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Summary Tables Exhibit 1 Morgan Stanley EE/MI Universe Comparative Multiples (priced on August 29, 2013) Dividend Total Market Ent. Stock Symbol Rating Price PT EV/Sales EV/EBITDA Price/FCF P/E Yield Return Cap Value 2012 2013E 2014E 2012 2013E 2014E 2012 2013E 2014E 2012 2013E 2014E 2014Ep* General Electric GE EW 23.1 24 3.4% 7.3% 235,347 228,736 2.2 2.2 2.0 21.8 20.7 16.6 17.6 23.7 14.6 15.1 14.0 13.1 13.1 United Technologies UTX OW 100.5 110 2.1% 11.6% 92,173 110,146 1.9 1.7 1.7 11.5 9.9 9.2 17.5 16.5 11.7 18.8 16.4 14.4 14.1 3M MMM EW 113.3 118 2.2% 6.4% 77,451 79,765 2.7 2.6 2.5 10.3 10.0 9.5 20.9 16.6 16.7 17.9 17.1 15.4 15.3 Honeywell HON OW 80.1 88 2.1% 11.9% 62,835 65,158 1.7 1.7 1.6 10.1 9.2 8.4 24.0 18.0 15.5 17.9 16.2 14.4 15.1 Danaher DHR OW 65.6 72 0.3% 10.0% 45,636 47,472 2.6 2.5 2.4 11.7 11.1 10.4 15.7 15.8 15.3 20.5 19.3 17.2 17.1 Emerson Electric EMR EW 60.6 63 2.8% 6.7% 43,308 46,019 1.9 1.9 1.9 9.3 9.5 9.0 16.9 16.5 15.6 17.3 17.3 15.6 15.2 Eaton ETN EW 64.0 74 2.6% 18.2% 30,325 38,813 2.4 1.7 1.7 16.7 11.2 10.1 21.0 16.1 12.1 16.2 15.2 13.0 12.7 Illinois Tool Works ITW UW 71.8 67 2.1% -4.6% 32,140 34,320 2.0 2.1 2.0 9.8 9.7 9.4 19.8 16.4 15.5 18.7 17.4 16.4 16.3 Ingersoll Rand IR EW 59.6 65 1.5% 10.5% 17,342 19,875 1.4 1.4 1.3 10.6 9.9 9.3 20.2 15.3 14.0 18.1 16.5 14.5 14.1 Tyco International TYC OW 33.3 39 1.9% 19.0% 15,381 16,327 1.6 1.5 1.4 11.2 9.9 8.9 41.4 34.6 16.1 22.4 17.2 14.5 14.6 Stanley Black & Decker SWK OW 85.8 91 2.3% 8.4% 13,743 17,884 1.8 1.6 1.6 11.5 10.9 9.5 24.7 17.0 12.5 18.5 15.9 13.9 13.9 Dover DOV OW 85.9 90 1.7% 6.5% 14,664 16,765 2.1 1.9 1.8 10.3 9.4 8.7 16.4 13.8 13.3 19.3 16.4 14.7 14.5 Rockwell Automation ROK UW 97.8 97 2.1% 1.3% 13,558 13,211 2.1 2.1 2.0 11.1 10.5 9.7 14.8 16.9 17.0 18.7 17.0 15.6 15.6 Large Caps 2.1% 8.4% 693,903 734,491 2.0 1.9 1.8 11.1 9.9 9.4 19.8 16.5 15.3 18.5 16.5 14.5 14.6 Ametek AME EW 43.5 44 0.6% 1.7% 10,619 11,518 3.5 3.3 3.1 13.5 12.5 11.6 19.2 19.1 17.8 23.1 20.9 19.0 19.1 Hubbell HUBB OW 103.4 111 2.2% 9.5% 5,396 5,961 2.0 1.9 1.8 11.1 10.3 9.5 20.6 19.5 16.9 20.7 18.9 16.7 16.6 SPX Corp SPW OW 74.1 91 1.6% 24.4% 3,360 4,708 0.9 0.9 0.9 10.1 10.1 8.7 - - 12.4 18.6 17.3 12.7 12.4 Regal-Beloit RBC EW 64.5 70 1.2% 9.7% 2,908 3,270 1.0 1.1 1.0 7.3 7.7 7.1 10.4 10.5 16.7 13.6 16.1 13.9 13.8 Lennox LII UW 69.5 65 1.0% -5.5% 3,470 3,919 1.3 1.2 1.2 14.1 11.2 9.7 20.9 44.7 15.0 25.8 19.0 15.1 14.8 SMID Caps 1.2% 9.5% 25,753 29,376 1.3 1.2 1.2 11.1 10.3 9.5 19.9 19.3 16.7 20.7 18.9 15.1 14.8 MS MI/EE Universe 2.1% 8.9% 719,656 763,867 1.9 1.8 1.7 11.1 10.1 9.5 19.8 16.6 15.4 18.6 17.0 14.6 14.7 ADT Corporation ADT EW 40.7 43 1.3% 7.0% 8,570 11,340 3.5 3.4 3.3 6.9 6.6 6.4 20.5 23.5 26.0 23.1 22.6 21.1 21.1 Source: Morgan Stanley Research estimates, Thomson Reuters. All multiples are on calendar year basis. GE EV-multiples exclude GE Capital. All multiples are on calendar year basis. 2014Ep stands for 2014 pension adjusted P/E multiple. For valuation methodology and risks associated with any price targets above, please email email@example.com with a request for valuation methodology and risks on a particular stock. Exhibit 2 Morgan Stanley EE/MI Universe Key Performance Indicators Price Bull Bear 3Q13 FY13 Stock Symbol Rating Price Target % Upside Case % Upside Case % Upside MSe Vs. Cons MSe Vs. Cons Danaher DHR Overweight 65.6 72 10% 85 30% 45 -31% 0.83 0% 3.40 0% Dover DOV Overweight 85.9 90 5% 103 20% 51 -41% 1.48 0% 5.24 -1% Honeywell HON Overweight 80.1 88 10% 101 26% 56 -30% 1.26 1% 4.95 0% Hubbell HUBb Overweight 103.4 111 7% 134 30% 73 -29% 1.59 0% 5.48 1% SPX Corporation SPW Overweight 74.1 91 23% 114 54% 47 -37% 1.22 -2% 4.27 -2% Stanley Black & Decker SWK Overweight 85.8 91 6% 108 26% 52 -39% 1.44 4% 5.40 -1% United Technologies UTX Overweight 100.5 110 9% 124 23% 76 -24% 1.61 4% 6.14 0% Tyco International TYC Overweight 33.3 39 17% 46 38% 24 -28% 0.53 0% 1.85 0% Median Overweight 10% 28% -31% 0% 0% 3M MMM Equalweight 113.3 118 4% 136 20% 86 -24% 1.71 -2% 6.64 -1% ADT Corporation ADT Equalweight 40.7 43 6% 58 43% 32 -21% 0.42 -11% 1.79 -3% Ametek AME Equalweight 43.5 44 1% 60 38% 31 -29% 0.52 0% 2.08 0% Emerson Electric EMR Equalweight 60.6 63 4% 76 25% 40 -34% 1.08 -2% 3.46 -1% Eaton ETN Equalweight 64.0 74 16% 94 47% 48 -25% 1.15 3% 4.20 0% General Electric GE Equalweight 23.1 24 4% 30 30% 16 -31% 0.36 -4% 1.65 -1% Ingersoll Rand IR Equalweight 59.6 65 9% 82 38% 47 -21% 1.09 -1% 3.60 0% Regal-Beloit RBC Equalweight 64.5 70 9% 88 36% 47 -27% 1.15 0% 4.01 -4% Median Equalweight 5% 37% -26% -1% -1% Illinois Tool Works ITW Underweight 71.8 67 -7% 88 23% 44 -39% 1.07 -3% 4.13 -2% Lennox International LII Underweight 69.5 65 -6% 88 27% 40 -42% 1.29 3% 3.67 0% Rockwell Automation ROK Underweight 97.8 97 -1% 113 16% 50 -49% 1.54 1% 5.65 1% Median Underweight -6% 23% -42% 1% 0% EE/MI Median 6% 30% -30% 0% 0% EE/MI Average 7% 31% -32% -1% -1% Source: Morgan Stanley Research estimates, Thomson Reuters. * ADT, Emerson, Rockwell and Tyco are on calendar year basis; GE revenue and EBITDA excludes GE capital. For valuation methodology and risks associated with any price targets above, please email firstname.lastname@example.org with a request for valuation methodology and risks on a particular stock. 3 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry This page has been intentionally left blank 4 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry 3M 5 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry MMM Question Bank 2013/14 Outlook How are you tracking relative to your 2-5% organic growth range for FY13? Have you seen any strengthening or weakening vs. 2% core growth in 2Q – to what extent should you benefit from easier prior year comps in 3Q? Have you seen a strong Back to School selling season at C&O? Have you seen a return to growth at E&E? What are you seeing by key geography and end market – any major standouts? What drove the standout strength at LatAm/Canada (up 8.5% in 2Q) and has this continued? How is the US trending relative to 1% growth registered in 2Q and why do you believe the US has been underperforming? Are you continuing to see positive growth in Europe? Have you seen any improvement in Japan (down 2.3% in 2Q)? Has the volatility in EM currencies changed your outlook for 2ppts FX headwind in 2013 and 5c EPS head wind during 2H? What are the EUR and JPY assumptions in your updated FX guidance? Are there any measurable transactional and/or margin impacts from these movements? What sort of an environment are you planning for in 2014? Would you expect growth to return to mid cycle levels? What do you see as the major puts and takes? Margin Dynamics Price/cost continued to moderate in 2Q (+80bps) - are you planning any pricing actions in 2013 by business? How did pricing look ex-Electronics and Optical Films? Are you seeing pushback from customers? How much influence did the weaker USD have on “headline” pricing? Do you see risk of price deflation developing over the next 12 months? Margins contracted by 90bps last quarter, but you still expect flattish margins for the full year? How realistic is that outcome? To what extent is lower factory absorption (50bps pinch in 2Q) still a performance drag? The 220bps decline at Safety & Graphics was a standout – do you still expect ~1.5ppts of pinch from lower mix of government projects and personal safety investments? How is price tracking relative to 60bps pricing realized in 2Q – have you seen any pricing pressure? How does price/cost look in 3Q and 2013 – do you still expect a net benefit during 2H and how does this look relative to the 80bps margin benefit realized in 2Q? How does cost inflation look for some of your key commodity inputs? Can you describe the ~40bps of growth investments and how these break out between ERP, R&D and other? Do you see growth investments accelerating in 2014? Has the recent slowdown led to any exceptional discretionary cost control measures that could result in some head wind through 2014? What restructuring payback do you expect on actions taken in 2012? What level of investment do you expect to incur in 2013? Where are the focus areas? Should we assume that the $4.5m restructuring charge in 1H13 could recur through the year? What benefits are you realizing from the restructuring of the Infrastructure Protection business? At current discount rates and plan returns, how does the 2014 benefit look relative to the $100m saving in 2013? Long-Term Targets (through 2017) What gives you confidence that you can reach 4-6% growth relative to the 3% achieved over the past 10 years? Where do you see the opportunity to drive 1-3ppts of incremental annual growth and which businesses do you expect to do much of the heavy lifting? 6 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Peak margins are a concern and your longer-term plan which embeds no margin expansion (productivity savings to be reinvested into funding top line growth) certainly endorses that view. How confident are you that R&D (stepping up by 50bps to 6%) and commercialization initiatives can drive better growth going forward? What steps have you taken here, what needs to be done and over what time frame? How much benefit do you expect to realize from lean six sigma and other excellence initiatives and do you expect the offsets of higher R&D (+50bps), sales & marketing and localization costs to broadly match each year; or might we see some near term margin pressure from upfront investment costs? What payback do you expect from the pick-up in R&D investment? How will you measure this – is it product funnel, NPI or organic sales? How do you think 50bps of incremental R&D investment translates into organic sales, in a very general sense? How critical is product development and commercialization investment – can you describe what this means (headcount, physical infrastructure etc)? What is the current margin delta between US/Europe and LatAm/Asia (it has been as high as 10ppts) and how do you expect this to change through 2017? How will localization initiatives impact this? Do you see the potential for downward margin pressure as you increasingly localize operations in EM and increasingly move into mid-tier market segments in high growth regions? What is the timeline and stage posts on ERP implementation? What did you learn from your Taiwanese pilot? What is the OpEx and CapEx investment profile? What qualitative and quantitative benefits do you expect to realize? When do you expect the initiative to become accretive? Can you describe what is expected to drive your tax rate down to 27% by 2017? Could there be additional benefits over and above the 50bps p.a. you have indicated? Could this result in a higher restricted overseas cash balance over time? Portfolio How is your M&A pipeline looking? What opportunities to you see to expand in the Heartland of your portfolio (abrasives, personal safety, auto aftermarket, adhesives and tapes)? Do you still see O&G and Aerospace as attractive growth end markets for M&A – where do you want to play in these areas? You have talked about looking to do larger deals going forward? Can you describe what a larger deal might mean for 3M – is there a ceiling? Do you have to hire talent or develop different procedures to source and vet larger opportunities? How active is the non-strategic portfolio review and can you provide some additional color on the profile of assets in this category; what else other than the Security, Traffic Safety & Fly Fishing businesses (with total revenue of ~$1bn)? Any sense on how much of the remaining $1.5bn sales will be sold vs. restructured – do you see possibility of EPS dilution from these actions? Are these generally lower margin assets? To what extent are these businesses integrated into the Heartland and Push-Forward assets from a basic technology and manufacturing perspective? Can you discuss how the recent Ceradyne acquisition will improve your strategic positioning in ceramics? What are the operational challenges? How will the earnings and cash flow impact look, given recent weakness in Ceradyne’s topline performance? In which divisions do you see the opportunity to leverage Ceradyne technology? Free Cash Flow Allocation Do you expect to complete the $3.5-4.5bn share repurchase commitment ($2bn YTD) in a fairly linear fashion? How much offset do you anticipate at the current share price from option dilution? Does the higher range represent a change in capital allocation philosophy and so should we look for a similar level of buy backs in 2014? 7 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry What is the cost/benefit analysis of safeguarding the AA rating? Net debt has moved into the $1-2bn range post-crisis vs. a more typical $3-4bn range pre-crisis. Do you see the potential to move back to this higher level of leverage over the next 1-2 years? What is your pension funding outlook beyond 2013 and where is the plan deficit at current market returns and discount rates? Consumer Consumer Outlook: How are you tracking relative to your 2-5% core growth target for FY13? Are you continuing to see growth across all businesses and major geographies? Have you seen continued strength in the US (+2% in 2Q) driven by back-to-school sales? To what extent was 2Q performance (+3% organic) aided by more robust construction/DIY demand – do you expect this to be a material tailwind in 2013? Consumer Margins: How do you expect segment margins to track vs. a flat corporate outlook in 2013 – what are the major puts and takes? Do you expect to make further investments in 2H13? How do you expect CCL’s acquisition of the Avery Dennison office products business to impact the competitive environment – could this put some downward pressure on pricing and margins? Portfolio: Where do you see the most intense competition within your consumer and DIY portfolio? Do you see the potential for pruning this portfolio (e.g., Household Products)? Where do you see opportunities to expand? Health Care Health Care Outlook: How are you tracking vs. your 4-7% core growth target for FY13? How do you see growth by geography? What was growth in China during 2Q13? Do you see risk of deceleration in this country? What impact do you expect to see from Obamacare/ government austerity measures – if any? Are you continuing to see strength in heath information systems – do you expect to see the same level of growth in 2H13? Health Care Margins: Health Care margins are at a record level of ~32% - what drove the 230bps Y/Y expansion in 2012 and how sustainable is this level of profitability? Are there any standouts within the portfolio? Do you still expect $20-25m headwind in FY13 from the 2.3% US excise duty?? Industrial Industrial Outlook: How are you tracking vs. your 2-5% core growth target for FY13 and how does this outlook break down by major category: Auto, Adhesives, Abrasives, Energy and Renewables, Personal Care and Liquid Filtration? How does growth look by geography? How sustainable is the strength in Aerospace? Industrial Margins: To what extent was 2Q margin impacted by underutilization (mainly in the renewable business)? Do you expect to see the same level of impact in 2H13? Are there any other standouts within the portfolio? How is the integration of Ceradyne progressing and how does dilution (120bps in 2Q13) track through 2H13? M&A Opportunities: Where do you see opportunities to grow by acquisition? Are you looking primarily at bolt-on opportunities or are you looking at new platforms? Which technologies and/or materials have significant white spaces? Safety & Graphics S&G Outlook: How are you tracking vs. your 1-5% core growth target for FY13 and to what extent is this being impacted by Traffic Safety & Security weakness? What sort of growth trend have you historically seen in Commercial Graphics, Traffic Safety and Architectural end-markets? Have you seen further declines in government related projects? 8 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Security Systems ($400m): What have been the major problems with this business and what benefits do you see from its integration with Traffic Safety ($900m)? Does this mean that this is a “fix” rather than a “sell” situation? Are you also seeing issues within recent Biometric acquisitions? S&G Margins: S&G margins contracted 220bps in 2Q due to acquisition dilution, declines in government projects and growth investments. In this light, what was 2Q margins ex-Traffic Safety & Security? (vs. 22.9% for segment) How does dilution from FS Tech acquisition (90bps in 2Q) and growth investment track in 3Q13? Have you seen any signs of improvement in government related projects? Over what time frame might we see a return to the 24-25% range? M&A Opportunities: SS&P has been built via acquisition – where do you see further opportunities for growth? What was the strategic rationale behind the Federal Signal acquisition and how is the integration progressing? Electronics & Energy E&E Outlook: Are you still comfortable with your 1-6% core growth target for 2013 and how does this break out between telecom, electrical, electronic and display graphics end markets? What are your expectations for LCD TV attachment rates? How is 3Q tracking by geography by end market? Electronics trends (60% of segment revenue): What are you seeing in terms of inventory trends? Have you seen any sequential improvement and have you seen orders related to planned new platform launches? Where is the B/B ratio trending? Energy: How is Energy performing vs. 2Q results (4% organic decline)? Have you seen any sign of stabilization in solar (down double digits in 2Q), and what is your outlook for 2013? Are you still seeing inventory destocking in the renewable energy market during 3Q? E&E Margins: How do E&E margins vary across the portfolio? To what extent was 2Q operating margin (-270 bps) impacted by lower factory utilization? Do you still expect low factory absorption to be a headwind in 3Q? Where do you see incremental margins tracking through an up cycle? Portfolio: How does the transition from LCD to OLED change the game for your optical film business? Does E&E have a disproportionately high level of assets in the $2.5bn problem bucket? Hypothetically, could Optical Systems be sold or is it too integrated from a manufacturing and IP standpoint? 9 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry MMM Company Background Exhibit 3 MMM Revenue Breakdown by Geography, Cyclicality and End Market EMEA By Geography 22% By End Market Consumer By Cyclicality 18% Asia Industrial No Cycle Pacific 22% 19% Gov't/ 30% Infrastructure LatAm Late Early Transportation 9% 12% 13% 7% 47% Resi & Comm'l Construction US 5% 36% Electronics & Mid Healthcare Tech 18% 27% 15% Source: Company data, Morgan Stanley Research Company Description Key Management Incorporated in Delaware and headquartered in St. Paul, Minnesota, 3M Inge Thulin services as Chairman, President & CEO of 3M, after being Company (NYSE: MMM) is a diversified technology company with a promoted in early 2012. He has served various roles within the global presence in the following businesses: Industrial & Transportation, company since 1979, most recently COO. Health Care, Display & Graphics, Consumer & Office, Safety, Security & David Meline was named CFO in 2011. He joined the company in 2008 Protection and Electro & Communications. 3M was incorporated in 1929 as Chief Accounting Officer following a number of years at GM. to continue operations begun in 1902 – as a mine and manufacturer of Joaquin Delgado: EVP of Health Care Business Group since 2012. abrasive products. Julie Bushman: EVP of Safety & Graphics Business Group since 2011. With over 80,000 employees, 3M produces more than 55,000 products Chris Holmes: SVP of Supply Chain since 2012. including abrasives, adhesives, laminates, passive fire protection, dental Michael Kelly: EVP Electronics and Energy Business Group since 2012. products, electronic materials, car care products, electronic circuits and Brad Sauer: EVP of Industrial Business Group since 2012. optical films. The company operates in over 60 countries and its products Michael Vale: EVP of Consumer Business Group since 2012. are available for purchase in over 200 countries. Exhibit 4 MMM Detailed Segment Breakdown 2012 Revs 2012 OP Division Est. Revs % of Seg % total Key Products & Services 5,138 1,641 Infection Prevention $ 1,490 29% 5% Surgical drapes, masks and preps, sterilization assurance equipment Healthcare 17% 23% Oral Care 1,336 26% 4% Orthodontic Appliances, Dental Fillings, Impression Materials Sking & Wound 1,079 21% 4% Medical tapes, dressings, wound closure products, orthopedic casting materials and electrodes Drug Delivery 514 10% 2% Trans-dermal drug delivery systems Health Information Systems 514 10% 2% Medicare reimbursement solutions Food Safety 206 4% 1% Testing & monitoring equipment for food processors 9,943 2,236 Adhesives & Tapes 3,314 33% 11% Adhesives, Bonding Tapes, Packaging Tapes, Converter Markets Industrial 33% 32% Transportation 3,004 30% 10% Body Repair, Painting & Paint Finishing, Mechanical Repair & Maint, Body Structures Abrasives 1,450 15% 5% Fiber Discs, Cubitron Ceramic Grain, Coated Abrasive Belts, Super Abrasives Energy & Adv Mtls 829 8% 3% Membrane Elctrd Assemblies, Lithium Ion mtls, Polymers, Fluoromtls, Nanomtls Personal Hygiene 725 7% 2% Tapes and fasteners for personal hygiene products Liquid Filtration 621 6% 2% Filtration for beer/wine distilleries, Semiconductor fabrication, Drug Manufacturing Consumer 4,386 943 Office & Stationery 1,667 38% 6% Post-it Products, Scotch Tapes, White Boards, Overhead Projectors 14% 13% DIY 1,272 29% 4% Home Care 965 22% 3% Scotch Brite: Tub & Tile Cleaners, Pads, Scotch Guard, O-Celo Sponges Prot. Mtrls & Consumer HC 482 11% 2% Nexcare Bandages, Nexcare Ankle, Elbow, & Knee Braces 5,471 1,217 Personal Protection Equipment 2,129 39% 7% Respirators, Eye & Ear Protection Prods, Reflective Material for Apparel Safety & Graphics 18% 17% Building Svcs 608 11% 2% Bomb blast resistant window films, Fire Mitigation Products Security & RFID 532 10% 2% RFID tags, Workstations, Self Check stations, Films that Increase Passport and Drivers License Security Corrosion Protection 228 4% 1% Scotchkote and Scotchcast products Roofing Granules 304 6% 1% Roofing Granules, Algae Block system for asphalt shingles, pool linings Commercial Graphics 639 12% 2% Graphics for: Buildings, Transportation, Food & Beverage, Banking Traffic Safety 923 17% 3% Reflective Coatings for: Road Signs, License Plates, Median Lines Architectural Markets 107 2% 0% 5,458 1,026 Electronics 1,646 30% 6% Chemicals & Gasses, Semi Materials, Tapes & Bonding Films Electro & Energy 18% 15% Electrical Mkts 968 18% 3% Sealing & Insulating Tubes & Tapes, Heat Shrink, Vinyl & Mastic Tapes, Connectors, Cable Accessories Telecom & Other 613 11% 2% Copper Cabling, Fiber Optic: Cabling, Closures, Splices, DSL Test Equip Optical 1,655 30% 6% Optical Films for: Computer Monitors, Televisions, Consumer Electronics Mobile Interactive Solutions 172 3% 1% Overhead Projectors, Transparency Films, Mobile Display Technology Renewable Energy 403 7% 1% Adhesives and tapes for Solar panels Source: Morgan Stanley, Company Information. 10 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry MMM Key Financial Statistics Exhibit 5 Exhibit 6 MMM – Organic Growth vs. EE/MI (1Q06/2Q13) MMM – EPS Growth vs. EE/MI (1Q06/2Q13) Organic Grow th 80% EPS Grow th 20% EE/MI Median EE/MI Median 60% 15% 40% 10% 5% 20% 0% 0% -5% -20% -10% -40% -15% -20% -60% 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 Source: Company Data, Morgan Stanley Research Source: Company Data, Morgan Stanley Research Exhibit 7 Exhibit 8 MMM vs. EE/MI – Core Operating Margin (2006/13e) MMM vs. EE/MI – Core Incremental OM (2006/13e) 25% Core Op.Margin 35% EE/MI Median Core Incremental Op. Margin 23% EE/MI Median 30% 21% 25% 19% 20% 17% 15% 15% 13% 10% 11% 5% 9% 0% 06 07 08 09 00 01 02 03 20 20 20 20 21 21 21 21 7% 2006 2007 2008 2009 2010 2011 2012 2013 Source: Company Data, Morgan Stanley Research. Note: 3M registered a core incremental operating margin of 104.1% in 2012. Source: Company Data, Morgan Stanley Research Exhibit 9 Exhibit 10 MMM vs. EE/MI – Revenue per Employee (2006/12) MMM – Capital Allocation (2008/12 cumulative) 400 Revenue/Employee EE/MI Median 350 Acquisitions 19% Share 300 Repurchases 28% 250 200 150 Dividends Capex 2006 2007 2008 2009 2010 2011 2012 29% 24% Source: Company Data, Morgan Stanley Research Source: Company Data, Morgan Stanley Research 11 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry MMM 2Q13 Earnings Call Transcript Opening Remarks – Inge Thulin, CEO Continued slow economy and strong USD Sales up 3% to $7.8bn, driven by 2.3% organic growth, led by Healthcare (up 6%). Industrial and Consumer up 3%, S&G up 2%, E&E down 2% (continued to expect some recovery in 2H13) LatAm/Canada up 9%, APAC up 2%, EMEA up 2% and US up 1% FX was 1.3ppts headwind, mainly due to weak JPY. M&A added 2ppts OM at 22%, down 90bps Y/Y, 22.4% OM ex-acqn 2Q EPS of $1.71, up 3% Y/Y FCF of $1.3bn, 107% conversion Returned $1.6bn cash to shareholders via dividends and repurchases. Anticipated slow market in 1H13, but expect 2H recovery, in consumer Electronics. Maintained FY13 guidance of $6.60-6.85, 2-5% organic. Now expect FX headwind of 2ppts vs. 1.5ppts previously. M&A unchanged 1.5ppts contribution. Expect tax rate of 29-29.5% vs. 29.5-30% previously. Continue to look for 90-100% FCF conversion. Quarterly Detail – David Meline, CFO Sales up 3%. Organic growth of 2.3% as volumes up 1.7%, pricing up 0.6%. M&A added 2ppts (mainly driven by Ceradyne), FX was 1.3ppts headwind, largely due to 20% depreciation in JPY. Sales by geography: o LatAm/Canada up 8.5%, led by DD results in Healthcare o Asia Pac 2.2%, with Healthcare up DD and S&G also saw solid growth. China up 3.4%, Japan down 2.3% o US up 0.8%, positive in all segment ex- E&E and S&G. o EMEA up 1.9% organic, led by Healthcare. MEA up DD, C. E Europe up SD, W. Europe also saw positive growth after several quarter’s of declines. Sales $7.75n, up 3% Y/Y Gross margin of 48%, up 30bps Y/Y SG&A & R&D up 5% Y/Y, OM 22%, down 90bps Y/Y on tough prior year comps. 40bps headwind from acqn. o Organic volume added 20bps o Price/raws added 80bps o Lower Pension/ OPEB added 10bps o M&A 40bps dilution o Factory utilization: 50bps headwind, improved from 1Q o Strategic investments: -40bps (ERP transformation and R&D) o FX/Med device tax/others: 70bps headwind 2Q EPS up 3% to $1.71, Tax rate of 27.4%, down 3ppts Y/Y, which added 6c EPS FX reduced EPS by 2c CapEx of $358m, up $36m Y/Y. Continued to look for $1.6-1.8bn CapEx in FY13. FCF of $1.3bn, up $254m Y/Y, driven by lower pension contribution and working capital improvement. FCF conversion of 107%, up 19ppts Y/Y, continued to expect 90-100% FCF conversion. Dividend payment of $410m (up $26m Y/Y, increased div by 8% in Feb) Share repurchase of $639m. Increased full year gross share repurchase target to $3.5-4bn vs. $2-3bn previously due to several reasons – 1) Solid FCF generation expected to continue given strong biz performance. 2) Rising interest rate has improved pension funding status; 3) MMM has not closed any new acqn YTD; 4) Capital structure is already strong today. 12 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Industrial o Sales $2.5bn, up 3.3% organic. o Strongest growth in aero, auto A/M, followed by liquid filtration, industrial adhesives/ tapes and Auto OEM. o Organic growth by geography: LatAm/Canada up 9% US up 3% Asia Pac up 2%, EMEA up 3% o Ceradyne sales of $116m (4.6ppts contribution) in 2Q, profitable on GAAP basis. o Op Income $599m, margins 22.5%. Ex-Ceradyne, OM was 23.2% Safety & Graphics o Sales $1.45bn, up 2% organic. o Positive growth in commercial graphics, personal safety, architectural, building & commercial services, partly offset by declines in roofing granules, traffic safety and security systems. o Organic growth by geography: LatAm/Canada up 9% Asia Pac up 7%, EMEA up 1% US down 3% o FS Tech added 1.9ppts, on track to meet top and bottom line targets in 2013. Mgmt plans to capture significant cost synergies in this biz. o Op Income $333m, margins 22.9% vs. 25.1% in 2Q12 (tough comps). Ex-Ceradyne, OM was 23.8%. Has continued to make investment in this biz, particularly in personal safety, Mining and O&G Electronics & Energy o Sales $1.3bn, down 2% organic. o Op Income $237m, margins 17.7%, negatively impacted by lower factory utilization (film for solar and electronics). OM up 240bps Q/Q o Electronics declined 1%, due to continued weakness in end-market and channel inventory reductions, but market seems to have stabilized and expect to see positive growth in 2H, while there’s still some inventory overhang in the Handheld market. o Sales declined 4% in energy related biz, with growth in electrical more than offset by declines in renewable energy (down DD). Sales stabilized in 2H and comps are expected to ease in 2H13. o Organic growth by geography: LatAm/Canada up slightly, more than offset by declines in all other regions. Healthcare o Sales $1.3bn, up 6% organic. o Broad-based growth, led by healthcare info systems, food safety, critical & chronic care, oral care and infection prevention. o Sales growth by geography: LatAm/Canada and Asia Pac both up DD. EMs up 15% (vs. up 13% in 1Q13) Developed markets: 8% growth in JP and 3% in both US & W. EU. o Op Income of $417m, up 1%. Margins of 31.2%. o US medical device tax was $5m (40bps) headwind in 2Q. Consumer & Office o Sales $1.1bn, up 3% organic. o Op Income of $235m, OM of 21.4%, up 40bps Y/Y 13 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry o Growth led by consumer health care, followed by home care, stationery & office supplies and DIY. Begun to see some impact of back to school sales, and QTD trends have been encouraging; also seeing sales lift from new product launches. o Growth by geography LatAm/Canada 7% US up 2% Asia Pac up 4% EMEA slightly positive EM up 7% and DM up 2% Closing remarks – Inge Thulin, CEO o Ceradyne integration exceeded expectations – awarded $40m orders in 1Q seeing sales impact now. o Portfolio mgmt: announced restructuring of Infrastructure Protection biz and expect to see rapid cost efficiency improvement. This biz shared common end markets. Also announced sale of fly fishing biz in 2Q. o R&D: formed a review team focusing on disruptive technology innovation. o Continued to move resources to low cost regions in Healthcare & Consumer biz. o Mgmt continues to expect demand recovery in 2H13. Q&A EMEA trends: Saw continued good growth in Central & East Europe viz. Russia, Turkey and Poland. Mgmt is not surprised with the positive results, as it has made substantial investments in this region over the past 10 year (built local capacity), particularly in Healthcare and Safety markets. MEA also had good growth, while comps were easier; all countries showed improvement (ex-South Africa due to political situation). MMM saw the first modest positive growth in Europe this quarter, with N. Europe outperforming S. Europe. Germany is going sideways, while UK was up 5-6%. S&G margin contraction: 1/3 related to FS Tech acqn, 1/3 related to declines in government projects (viz. road safety) and 1/3 due to growth investments in Personal Safety (up 6% in 2Q13), mining and O&G. Mgmt is pleased with the 23.8% OM (ex-M&A dilution). US growth deceleration (up 2.3% 1Q vs. 0.8% in 2Q): had solid growth in Healthcare, Industrial and Consumer, partly offset by government related biz and lower sales in roofing granule (inventory correction). Consumer was up almost 10%, driven by back to school. Pricing in LatAm: significant pricing increase in LatAm, largely driven by currency/ inflation. With strong branding position, the company was able to put through some price increases in this region. Strategic investments was mainly related to ERP transformation (will continue through the end of this year) and R&D (will start picking up somewhat). Overall, expect about he same level of investment through the rest of this year. EPS tailwind from pension & share count: pension added 30bps OM benefits in 1H (expecting similar benefits in 2H, might see further tailwinds in 2014 if interest continues to move higher). Additional share repurchase will have more impact on share count in 2014. Additionally, MMM had 2-3c FX headwind in 1H, which is expected to expand to 5c in 2H. Increase in share repurchase target: The decision was driven by several reasons: 1) mgmt was pleased with biz performance YTD and believes it will continue; 2) Rising interest rate has helped pension funding - 94% funded by mid-year vs. 87% by year end of 2012; 3) Didn’t deploy any capital for M&A. still plan for $1-2bn M&A, although the timing is very difficult to predict. Tax rate guidance: now looking for 29-29.5% in FY13. By the end of the 5Y planning period, mgmt continues to expect tax rate to be ~27%. 14 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Pension: absorbed $550m increase in pension expenses over the past few years. This year, pension expense has declined ~$100m. Given rising interest rate and the fact that MMM has transitioned its workforce globally, mgmt expects $100m or more decline next year. Price/cost outlook: continue to expect pricing to decline Q/Q for the year, but more favorable than original expectations on Y/Y basis – 1H pricing increase was mainly driven by actions put in place last year, which will likely to moderate in 2H, offset by inflation driven pricing. Mgmt currently don’t have particular plan to drive additional price increases this year, given the benign commodity price environment. 2H outlook for Latin America - optimistic about 2H and currently on plan - expect a slight uptick in Brazil. Broad LatAm portfolio, probably most balanced portfolio in any part of the world with good execution capabilities across countries. Feel good about region for many years to come. Business here is as sizable as China and is quite profitable. Expect some acceleration into end of the year. Net share repurchase target vs. previous expectations – reissuance expected during the year, originally guided at $1 to $1.5 billion, looks to be at or slightly above the high end for the year, so net, the $3.5 to $4.5 would imply $2 to $3bn net vs. $1 to $1.5 original guidance. Electronics and Energy, sequential improvement in 2H and what levers remain – stabilized relative to 1Q in terms of growth on the lower levels, improved margins from 15.3% to 17.7% sequentially on mix improvement and better utilization, and taking action on portfolio management. Counting on tick up in consumer electronics in the second half of the year and see signs of that heading in 3Q (on plan based on order flow). Growth vs. global GDP: MMM outperformed IPI this quarter and has showed 3 consecutive quarters of positive organic growth. The company will continue to focus on developing disruptive technologies and will start to see some traction in the next ~12-18 months. The ERP, portfolio mgmt and R&D initiatives will continue to strengthen the company. Mgmt believes it has started to take market share, particularly in heartland businesses. E.g. personal safety saw 6% growth in the quarter with strong profitability. M&A targets: Looking for slightly bigger targets than the ones acquired in the past 6-7 years. Mgmt is focusing on businesses with technologies that it could leverage across different biz segments and/or geographies (e.g. the Ceradyne acquisition in 2012). Pipeline continues to be very active. Confidence in 2H organic guidance (2-5% target) – continues to expect a 2H recovery vs. 1H. All segments are tracking in line with mgmt’s expectations ex- E&E; guidance low end assumes no economic recovery vs. 1H, which is not what the company is expecting now, while the high-end of the range assumes some additional growth drivers (good holiday selling season and additional economic recovery). Ceradyne synergies: 13-15 divisions could use the technologies from Ceradyne. Very pleased with the acquisition, which not only gave MMM a position to play in this market, but also provided it with a technology that could be leveraged across different platforms. Healthcare margins: 78% of the portfolio is in developed economies where MMM very strong position has. The company is growing into the developing world (up 15% in 2Q), actually ahead of Consumer in many countries. The value proposition is strong in both regions. Margins have remained at 30%+ despite investments in global. Factory utilization: saw some good progress in the Industrial segment (1Q headwind mainly due to inventory correction), but the company will continue to review the renewable biz, which will likely continue into 2014. 15 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Capital deployment: MMM is vertically integrated to some extent, given some proprietary technologies that it wants to keep in house – mgmt plans to stay this way. Over a longer period, it doesn’t expect the step-up in R&D investment to increase CapEx. FX impact in the earnings bridge was mainly translational impact of US imports. Portfolio restructuring: has taken three actions so far – sold one biz and combined two; it is also harvesting another one. Total revenue impact of these businesses was ~$1bn vs. $2.5bn pool. 16 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry MMM Summary of Guidance Exhibit 11 MMM – FY13 Guidance (yellow denotes changes) FT13 Old FY13 Comments Revenue Growth Organic Revenue Growth +2% to +5% +2% to +5% Unchanged. Driven largely by volume growth, while mgmt also noted better than expected pricing trends YTD (mainly due to inflation driven price increases in EMs). Expected growth by geography: LatAm +8-11%, MEA +9-12%, Asia Pac +2-7%, US/Canada +2-5%, W.Europe -3% to +1% Acquisitions +1.5% +1.5% Unchanged. Includes Ceradyne, Code Rite & FS Tech. Y/Y EPS impact is neutral ($0.03 total headwind, consistent with 2012e). M&A expected to add $90m of EBITDA Currency -1.5% -2.0% Lowered by 50bps, representing ~8c EPS headwind in FY13 Organic Growth by Segment: Industrial +2% to +5% +2% to +5% Unchanged Health Care +4% to +7% +4% to +7% Unchanged Consumer +2% to +5% +2% to +5% Unchanged Safety & Graphics +1% to +5% +1% to +5% Unchanged. Expected growth more modest due to leverage to government spending within Traffic Safety. Personal Safety expected to do well. Electronics & Energy +1% to +6% +1% to +6% Unchanged, although growth will be more back-end loaded Tax Rate 29.5 - 30% 29-29.5% Reduced by 50bps, largely due to lower tax rate in 2Q13 (27.5%) EPS $6.60 - 6.85 $6.60 - 6.85 Unchanged CFOA $6.4 - 6.8bn $6.4 - 6.8bn Capex $1.3 - 1.5bn $1.3 - 1.5bn Unchanged FCF Conversion 90 - 100% 90 - 100% Unchanged M&A Investment $1 - 2bn $1 - 2bn Mgmt noted that the M&A pipeline remains robust Dividends $1.65 - 1.75bn $1.65 - 1.75bn Share Repurchases $2 - 3bn $3.5-4.5bn Guidance raised by $1.5bn, mainly due to four reasons: 1) solid FCF generation in 1H; 2) rising interest rate has improved pension funding status; 3) MMM has not closed any new acqn in 1H; 4) strong capital structure. Mgmt also expects FY13 share issuance to track towards (or slightly above) the high end of $1.5-2bn guidance. Pension/OPEB Funding $0.4 - 0.6bn $0.4 - 0.6bn Source: Morgan Stanley Research, Company Data 17 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry This page has been intentionally left blank 18 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry ADT 19 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry ADT Question Bank QTD Trends Revenue trends: How are you tracking versus your full year 4.5% to 4.8% recurring revenue growth guidance? Are you seeing continued softness in deal channel production? The range is fairly wide given that there’s one quarter left. What causes the volatility embedded between the bottom and top-ends of the range? Margin trends: Your guidance for 51% EBITDA margins implies a 51% margin target for 4Q. How are you tracking currently? How should we think about the sensitivity to that target if revenue came in at the top or bottom end of the guidance range? Management What is the view of the board with regard to the post-spin volatility in your stock price and credit rating? What changes to investor communication and targeting strategy are under consideration? Can you provide an update on your relationship with Corvex? What contributions have Mr. Keith Meister made since he joined the board? You mentioned that the CFO search is near complete – do you have an estimated timing? Can you provide some color on the candidate’s profile? Security Market What is the structural long-term growth rate of the NA Residential Security industry? How does this break out between RMR and Subscriber Growth? Security penetration is currently ~20% in NA - why do you think it is so much lower than other consumer services such as wireless, cable and broadband? Where do you believe penetration can realistically go over time? Do you believe that the entrance of Cable/Telecom providers will help increase penetration, at the potential expense of ARPU dilution? Is there any evidence that the combination of interactive services and cable/telecom entry is expanding the addressable market? Competition To what extent are you feeling the impact of cable and telecom competitors within your major markets? You noted that less than 10% of your attrition units were attributed to lost to competition and ~1% to new entrants – how does this compare to historical levels? How do you expect this to trend over the next 12 months? What do you make of the recent product launches from AT&T, Time Warner and others? To what extent do their product offerings and services differ from ADT? Which one of these “new” players would you describe as the most aggressive and credible (not necessarily the same company)? Do you believe Cable/ Telecom players will be able to grow this business organically, or would acquisitions be necessary to gain substantial share? Do you see them buying regional service providers? Have you made any changes to your pricing structures, such as promotional discounts on monthly fees or installation? Do you plan to increase your A&P expenditures? 20 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry ADT Pulse Can you compare and contrast your interactive service offering with your competitors with regard to price point, functionality and software platform? What do you believe is your key point of differentiation vs. competitors? What are the demographics of the Pulse subscriber base, and how does this differ from traditional monitoring customers? What do you think is the potential for interactive services to expand the traditional security market? Can you provide an update on Pulse take rates in the small business, residential direct and dealer channels? Where do you expect take-rates to peak in each of these channels? What is the current subscriber base and ARPU for Pulse (420K and $50 in 3Q13)? How does Pulse SAC compare with standard accounts? How does the cost-to-serve and margin of a Pulse customer compare with a traditional customer? What trends are you seeing among the various Pulse tiers – is the bulk of growth still coming from the entry-level (Select) package? You noted that ~50% of your existing subscribers are upgradable. What level of investment is required to upgrade an existing customer? How many accounts do you expect to upgrade in 4Q13 and FY14 (vs. ~6K in 1Q, 13K in 2Q and 11K in 3Q)? You have mentioned that the return on upgrades is not as attractive as that of a new Pulse account. In this regard, what sort of payback period do you expect for an upgrade? How does it compare to a new account? Other than signing a new three-year contract, do customers need to pay one-time fees for upgrades? Dealer Network YTD dealer new gross additions (ex-bulk purchase) were 20% below prior year level - can you provide an update on the production issue you have experienced in your dealer network? Are you facing any other challenges in the dealer channel i.e. is attrition picking up? When do you expect the number of dealer gross additions to return to 2012 (normal) levels? Are you content with the mix between internal vs. dealer account growth (~45% via independent dealers)? Can you provide some metrics on how internal vs. dealer accounts differ, e.g. attrition, ARPU, FICO scores? How do the respective payback periods and ROIC compare? Dealer account expenditure has scaled up from ~$400m to ~$700m over the past 5 years – can this go even higher? Pricing Are you still targeting 5-7% p.a. recurring revenue growth over FY13-17 (vs. FY13 guidance of 4.5-4.8%)? How does this break out between price inflation and growth in subscriber base? How does pricing vary across the subscriber base? Now that you have lapped the impact of last year’s accelerated price escalations, how should we expect price inflation to trend going forward, excluding Pulse mix? Are you seeing any pricing pressure on the Pulse product from competitors? How do you expect Pulse ARPU to track over the next 12 months? What do you make of the competing plans from cable and telecom companies? How big is the addressable market for Pulse products at current price points? Attrition Why is your attrition rate so much higher than that of the overall industry – 18% on a unit basis? What measures have you implemented to address this problem – have you seen evidence of improvement yet? What best practices did you adopt from the 21 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Broadview team and why has this not yet succeeded in bending the curve? What measures are you implementing to increase your relocation recapture rate? Attrition ticked up 30bps Q/Q in 3Q13 – do you expect to see an upward or downward trend in 4Q13? Are you concerned that a pickup in the housing market (i.e. greater existing home sales) will drive up attrition over the next few years? Will customer vintage have an impact on attrition, given an increasing proportion of customers hitting their 3Y anniversaries over the next year? When and where do you expect attrition to peak? Have you seen any evidence that increasing penetration of Pulse can drive down churn over time? Is this a fundamentally “stickier” product? What benefits have you seen from partnering with utilities? Do you see partnership opportunities with other consumer-facing companies? Profitability How does your margin structurally differ from Monitronics (~65% margin), aside from accounting differences? Did 3Q13 represent the full run rate of stand-alone G&A ($120m)? What measures are you taking to offset post-spin dis-synergies? Where do you see scope for further cost and efficiency improvements? Where are the major cost bottlenecks? Is there scope for further restructuring actions? Are you seeing any upward pressure on cost-to-serve from higher Pulse penetration? Where could recurring margins go over time? What is your current advertising spend and how do you assess payback on this investment? How do you expect this spending to trend over time as % of recurring revenue? How much benefit should we model from a higher mix of dealer customer acquisitions and/or a rising mix of ADT-owned CPE direct accounts? What margin impact do you see from the acquisition of Devon Security? How much margin (and ARPU) dilution should we model? Steady State Free Cash Flow What drove the 8% Y/Y decline in Steady State Free Cash Flow (SSFCF) over the trailing 12 months? Can you break out the impact between rising attrition, Pulse adoption and others? You recently noted downward pressure on SSFCF in the near term as Pulse penetration continues to ramp up – when do you expect Pulse to be cash accretive for the overall company? Why is Pulse dilutive to SSFCF and does this imply further pressure to SSFCF in FY14? You mentioned that recent increases in SAC expenses were mainly driven by higher Pulse take rates and investment for upgrades. How do the underlying components (Commission, Sales/Marketing, Installation) of Pulse SAC compare to those of a standard account? How do you expect SAC CapEx to trend as % of recurring revenue over time? 22 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Capital Allocation Over what time frame do you plan to raise debt leverage to the new 3x target? Are there any significant contingent liabilities that we should factor into our leverage calculations? Can you provide additional color on how you plan to deploy the proceeds from incremental leverage? What is the ceiling on long-term leverage – is it 4-5x, given the stability of the business model? What is your outlook for share repurchase in FY14 (vs. $1.1bn MSe in FY13)? What drove the decision to engage in an Accelerated Stock Repurchase program earlier this year? Do you favor this approach over regular buybacks? What return metrics drove the pricing of the Devon security acquisition: $149m @ 41x RMR and $1,260 per subscriber? What potential for cost and other synergies do you see? Where do you see the potential for further M&A activity? Do you have an interest in consolidating the US security market? What opportunities exist in US commercial and non-US security markets? Taxes How do you currently expense subscriber assets and dealer accounts for tax purposes, and how does this differ from GAAP accounting? What risks are there, if any, to the cash tax rate rising materially above the current 6-8% range over the next 3-5 years? To what extent does the higher leverage target of 3x extend the low cash tax rate period? Was the $2bn repurchase program capped in part due to the 2 year post-spin IRS restrictions on stock repurchases? Do you have any update from Tyco’s tax dispute with IRS? What could be the potential financial impact on ADT? Do you have any plan to increase your tax reserves? 23 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry ADT Company Background Exhibit 12 ADT Revenue Breakdown by Geography, Cyclicality and End Market United By End Market By Cyclicality By Geography Intallation States & Other 94% Resi 11% Security Services 94% Small Biz Security Recurring Services Canada Revenue 6% 89% 6% Source: Company data, Morgan Stanley Research Company Description Key Management Headquartered in Boca Raton, FL and incorporated in Delaware, the ADT Naren Gursahaney is CEO of ADT. Mr. Gursahaney previously served Corporation (NYSE: ADT) is a leading provider of electronic security, as President of Tyco’s ADT North American Residential business interactive home and business automation and related monitoring segment (since Jan 2012), President of Tyco Security Solutions (since services, serving more than six million residential and small business 2007) and President of Tyco Flow Control. Prior to joining Tyco in 2007, customers in the US and Canada. Originally formed in 1874 as the he was President and CEO of GE Medical Systems – Asia. American District Telegraph Company, ADT became one of the leading Don Boerema is Chief Corporate Development Officer of ADT. Prior to electronic security providers in the 1980s and was acquired by Tyco in the split, Mr. Boerema served as Chief Marketing Officer for ADT and was 1997. In 2010, the company acquired its largest competitor, Broadview responsible for the product development and advertising campaign for Security. ADT spun out from Tyco as an independently traded company ADT Pulse Interactive Solutions. Before joining Tyco in 2007, he held on October 1, 2012. various leadership roles at PepsiCo, AT&T, and McCaw Cellular. Tony Wells serves as Chief Marketing and Customer Officer. He joined As of December 2011, ADT employed more than 16,000 people, with ADT in May 2012 from 24 Hour Fitness, where he was Chief Marketing approximately 4,500 sales professionals, 3,900 installation & services Officer. technicians and 3,300 monitoring center customer care professions operating ~200 field offices nationwide. The company also maintains a ADT is set to announce shortly the replacement for prior CFO Kathy broad partner network, including ~450 authorized dealers, affinity Mikells, who left effective May 1, 2013. organizations like USAA and AARP, and technology providers. Exhibit 13 ADT Detailed Segment Breakdown FY12 FY12 % of Revs Op. Profits Revenue Type Total Product Categories Key Products & Services Key Brands Competitors Recurring Revenue 89% - Fast alarm service - Carbon monoxide monitoring $3,229 $754 Installation Revenue 11% Residential Security - Burglar alarm monitoring - Flood & temperature monitoring Alarm.Com - Fire & smoke monitoring ADT Protection 1 Monitronics Small Business - Intrusion detection & monitoring - Video surveillance & monitoring Vivint Solutions - Access control & mgmt system - 24/7 alarm & video monitoring Time Warner Comcast - 24/7 life safety monitoring - Lighting and climate control FrontPoint Interactive Services & ADT Pulse - Remote system arm/disarm AT&T Home Automation - Custom notifications & scheduled Personal Emergency Companion - Home medical alert system Phillips/Lifeline Response Systems Service Source: Morgan Stanley, Company Information. 24 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry ADT 3Q13 Earnings Call Transcript Opening Remarks – Naren Gursahaney, CEO Near the conclusion of CFO searching. Completed the first annual strategic planning and will provide more details on the investor day in fall. Acquired Devcon Security from Golden Gate Capital for $148.5 million, which will be funded with cash. The acquisition includes 117K residential, homeowner association and small biz customers, with total RMR of $3.6 million. Repurchased total 25.3m share YTD under the $2bn program. Had 213m shares outstanding at the end of 3Q13. Recurring revenue up 4% to $764m, accounting for 95% of its total revenue Total revenue of $833m, up 2.3% Y/Y, which continued to be impact by mix shift EBITDA ex-items of $433m, up 5.1% Y/Y; margin of 52.0%, up 140bps Y/Y EPS of $0.53, up 20% Y/Y; GAAP EPS of $0.52, which included 3c benefits due to a true up in the value of deferred tax liabilities. EPS using cash tax rate was $0.80, up 11% Pulse take rate of 27.8% total. 28% vs 23% last Q and 10% last year. o Direct Resi 38.5%, up 6ppts Q/Q and 18ppts Y/Y, o Small biz just under 30%, up 5ppts Q/Q and 19ppts Y/Y, will continued to customize Pulse for small biz customers o Dealer channel 14.7%, up 5ppts Q/Q o Existing customers upgraded to Pulse: 11K, up 250% Y/Y. Pulse now represents 6.5% (420K) of total customer base New and resale ARPU up 4% to $44.20, while average ARPU up 4.5% to $40.08 New Pulse customer ARPU continued to be $50 Recurring margin of 67.9%, down 100ppts Y/Y, due to dis-synergies. Q/Q, margin up 190bps due to volume leverage and cost reduction actions. Cost to serve in 3Q including $4m benefits of supplier rebate, which is not expected to repeat in 4Q. Restated net attrition to properly reflect resale, while there was no change to gross attrition. Attrition up 30bps Q/Q to 13.8% driven by higher reallocation disconnects. However, mgmt saw improvement in this quarter driven by new customer retention program. It has also launched new programs such as enhanced payment prospects to reduce non-pay attrition. Gross adds of 276K down 5.2% Y/Y, Direct new adds rose 5% Y/Y, driven by recovery in the housing market and its enhanced relocation program and partnerships with a number of key homebuilders. Dealer new adds declined 16% Y/Y, but up 4.6% ex-bulk account purchase in 2Q. TTM SAC in direct channel up 12.8% Y/Y driven by rising Pulse take rate. TTM Dealer SAC was down 1.4% Y/Y, due to favorable dealer bulk pricing and a pickup in volume from smaller dealers. Quarterly Detail – Naren Gursahaney, CEO Recurring revenue grew 4.2% to $764m, driven by growth in ARPU (60% due to prior year price actions and the rest due to richer Pulse mix) Net account growth was modest due to lower dealer new adds Non-recurring revenue of $69m, down 15%Y/Y due to $15m decline in installation revenue Total revenue up 2.3% to $833m Operating expenses ex-items $635m, up 3%, driven by o $17m higher cost of service, dis-synergies, account growth and higher investment o $23m higher D&A – increased penetration of Pulse, mix shift o $26m lower SAC, due to increased deferred installation costs EBITDA $433m, up 5% Y/Y, margin of 52% up 140bps Y/Y. Pre-SAC EBITDA up 2% Y/Y, margin of 67.3% was down 60bps Y/Y, due to dis-synergies and higher corporate costs. Up 170bps Q/Q due to volume leverage and cost reductions. CFOA up 9% Y/Y to $461m, driven by $21m EBITDA growth, $16m increase in deferred installation revenue and $17m due to the timing of interest payments. CapEx of $308m, up 3% Y/Y 25 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry o Direct CapEx was $150m, up $54m,Y/Y due to higher Pulse; $19m from mix shift o Dealer CapEx was $138m, down $33m Y/Y, due to lower gross additions. o Maintenance CapEx down $12m Y/Y due to split from Tyco FCF ex-items was $165m, up 25% Y/Y. YTD FCF of $416m, up $17m Y/Y. TTM Steady State Free Cash Flow of $918m, down $75m Y/Y due to o Increase in direct SAC per unit and Pulse upgrade o Higher attrition o This metric does not fully reflect the benefit of higher Pulse penetration, which will benefit FCF generation over the long term. Closing Remarks – Naren Gursahaney, CEO FY13 Guidance o RMR up 4.5-4.8% vs. 4.9-5.2% Y/Y previously o EBITDA margin of ~51% vs. 49.5-50.5% previously o Tax rate lowered to 35-36% vs., 36-38% previously o Cash tax rate of 2-3%, lowered from 3-4% previously o FCF target increased from $375-425m to $450-500m o Steady-state FCF target was lowered from $950m-1bn to $900-950m, due to better than expected Pulse take rate and Pulse upgrades. o DWAC will be reduced from 219m in 3Q to 213m-215m in 4Q. o FY DWAC expected to be 225m. Strategic planning update: o Target leverage ratio over time to 3x EBITDA, expected to use proceeds for investment in organic growth, pursuing accretive acquisition and returning capital to shareholders via dividends/ share buyback Q&A Dealer new additions: making good progress on a sequential basis, with Dealer new gross adds up 55 Q/Q. Another challenge in the dealer channel is on the lead generation side, as ADT has to abandon some lead generation programs due to change in regulation. Acquisition target: will see what becomes available and focus on quality assets with varying sizes. Devcon Security: will acquire all of the Devcon biz. Transaction expected to close in August, so the impact on FY13 results will be very small. Mix shift: only impacted the direct channel and there’s no impact on the dealer channel. SAC impact from higher Pulse penetration: iControl licensing fee doesn’t have much impact. The main driver of higher SAC was due to upfront investment to add new Pulse accounts, while the SSFCF metric doesn’t reflect the benefit of higher APRU in the following period. The IRR on Pulse account comes in at the higher end of total company range. The change in FCF expectations was mainly due to lower dealer new additions. Lower Dealer SAC: partly due to higher volumes from smaller dealers. The company continues to recruit new dealers, as while they start small, they are expected to increase in size over time. Dealer SAC will increase as ARPU and Pulse take rate increase. Devcon has very attractive customer base, with traditional residential attrition rates modestly better than ADT and home owner association attrition at much lower levels. Unbundling home automation & security products: Mgmt considers ADT as a security company and sees very attractive integration of security and home automation products. The success of Pulse also proved that the strategy works. 26 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry The increase in attrition was mainly driven by housing recovery – summer time is usually when a lot of relocations happen. Losses to competition haven’t changed substantially, while there might be some change in terms of which competitors show up at the top of the list. Decision to increase leverage: mgmt sees a lot of opportunities to make investment for organic growth and acquisitions. Where can Pulse take rates go? The company has gone past its original forecast of 30%. Mgmt believes new customer take rate will be north of 40-50% on the new customer side, although it’s a bit more challenging in the resale channel. The company sees 50% of its customer base as target opportunities and there is scope for Pulse to account for 20% of its total accounts. Devcon ARPU was in the low $30s, due to lower ARPU contribution on the home owner association side. Competition: the company is still seeing nice Pulse penetration, while there are fewer and fewer markets where it doesn’t see new competitors, as Cable and Telcos expand their geographic footprint. Mgmt believes it will be able to continue to get prices. Most of ADT’s SAC increase was due to increase in Pulse. . 27 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry ADT Summary of Guidance Exhibit 14 ADT – FY13 Guidance FY13 Old FY13 New Comment Recurring Revenue 4.9-5.2% 4.5-4.8% Reduced guidance due to continued softness in deal channel production EBITDA Margin 49.5-50.5% ~51% Increased guidance due to strong performance in 3QFY13 D&A (net of amortization of deferred revenue) $920-935m - Net Interest Expense ~$120m ~$120m Unchanged Book Tax Rate 36-38% 35-36% Cash Tax Rate 3-4% 2-3% FCF (before special items) $375-425m $450-500m Increased guidance due to weaker than expected new customer additions in the dealer channel Steady State FCF (SSFCF) $950m - 1bn $900-950m Reduced guidance due to better than expected Pulse take rates and Pulse upgrade activity Capital Allocation Incremental debt capacity $650-900m - Mgmt announced its plan to increase target leverage ratio to 3x EBITDA over time Organic growth investment $1.2-1.3bn - Productivity Improvements $55m - Acquisitions $100-150m - Announced acquisition of Devcon for $150m, expected to be closed in August Return of Capital $900m - 1bn - $1.1bn share repurchases YTD Source: Morgan Stanley Research, Company Data 28 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Ametek 29 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry AME Question Bank Management What is the basis for management’s long-term compensation – what are the key metrics and what changes, if any, are the board considering? What companies does AME benchmark performance against? What is the mandatory retirement age for senior executives and what succession plans does the board have in place for CEO Frank Hermance? Can you describe the new COO role and what responsibilities David Zapico currently has in his portfolio? Are there any other changes to the organizational structure under contemplation? QTD Trends Within your guidance for $0.51-0.52 EPS in 3Q13, how much growth have you embedded within your key businesses – EIG (vs. +1% in 2Q13) and EMG (vs. flat)? What have you embedded by end market and geography? QTD, what are you seeing by geography, and how does this compare to 2Q13 results? Have you continued to see improvement in the US? Are you seeing any signs of recovery in China? How is EMEA tracking vs. 2Q (+5% organic)? What are seeing in Western Europe? Can you discuss what you are seeing by end market QTD? How does this compare to 2Q13 results? How has order activity tracked vs. 2Q (up 2% organic)? Has the strength in July continued? Across your portfolio, have you seen any pockets of distributor de-stocking or restocking during 3Q13? Would you say that distributor inventory levels are in line with typical seasonality/ current levels of demand? How are margins tracking vs. your 50-60bps Y/Y expansion target for 2013? How is pricing trending vs. 2Q13 (+1.5%)? How do you expect price/cost to track throughout 2H13 (vs. +0.6% in 2Q) based on current spot prices and expected pricing? Can you break it out by segment? How is price/cost tracking vs. 60bps achieved in 3Q? 2013/14 Outlook What are the upside/downside risks to your updated low-single digit core growth target in 2013? Can you discuss your growth assumptions by sub-segment and geography vs. your prior expectations? You have increased your FY13 cost savings target to $100m (vs. $95m previously) – can you break it out by segment? How are you tracking vs. your $35m restructuring investment plan in FY13? What is the estimated payback of actions taken during 1H13? What are your expectations for restructuring through the rest of the year? What broad framework do you see for 2014 at this stage? What sort of margin expansion do you believe you can achieve in 2014 – how volume dependent is it? Long-Term Outlook Can you walk through your goal to double your sales and profitability? Over what time frame to do you expect to achieve this? How much will be driven by organic vs. M&A growth? You have commented that you are focusing on growth investments – can you describe in greater detail the nature and magnitude of these? Is this fueling growth in EM, new products, movement into adjacent markets, etc.? 30 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry When you say you are looking to double profitability, what sort of margin increase do you envisage, if any? Ametek is already operating well above prior peak margin levels. Is there a structural margin ceiling to this business, or can you continue to drive expansion? What are the main levers you can pull to drive margin expansion? How do you prioritize between organic growth and margin expansion? What is an appropriate cross-cycle incremental margin level for your business? Can you provide an update on your LCC sourcing initiative? How much further can you go vs. $400m of sales sourced from LCC currently? What percent of your components can be sourced from LCC over time? How are you tracking vs. your $54m savings target for 2013? Can you elaborate on your operational excellence program – what measures are you taking within your facilities to drive improvements? What are the key metrics your plant managers are targeting? What inning of this long-term initiative are you currently in? Capital Deployment The transaction multiple of CSI ($160m, 3.2x revenue, closed in Aug 2013) seems a bit higher than your prior acquisitions (~2x on average) – what kind of return on investment are you expecting from this deal? Are you seeing more competitive bidding in the M&A market? You indicated more M&A activity in 2H13 - given that you are integrating several deals (CSI, Micro-Poise, Dunkermotoren) currently, how much bandwidth does management have to take on more bolt-on acquisitions or another large deal? How much of the $1-1.5bn of available M&A capital would you realistically hope to re-deploy over the next 12 months? How would you handicap the probability of closing a larger deal $200-400m over the next 6-12 months? How much of your current cash balance is “trapped” overseas, and how much cash do you generate in the US each year? Do you see enough attractive opportunities to successfully deploy overseas cash into acquisitions? Do you have a target for dividend payout and/ or growth? What has led you to repurchase stock in the past – is it share price contingent? Portfolio What are your priorities for future transactions – end markets, geographies? Are you currently interested in doing acquisitions in Europe, given the macro challenges in this region now? Are you happy with the portfolio, or would you consider any of your businesses to be non-core (viz. cost-driven motors)? Would you consider adding another growth platform? Globalization What percent of your sales are now driven by Emerging Markets, and where can this go over time? What organic growth investments are you making to increase your EM exposure? How do your margins compare by geography? What measures are you taking to improve profitability in under-performing regions? Electronic Instruments Group (EIG) QTD trends: How are you tracking vs. your low-single digit growth target for FY13? How do you see growth by geography? 31 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Medical Outlook. How has the Medical market trended QTD, and how do you expect this to shake out throughout 2H13? How might this business be impacted by Obamacare and the new Medical Device Tax? Would you consider Medical to be a strong candidate for M&A expenditure? O&G Outlook. Has strength in upstream continued into 3Q? How is mid/downstream trending QTD vs. 2Q? Have you seen signs of recovery in the MRO business? How has AME been impacted by low natural gas prices in the US, and how much of a benefit do you expect over the next several years? Defense Outlook. How is your Defense business tracking vs. 2-3% organic growth in 2Q? Do you still expect Defense to be down 1-2% in FY13? What is the expected Y/Y impact from sequestration? What is your outlook for 2014? Aerospace Outlook. Would you say that OE growth remains robust? How are you tracking vs. your mid-single digit growth target for FY13? You called out weakness in the North America MRO business during 2Q13 (the 3rd party MRO business is reported under the Electromechanical group) – have you seen any improvement QTD? How active is the pipeline – could we see additional MRO deals in 2013? Power & Industrial Outlook. How is this business trending QTD vs. mid-single digit decline in 2Q13? Are you still looking for mid-single digit decline in FY13? Have you continued to see weakness in the heavy truck and off road market? Government/ Research Exposure. What percent of your sales are linked to global governments, and how has austerity impacted your results? Margin Outlook. EIG margins reached a record level of 26.5% in 2012 - where can margins go in this business over time? Where did restructuring take place in 1H, and what is the expected payback? Electromechanical Group (EMG) QTD trends: How are you tracking vs. your low-single digit growth target for FY13? How do you see growth by geography, and by sub-segment? Specifically, have conditions improved in the EMIP business following weaker than expected results in 1H13? Industrial Outlook. This business is closely linked to general industrial trends – what are you seeing by geography? Do you expect to see further deterioration from here? Dunkermotoren. How is the Dunkermotoren integration progressing? Please remind us of the cost and revenue synergies associated with this deal. You mentioned that Dunkermotoren was a bit behind your original plan – was it mainly on the revenue or margin side? Floorcare & Special Motors. How are you tracking vs. your mid-single digit growth target for FY13 (flat in 1Q, +10% in 2Q13)? Given that a number of Asian competitors have entered this business, should we consider this to be non-core? What is your long term growth expectation for this business? Margins. What is the delta in margins between your Differentiated and Cost-Driven businesses? Are >20% margins on an annualized basis now sustainable? 32 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry AME Company Background Exhibit 15 AME Revenue Breakdown by Geography, Cyclicality and End Market Other By End Market General By Cyclicality No Cycle Defense By Geography Asia 8% 10% 11% Industries 19% 25% Late Cycle US Appliance/ Aerospace 36% Early Cycle 48% Commerical 16% 1 1% 8% Semiconductor Other 3% Europe 16% Metals Defense 10% 10% Medical Mid Cycle UK Oil & Gas 35% 8% 6% 20% Source: Company data, Morgan Stanley Research Company Description Key Management Headquartered in suburban Philadelphia, PA and incorporated in Frank S. Hermance is Chairman (since January 2001) and CEO (since Delaware in 1930, Ametek (NYSE: AME) is a global manufacturer of September 1999) of Ametek Inc. Mr. Hermance joined AME in 1990, to electronic instruments and electromechanical devices with operations in serve as Ametek’s COO and President of Precision Instruments. North America, Europe, Asia and South America. The company markets Robert R. Mandos, Jr. became Executive Vice President and CFO of its products worldwide through two operating groups - the Electronic Ametek, in July 2012. He previously served as Senior Vice President Instruments Group (“EIG”) and the Electromechanical Group (“EMG”), (since 1998) and Controller (1996). with 50% of sales coming outside of the US. David A. Zapico: Chief Operating Officer (since January 2013). The company has approximately 12,500 employees working at more than John Wesley Hardin: President of Electronic Instruments (since 2008). 100 manufacturing facilities and 100 sales and service centers in the US Timothy N. Jones: President of Electromechanical Group (since 2006) and 40 other countries around the world. Exhibit 16 AME Segment Breakdown 2012 2012 Geographic 2012 % of Seg. Revs Op. Profits Brekdown Sub-segment Rev Revs End Markets Key Products & Services $1,873 $497 US 44% Process & Analytical $ 1,236 66% Chemical/Petrochemical Analytical and emission monitoring instrumentation, EIG 56% 63% Int'l 56% Instrumentation Oil & Gas Production drilling and completion instruments, level Research/Laboratories measurement, pressure gauges, transducers and Medical seals, and radiation measurement. Power and Industrial $ 449 24% Power T&D UPS, power quality monitoring instrumentation, Instrumentation Heavy Trucks programmable power systems, dash panel Food Services instruments, food service instruments Construction, Ag. & Military Vehicles Aerospace $ 187 10% Large comm. aircraft Airframe & engine monitoring systems, engine Instrumentation Biz & regional aircraft sensors, avionics, fluid gauging systems, pressure Military transducers and acceleratmeters $1,462 $292 US 57% Technical Motors & $ 658 45% Aerospace & Defense AC and brushless DC motors, blowers & pumps, high- EMG 44% 37% Int'l 43% Sys. Medical precision motion control products. EMG also serves Industrial the comm.& military aerospace 3rd party MRO market Biz machine & computer equip. Engineered Materials, $ 541 37% Medical/Surgical Specialized metal powder, strip, wire & bonded Interconnects & Automotive products; highly engineered hermetic (moisture-proof) Packaging Appliance connectors, terminals and headers and microelectronic Aerospace packages Telecom Floorcare & Specialty $ 263 18% Vacuum cleaners Air-moving electric motors, motor/blower systems and Motors Comm. floorcare equip. a variety of specialty motors Outdoor power equip. Small houshold appiances Source: Morgan Stanley, Company Information. 33 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry AME Key Financial Statistics Exhibit 17 Exhibit 18 AME – Organic Growth vs. EE/MI (1Q06/2Q13) AME – EPS Growth vs. EE/MI (1Q06/2Q13) 25% Organic Grow th 90.0% EPS Growth 20% EE/MI Median EE/MI Median 70.0% 15% 10% 50.0% 5% 0% 30.0% -5% 10.0% -10% -15% -10.0% -20% -30.0% -25% -30% -50.0% 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 Source: Company Data, Morgan Stanley Research Source: Company Data, Morgan Stanley Research Exhibit 19 Exhibit 20 AME vs. EE/MI – Core Operating Margin (2006/13e) AME vs. EE/MI – Core Incremental OM (2006/13e) Core Op.Margin 35% Core Incremental Op. Margin 25% EE/MI Median EE/MI Median 30% 20% 25% 15% 20% 15% 10% 10% 5% 5% 0% 0% 2006 2007 2008 2009 2010 2011 2012 2013 2006 2007 2008 2009 2010 2011 2012 2013 Source: Company Data, Morgan Stanley Research Source: Company Data, Morgan Stanley Research Exhibit 21 Exhibit 22 AME vs. EE/MI – Revenue per Employee (2006/12) AME – Capital Allocation (2008/12 cumulative) 300 Revenue/Employee EE/MI Median Dividends 250 5% 200 Capex 150 7% 100 Acquisitions 71% Share 50 Repurchases 7% 0 2006 2007 2008 2009 2010 2011 2012 Source: Company Data, Morgan Stanley Research Source: Company Data, Morgan Stanley Research 34 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry AME 2Q13 Earnings Call Transcript Opening Remarks – Frank Hermance, CEO Backlog was $1.1bn by end of 2Q Orders of $895m, up 2% Y/Y organic, B/B was 1.02x Sales up 6% to $879m, organic sales flat (in line with expectation), acquisitions added 6ppts, and currency was flat Op income of $203m, up 10%, OM of 23.1%, 70bps Y/Y improvement Net income up 13% to $128m, Diluted EPS was $0.52, up 11% CFOA was $128m, up 11% Y/Y, FCF of $117m Op WC was 17.9% of Sales Segment Information: o EIG sales increased 7% to $483m, driven by strength in long cycle O&G and Aerospace and Micro Poise acquisition. Measurement &Calibration, Adv Measurement also posted solid growth. o Organic sales up 1%, M&A added 7ppts, while currency was 1% headwind. o Op income of $130m, up 10% o OM was 26.8%, up 80bps Y/Y o EMG sales increased 6% to $395m, driven by strength in Floor Care and Specialty Motor o Organic flat, acquisitions added 6% and currency was flat o Op income of $83m, up 6% o OM was 21.1% Operational excellence: recognized $16m savings in 2Q13 and increased cost savings target for FY13 to $100m up from $95m previously. Global market expansion: international sales represented 54% of total revenue, up from 50% in 2Q12, driven by strong growth in Process and last year’s acquisition. BRIC region sales were up 21%, in 2Q13. Orders: Process Instrument was awarded a $2.6m contract in UAE to supply process analyzers for a field sulfur recovery unit. AME’s power systems and instruments business was also chosen by a South Korean EPC firm to provide power supplies to support their ballast water management systems. Expect to spend $173m R&D in FY13, up 12% Y/Y. Revenue from new products was 21% of sales in 2Q. Acquired Controls Southeast for $160m, with $50m annual revenue. Closed after the end of 2Q. CSI is manufacturer of customer-engineered thermal mgmt systems for process industries including oil and gas among petrochemicals, plastics and Pharmaceuticals. The combination of CSI’s thermal mgmt solutions and AME O’Brien’s gas and fluid handling systems allows the company to provide more complete toll and process control solution for global customers. AME could also leverage its market-leading position in the sulfur analyzer market to better position CSI globally. Will continue to focus on M&A in 2H13 and pipeline remains active. FY13 Outlook o FY revenue now expected to be up MSD Y/Y vs. HSD previous, reflecting LSD organic growth in aggregate and in both segments o Earnings expected to be at the low end of the $2.08-2.12 range o 3Q13 sales are expected to be up MSD, flat to up LSD organic growth. EPS to be $0.51-0.52, up 9-11% Financial Details – Bob Mandos, CFO G&A expenses was 1.2% of sales, vs. 1.4% in 2Q12 Tax rate was 29.4%, down from 30.8% in 2Q12, driven by on-going international tax planning initiatives. 2013 tax rate expectations are for 29-30%. 35 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry WC was 17.9% of sales, up slightly vs. 2Q12 CapEx was $11m for the quarter, expected to be $65m in FY13 D&A was $29m for the quarter, expected to be $118m for FY13 CFOA was $128m for the quarter, up 11% vs. 2Q12, FCF was $117m; 1H13 CFOA was $285m, up 11% Y/Y; 1H FCF of $263m represents 104% of net income. Targeting 115% conversion in FY13 Total debt was $1.24bn, down $210m from YE 2012 Cash of $208m. Net debt to capital ratio of 27.3% $950m of cash and existing credit facilities to fund growth Q&A Lower revenue guidance: market conditions remain tepid and 2H13 is not as strong as expected. Growth in BRIC: put some sizable investments in these regions and it has paid off. BRIC outside of China was strong, although China was a bit tepid, but the company is still making investment there. EIG margin improvement: expect to see better growth in 2H vs. 1H, but not as strong as expected, so the company has put in more cost reduction investment in EIG and EMG. Mgmt was pleased with margin performance in 2Q, expect 50-60bps margin improvement in FY13, and look for similar range in FY14. There are continue to be leverage for margin expansion, driven by volume growth (north of 40% operating leverage in EIG), as well as improvement in operating efficiency. 12.9% ROIC in 2Q13 vs. 12.4% last year. CSI: 9x forward EBITDA, operating at margins slightly below AME, so mgmt sees sizable synergies here. Ametek’s Process Instrument has very strong market share in Sulfur recovery (70-90%), suggesting cross selling opportunities for CSI in this market. CSI has 50% exposure to international market, but limited presence in BRIC countries - opportunities to expand internationally. M&A pipeline: closed one deal in 1H13 (walked away from a couple), but expected to have an active 2H13 in terms of acquisition. Incremental margin on organic growth: ~35% for the whole company and EIG tends to be at the high end, EMG slightly lower. CSI synergies with O’Brien: CSI products mainly focus on steam application, while O’Brien focuses on the Electrical side. The core competency for this biz is its Thermal mgmt solutions and MRO offerings given CSI’s proprietary technology and software – a niche market with $500m revenue opportunity. Quarterly trends by sub-segments: o EIG: FY13 sales to be up MSD, up LSD organic, with some strengthening in 2H13. Aerospace was strong driven by regional and biz jet, up MSD in 2Q. Mgmt expects strong growth in Commercial and regional biz markets going forward. Full year growth should be up MSD. Process up LDD in 2Q, LSD organic, driven by O&G and Micro Poise contribution. Measurement & Calibration and Adv Measurement also performed well. Process up HSD, up LSD organic. Power & Industrial down MSD, due to continued weakness HD truck and off-road market. FY13 sales expected to be down MSD. o EMG: FY13 sales up MSD and up LSD organic, with some strengthening in 2H13 as well. Differentiated up MSD, driven by procession motion control. Down LSD organic, due to weakness in NA MRO and EMIC. Overall, revenue expected to be up MSD in FY13, flat organic. EMIP has been weak for the last few quarters, due to inventory destocking in the master alloys markets for Aerospace manufacturing - it has just started to bleed off. This biz is also US focused and the US economy has been weak. 36 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry 3rd Party MRO was also weak in 2Q, mainly due to softness in the US, although the international biz did well. Many companies saw US MRO weakness in 1Q and AME had some delayed impact in 2Q, but it’s looking better. Overall US sales in July were trending much better. Floor care & Specialty motors: up 10% organic in 2Q with good margins, driven by wins with two OEMs. Expect FY13 sales to be up MSD. O&G outlook: international rig counts came off from recent peak, but still at high levels. AME’s strength is in the upstream area, seeing good trends in the US and internationally. Mid-stream is not quite as strong, but still doing okay. Downstream (mainly MRO) has been a bit softer, but seeing improvement. Long-cycle biz accounts for 1/3 of AME’s total sales, but 40% of operating income. O’Brien update: when buying O’Brien, mgmt understood that there’re opportunities to add other biz. In fact, AME bought both Obrien and CSI from the same PE firm. Recent order trends: 2Q orders were basically flat throughout the quarter, while July came in strong both on orders and shipments (solid profitability as well). Geographic growth breakdown: in 2Q, overall flat on sales - down 4% in the US, down slightly in Asia due to tough comps (booked large orders in the Power and had strong sales to Fukushima) – not indicative of future growth rate, up 5% in EMEA driven by strong O&G (particularly in MEA and Russia). But overall the long term, mgmt still expects Asia to deliver the highest organic growth, followed by NA and EMEA. Price realization was 1.5% in 2Q. Price/cost was +0.6% in 2Q. MRO vs. total Aero growth: total aerospace growth was slightly negative in 2Q, due to weakness in MRO (mainly Military, down 2-3% organic, while regional and biz jets were strong), but orders were up MSD. Overall, expects Aerospace to be up LSD for FY13 and 2H13. Military drives 50% revenue from the US market, expected to be down a few points in FY13 – better than prior expectations for MSD decline; expect similar trends for the next few quarters. 2H13 outlook: EIG is expected to be stronger than EMG in 3Q, but weaker in 4Q. Half of the anticipated 4Q growth in EMG was driven by easy comps and half due to seasonal uptick. A/P in 2Q was $322m CIS: not expecting any significant accretion this year, but expects a couple pennies accretion in FY14. Purchase accounting charges for 3Q: at least 1.5c, but will not be excluded from headline EPS. M&A capacity: ~$950m cash and liquidity available. Currently standing at 1.36x EBITDA, so AME can easily lever up but stay in IG. Could have $1-1.5bn capital for M&A in the next 12 months. Size of potential M&A targets: have wide range of deals in the pipeline, from $30-50m to $200-400m. Mgmt is looking to close one, two or more deals in 2H13. Dunkermotoren & Micro-Poise up dates: Dunker is a bit behind and Micro is on track vs. prior plans. Expect both biz to deliver positive organic growth. US down 4% in 2Q13, driven by broad-based weakness. 37 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry AME Summary of Guidance Exhibit 23 AME – FY13 Guidance 2013e AME Guidance Comments Total Revenue Growth Up HSD Includes acquisition contribution from already announced deals. AME expects 1.5% pricing. By geography, management forecasts LSD growth in Europe and the US, and MSD growth in Asia. Organic Revenue Growth Up LSD to MSD Expect particular strength in higher margin, longer-cycle O&G and Aerospace businesses. Organic Growth by Segment: EIG Up LSD to MSD Management expects HSD total growth. Aerospace up MSD to HSD driven by sizeable content wins and continued third party MRO growth (Commercial up LDD, third party MRO up LDD, biz/regional jets up MSD, Defense down 5%). Process up LSD to MSD organic (up 10% total), although this was described as conservative - O&G will continue to do well. Power & Industrial up LSD to MSD driven by Power strength. EMG Up MSD Driven by LSD to MSD organic growth in Differentiated business (10% total growth) as trends are expected to improve. Management expects cost-driven motors business to come in flat Y/Y. Incremental Margins ~35% Expect to take out $95m of cost for full year, offset by about $35m of investments. Management believes this is a conservative outlook. Specifically within EIG, management thinks it can drive 30-50bps Y/Y expansion (no target given for EMG). Tax Rate 30% EPS $2.08 - 2.12 Represents 9-11% EPS growth. D&A $118m CapEx $65m Source: Morgan Stanley Research, Company Data 38 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Exhibit 24 AME – 3Q13 and FY13 Guidance Summary 3Q13 Guidance FY13 Guidance - Old FY13 Guidance - New Total Revenue Growth Up MSD Up HSD Up MSD Down Organic Growth Flat to up LSD Up LSD to MSD Up LSD Tightened to the low end EIG Organic Growth Up LSD to MSD Up LSD Tightened to the low end Aerospace Up MSD to HSD Up MSD Tightened to the low end Process Up LSD to MSD Up LSD Tightened to the low end Power & Industrial Up LSD Down MSD Lowered guidance due to weakness in HD Truck EMG Organic Growth Up LSD to MSD Up LSD Tightened to the low end Differentiated Motors Up Low to MSD Flat Lowered guidance due to weakness in EMIP & 3rd Party MRO Cost-Driven Motors Flat Up MSD Increased guidance due to strong performance in 2Q (+10%) Diluted EPS $0.51 - 0.52 $2.08 - $2.12 $2.08 - $2.12 Mgmt now guides towards the low-end this range CapEx $65m $65m Unchanged D&A $118m $118m Unchanged Tax Rate 30% 29-30% Lower than prior expectation due to international tax planning activities FCF Conversion 117% 115% Down 2% Source: Company Data, Morgan Stanley Research 39 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry This page has been intentionally left blank 40 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Danaher 41 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry DHR Question Bank QTD Trends How are you tracking relative to your expectation for 2-3% core growth in 3Q13? How does this look by segment and major geography? What has been the biggest surprise to the upside and downside this quarter? Have you continued to see high single digit growth in HGRs and low double-digit growth in China? Have you seen growth rates improve in North America (up LSD in 2Q) and Europe (down LSD)? Can we peel back the onion on China and run though how growth is trending by major business line? More specifically, how confident are you that LSD and Dental growth rates can remain in the ~20% zone? Are you seeing signs of life in T&M, Environmental and Industrial end markets? Are you continuing to see outperformance from Hach, GVR and US Diagnostics? Are you seeing any sign of inflection at TEK Instruments (outlook for modest growth during 2H) and Motion (down mid-teens in 2Q)? How is pricing trending from the +70bps trends of the last several quarters? Where are you finding it easiest / most difficult to take price? Are there any standouts where you are out performing on market share e.g. Chemtreat, Videojet, Radiometer? Can you comment on the cadence of restructuring actions – are you still on track to take a “couple of pennies” of actions during 3Q? Have you reached the full run rate of payback on 2012 actions and can you quantify? Outlook How are you tracking vs. the 1-4% core growth target for 2013 – do you still have a “midpoint mentality”? Have you seen any incremental pinch to 2H from recent current movements? What is your growth outlook by segment (Environmental, T&M, Dental, LS&D and Industrial) relative to the 1-4% range for the overall company? What should we expect from a season perspective through 2H vs. normal? Could we see growth rates deteriorate in 4Q vs. a tough prior year comp? Where are you seeing channel inventory adjustments? Would you describe the summer shut downs as normal and are OEM customers starting to ramp back up production levels? Have you continued to see a divergence in trends between equipment (-) and consumables (+) and to what extent has this benefited margins from a mix perspective? Are you still on track to initiate $90-100m of restructuring actions during 2H – could this move higher? What are the leading candidates for restructuring investments and what level of payback do you expect to achieve in 2014? What is the growth set up for 2014? How is the tone of conversation with your business unit leaders and customers? What do you see as the biggest risks to the upside and the downside? Growth Investments What has been the major driver of the step-up in R&D investment (up 40bps during 1H)? How do you access payback from R&D investment and is it possible to quantify or qualify the sales and/or margin benefit? Where is R&D tracking by segment and is it possible that R&D could move even higher in 2014? You have stepped up your direct marketing and e-commerce initiatives at Videojet. Can you comment on how the investments are tracking and the payback on some of these initiatives? Which other businesses are leading candidates for the next stages of the rollout? 42 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Capital Allocation How does the M&A pipeline look and in which businesses do you see the best opportunities? Can you describe the mix of public vs. private companies? How are bid/ask spreads trending? Do you expect to deploy a similar level of capital during 3Q vs. $0.3bn spent last quarter? How would you assess the probability of a larger ($1-2bn) deal in the next 3-6 months? Given continued macro uncertainty, how confident do you feel deploying your $8bn capital target by the end of 2014? How much confidence do you have in target financial projections – is this a barrier to doing deals or is it more caution on target financial projections? You repurchased $0.6bn of stock last year and seemed to indicate a willingness to do more. What is your stance on further stock repurchases given your high FCF yield? Would you consider a large accelerated share repurchase if deal flow remains depressed through to year-end? There are some concerns over the sustainability of the M&A growth model given DHR’s size and the outsized influence of med-tech – how do you respond to those concerns? What would need to happen for the Board to significantly increase the dividend payout ratio? Portfolio Composition Within which parts of the portfolio do you see the most interesting opportunities for M&A? Is it still Industrial, Environmental, T&M? Do you see scope for the addition of a new leg? Are you still committed to lowering the Med-Tech sales mix into the 35-40% range over time? What areas of the Med Tech complex do you find most interesting – liquid chromatography, molecular diagnostics, sequencing, etc? What is the strategy for your investment in ALGN – are you happy to remain a passive shareholder? Are you comfortable with the elevated cyclicality within the Tektronix and Motion businesses? Does the long period of negative core performance in Motion through 2012/13 indicate a need for further pruning of the portfolio? Beckman Coulter What have been the biggest driver to the better sales performance at Beckman Coulter? Do you still plan to see low single digit growth in the rest of 2013 and can you explain why growth rates would deteriorate vs. 1H? Are you still planning for mid single digit growth in 2014 – what is expected to drive this acceleration? Can you provide an update on the BEC integration – which business units are surprising to the upside or downside vs. plan? Where are you tracking on cost synergies and when do you expect to reach the $350m run-rate? How much upside vs. $350m cost saving target (we see potential for closer to $500m) do you plan to invest in growth initiatives (R&D, NPI, etc)? What are the next elements of the BEC restructuring program – G&A, procurement, productivity – and what is the savings potential within each bucket? Can you describe the customer reaction to FDA approval of Troponin( received in June 2013)? What is your base case assumption for regulatory approval for the high speed box? What impact would this approval have on your competitive positioning? What other healthcare policy changes in 2H and 2014 are you monitoring that could have a material impact on your business? What is the opportunity from integrating Iris into Beckman? What other Iris-type opportunities exist? 43 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Danaher Business System Please describe the major tenets of DBS; how does it differ from other Lean Six Sigma systems? How has DBS evolved over time? How do you measure the efficacy of DBS? Outside of recent acquisitions, where do you feel DBS is having the most impact within the portfolio? Free Cash Flow Conversion Your FCF conversion has remain very solid (124% last quarter). Can you describe why your FCF is so much better than the majority of industrial peers and how sustainable is such a high level of conversion? Your working capital turns have deteriorated from 7x to 5x over the past several years – below the EE/MI average of 5.8x at the end of 2012. Is this a function of the changing mix of the portfolio, or do you see the potential for a return to historical levels? You commented that you have released $200m of working capital from Beckman Coulter – how much more opportunity do you see here? What is the opportunity on CapEx? Which businesses have the lowest working capital turns and how are these trending? Environmental GVR: How is 2Q13 trending vs. 2Q results (up MSD)? How does performance vary between the US, Europe and ROW? Are there any other upcoming environmental rules that could drive growth during 2013? Does rising diesel penetration in the US benefit GVR as different dispensers are required? Has GE’s purchase of Dresser had a material impact on competitive dynamics? What have the acquisitions of Automated Fuel Systems Group and Nabman Wireless added to the portfolio? Water Quality: How is 3Q13 trending vs. low-single digit growth in 2Q? Can you describe Municipal exposure and trends by geography? How does the project pipeline look for Trojan? Can you quantify the Ballast Water treatment opportunity – how is the order book trending? Where do you see the broader muni spending environment trending over the next six to twelve months? ChemTreat: How sustainable is double-digit growth at ChemTreat? Which verticals are driving this performance and are you gaining market share? Could you theoretically purchase Betz (from GE), or would there be anti-trust considerations? Environmental Margins: How do margins differ between GVR, Hach Lange, Trojan and Chemtreat? Where do you see the best operating leverage opportunities? What is a realistic long term segment margin target? Test & Measurement Tektronix: How is 3Q13 trending vs. the low-single-digit decline seen during 2Q? How is TEK performing by geography and is the business continuing to improve sequentially? When might you expect TEK to return to positive growth – is 3Q13 still the base case assumption? How would you characterize competitive dynamics in the core Oscilloscope market? How are mix and price changing and how is this impacting profitability? Where are TEK margins currently tracking? What other Keithley-like bolt-on opportunities do you see? Fluke: Can you comment on QTD trends at Fluke vs. the flattish results in 2Q? What are you seeing by end market (utility, industrial etc) and geography? Do you expect the strength in NA industrial markets to continue into 2H? How is New Product Vitality trending, and what white spaces in analytics are of interest? Are you seeing an uptick in Chinese-based competition? Where are Fluke margins currently tracking? Communications: Communications decelerated quite significantly in 2Q (low single digit in 2Q versus low double digit in 1Q). What caused the sequential deceleration in Tektronix Communications (core growth down LSD)? Can you quantify the growth 44 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry potential in network security solutions over the next few years? How do you expect 4G LTE network roll-outs to benefit Tek Comms and F-Net – how does this balance between maturing 2G and 3G legacy expenditures? T&M Margins: How much of the 30bps core margin contraction seen in 2Q13 was driven by mix vs. volume de-leverage? What measures can you take to preserve profitability – discretionary spending etc? What level of incremental margin do you expect on a volume recovery? Do you view mid-20s margins as a realistic long term goal? Dental QTD trends: Can you comment on QTD trends by end market vs. 2.5% core growth during 2Q? How is equipment vs. consumables tracking? How would you characterize current distributor inventory levels vs. seasonal norms? What are you seeing by geography? Can you comment specifically on China and Western Europe? Margins: What drives such high quarterly volatility in Dental margins? How are KaVo margins trending – what initiatives have you taken and what still needs to be done in order for KaVo margins to improve to the mid-teens range? Do you see segment margins in upper-teens range longer term? How do margins vary between equipment, consumables and imaging? M&A: Within which parts of the Dental complex do you see potential for M&A – tools, consumables, imaging? What are the options for your ALGN stake – are you a seller or a buyer? Life Sciences & Diagnostics Life Sciences: Can you describe end market conditions in the US, Europe and EM, as well as within pharma, healthcare, educational and applied markets? What are you hearing from these customers – are the tones of conversations turning more positive? Can you quantify your exposure to NIH Funding (sequestration) and EU govt. austerity in Life Sciences? How much downside risk is there? What was the rationale for acquiring ClearTech in 2Q, what end markets or products does that business address? Diagnostics: Radiometer continues to perform well (upper single digit growth in 2Q) – which regions are driving that growth? What is the revenue contribution from AQT and where are we on the roll out and regulatory approval schedule? What impact do you expect from Agilent’s acquisition of Dako in the advanced staining market? See Beckman section for additional questions. Margins: How should we think about LS/D margins during 2013 – what impact do you expect Beckman cost savings to have? What was the rationale for the move from distribution to a direct sales model in Europe? Do you expect this transition to have further impact in 3Q and beyond? How much restructuring payback should we factor in for 2013/14? Do you still view LS/D as a 20% margin segment longer term and over what timeline? Industrial Technologies Product ID: Has 2Q strength (MSD growth) continued into 3Q? Are you gaining market share, and if so, in which businesses and geographies? How is book/bill trending by business? How is the mix between printing vs. marking trending? Are you continuing to see stabilizing in NA distribution? How are Esko Artwork and X-Rite performing vs. plan? Should we view 3D printing and CAD/CAM software as viable adjacencies? Motion: How is your 2H tracking versus your down HSD expectations; to what degree is SKU rationalization continuing to impair growth and when does this process end? How is Motion tracking by major vertical – have you seen sequential improvement in any geographies? Do you still expect core growth to remain negative during 3Q13, and if so, when do you expect growth to turn positive? Why are these cyclical businesses attractive to DHR? 45 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Industrial Margins: How do margins break out between Product ID and Motion? Do you believe the new platforms in Product ID can drive into 20-30% range, given increasing mix of e-commerce and software in the mix? Do you view upper teens margins at Motion as defendable? To what extent has price/cost benefited Motion? 46 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry DHR Company Background Exhibit 25 DHR Revenue Breakdown by Geography, Cyclicality and End Market By Cyclicality By End Market Late Retail Gas Electronic & By Geogrpahy Electrical 5% ROW Equip 7% 5% Test Mid Water 22% 17% 8% APAC 21% Other 10% Product ID NA 46% 4% Early No Cycle 23% 55% Automation 4% EMEA Life Dental 26% Sciences 10% 37% Source: Company data, Morgan Stanley Research Company Description Key Management Incorporated in Delaware and headquartered in Washington, D.C., Larry Culp serves as Chairman, President and CEO (since 2001) of Danaher Corporation (NYSE: DHR) designs, markets and manufactures Danaher. He joined the company in 1990 within Veeder-Root and professional, medical, industrial and commercial products and services, became a Corporate Officer in 1995. He became COO in 2000. DHR’s R&D, manufacturing, sales, distribution, service & administrative Dan Comas was named CFO in 2005. He joined the company in 1991 facilities are located in over 50 countries worldwide. The company was within Corporate Development. originally incorporated in 1969 as a REIT. Tom Joyce: EVP, President of Beckman Coulter. Danaher has grown its business both organically and through a number Jim Lico: Electronic Test Group Executive since 2002. Also serves as of large acquisitions, and now operates within five platforms: Life Executive Sponsor of Asia Pacific region. Sciences & Diagnostics, Dental, Test & Measurement, Environmental Dan Daniel: President of Industrial Technologies since 2008. and Industrial Technologies. Exhibit 26 DHR Detailed segment breakdown Geographic Breakdown OE/MRO Breakdown Market Growth Division Key Brands Key Products and services Test & NA 54% Instruments 70% Tektronix Tektronix Oscilloscopes, electronic testing and process monitoring products EU 18% Service/Software 30% 5 - 7% Tektronix Communications Tek Comm, Fluke Networks Network testing and monitoring equipment and software Measurement ROW 28% Fluke Fluke Electronic test and measurement tools, cable testers, digital multimeters Other Businesses Matco, Hennessy Professional tools for the automotive aftermarket, aftermarket wheel service equipment Geographic Breakdown OE/MRO Breakdown Market Growth Division Key Brands Key Products and services Environmental NA 49% Instruments 60% Gilbarco Veeder-Root Gilbarco Veeder-Root Products for retail/commercial petroleum market EU 25% Consumables 25% 4 - 6% Water Quality Group Hach Lange Water quality testing, measurement ROW 26% Service 15% TrojanUV Ultraviolet disinfection ChemTreat Industrial water/ wastewater treatment Geographic Breakdown OE/MRO Breakdown Market Growth Division Key Brands Key Products and services Life Sciences & NA 39% Instruments 45% Beckman Coulter Beckman Coulter Biomedical laboratory instruments and related consumables EU 28% Consumables/Svc 55% 5 - 7% AB Sciex AB Sciex, eksigent Mass spectrometers and associated products Diagnostics ROW 33% Radiometer Radiometer Blood gas and immunochemistry instruments and related consumables Leica Leica, Leica Biosystems, Invetech Professional microscopes; pathology diagnostics Other Businesses Genetix Solutions for imaging and intelligent image analysis for life sciences and clinics Geographic Breakdown OE/MRO Breakdown Market Growth Dental NA 51% Instruments 50% Division Key Brands Key Products and services EU 32% Consumables 50% 4 - 6% Consumables Sybron, Kerr, Ormco Dental consumables: bonding agents, composites, implants, endodontics, etc ROW 17% Equipment KaVo, Dexis, PaloDEx Dental imaging equipment, instruments, complete dental equipments, dental systems Geographic Breakdown OE/MRO Breakdown Market Growth Industrial NA 45% Instruments 75% Division Key Brands Key Products and services EU 29% Consumables/Svc 25% 4 - 6% Product Identification Videojet, Linx, Esko, X-Rite Equip for product marking, sorting & tracking - bar codes, date codes, lot codes Technologies ROW 26% Motion Thomson, Kollmorgen Precision motion control equipment. Motors, drives, controls, mechanical components Specialty Products Sunbank, Dynapar Sensors and controls, power quality 47 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Source: Morgan Stanley, Company Information DHR Key Financial Statistics Exhibit 27 Exhibit 28 DHR – Organic Growth vs. EE/MI (1Q06/2Q13) DHR – EPS Growth vs. EE/MI (1Q06/2Q13) 50% EPS Grow th Organic Grow th 15% EE/MI Median 40% EE/MI Median 10% 30% 20% 5% 10% 0% 0% -5% -10% -20% -10% -30% -15% -40% -20% -50% 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 Source: Company Data, Morgan Stanley Research estimates Source: Company Data, Morgan Stanley Research estimates Exhibit 29 Exhibit 30 DHR vs. EE/MI – Core Operating Margin (2006/13e) DHR vs. EE/MI – Core Incremental OM (2006/13e) 19% 35% Core Op.Margin Core Incremental Op. Margin EE/MI Median 18% EE/MI Median 30% 17% 25% 16% 20% 15% 15% 14% 13% 10% 12% 5% 11% 0% 2006 2007 2008 2009 2010 2011 2012 2013 10% 2006 2007 2008 2009 2010 2011 2012 2013 Source: Company Data, Morgan Stanley Research estimates Source: Company Data, Morgan Stanley Research estimates Exhibit 31 Exhibit 32 DHR vs. EE/MI – Revenue per Employee (2006/12) DHR – Capital Allocation (2008/12 cumulative) 350 Revenue/Employee EE/MI Median 300 Capex 10% 250 Dividends 200 2% 150 Share Repurchases 100 Acquisitions 5% 82% 50 0 2006 2007 2008 2009 2010 2011 2012 Source: Company Data, Morgan Stanley Research estimates Source: Company Data, Morgan Stanley Research estimates 48 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry DHR 2Q13 Earnings Call Transcript Opening Remarks – Larry Culp, CEO Core revenue up 2.5%, slighted better than expected, driven by Hach, GVR, LS Diagnostics and BEC. GM up 100bps to 52.7% ($140m), driven by volume and productivity gains. Core OM up 95bps, reported margin flat. EPS of $0.87, up 3.5% Y/Y, or 7.5% Y/Y ex one-time items. Revenue up 4% to $4.7bn. M&A contributed 2ppts, partially offset by 50bps FX headwind HGR up HSD (improvement in Brazil and ME, up >15%), China up LDD (driven by LSD, up 20%). DM up slightly, US/JP up LSD and Europe down LSD OM flat Y/Y at 17.8%, negatively impacted by 35bps M&A dilution. CFOA of $ 899m, FCF of $763m, conversion of 124% Closed $300m M&A in 2Q in environment and LS segments. More than $8bn M&A capacity Test & Measurement o Revenue flat, core up 0.5% o Core margins down 30bps Y/Y, reported margins down 60bps o Fluke flat, 10% growth in HGR offset by weakness in DM, but saw MSD growth in NA industrial. o TEK down LSD, both DM and EM up sequentially. o Comms up LSD, led by HGRs, ME and LatAm. Increased R&D by 15% YTD, focusing on NPI. o Arbor Networks products continued to see strong demand, added 50 new customers in 2Q. Environmental o Revenue up 8%, core up 4% o Core OM up 70bps, reported OM flat, due to M&A dilution o Water Quality up LSD Hach-Lange up MSD, up M-Tns in services. US up MSD, China up DD (drinking water projects). Strong consumables in NA Industrial and improving demand in China and ME. ChemTreat up Y/Y Muni spending continued to be weak o GVR up MSD, led by all major product lines and region. APAC and ME were particularly robust, gaining share in payment markets, up M-Tns. Life Sciences & Diagnostics o Revenue up 5.5%, core up 5% o Core OM 180bps, reported OM up 130bps, despite DD increase in R&D investments o Diagnostics up MSD Beckman up MSD, growth in all product lines. LSD or better growth in the past 5 qtrs. 2Q OM up 150bps Y/Y. FDA approval for Troponin assay in 2Q. Radiometer up HSD, HGR up >20%, China up 45%. Blood gas up 25% and AQT up >50%. Closed HemoCue acquisition in 2Q. Leica Biosystems up MSD, Adv Staining up L-Tns, China up H-Tns. Acquired ClearTech systems in the quarter. o Life Sciences up MSD AB Sciex up MSD, led by Pharma and applied markets (food & environmental). Expects the new 6500 triple-quad platform to generate $100m incremental revenue on annualized basis Leica Microsystems up MSD, DD in China, ME and JP. Acquired distributor Aotec in Brazil. Dental o Revenue up 3%, core up 2.5% 49 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry o OM up 90bps to 15.3% o Consumables up MSD, led professional consumables and implant products (up H-Tns). Growth in NA, China and other HGRs partly offset by contraction in W. Europe. o KaVo up LSD, led by increased demand in China and other HGRs. Industrial Technology o Revenue up 2%, core down 2.5% o OM up 110bps to 23.5% o Product ID up MSD, driven by both printing and packaging biz. NPI drove share gains. o Motion down mid-teens, weakness in major vertical. Began to see stabilization in NA distribution, up modestly Y/Y and sequentially. Expect core revenue to remain negative in 2013. o Other Industrial down LSD, driven by lower demand for retarder; sensors & controls flat. Guidance o Initiating 3Q13 guidance of $0.78-83, assuming 2-3% core growth o FY13 guidance of $3.37-3.42 VS. $3.32-3.47 previously. Outperformance in 2Q allows the company to fund additional growth investment as well as productivity initiatives. Q&A Incremental Investments: not seeing any inflection point suggesting that things are getting materially better, so the company wants to position itself to be able to gain share via both NPIs and EM expansion. Will also make investment in productivity initiatives in 2H (likely $90-100m), expecting a couple of pennies impact in 3Q and 4Q will have larger impact. Step-up in R&D: saw payback of R&D investments in 2Q as NPIs helped the company to gain share; new product sales were up >50% sequentially in GVR, Hach & PID. 2H step-up will be largely in line with the 40bps increase in 2Q. 3Q seasonality: revenue was down ~$140m from 2Q to 3Q in 2012; will likely be down ~$100m in 2013, and that should be in-line with typical seasonality (organic decline Q/Q was more than reported numbers in the history due to acquisition impact). NA Industrial picked up in both Fluke and Motion. Mgmt was encouraged by Q/Q growth in Fluke, but wants to see another quarter of improvement before calling for an inflection. Did see some inventory impact in Motion. T&M: tech market improved sequentially, but still down Y/Y. Watching China closely, particularly in the export markets. Haven’t seen any substantial improvement, but easier comps should drive positive growth in 2H13. Beckman outperformance: mostly driven by improved retention rate in NA and new product introduction. 2H expectation continues to be LSD growth, but 2Q outperformance gave mgmt more confidence in the growth outlook. Performance since acquisition were better than expectations, particularly on the margin side, but also slightly better T&M core margin contraction: 1) negative mix due to lower sales of high margin instrument products, 2) also stepped up growth investment in communications. M&A environment: valuations are up, so the company will continue to be disciplined, but mgmt remains confident that it will be able to deploy the $8bn capacity over the next 2 years. Motion: Transition from low margin biz had ~400-500bps core revenue headwind Beckman: healthcare policy changes in NA, but the company is working its way through. Distribution issue in Europe is also improving sequentially and expect headwind to moderate in 2H. 50 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Core diagnostics: up ~20% in China. It’s hard not be a bit cautious on China, so growth will likely decelerate, while declines in NA/Europe are also moderating. FCF/CFOA down slightly Y/Y, driven by timing of tax payments and slightly higher inventory levels due to new product launches, which will normalize in 2H, partly offset by lower customer deposits at T&M. Muni spending: low-ticket spending actually improved slightly, but this might be driven by fiscal year end effects for government agencies. High-ticket category continued to be challenging. Weakness was mainly in NA and to some extent in Europe, but China remained solid. Europe: have not seen much turns here. PID was slightly better. T&M B/B: flat Y/Y. TEK instruments will be modestly up in 2H and China is the key swing factor. Q/Q Mix change: Consumables up 3-4%, equipment/instruments flat in 1Q, up 1-2% in 2Q Industrial expected to be flat to slightly down in 2H, down HSD in motion. Troponin impact: sales will start kicking in, but the impact is more significant on the reputation side, which will help retention and new customer wins. Pricing trends: pricing has remained at ~70bps in the past few quarters. 100bps margin improvement was partly driven by price/cost benefits – both higher pricing and lower costs (benefits from productivity initiatives). Overall flattish pricing on instruments/equipment Growth in HGR: seeing good traction in LatAm and ME - HGR up MSD. While growth might slow down a bit in 2H, but mgmt sees potential opportunities of penetration gains. Guidance: look for LSD core growth in 2H. 51 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry DHR Summary of Guidance Exhibit 33 DHR – 3Q13 & FY13 Guidance 3Q13 FY13 Old FY13 New Change (%) Organic growth 1-2% Up 1 - 4% Up 1 - 4% Unchanged Gross Margin - Core Operating Margin - EPS $0.80 - 0.85 $3.32 - 3.47 $3.37 - 3.42 Unchanged at the mid-point Source: Company Data, Morgan Stanley Research Exhibit 32 DHR – FY13 Detailed Guidance 2013e DHR Guidance Comments Organic Revenue Growth +1% to +4% DHR expects to see a similar macro environment in 2013 vs. what was seen in 2012. As of 2Q13, expect core growth at ~3%. FX Neutral In line with our expectations and current spot rates. Embeds $1.30 EUR rate. Organic Growth by Segment: Environmental +1% to +3% Factors that could drive upside include improved muni spending, industrial demand and ballast water. Factors that could drive downside include further muni deterioration (viz. China) and slowing of high growth markets. Test & Measurement +1% to +4% Factors that could drive upside include China recovery, global CapEx spending and accelerated wireless carrier investments. Factors that could drive downside include weaker global PMI and lower IT spending. Life Sciences & Diagnostics +2% to +5% Factors that could drive upside include new products, US policy resolution and continued growth due to China's 5Y plan. Factors that could drive downside include fiscal cliff/sequestration and lower utilization rates. Dental +1% to +3% Factors that could drive upside include HGM penetration and new products. Factors that could drive downside include lower patient volume and European deterioration. Industrial Technologies 0% to +3% Factors that could drive upside include China recovery, global CapEx spending and new products. Factors that could drive downside include weaker global PMI. Underlying Incremental Margins 35% Management expects normal 30% cross-cycle incremental margins to be augmented by continued cost synergy benefits from Beckman Coulter. Restructuring Benefits $140m This is driven by $90m of savings from 4Q12 restructuring spend and $50m anticipated lower spend in 2013e. Restructuring Charges $90-100m More heavily weighted to 4Q13. Tax Rate 24% In line with our expectations and 2012 results. Headline EPS $3.37 - 3.42 Narrowed guidance by 5c at the high and low end. Source: Company Data 52 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Dover 53 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry DOV Question Bank QTD Trends In general, how is the quarter tracking relative to your expectation for 3-5% organic growth in FY13? How does this look by segment? Has top line strength continued at Energy (5% organic) and are you seeing the new platform launch orders at Knowles, as expected? Are you seeing traction at P/ID (flat in 2Q) from new product launches or are industrial verticals still retarding growth? Have you seen any significant strengthening/ weakening within any geographies? Has the strength in North America and China continued into 3Q? Are you seeing signs of improvement in Europe (flat in 2Q) – are you seeing any improvement at SWEP (heat exchangers) which fell 5-7% in Europe last quarter? How is Book/Bill tracking (vs. 0.99x in 2Q) – does the $70-75m order received from the Queensland project in early-July mean that overall BtB (and Energy specifically) will be stronger than normal (weak) seasonality? Have you seen any signs of weakening at Hill Phoenix commensurate with lower capex outlooks at some of the US Grocery chains? 2013/14 Outlook Where are you tracking relative to your 3-5% organic growth guidance for FY13 and what are the puts and takes at the segment level? Does market activity still support 9-11% organic growth at Communications? What is your early read on the 2014 growth outlook? What are the major puts and takes at the margin line during FY14? How much of the 20-25c of productivity is coming from restructuring payback ($20-25m of spend) and how much from excellence initiatives (such as sourcing)? What are your expectations for price/cost tailwind in 2013 – overall and by segment? Do you still expect price/ cost to remain a tailwind during 2H? Do you still feel comfortable that volume/price/mix will be a 31-44c benefit this year? What drove weakness in Energy margins during 2Q (down 30bps on 5% core growth) and how does this change through the backend of the year? Long-Term Targets Can you describe the growth investments you need to make to achieve your organic growth target of 4-6% over the next three years? To what extent is this view predicated on global growth acceleration and how has this view evolved over the past year? You are targeting 19%+ margins this cycle. Where do you see the ceiling on margins and why? What has changed structurally since the last cycle? How much of the improvement vs. last cycle is attributable to portfolio mix vs. productivity? Where do you see the best opportunities for operating leverage by segment – how do you respond to concerns that Energy margins are tapped out? What is the cost capture rate by procurement category and what is the longer term potential? Are you still on track to reach your original $175m target for cost savings? What investments (type and quantity) were required to capture these savings? What incremental opportunities do you see for centralization within the back office and other excellence initiatives? 54 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Knowles Spin-Off Can you discuss the events that led you to conclude that a spin out of Knowles was the right decision? What has changed in those markets that converted this from a growth platform into a non-core Dover asset in just two years? What has been the reaction from your major shareholders? Where are you currently in the spin-off process? Do you have an estimated time for the initial filings and do you still expect to complete the spin during 1Q14? Can you provide more color on potential leverage for the SpinCo? How do you plan to deploy the dividend from the Knowles spin? What is your plan for the remaining businesses (i.e. Aerospace, Military and Telecom) within Comm Tech? Are they going to be integrated into other segments? Does the spin-off of Knowles, together with the EA&T sale, signal the end of portfolio rationalization or do you see further prospects? M&A and Capital Deployment What lessons have been learned from the problems experienced at Sound Solutions – is there any need to modify the M&A process? Within which businesses and geographies are you seeing the best M&A opportunities? What would be a good placeholder for M&A spend during 2013? How would you describe your M&A backlog and do you see scope for further deal flow in the $100-200m range during 2H13? Can you describe the process in identifying and closing the Finder acquisition? What is the revenue and EBITDA contribution and what does it bring to the portfolio (API-certified centrifugal pumps)? What revenue and cost synergy potential do you see? Do you still see 13-15c accretion from M&A in 2013? What is the 2013 and 2014 EPS impact from Finder? How should we view the $1bn share repurchase program? Is it connected with proceeds and dilution offset from the EA&T sale process or does this represent a more fundamental change in your capital allocation policy? How should we model the phasing of the remaining $500m share repurchase through 2013/14? Has the cadence picked up in 3Q and do you expect to complete the program during earning 2014? Sale of Electronic Assembly & Test Where are you in the auction process? Do you still expect the transaction to happen in 3Q13? Does the write-down taken in 4Q12 reflect expected proceeds from the divestment ($240m Disc Ops book value as at 30 June 2013)? Do you believe you can realize full value for this asset given depressed Solar and Semi end markets? Why is now the right time to move forward with a sale of EA&T given its position at the bottom of the cycle? Management Changes Can you talk about the recent decision to replace Tom Giacomini with Bill Spurgeon (ex-Dover Energy President & CEO)? Given the unique nature of the Energy businesses, what transferable skills will he bring to the Engineered Systems portfolio? Is his mandate any different from that of Tom’s? Can you talk about the experience of new Dover CEO Soma Somasundaram and why he was the right candidate? How are you managing the expectations of other candidates who may have been vying for this role? 55 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Energy What is your outlook for 3Q13 vs. 2Q (+4.5% organic)? How are you tracking relative to the 5-7% core growth target for FY13? Have you seen a pickup in Energy bookings QTD vs. 2Q13 (weakened to 0.92x B/B, due to timing of the Australia Queensland project)? What trends are you seeing in production (+) vs. drilling (-)? What is your growth expectation for Drilling in 2013 given weak NA rig count YTD? Have you continued to see inventory drawdowns in Drilling, and is this causing pricing pressure? Are you still looking for 3% sequential improvement in US rig count during 2H13 (vs. 1H)? What proportion of Energy revenue and earnings do you derive from non-US markets? What was the major driver of your 37% growth in international Energy business during 2Q13? What growth investments have you recently made? Are you seeing increasing demand for artificial lift solutions in markets like the Middle East, Russia, etc? How do margins in your International Energy business compare to the segment average? Are you still targeting international to contribute 30% of Energy sales by 2014? What is the mix going to look like by end of 2013? Can you describe the competitive environment in Artificial Lift? How do you believe GE’s purchase of Lufkin will change the competitive dynamic – what sort of a competitor was Lufkin? How is pricing trending? What is driving the recent strength in the downstream business and how sustainable is this? How does your performance compare to your competitors? How are you tracking relative to your ~24% margin target for FY13? What was impact from higher product development spending in 2Q13? To what extent are you experiencing margin pressure from negative Drilling mix (US Synthetic is one of DOV’s highest margin BU’s) and pricing? Describe the productivity gains you are benefiting from in Energy. How do the economics of an oil vs. gas rig compare – is there any significant margin difference? Does the TX facility consolidation have any material impact on margins? How active is the Energy M&A pipeline – where do you see further opportunities? Does the reduction in long-term Energy growth to 3-5% change your Energy capital allocation mix, in any way? Communications Technologies Also refer to separate Knowles Spin-Off section How are you tracking vs. your 9-11% core growth target for FY13? How is your Handset business (Knowles & Solutions) trending QTD relative to a strong 27% growth in 2Q13? What are you seeing in terms of volume and pricing trends YTD? Do you have any more visibility on the timing and your share content of the new product launches during 2H13? How does ASP look on the new platforms? Have you seen any delay in OEM launches? What is your updated outlook for smartphone growth in 2013 and how does Knowles/Sound Solutions compare to this? How does the competitive environment look in MEMS? Are you seeing increasing price and volume competition in the smartphone market? How does your share on the iPhone 5 compare to previous models? How does your share at other smartphone OEMs compare to competitors? You referenced that Apple and Samsung will be similar size this year – can you describe the differences between the two OEMs in terms of MEMS vs. speaker? Is one OEM better margin? Where is the mix of Nokia/ Blackberry sales running right now at Sound Solutions, and where do you see this trending by year-end? To what extent has the integration with Knowles yielded revenue synergies? 56 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry How are the non-handset markets trending? Are you seeing any positive inflection in Medical (hearing aid, -1% in 2Q), Aerospace & Defense (-1%), Telecom (flat)? Where did Sound Solutions’ operating margin stand in 2Q13? Given restructuring actions taken in 1H13, how much Y/Y EPS tailwind do you see in 2013? Did you implement further cost reductions in 3Q? Where do you see opportunities for improved profitability? How are you tracking vs. your double-digit SS operating margin target by end of 4Q13? How long before SS returns to high-20s EBITDA margins? What is the principal driver of lower SS profitability – is it simply volume leverage or are there significant productivity and mix factors to consider as well? Are your Beijing high-flex production automation plans on track? Where are production yields trending? Have your longer-term Sound Solutions ROIC expectations been impaired and what would be the trigger for a goodwill write-down? Printing & Identification How are you tracking vs. your 1-2% core growth target for 2013 – have you continued to see strength in FMCG markets with weakness in Industrial? How is Markem-Imaje trending? What trends are you seeing by geography – has strength in China (up DD in 2Q) continued into 2Q? How is Europe tracking vs. +2% in 2Q? How does the new product pipeline look? What do you think of DHR’s horizontal acquisitions of X-Rite and Esko Artwork? Where do you see opportunities for bolt-on Product ID deals – are 3D printing and CAD/CAM interesting opportunities? You have seen a strong recovery in P/ID margins (+200bps in 1Q13, +60ps in 2Q); what restructuring payback have you realized so far? How do M/I margins compare to the segment average? When Industrial verticals recover, will this dampen operating leverage? Engineered Systems - Refrigeration & Industrial How are refrigeration and industrial markets tracking QTD – are you seeing any backlog push-outs during 3Q13? How are Refrigeration bookings trending (1.01x B/B in 2Q) vs. typical seasonality? How does the organic growth outlook for R&I compare to your 2-4% segment target? What have you heard from retail customers regarding new store build and remodel activity for 2013? Which food retail customers are undergoing major renovations, upgrades and expansions? Have you seen any pressure on account of lower capex outlooks from several US Food Retailers? How is your market share trending in cases and systems? Have you seen any changes in behavior at Hussmann since IR sold down its majority stake? What opportunities do you see in the international market? How is Anthony performing since the acquisition? What is the opportunity for energy retrofit activity in the North American case market? Do you see the potential for Anthony’s re-skinning kits to cannibalize your new case sales? Will Anthony be run as a separate entity or will it be integrated into Hill Phoenix? Do you see upside vs. your 10-12c EPS accretion target for 2013 given strength in 1H? Margin performance was strong in 2Q (16.5%, +130bps Y/Y); what impact did price/ cost have and how do you expect this to evolve? What impact will acquisition accounting have on comps through 2013? What impact will the GA facility consolidation have on the cost base and margins? 57 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Engineered Systems – Fluids How is growth trending QTD by end market and geography – what is your growth expectation for 3Q13 vs. +4% organic 2Q (which included a deferred shipment from 1Q)? Are you continuing to see strength in the long-cycle pumps business? Can you comment on QTD order growth within Fluids by key end market and by geography? How does the organic growth outlook for the Pump Group compare to your 2-4% segment growth target? What M&A opportunities do you see within the Pump market? Would you be prepared to do a larger acquisition in this space? What is the revenue and EBITDA contribution from Finder and what does it bring to the portfolio (API-certified centrifugal pumps)? What revenue and cost synergy potential do you see? How do Pump Group margins compare to R&I? What opportunities do you see for improvement? 58 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry DOV Company Background Exhibit 34 DOV Revenue Breakdown by Geography, Cyclicality and End Market Commercial Aero Asia By End Market Handset s By Geography ROW Aut o A/ M 9% 3% Downstream O&G By Cyclicality 18% 3% 5% 6% Truck/ Trailer Late No Cycle Other 3% Upst ream O&G 30% 4% Food Equipment 14% Americas 3% 10% Commercial Def ense Refrigerat ion 2% Europe 10% Healt hcare 15% Other Process 3% Early 3% Product ID Mid 28% US Power Gen 2% 11% 54% General Industrial 38% 26% Source: Company data, Morgan Stanley Research Company Description Key Management Founded in 1947 and incorporated in Delaware, Dover Corporation Robert Livingston serves as President and CEO of Dover (since Dec (NYSE:DOV) operates a global portfolio of manufacturing companies, 2008). He joined Dover in 1983 and has been President of Dover providing specialized products, equipment and services that serve a Engineered Systems, VP of Electronics and President of Vectron. variety of markets, including energy, product identification, material Brad Cerepak has been CFO and Vice President since 2009; prior handling, fluid management, mobile equipment, engineered systems and thereto, he was Vice President and Controller of Trane, Inc (2005/08). electronic components & equipment. William W. Spurgeon, Jr.: President & CEO of Engineered Systems. Dover relocated its headquarters from New York City to Downers Grove, S. Soma Somasundaram: President & CEO of Dover Energy. Illinois in mid-2010. Unlike most other conglomerates, the company Jeffrey Niew: President & CEO of Communication Technologies. utilizes a highly decentralized business model, encompassing over 30 John Hartner: President & CEO of Printing & Identification. individual businesses and 32,000 employees around the world. Exhibit 35 DOV Detailed segment breakdown 2012 2012 Operating Products End-markets Revs Profits Companies Communications $ 1,517 $219 Knowles Micro-acoustics products, MEMs microphones & specialty audio components Consumer Electronics, hearing aid devices Technologies 19% 16% Vectron Precision frequency generation and control sensors and components Telecom, military, aerospace & industrial Ceramic & Microwave Specialty RF & microwave filters, ceramic capacitors and switches Telecom, defense, semiconductor & medical Sargent Hydraulic actuators, valves, bearings, specialty fasteners & services Aerospace, military & defense Colder Products Quick disconnect couplings Industrials, life sciences and chemicals $ 2,173 $539 Norris Rod lifts, plunger lifts, reciprocating pumps, well site controls, analytic tools O&G development & production Energy 27% 39% US Synthetic Diamond inserts for applications in down-hole drilling tools O&G exploration Waukesha Bearings Highly engineered bearings and magnetic bearing systems O&G, Power Gen Quartzdyne Quartz pressure transducer for the downhole O&G industry O&G exploration, development, production Cook Compression Compressor valves, pistons and other products; monitoring solutions Natural gas production, refining & distribution OPW Fluid Transfer High hazard, quick interconnects and related gauging and monitoring systems Transportation, energy, chemical & industrial OPW Fueling Components Above ground fueling components and systems Oil companies, convenience stores Tulsa Winch Standard and engineered winch, gearbox and load information systems Energy, infrastructure $ 3,420 $502 Pump Soln. Group Specialty industrial pumps and supporting technologies Chemical, petroleum, pharma, F&B, Industrial Engineered Systems: 42% 36% HydroSystems Chemical proportioning and specialty liquid dispensing systems Food services, food processing, industrial Fluid Solutions Swep Compact brazed heat exchangers Industrial and climate control Warn Off-road equipment & accessories, winches, hoists, powertrain components Consumer, industrial, military & transportation Engineered Systems: De-Sta-Co Clamping, indexing, transferring and robotic tooling for workplace automation. General industrial, auto & aerospace Refrigeration & Texas Hydraulics High reliability hydraulic cylinders Infrastructure, construction & industrial Industrial Heil Trailer* Tank trailers, dry bulk trailers, specialty Flatbeds Energy, infrastructure & defense Environmental Soln. Refuse collection vehicles, waste compacting and recycling equipment Municipalities, waste management VSG Vehicle lifting and collision repair equipment Auto repair, dealerships, service centers Performance Motorsports Piston and other engine related components Automotive, powersports, marine PDQ Touch free vehicle wash systems Big box retailers, convenience stores Hill Phoenix Refrigeration cases & systems and specialty cases Supermarkets, food retailers Unified Brands Cooking equipment and other food preparation equipment Restaurants, food services, govt. & muni. Belvac Beverage can production equipment Food and beverage Tipper Tie Specialty food packaging equipment Packaging and processing industry $996 $135 OK International Soldering and fluid dispensing tools Electronic assembly and industrials markets Printing & Identification 12% 10% Markem-Imaje Inkjet, thermal transfer, laser, print and other product marketing equip., Consumer goods, pharmaceuticals, industrials DataMax O'Neil Stationary and portable label and receipt printing solution Consumer goods, pharmaceuticals, industrials Source: Morgan Stanley, Company Information. *Note: Proforma for Electronics divestiture within Printing & Identification. 59 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry DOV Key Financial Statistics Exhibit 36 Exhibit 37 DOV – Organic Growth vs. EE/MI (1Q06/2Q13) DOV – EPS Growth vs. EE/MI (1Q06/2Q13) 100% 30% EPS Grow th Organic Grow th 80% EE/MI Median EE/MI Median 20% 60% 10% 40% 20% 0% 0% -10% -20% -20% -40% -30% -60% 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 Source: Company Data, Morgan Stanley Research Source: Company Data, Morgan Stanley Research Exhibit 38 Exhibit 39 DOV vs. EE/MI – Core Operating Margin (2006/13e) DOV vs. EE/MI – Core Incremental OM (2006/13e) 17% 45% Core Incremental Op. Margin Core Op.Margin EE/MI Median 16% EE/MI Median 40% 15% 35% 30% 14% 25% 13% 20% 12% 15% 11% 10% 10% 5% 9% 0% 8% 2006 2007 2008 2009 2010 2011 2012 2013 2006 2007 2008 2009 2010 2011 2012 2013 Source: Company Data, Morgan Stanley Research Source: Company Data, Morgan Stanley Research Exhibit 40 Exhibit 41 DOV vs. EE/MI – Revenue per Employee (2006/12) DOV – Capital Allocation (2008/12 cumulative) 270 Revenue/Employee Dividends EE/MI Median Capex 16% 250 17% 230 210 190 Share 170 Repurchases 25% Acquisitions 150 42% 2006 2007 2008 2009 2010 2011 2012 Source: Company Data, Morgan Stanley Research Source: Company Data, Morgan Stanley Research 60 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry DOV 2Q13 Earnings Call Transcript Opening Remarks – Bob Livingston (CEO) 2Q13 revenue up 9%, organic up 5%, driven by particularly strong performance in Consumer Electronics and Refrigeration. OM up 30bps and adj. EPS growth of 24% NA was modestly positive, China remained strong (~20% growth), also saw growth in ME, LatAm and Canada. Europe was largely flat. Bookings up 8%, supporting solid growth outlook in 3Q, driven by sequential ramp-up in Consumer Electronics, continued growth in Energy (looking for modest sequential increase in rig count), seasonal strength in refrigeration and PID (consumer goods companies preparing for the selling season). Consumer Electronics growth in 2Q was driven by Samsung new product launches, and mgmt expects the strength to continue into 2H, driven by ramp in Samsung and additional new product launches from other OEMs. Energy: solid Production (especially in international markets) and Downstream growth. Refrigeration was seasonally strong. Fluids benefited from healthy mix, with particular strength in the long cycle pumps biz. Industrial performance was solid, driven by Auto related biz and environment solutions. PID: growth in FMCG offset by tough bar code market and project timing, but mgmt was encouraged by solid sequential revenue growth of 5%. M&A activity remained active and closed 5 small deals in 2Q. Taking up low end of EPS guidance. Knowles spin on track to be completed in 1Q14 and is expected to create significant shareholder value. Quarterly Detail – Brad Cerepak (CFO) Revenues of $2.2bn up 9% Y/Y, M&A added 4ppts EPS up 55% to $1.70, or $1.36 adjusted for spin cost and tax benefits, up 24% Y/Y. Segment margin up 30bps, on the back of strong execution and restructuring payback, despite $4m incremental restructuring charges. Bookings up 8% to $2.2bn, up 15% in ES, 9% in Comm Tech and 3% in PID, down 1% in Energy. B/B of 0.99x, in line with typical seasonality. Backlog flat at $1.6bn FCF of $251m, 11% of total sales. FY13 FCF forecast unchanged. Revenue growth was driven by 5% organic and 4ppts M&A contribution. o CT up 11% organic, driven by NPI in consumer electronics. o Energy up 5%, M&A added 2ppts, FX was 1ppt headwind o ES up 4% organic, M&A added 9ppts o DPI flat Sequentially, sales up, o CT up 8% o Energy up 2%, driven by downstream growth o ES up 16%, driven by seasonal strength in refrigeration and shipments of long-cycle pumps products, including deferred shipments from 1Q. o PID up 5% Bookings flat Q/Q, CT up 11%, PID up 9% (deferred bar code projects), ES up 2%, offset by 15% decline in Energy (typical seasonal slowdown, severe weather conditions in Canada, and large non-repeated orders in 1Q). Communication Technologies o Revenues up 11% organic, driven by strong growth in Consumer Electronics, particularly in smart phones. Med Tech, Aero/Defense, Telecom were largely flat (showed improvement sequentially). o Earnings up 3% o OM of 12.9 %, down 100bps, largely due to incremental restructuring costs of $9m (productivity initiatives, integration of speaker/receiver biz and facility rationalization in Telecom). OM up 110bps after adjusting for restructuring. 61 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry o Expect OM to improve in 2H, driven by restructuring payback and volume increases. o Bookings up 9%, in-line normal seasonality and OE product launches. o B/B of 1.05x Energy o Revenue up 6%, 5% organic, o Earnings down 1% o All three segments achieved positive growth. NA rig count down Y/Y and DOV continued to focus on international growth (+37% in 2Q). o OM: 23.2%, down 170bps. Margins contraction due to negative mix, product development costs, and investments in international markets. o Bookings of $526m, down 1%, strong growth in Drilling & Downstream, offset by declines in Production, which was due to Canada spring thaw and the timing of Queensland order. o B/B of 0.92x Engineered Systems o Revenues up 13%, 4% organic o Fluids up 7%, 4% organic, strong results in Pump. o Ref & industrial up 15%, 4% organic, driven by food equipment and environment solutions. o Earnings up 24%, o OM: 16.5%, up 140bps o Bookings up 15%, driven by M&A o B/B of 0.99x. Fluid bookings up 5% to $213m, B/B at 0.94x, due to large project shipments Refrigeration/Industrial bookings up 18% to $785m, B/B at 1.01x Printing & Identification o Revenues flat. FMCG up modestly, offset by weakness in Industrial. EU revenue increased after 2 quarters of decline o Earnings up 24% o OM of 14.3%, up 280bps, driven by restructuring payback. o Bookings of $259m, up 3%, driven by FMCG. o B/B of 1.03x 2Q12 Overview o Net interest of $30m, $0.6m higher Y/Y, in line with expectations o Corporate up $2m due to spin costs. o Normalized tax rate of 26.7%, excluding 36c tax benefits. 27.2% YTD o CapEx of $53m o Repurchased $59m or 760k shares. Overall, repurchased $600m shares under the $1bn program. Expected to complete the program by early 2014 2013 Guidance o Revenue guidance unchanged, up 7-9%, driven by 3-5% organic and 4ppts M&A. o $150m corporate expense and $127m interest, unchanged o Tax rate: 27-27.5%, slightly lower than previous estimate due to more favorable geographic mix. o CapEx expected to be 3.1% of full year revenue, o FCF: 10% of revenue. o EPS form cont. op: $5.56-5.71, increased from $5.05-5.35 previously. 2013 earnings bridge o Volume, mix & price: $0.31-0.44, unchanged 62 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry o Net benefits of productivity: $0.20-0.25, up from previous estimates due to restructuring benefits o M&A: $0.13-0.15, largely driven by Anthony o Growth investments/higher compensation: $0.16-0.23 headwind, higher investment in international market. o Corporate expense: negative 5c o Interest/lower share count & tax rate: $0.33-0.35 o 2013 tax benefits: $0.38 o Spin-off costs in 2Q: -2c o Total EPS in FY13: $5.56-5.71 Closing remarks o Continue to execute on growth initiatives, including geographic expansion and new product innovation. o Plan to complete the share repo program by early 2014 and mgmt remains committed to dividend growth. o Robust M&A pipeline; expect to close several deals in the next few quarters. Q&A Consumer Electronics outperformed in 2Q: mgmt was being conservative on 1Q call, due to launch timing uncertainty. Expect significant sequential growth in 2H, driven by new product releases (likely late 3Q and early 4Q) – the full year forecast can be somewhat conservative. Energy: 2Q OM declined, but mgmt believes it’s temporary, due to slower activity in Canada and elevated product development spending (2Q much higher than 1Q and 3Q estimate costs). Expect segment margin to be ~24% in FY13. Bookings weakness in Energy: 3-5% core growth guidance for FY13 unchanged - do not expect weak Energy bookings in 2Q to impact 3Q revenue outlook; it was mainly due to timing of international orders - the company received $70-75m orders from Queensland in early July. Consumer Electronics: The biggest two customers (Samsung & Apple) will likely account for similar share of DOV revenue in 2013. China: DOV serves two key end markets in China – doing much less in export oriented markets now, but the consumer market remains robust - all four segments had DD growth in China during 2Q. M&A: expects to close several small deals in the next few quarters. $45-50m acquired revenue in 2Q; multiples were a bit lower than historical levels (~9-10x EBITDA in the past 4-5 years). Completed a couple deals in pumps, one in environmental solutions and one in PID. Capital deployment: stepped back repurchases in 2Q, as mgmt was mainly focusing on the Knowles spin in 2Q. Will be more active in 3Q. Anthony performance in line with expectation, particularly happy with front-end sales & marketing activities. Anthony saw sequential growth of 25% in 2Q and will continue to expand in 3Q. Samsung: expect Samsung revenue to be substantially up Y/Y in 2H; modestly up sequentially. Rig count outlook: YTD gas rig count was down ~20%, which will likely remain the same in 2H. Currently planning for 3% sequential improvement in US rig count in 2H13. Canada rig count typically sees 70% decline in 2Q vs. 1Q, which is expected to recover in 2H. Comm Tech: 2H revenue ramp up will be largely driven by the Acoustic biz, but mgmt also expects the non-handset biz to see some sequential improvement. 63 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry ES: H-F was up 5% organic in 2Q, despite modest headwind related to prior year’s Target P-Fresh project. Long cycle pump biz: mainly in Maag, where DOV had deferred shipments in 1Q, which partly contributed to growth in 2Q. Plastics stood out as a particularly strong end-market. Capital allocation: looking at acquisitions across the portfolio and making investments in international markets. Electronics divestiture: running the process now and still expect the transaction to be completed in 3Q13. Increased outlook for productivity benefits: mainly driven by restructuring activities. Originally expected to spend $12-15m in restructuring, but now looking for $20-25m – the bulk of this was already completed in CT, which will likely drive better margins in 2H. PID margin: 2H13 margin will be similar to 2H12. US short cycle industrial market: auto related market improved, mainly driven by growth in Lift. Refuse truck biz had a strong quarter both on revenue and bookings. Price/cost a bit better, but no material impact on margins. Europe: flat in 2Q, but not ready to call for an inflection point. Markem Imaje was up 3-4% in 2Q, pumps also up slightly (mixed trend by end market), while Heat Exchangers down 5-7% in Europe. ES margin: Anthony was a drag on margins due to D&A step-up. Ex-purchase accounting adjustment, Anthony will be neutral/ accretive to ES margin. H-P: strong performance partly driven by international expansion. PID: still sees plenty of opportunities in EMs - Markem Imaje saw DD growth in China as well as solid performance in LatAm; mgmt also sees US as a growth market. Closed one acquisition in 2Q and still have 2-3 opportunities in the pipeline. 64 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry DOV Summary of Guidance Exhibit 42 DOV – FY13 Guidance Pre-earnings FY13 Post-earnings FY13 Change Organic Revenues Up 3-5% Up 3-5% Unchanged M&A Contribution 4% 4% Unchanged Total 7-9% 7-9% Unchanged Organic growth by segment: Communication Technologies 9-11% 9-11% Unchanged Energy 3-5% 3-5% Unchanged Engineered Systems 2-4% 2-4% Unchanged Printing & Identification 1-2% 1-2% Unchanged M&A Growth Communication Technologies - - Energy 2% 2% Unchanged Engineered Systems 8% 8% Unchanged Printing & Identification - - Segment Margin - - Corporate Expenses $150m $150m Unchanged. Compares to $136m in 2012, driven by higher pension expenses Interest Expense $127m $127m Unchanged Tax Rate 27.5-28% 27-27.5% Lowered by 50bps due to favorable geographic mix 2013 EPS Guidance Bridge FY12 Adj. EPS $4.44 $4.44 Volume, mix & price 28-46c 31-44c Productivity 12-22c 20-25c Higher forecast driven by expected restructuring payback Acquisitions 13-16c 13-15c Investment/Compensation Negative 10-16c Negative 16-23c Higher investment, particularly in international markets Corporate expense Negative 5c Negative 5c Interest/ shares/ Tax rate 23-28c 33-35c Up 2c at mid-point Knowles spin-off costs - 2c 2013 tax benefits 38c 2c in 1Q and 36c in 2Q 2013 EPS from Cont. Ops $5.05-5.35 $5.56-5.71 CapEx 3-3.5% of revenues ~3.1% of revenues Compares to 3.8% in 2012 FCF 10% of revenue 10% of revenue Compares to 12% in 2013 Source: Company Data, Morgan Stanley Research * Note: EPS guidance was lowered from $4.85-5.00 to $4.7-4.85 on July 9th. 65 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry This page has been intentionally left blank 66 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Eaton 67 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry ETN Question Bank Key Issues Thro’ YE QTD Trends: How is core growth and booking tracking relative to 2Q results (-2% core growth)? Are you seen any notable strengthening or weakening within any geographies or end markets? How are you tracking relative to the normal 1% Q/Q step-up? 2013 Outlook: How are you tracking vs. your $350m core revenue growth target for FY13? This implies 2% organic growth on a pro-forma basis, which is above your forecast of ~1% end market expansion in 2013 - where do you see Eaton outperforming/underperforming the end markets? What is the outlook by geography? Where do you see the most upside/ downside risk to plan? Do you believe the Construction Equipment OEMs could ramp up production early, given the state of inventories? 2014 Outlook: CEO Sandy Cutler has been vocal that 2014 will mark a more normal linkage between IPI and industrial demand. Can you talk about what caused this disconnect (inventories) and how quickly you expect the two to re-couple? Where do you view the 2014 outlook in relation to your long term targets (see below) and can you talk about the tone of customer conversations in Truck, Hydraulic, Utility and Data Center markets, in particular? Meritor Litigation: What is the latest update after the Supreme Court decided not to review your appeal? What is your estimated timing of a resolution and potential losses? Have you made any reserves to date? Margin Outlook 2013 Outlook: How comfortable are you with your 15.25% margin target for 2013? Can you break it out between synergies, volume leverage, mix, pricing and restructuring payback? Why would Aerospace (15% OM in 2Q vs. 14% FY13 target) and Vehicle (17.2% vs. 16% target) margins deteriorate sequentially into 2H? Do you see scope for a stronger-than-normal Hydraulics back-half or is volume visibility still too murky? Price/ cost: How much pricing have you taken by business YTD and how have customers/competitors responded? How are commodity costs trending QTD vs. your initial expectations? What is your outlook for price/cost in 2013 by segment? Restructuring: What restructuring payback do you expect on actions taken in 2012? What was the impact to 1H13 margins and how much shall we factor in for 2H? Do you expect to take more actions in 2013? Cooper Integration How is the integration progressing? To what extent is legacy Cooper management involved in the integration process? How long do you expect Kirk Hachigian to remain involved in the integration process? You increased your cost synergy guidance to $325m by 2016 vs. $290m previously - what were the main drivers of this uplift? Are you still tracking towards $0.15 EPS accretion in 2013 or do you see scope for further acceleration in cost reduction (increased 2013 synergies by $25m during 2Q call) – where are you making the fastest progress? What have been the largest surprises – both positive and negative - during the integration process so far? Can you quantify the potential $325m cost synergies by category - plant consolidation, application of EBS, strategic sourcing, shared services, and corporate cost reduction? How much hedge do you have against this target – where do you see the upside biases? 68 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Can you also break out the $570m revenue synergies by main component (larger package to customers/channels, service opportunities and geographic expansion)? What will be the main drivers of benefits in 20013/14? Where are you beginning to capture revenue synergies? What are the biggest risks? Long-term Targets Growth target: What gives you confidence that you can reach 6% through-cycle core growth relative to the 3% achieved over the past 10 years in the context of a more sluggish global growth environment? Can you describe your growth strategy in emerging markets - have changing dynamics in China, Brazil over past 1-2 years altered your investment strategy in any material way? Investment: What sort of CapEx investments do you plan to make to achieve your long-term revenue growth target? What levels of NPI and R&D are required? Where is capacity tightest across the portfolio? Given the current macro environment, how are you thinking about growth/capex in 2013? Margin target: Can you discuss the major drivers of margin expansion by business? Do you see further upside to your 17% margin target by 2015? Where do you see the ceiling on margins and why? Where do you see margins troughing through the next down-cycle? Competition Market Share Dynamics: Where do you believe you are gaining or losing share? Do you still see share gains in Power Quality? Are you gaining share in Automatic and Semi-Automatic transmissions? Have you succeeded in taking share in Electrical products and systems markets as you drive revenue synergies? Emerging Competition: Within your portfolio, where do you see increasing commoditization or rising competition across your portfolio – particularly from EM players e.g. Hydraulics? Capital Allocation M&A: While you have mentioned that M&A will not be a major focus in the near term, would you still consider bolt-on acquisitions? If so, within which parts of the portfolio do you see the most interesting opportunities for acquisitions? Do you view the need to strengthen your industrial portfolio? Auto/Truck: How much consideration have you given to a divestment of the Vehicle business? Would the Meritor litigation uncertainty represent a barrier to such an outcome, in any material way Legacy Cooper Portfolio: Are there any parts of the legacy Cooper business that may be considered no-core? Equally are there any niche parts of the portfolio that you would like to grow e.g. the safety products business (Wheelock)? Cash Return: What sort of dividend payout ratio are you targeting going forward? You expect 70-80% of your future dividends to be treated as return of capital to US shareholders – how sustainable is this advantageous tax advantage? At what stage would you expect to ramp up share repurchases? Debt pay down: Over what time period will you pay down the $2.1bn of debt? Do you see upside to that target? Taxes Incorporation and Taxes: Are there any restrictions or nuances to being an Irish holding company rather than a Delaware company? How sustainable is your below-average tax rate over the cycle? What are major drivers of low tax rate – inversion, intercompany loan? 69 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Tax Reform: How could tax reform permutations impact ETN – do you view yourself as a relative loser if the US moves to a territorial system of taxation? How real do you view the risk of Ireland being coerced into raising corporate tax rates? What options would you consider in response? IRS Tax Dispute: Do you have any update from the US Tax Court regarding the APA dispute? What could be the potential financial impact related to this case? Any sense on timing? Electrical Also refer to separate Cooper section 2013 Outlook: How is 3Q tracking relative to your 2013 guidance (+1.5% in Products and +1% in Systems & Services)? How are bookings trending in Europe and APAC vs. your -2% and +3% growth expectations for 2013, respectively? What trends are you seeing by major end market - Utility, Industrial, Non-Resi, Resi, IT? Construction: How are you tracking vs. your +12% growth target in Resi and up 2-3% guidance in Non-Resi for 2013? Have you seen any signs of a slowdown in Residential demand from rising mortgage rates and more sluggish new home sales? Within Non-Resi, what are you seeing within Institutional vs. Commercial? Would you say that the bulk of your Non-Residential Construction growth continues to be driven by retrofit/ replacement rather than new construction – what impact is LED having? Utility: What drives your outlook for 4% decline in utility during 2013 – how does this break out between Transmission and Distribution? What are Utility customers saying about CapEx into 2014? Data Center/IT How is data center/IT investment tracking vs. your expectation for 2% decline in 2013? Has data center demand continued to strengthen in August and in what regions? What is the long-term growth outlook here? Margin: Are there appreciable margin differentials between your industry verticals? Do you see further upside to your 16.5% and 14.5% margin targets for Electrical Products and ESS, respectively? Excluding Cooper, how did the core Electrical margins in 1H13 compare to 1H12? Have you seen any changes in competitive pricing dynamic? How do you expect segment margins to track in 2013 ex-synergies? How did legacy Cooper perform in 1H? Competitive landscape: In which verticals do you think you are gaining or losing share? How is Emerson responding to their recent share losses? Emerson is trying to offer complete data center management solutions – what is Eaton’s response here? M&A: Do you sense that there could be further consolidation in the North America Electrical Equipment market? Do you plan to participate? How does your M&A pipeline look? Where do you see opportunities for growth through acquisitions? How do you respond to concerns that your industrial portfolio is too weak? Hydraulics 2013 Outlook: How is 3Q tracking vs. your 2013 outlook (-5% in the US and ROW)? How are bookings tracking QTD vs. 12% decline in 2Q? How are customer and channel inventories looking relative to normal levels? When do you expect Hydraulics growth to turn positive (vs. -9% in 1H13)? What are you seeing in Europe, Asia and LatAm vs. your 2013 guidance of 4%, 7% and 3% decline, respectively? 70 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry End Markets: Can you comment on QTD trends in Mobile (vs. -18% in 2Q) vs. Stationery (-8%) markets, as well as OE (-16%) vs. MRO (-9%)? Do you see potential for the Construction OEMs to ramp up production earlier than normal given the state of inventories? What is your exposure to Mining and Agriculture – to what extent do you see growth to be impaired by these end markets thro’ 2015 Competition: Can you describe the competitive threat from EM players – which companies have the best capabilities? What are major technological trends within Hydraulics? Margin Outlook: How are you tracking vs. the 13.5% target for FY13? How much restructuring benefits should we factor in for 2013? What sort of incremental margins do you see over the next 2-3 years? Your 2015 target of 15% implies 4ppts improvement vs. 2012 – what are the major drivers of this expansion? M&A: Why is Hydraulics a growth platform for Eaton? How does the current M&A pipeline look in Hydraulics, and where are you most interested in growing via acquisitions? How is the Jeil integration progressing, in terms of revenue/cost synergies? Aerospace Business Trends: How are revenues and bookings tracking in 3Q relative to 2Q results (+3% and +5%, respectively)? What trends are you seeing within Commercial OE, Commercial A/M and Defense? How does commercial shake out between Large Commercial and BJ? Within your 3% end market growth guidance for FY13, what level of growth do you expect within Commercial OE, A/M and Defense? Growth Outlook: How much content has ETN secured on new programs, viz. A320neo, A350 and others? Can you quantify the organic growth impact vs. last cycle? What Defense programs do you have the most exposure to and how did these fare in the most recent budget proposal? How much risk is there from sequester and do you view 2014 as the risk year? Are you still looking for 6% contraction in Military during 2013, and what is the outlook for 2014? Competition: Do you see any threat from Parker Hannifin’s AAT JV with GE? Do you see scope for similar JV arrangements with some of the larger suppliers to improve competitive positioning? Margins: 1H Aerospace margins were very solid (up 100bpsY/Y to 14.7%), particularly given the negative A/M mix – what was the impact from restructuring benefits and how will these trend? Why do you expect margins to contract through the back half as implied by your 14% FY13 target? As Commercial A/M recovers, do you see upside to your FY13 target of 14%? How do you expect E&D expense to trend over the next few years? What assumptions drive your long-term Aerospace margin target of 16%? M&A: How does the current M&A pipeline look in Aerospace, and where are you most interested in growing via acquisitions? What has prevented deal flow in this area – too much competition for deal flow? Vehicle 2013 Outlook: How is QTD growth trending in both Truck and Auto, and how does this compare with 2Q results and your 2013 plan? Do you still feel comfortable with our 1% growth outlook for 2013? Can you break it out by region and by vertical (Truck vs. Auto)? How is LatAm tracking vs. your 18% growth target in 2013? Truck: What trends are you seeing in Class 8 orders by geography - NAFTA, Europe, LatAm? How is NAFTA HD production tracking vs. ETN’s 260K forecast for 2013? What traction are you seeing in hybrid hydraulic transmissions and automatic transmissions? To what extent do you expect to benefit (or suffer) from recent (and proposed) emission standard changes? 71 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Auto: What are your expectations by region for 2013? Have you continued to see improvement in Europe and LatAm? What have you seen in the summer shutdown period, and how does it compare to your expectations? Can you quantify the potential impact from new platform launches during 2013? Are you focused on expanding your exposure to EM OEs viz. China and India? What is current content and where could this go? Margin: You have guided for 16% margin in 2013 and 17% by 2015 - what are your embedded assumptions for Auto and Truck, respectively, in both periods? Why would 2H margins contract from the 17.2% reported in 2Q? 72 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry ETN Company Background Exhibit 43 ETN Revenue Breakdown by Geography, Cyclicality and End Market (2012) By Geography By End Market Data Center/ By Cyclicality Defense General IT 2% No Cycle Industrial 10% Resi 20% 9% Construction US Canada 5% 50% 6% Agriculture Early 2% 30% Non-resi Late Auto Construction LatAm 30% 9% 19% 9% Defense 2% Comm. Aerospace Truck/Other Utility/ Energy 5% Manufacturing 9% EMEA Comm. APAC Vehicle / Machine 23% Builder 12% 10% 9% Mid 29% Source: Company data, Morgan Stanley Research Company Description Key Management Headquartered in Cleveland, OH and incorporated in Ireland (since May Sandy Cutler is Chairman and CEO of ETN since 2000. He previously 2012), Eaton Corporation plc (NYSE: ETN) is a leading manufacturer of served as President and COO since 1995. electrical components/ systems for power distribution and transmission; Richard Fearon has been Vice Chairman and Chief Financial and hydraulics components; industrial and mobile equipment systems; Planning Officer for ETN since 2009. He previously served as Executive aerospace fuel, hydraulics and pneumatic systems; truck and automotive Vice President and Chief Financial & Planning Officer. drivetrain and powertrain systems. Tom Gross is Vice Chairman and Chief Operating Officer – Electrical On May 21, 2012, Eaton announced the acquisition of Cooper Industries Sector. Prior to this role, he served as Vice President, Eaton Business plc for $13bn. Cooper was a diversified manufacturer of electrical Systems, from 2003. products and systems to the utility, construction and utility markets. As of Craig Arnold is Vice Chairman and Chief Operating Officer – Industrial year-end 2012, Eaton had approximately 103,000 employees (pro-forma Sector. Prior to this role, Arnold served as CEO – Fluid Power Group. for the Cooper acquisition). Exhibit 44 ETN Detailed Segment Breakdown 2012 2012 % of Seg. Revs Op. Profits End Markets Revs Key Products & Services Key Brands Competitors Electrical $13,111 $1,939 Data Center/IT 16% Circuit breakers, switchgear, UPS systems, power distribution units, panelboards, Eaton, Cyme, FR3, CL-6, Emerson Network Power, 60% 62% Residential 8% loadcenters, motor controls, meters, sensors, relays and Yukon, Mforce, Crouse- Schneider, Siemens, Regal Beloit, Commercial 16% inverters, lighting fixtures and controls, enclosures, wiring devices, plugs, recepticals, Hinds, MTL, CEAG, Hubbell, Legrand, ABB, Areva, Electrical Products 50% Institutional/ Gov't 7% switches, emergency lighting, fire detection and mass notification systems, cable Nortem, Halo, Metalux, GE, Acuity Brands, Philips Infrastructure 4% glands/boxes. Neo-Ray, Lumark, Electrical Systems & 50% Utility 15% Bussmann, Fusetron, Services Industrial 30% Magnum, Edison, Other 2% KwikWire, Aspire Hydraulics $2,960 $385 Construction 23% Pumps, motors and hydraulic power units, controls and sensing products, valves, Aeroquip, Airflex, Arrow, Parker Hannifin, Sauer Danfoss, 14% 12% Agriculture 15% cylinders, industrial and hydraulic hose, fittings, assemblies, thermoplastic hose and Boston, Char-Lynn, Bosch Rexroth, Dongyang O&G/Energy 13% tubing, couplings, connectors, assembly equipment, filtration systems solutions, heavy- Dynapower, Everflex, Mechatronics, Sun Hydraulics, Comm Vehicle 10% duty drum and disc brakes, and golf grips. Hansen and Gromelle, SPX, Zhenjiang Hydraulics Manufacturing 10% Hydrokraft, Hydro-Line, Components, Siemens Processing 10% Hydrowa, Integrated Hydraulics, Synflex, Other 10% Ultronics, Vickers, Material Handling 6% Weatherhead Rrecreation 3% Aerospace $1,719 $213 Aerospace 65% Pumps, motors, hydraulic power units, hose and fittings, electro-hydraulic pumps and Aeroquip, Argo-Tech, Parker Hannifin, UTX, Honeywell, 8% 7% Defense 35% power and load management systems for use in aerospace applications, controls and Carter, Vickers, Centurion Rockwell Collins, GE Aviation, sensing products, fluid conveyance products, and fuel systems including fuel pumps, BAE Systems, Moog, Safran sensors, valves, adapters and regulators. Vehicle $3,914 $570 Truck 59% Transmissions, clutches and hybrid power systems for OEM and after-market customers EverTough, Fuller, Dana, Meritor, Wabco, Cummins, 18% 18% of heavy-, medium-, and light-duty trucks and passenger cars. Roadranger Allison Transmission Auto 41% Superchargers, engine valves and valve actuation systems, cylinder heads, locking and Aeroquip, Fuller Borg Warner, Johnson Controls, limited slip differentials, transmission and engine controls, fuel vapor components, Lear, Autoliv compressor control clutches for mobile refrigeration, fluid connectors and hoses, underhood plastic components, fluid conveyance & sealing products. Source: Morgan Stanley, Company Information. 73 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry ETN Key Financial Statistics Exhibit 45 Exhibit 46 ETN – Organic Growth vs. EE/MI (1Q06/2Q13) ETN – EPS Growth vs. EE/MI (1Q06/2Q13) 25% Organic Grow th EPS Grow th 20% EE/MI Median 70% EE/MI Median 15% 10% 5% 20% 0% -5% -30% -10% -15% -80% -20% -25% -30% -130% 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 1Q 06 2Q 06 3Q 06 4Q 06 1Q 07 2Q 07 3Q 07 4Q 07 1Q 08 2Q 08 3Q 08 4Q 08 1Q 09 2Q 09 3Q 09 4Q 09 1Q 10 2Q 10 3Q 10 4Q 10 1Q 11 2Q 11 3Q 11 4Q 11 1Q 12 2Q 12 3Q 12 4Q 12 1Q 13 2Q 13 Source: Company Data, Morgan Stanley Research estimates Source: Company Data, Morgan Stanley Research estimates. Note: ETN registered an EPS growth of 486% in 2Q10. Exhibit 47 Exhibit 48 ETN vs. EE/MI – Core Operating Margin (2006/13e) ETN vs. EE/MI – Core Incremental OM (2006/13e) 35% Core Incremental Op. Margin 16% Core Op.Margin EE/MI Median EE/MI Median 30% 14% 25% 12% 20% 10% 15% 8% 10% 6% 5% 4% 0% 2006 2007 2008 2009 2010 2011 2012 2013 2006 2007 2008 2009 2010 2011 2012 2013 Source: Company Data, Morgan Stanley Research estimates Source: Company Data, Morgan Stanley Research estimates Exhibit 49 Exhibit 50 ETN vs. EE/MI – Revenue per Employee (2006/12) ETN – Capital Allocation (2008/12 cumulative) 300 Revenue/Employee EE/MI Median 250 Capex 10% 200 150 Dividends 9% 100 Acquisitions 79% Share 50 Repurchases 0 2% 2006 2007 2008 2009 2010 2011 2012 Source: Company Data, Morgan Stanley Research Source: Company Data, Morgan Stanley Research 74 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry ETN 1Q13 Earnings Call Transcript Opening Remarks – Sandy Cutler (CEO) EPS of $1.09, slightly below the mid-point of $1.05-1.15 guidance and consensus of $1.11. Sales of $ $5.6bn, up 38%, up 5.5% Q/Q, below the 7.5% (5-10%) expectations, due to broad end market weakness. Segment margins of 15.6%, up 90bps Y/Y Op cash flow of $609m Cooper integration ahead of schedule. Increased FY13 synergy target by $25m to $115m vs. $90m previously, which helps to offset top line weakness 2Q vs. expectations: o $125m lower volume than expected, -8c o Higher incrementals, 4c benefit o Lower tax rate was +3c benefit, 7% vs. 10% guidance o Net/net, 1c lower than expectations at the mid point. 2Q vs. 1Q: o $290m higher seasonal volume contributed 19c, up 5.5% Q/Q o The lack of inventory charges from purchase price adjustment added +6c ($33m) o Improved margin performance added +5c (beyond the 33% incremental margin target), up from 14% to 15.6% o Additional acquisition synergy realization was +1c tailwind o Higher tax rate was -2c headwind, 7% vs. 5% in 1Q o Higher corporate expense increased $85m Q/Q, -4c impact 2Q vs. last year: o Acquisitions contributed $1.6bn, or $0.66 o Better incrementals was $0.06 benefit, 14.7% to 15.6% o Lower tax rate was $0.03 tailwind o Higher share count, 476m vs. 339m last year, $0.44 headwind o Purchase accounting/ amortization was $66m or $0.18 headwind o Higher interest was $41m, 11c Y/Y headwind o Core volume was $90m lower Y/Y, 8c headwind, Sales up 5.5% Q/Q vs. 1Q. OM up 90bps Q/Q Quarterly Detail – Sandy Cutler (CEO) Electrical Products o Sales up 6% Q/Q o OM of 16.2%, 50bps Y/Y, but improved 150bps sequentially, large acquisition contribution o Cooper not included in 2Q12 numbers. Made solid margin improvement in both legacy Copper and ETN. o Bookings up 2%, continued strength in the US, ME and LatAm offset by weakness in APAC and Europe o Raising segment margin target to 16.5% for FY13 vs. 16% previously Electrical Systems & Services o Sales up 7% Q/Q o OM of 14.7%, up 420bps Y/Y and up 60bps Q/Q o M&A contributed 78ppts to revenue – Cooper, Rolec and Gycom o Raising segment margin target to 14.5% for FY13 o Bookings up 2% Hydraulics o Revenues of $772m, flat Y/Y or up 2% Q/Q o OM of 14.5%, down 190bps Y/Y, up from 11.9% in 1Q o M&A added 10ppts, Jeil and Polimer o Bookings down 12% on tough comps 75 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry o Distributor sales down 9%, OEM down 16%; Mobile down 18%, stationary down 8%. Haven’t seen a snap-back in APAC, EU and NA remained weak, particularly in mining and construction. Aerospace o Core revenue up 3% o OM of 15%, up 150bps Y/Y and expanded 70bps vs. 1Q13 o Bookings up 5% driven by Comm OE strength o AM remains weak, but expected to stabilize in 2H13 Vehicle o Revenues of $1bn, up 7% Q/Q o OM of 17.2%, up 120bps Y/Y and up 310bps Q/Q o Now expect NAFTA HD truck production to be 260K units in FY13 vs. 270k previously, but still expect 2H to be stronger than 1H, 55K in 1Q, 66K in 2Q, 68K in 3Q and 71K in 4Q. 2013 End market forecasts o US GDP up 1.7% in 2Q, while Mfg was up just 0.1%, essentially no growth. o Full year market growth guidance down to 1% vs. 2-3% previously Global economy is trending slightly better, but mix by regions: US is plotting, Europe may be bottomed, not expects to sharp recovery. EM mixed bag, growth halting in China, and India. Not expecting a substantial uptick in 2H. Construction mix in the US; Europe flat at best. Vehicle flattening EU US defense/weak government spending continues to be a challenge. US/Canada saw strong Resi construction, but weak non-Resi trends – weak construction equipment. Weaker general industrial demand. Utility demand weaker than a year ago, particularly in distribution. Flat to weaker HD truck demand. Data center strengthening in the US, both in large and medium sized markets. Expect GDP growth in US to be below 2% this year. Demand slowing in Australia and India. o Electrical Products up 1.5% vs. 3% previously, Electrical Systems & Services up 4% previously – EU down 2%, APAC up 3%, both weaker than prior expectations. US utility will be down 4%, non-resi up 2-3% vs. 4-5% previously. Resi will be up 12%, general industrial up 2%, Power Quality down 2% due to weak 1H. o Hydraulics: down 5%, weakened in non-US to -5% vs. -3% previously. EU down 4%, APAC down 7%, LatAm down 3% o Aerospace: up 9% in US Comm Aero (vs. 8% previously), up 4-5% in non-US - up 2-3% overall. o Vehicle: US down 3% vs. +1% due to weaker HD truck outlook, up 4% vs. 3% in non US previously – LatAm up 18% vs. up <10% previously. o Overall, US flat vs. up 2-3%, non-US up 1% vs. up 2-3% previously 2013 margin expectation o Increased Elec Prod margin target to 16.5% vs. 16% previously, and raised ESS margin guidance by 50bps to 14.5%. o Hydraulic & Aerospace had very strong 1H performance, so remain confident in the full year margin targets. o Total segment margin target up 25bps to 15.25% Cooper synergy projection o Increased FY13 cost synergy target by $25m to $115m, up $30m in 2014, up $35m to $440m o Expect integration costs up $40m in 2013, up $30m in 2014 as the company pulls integration actions forward o Cost savings upside primarily driven by better SG&A savings and plant consolidation. 2013 EPS Forecast o Reduced the high-end of FY13 guidance by 20c to $4.05-4.25 due to weaker end market demand. No change to lower end, as lower growth offset by productivity gains and better synergies. o 3Q13 initiated at $1.05-1.15. 76 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry 2013 earnings bridge o Acquisition contribution up $0.18 to $2.66, in addition to $25m synergy upside due to higher profits from Jeil and Cooper o Organic growth $0.32, reduced core revenue growth target from $900m to $350m o Additional expense control adds $0.15, or $55m. o Higher number of shares expected to be $1.47 headwind, 12c better than prior expectations. o Total EPS in FY13: $4.15 2Q13 to 3Q13 EPS walk o Reported 2Q EPS of $1.09 o Seasonal volume impact expected to contribute $0.05 or $75m, don’t expect substantial uptick Q/Q. 33% incrementals. o Additional acquisition synergy realization: $0.01 o Higher tax rate expected to reduce earnings by 2c, 9% in 3Q o Corporate expense will be $15m higher or 3c headwind, including pension and amortization. 2Q13 to 3Q13 EPS walk o $350m core revenue growth vs. $900m previously o No change to acquisition revenue and incremental margin expectations. o Op cash flow guidance down $100m at both ends; FCF target reduced by $50m, also lowered CapEx target $700 to 650m 2Q13 to 3Q13 EPS walk o End market remains weak. o Pleased with OM performance, better than expected o $55m additional savings in 2013, not related to acquisitions or incrementals. Q&A Market outgrowth: will not provide quarterly break-out for end market growth rates. Overall, ETN is doing well vs. end markets, but it is difficult to quantify as number of businesses are new to the portfolio. Non-resi update: weak government spending, seeing 5-6% decline. Private put-in-place was strong (up >2-3%) - seeing a lot of projects bidding action, but there are still uncertainties with new investment due to sluggish growth outlook. Sequential revenue growth: Vehicle typically weaker in 3Q due to OEM shut downs, but mgmt does expect a 2H ramp in NA HD truck; Electrical usually stronger in 2Q & 3Q, Aerospace consistent throughout the year and Hydraulics usually see weaker 2H vs. 1H. 2H earnings ramp up: revenue only up $75m in 2Q. Mgmt is not counting on much sequential uptick in market growth, but do expect offsets from incremental synergies and cost reductions, partly offset by higher taxes and corporate expenses in 2H (mainly intangible amortization, which came in higher than expected). Cost synergies: $35-40m in 1H and the balance will be seen in 2H. 2014 expectations: expect stronger cost synergies in 2014 as per guidance. Will see more stable market conditions, maybe slightly positive. China has been going through some digestion periods, but should stabilize sometime. Overall, EM growth not expected to be as strong as in the past few years. Negative end market outlook – what has changed in the latest 3 months? Started the year thinking the market will be up 2-3%, and thought it will be more like 2% by end of 1Q vs. 1% in 2Q - US truck orders haven’t materialized, Hydraulics 77 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry bookings down 12% in 2Q, not much change in Aerospace. Growth in 2Q was 1ppt lower than expected – non-resi outlook slowed and utility came in softer than expected. EU and APAC have not stabilized yet and the company is still seeing negative numbers there. Throughout the quarter, M/M trends were pretty stable - haven’t seen declaration, but no acceleration either. Lighting up DD in 2Q, pleased with recent new product introduction and seeing positive order intake. Distribution sales: good but not outstanding. Mixed by end markets - Resi was very strong, but non-resi, utility and general industrial were softer and single-phase PQD was very weak in 1H. OECD tax proposals: no special deals in Ireland. Mgmt doesn’t’ think the issue is pertaining to Eaton. Sequestration impact on public construction/Defense: the public sector was down 6% in 1H, and the private put-in place has been running in the 3-4% range – this is the key area the company is monitoring. Had forecasted 6% contraction in Aerospace – ETN’s Defense biz is more involved in the equipment market. Why keep Machinery exposure in light of underperformance? Actually Electrical market outlook came down more than the rest. Hydraulics going through big inventory corrections, but growth should be quite good after the destocking cycle. Also seeing solid growth opportunities and strong margin profile in Vehicle. Integration costs also increased as mgmt found more opportunities to reduce SG&A savings. Mgmt is also seeing more potential in plant consolidation, which is more expensive to execute than SG&A projects. The net integration cost and savings impact will be slightly negative in FY13 Distribution destocking: saw more destocking end of last year and first quarter and doesn’t believe there is much destocking going on now – distributor inventories are fairly thin now, so the current sales trend is just reflective of weak end market conditions. Core volume was down 3.5% in 1H, so 2H implied guidance is up 6.8% - how achievable is the target? Vehicle will continue to see strong retail demand in LV, EU stabilizing and South America & APAC strengthened. HD will get a ramp up in 2H. Aero had strong bookings in 1H, which supports the outlook for growth to pick up in 2H. Hydraulics bookings also improved, and comps will be much weaker in 2H. Electrical will have a seasonal strong quarter in 3Q (particularly in resi), and seeing substantial strengthening in PQD, especially in 3-phase power quality. EU and APAC will both be better in 2H than 1H. Operational leverage to offset growth downside: very pleased with cost reduction efforts this year in a slow growth environment - $55m additional cost savings and $25m incremental cost synergies. For 2014, guidance for operational synergies was increased to $210m and mgmt believes there will be some additional cost reductions as well. US will improve and Europe is getting close to the bottoming. China will be a more stable story - sales up 20% in 2Q vs. 1Q– just not seeing economy jumping. Up HSD in Electrical and seeing positive development in Asia. Will continue to see EM getting back, but not expecting the pace of growth as in the past few years. Increased intangibles and amortization: ETN was not done with all the appraisals in 1Q. As it has almost completed the appraisal process now, mgmt now expects amortization costs to be up by $10-15m annually, mainly driven by higher valuation of trade names. APAC performance: Electrical up HSD in 2Q vs. 1Q and the biggest driver was China. While mining has been weak, it is getting a bit better. Hydraulics was down, but Vehicle was up in 2Q. Liquidity pressure for SMEs has impacted certain end markets, such as single phase power quality. 78 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Prospects for share repurchases: no change to plan. The top priority will be organic growth and dividends, followed by debt reduction – $2.1bn expected to be repaid, done with $300m and $550m coming due next year, so not expecting to do share repurchase at this stage. Vehicle outlook: difficult to call for FY14 now, but fleet profitability has been encouraging. The main reason to reduce HD production forecasts was due to weaker than expected orders. Additional cost control: structural reductions, not something will be reverted next year. Aerospace Margin: bookings have not started to materialize in A/M, so not ready to increase margin target. Tax rate outlook: continue to target 7-9% range for FY13 and there is no particular seasonality in terms of tax rates. Mgmt continues to believe 2H tax rates will be higher 1H. Vehicle margin was impressive: the rate of decline in EU has moderated and Brazil started to strengthen. 3Q is typically a weaker quarter vs. 2Q on the margin side due to OEM shutdowns. China A/M was quite strong in 2Q as well, which contributed to solid margin performance. Overall, Vehicle usually sees the strongest margin in 2Q. Price/ costs expected to be relative neutral. 79 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry ETN Summary of Guidance Exhibit 51 ETN – FY13 Guidance 2013 Old 2013 New Comments US Non-US Total US Non-US Total Revenue growth 2-3% 2-3% 2-3% 0.0% 1.0% 1.0% Reduced forecasts in both US & non-US Electrical Products 4.0% 2.0% 3.0% 3.0% 0.0% 1.5% Reduced forecasts in both US & Non-US markets. For overall Electrical, expects EU to be down 2% and APAC up 3%. By end market, US utility is expected to be down 4%, non-Resi construction up 2-3%, Resi up 12%, general industrial up 2%, and power quality down 2% Electrical Systems & Services 4.0% 4.0% 4.0% 1.0% 1.0% 1.0% Reduced forecasts in both US & Non-US markets Hydraulics -5.0% -3.0% -4.0% -5.0% -5.0% -5.0% Reduced forecasts in Non-US markets, with EU down 4%, APAC down 7% and LatAm down 3% Aerospace 1.0% 4.0% 2.0% 1.0% 5.0% 3.0% Increased forecasts in Non-US markets Vehicle 1.0% 3.0% 2.0% -3.0% 4.0% 1.0% Reduced forecasts in the US due to weaker HD Truck market, but increased guidance for non-US markets, driven by LatAm (+18% vs. up <10% previously) Margin Expectation 15.0% 15.25% Up 145bps Y/Y. Increased FY13 synergy target by $25m to $105m Electrical Products 16.0% 16.5% Increased by 50bps Electrical Systems & Services 14.0% 14.5% Increased by 50bps Hydraulics 13.5% 13.5% Up 50bps Y/Y; unchanged Aerospace 14.0% 14.0% Up 160bps Y/Y; unchanged Vehicle 16.0% 16.0% Up140bps Y/Y; unchanged Core Revenue Growth $900m $350m Weaker than expected core growth Net acquisition revenue $6,000m $6,000m Unchanged Incremental Margin 33.0% 33.0% Unchanged Tax Rate 7-9% 7-9% Unchanged Operating Cash Flow $2.6 - 2.7bn $2.5 - 2.6bn Reduced by $100m Free Cash Flow $1.9-2.0bn $1.85-1.95bn Reduced by $50m, assuming $650m CapEx Operating EPS $4.05 - 4.45 $4.05 - 4.25 Reduced high-end by 20c 2013 EPS Bridge Old New Comments 2012 EPS 3.94 3.94 Acquisitions 2.48 2.66 Increased 2013 synergy target by $20m to $115m Organic growth at 33% margin 0.77 0.32 Reduced by 45c Additional expense control - 0.15 Higher # of DWAC -1.49 -1.47 2c better than prior forecast Other corporate expenses -1.24 -1.24 Unchanged Higher tax rate -0.17 -0.17 Unchanged Increase in pension expense -0.04 -0.04 Unchanged 2013 EPS 4.25 4.15 Lowered by 20c Source: Company Data, Morgan Stanley Research Exhibit 52 ETN 3Q13 Guidance 3Q13 Comments Operating EPS $1.05-1.15 3Q13 EPS Bridge 1.09 2Q13 EPS 1.09 Higher core volume at 33% margin 0.05 Expects revenue up $75m Q/Q in 3Q Additional acquistiion synergy realization 0.01 Higher tax rate -0.02 9% in 3Q Increase in pension expense -0.03 Expects corporate expenses up $15m Q/Q 3Q13 EPS 1.10 Source: Company Data, Morgan Stanley Research 80 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Emerson Electric 81 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry EMR Question Bank 4Q13 Trend How is 4Q13 tracking vs. your 1% core growth target for FY13? Have you seen any improvement in US (-3% in 3Q) and EU (-6%)? What is driving the continued strength in LatAm (+8%) and Canada (+4%)? Has the adverse move in several EM currencies had a measurably negative sales impact? What order cadence is consistent with your plan? How do August orders compare to July (up 0-5%) by geography and by end market? Have you continued to see declines in Developed Markets? What sequential trends are you seeing in Emerging markets (vs. +2% in 3QFY13)? What are the major puts and takes within your flat Y/Y EBIT margin expansion guidance – price/inflation, executive comp accruals, restructuring payback/investments, and other items? How comfortable are you with your $3.48-3.55 EPS guidance? Are you still more comfortable at the lower end of this range? Given that your implied 4Q13 guidance of $1.11 at the low end accounts for 32% of FY13 earnings vs. normal 29%, can you discuss what factors do you expect to drive a stronger 4Q than normal seasonality? FY14 Expectations What key end market assumptions are you embedding in your guidance for core growth in the 2-4% range and what are the key swing factors? Where do you think your FY14 outlook may differ from peers? By region, you have talked about low single digit growth expectation for Europe in FY14, mid-single digits in Asia and ~3% in the US – where do you see the most upside/ downside risk to plan? Do you see any negative impact from China’s manufacturing capacity reduction plan? You have referred to several years of underinvestment that could reverse in FY14. Is that view endorsed by conversations with your customers? Are you continuing to see large project activity in Process – can you talk about which parts of the energy complex? When do you expect power generator alternators to return to growth – have inventories finally bottomed? Are you continuing to see growth and robust quoting activity in data centers – in which regions? Do you believe your Climate growth rates will be more consistent with recent OEM growth rates in the mid/high single digits? What are your margin expectations for FY14 – do you believe you will be able to build off elevated margin plateaus in Process, IA and Climate? Are you still looking for a negative inflection in the price/inflation gap over the next one to two quarters? Do you expect the potential price/ cost headwind to more than offset your pension (~$50m) and stock comps ($35-50m) tailwinds next year? Do you still plan on $85-90m of restructuring actions in FY14? What sort of paybacks do you expect on these actions and what are the major focus areas e.g. Precision Cooling? What scope do you see to leverage your global presence into a lower tax rate? Is this precluded by the need to repatriate cash to the US given such a high dividend payout ratio? 82 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Long term targets How do you expect GFI to trend within your 3-5% range over the next 5 years? When does EMR organic sales tend to outperform GFI – is it in the 4-5% range? Do you see potential for US to outperform the 2-4% range given uptick in construction and energy investment? How should we view the 3-5% core growth target over 2012/15 vs. 5-7% through cycle bogey? Do you still view EMR as a 5-7% core growth portfolio? What will change beyond 2015 to drive accelerating growth? Where do you view segment margins relative to the 19% OM target in 2015? Where do you see margins troughing through a down-cycle – is it still in the 15% range? Where do you see major upside/downside risks to the long term outlook since last year? Capital Redeployment Does upside to share repurchases in 2013e (~$900m) and 2012 imply a change in mix between M&A and repurchases in your long-term plan? Do you see material upside to the $2-3bn placeholder through 2015, given that you are planning for another $800-900m share repurchase in FY14 on top of the $600m incremental buyback associated with the EC&P sale? How should we model the phasing of the $600m repurchase program? You have suggested $1bn M&A placeholder for FY14 and a preference for bolt-ons; do you have a size “sweet spot” for deals? You have pointed to Process and Climate as the main focus for bolt-on deals in the next 6-9 months - beyond this timeframe, do you see scope for larger deals in these two or any other segments? Would you consider adding a new leg to the portfolio? Do you sense that there could be further consolidation in the Process industry? Do you sense that Japanese discrete players are looking to acquire Process technology? Where do you see threats and opportunities? Given your interest in one of the major Process players in the past, do you have an appetite for sizable deals in the automation market at some point? Dispositions Given greater cyclicality during FY12&13 vs. US peers, do you need to rethink portfolio diversity? Have you been surprised by the relatively high correlation between Network Power and Industrial Automation cycles? Can you provide an updated on the Embedded sale ($1.4bn revenue, $300m proceeds for 51% stake)? When do you expect the transaction to close? What earnings contribution do you project from the JV in FY14e and going forward? What is the timeline on the $0.5-1bn of remaining assets under review (EGS, Storage Solutions)? What marks these BUs as candidates for disposal viz. EGS? Competitive Dynamics Can you discuss the competitive dynamics across the portfolio viz. UPS, Precision Cooling, Compressors and Process Control? Where do you believe you are gaining or losing share? Has competition picked up enough to tip the balance of power with your OEM customers? Do you believe recent industry consolidation in the automation industry will see competitive intensity pick up? Do you believe the combination will be stronger in the Process or Discrete markets? Does this strengthen the logic of Emerson adding factory automation and software to the portfolio? 83 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Can you provide an update on the competitive dynamics in the Chinese market? In which spaces are you seeing the emergence of viable Chinese competitors? Do you view any of your Chinese competitors as potentially world-class? Manufacturing Footprint & Supply Chain EMR has seen an outsized impact from natural disasters such as the Japanese tsunami and Thai floods - do you need to rethink your manufacturing and/ or sourcing footprint? Do you see the need to shorten supply chains? You have significantly raised the proportion of CapEx in the US. What is driving that? Do you see scope to add manufacturing capacity in US? Do you expect US capacity to grow in line with sales? What actions are you taking in China to counter labor inflation? Are Vietnam and other SE Asian nations viable alternatives? Are you adding capacity in the US? Some companies are taking steps towards more vertical manufacturing integration. Where does EMR stand on this issue – are you insourcing more manufacturing? Process Management Outlook: Do you still see outlook for flattish sales in 4Q? How are bookings trending vs. the 8% core growth seen in 3Q13 and what sort of growth outlook do you see in FY14? How are Control, Valves and Instrumentation trending QTD? Business Trends: How is project vs. MRO activity trending – have you seen US MRO activity pick up after three quarters of weakness? What are you seeing by geography and by major end market – O&G, Refining, Chemical, Power, etc.? Project Pipeline: How does the pipeline of projects look? Is the Greenfield/ Brownfield project mix in Process changing? If so, what are the implications for margins? Is the CHARMs Electronic Marshalling product driving improvement in project win rate? Industry consolidation: Do you expect to see further consolidation in the Process market? Where do you see threats and opportunities? Do you sense that Japanese discrete players are looking to acquire Process technology? Given your interest in one of the major Process players in the past, do you have an appetite for a sizable deal in this market at some point? Process Margins: What has changed in the Process business to support margins in the >20% range – how does the margin vary between Control, Valves and Instrumentation? What sort of incremental margin do you see over the next 1-2 years, particularly if the large project mix starts to turn up again? Where do you see the cyclical trough relative to the 18.1% reported in FY09? Industrial Automation Trends by Business: Do you expect the recent improvement in orders (down 0-5%) to see organic sales improve in 4Q vs. -7% reported in 3Q? How are the underlying BU trending – Motors/ Drives, Power Transmission, Power Generation, Fluid Automation, Power Distribution and Industrial Equipment? Do you remain confident that the Power Gen Alternators business will turn up in 4Q and what sort of growth acceleration can we expect? To what extent has performance been impacted by launch of the new Drives product line? Trends by Geography: Can you comment on recent trends by geography – is there any sign of inflection in any of the key end markets? Are you still seeing channel inventory destocking? How is customer spending trending QTD? Portfolio. What is your current view of the Industrial Automation portfolio? Which areas are focuses of growth, and which are candidates for divestment? What is the opportunity to fill white spaces organically e.g. Drives capacity expansion? 84 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Margins: Do you see potential to keep margins flat in 4Q, despite negative volumes? You have done $24m restructuring YTD (vs. $22m prior guidance) – are you planning to take more actions in 4Q13? What payback have you realized so far and how much benefit shall we factor in for FY14? At what level and in which areas do you expect future restructuring to be focused? To what extent are you managing discretionary costs? To what extent is favorable mix of hermetic (strong) vs. alternator (weak) supporting margins? How material have price/inflation benefits been and how will this trend into 4Q13 & FY14? Network Power Outlook: Core growth remained depressed YTD (down ~4%) - what is your outlook for FY13 vs. the guidance of down 1-2%? How are orders trending vs. the 0-5% decline reported in June? What was organic growth in the core Network Power Systems business YTD? What broad trends are you seeing in Telecom (negative) and Data Center (improving) investment? When you begin to lap the tough comparisons from the Australian NBN project – how material was that project? Data Center Outlook: What drives the 5% growth outlook for data center investment through 2015? How does the mix between small and large data center impact competitive positioning and near term profitability? You noted a pickup in data center quoting activity lately – how is your order intake looking now and what doest it imply for growth in 2014? Competition: How would you describe the competitive environment in data center – who is the most aggressive player? Has your UPS market share stabilized and what challenges do you face in Precision Cooling from an increasing trend towards Unitary HVAC systems? Trellis: Can you describe how Trellis is trending vs. plan? Do you view $250m of cumulative sales by 2015 as realistic? To what extent does Trellis pull forward hardware sales and how should we view profitability between Trellis and related hardware? How do the economics of a Trellis sale via IBM Tivoli and direct compare and contrast? How do you respond to claims that Trellis is very good but too expensive – are you prepared to cut price to gain share? Telecom: What is driving 5% growth in telecom capex through 2015 – if wireless is flat, what subsectors are driving growth? Which regions do you expect to see above-average growth and how does your competitive positioning compare across regions? Are you seeing a pick-up in US wireless, given increasing capex budgets from certain carriers? Acquisitions: How are the CHLD/ Avocent integrations tracking vs. plan, in terms of revenue/ cost synergies? Is CHLD being adversely impacted by the European recession? Are there any remaining white spaces in Network Power and if so, what are they? Margins: What is your updated margin outlook for FY13 vs. prior guidance of 10.3% and YTD result of ~7.6%? Can you provide color on how margins have trended by sub-segment – Embedded Power and Computing, Network Power Systems and Services? Can you expand on the negative product mix that caused contraction? What are the upside/downside risks to the 14-15% margin target for the Systems business, longer term? Climate Technologies BU Trends. Can you break out the 2% organic decline during 3Q13 between residential, commercial and transportation? Have you continued to see inventory destocking in US residential HVAC and are you still tracking towards mid single digit growth for 4Q? How has EMR’s performance been impacted by the mix away from repair and towards lower efficiency systems and what mix impact do you see for FY14?? Competitive landscape. Can you describe the competitive environment in compressors? Do you believe there has been a sufficient uptick in competitive activity so that the balance of power has swung more towards the OEMs? How is pricing trending? How does Daikin’s purchase of Goodman change the competitive dynamic and how will you respond to the increasing penetration of variable speed compressors? 85 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Solutions Opportunity: What field office investments do you need to make to more aggressively attack the Service/ Solutions opportunity (e.g. Retail)? How do you manage conflicts with OEMs who are pursuing similar strategies? What is the opportunity within the residential market? M&A: Why is the JCI Container acquisition so important and how do you think this can be leveraged across the portfolio? What is you growth strategy in Industrial refrigeration and do you have ambitions to supply larger commercial refrigeration compressors? What other M&A opportunities do you see in the Climate space? Margin: Climate margin performance has been exceptional - to what extent was price/inflation a favorable factor YTD? How much drag do you expect from a residential HVAC OEM channel recovery (lower margin) and what will be the resultant downward pressure on aftermarket compressor sales? How do margins in Asia/China compare to US? Commercial & Residential Solutions Trends/ Portfolio: How are end market trends tracking QTD? How soon could you seek to pare back the Storage Solutions portfolio? Are there any areas with the C&RS value chain where you would be an acquirer e.g. Healthcare? How is CR&S tracking relative to your ~4% core growth and 21.7% margin guidance? 86 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry EMR Company Background Exhibit 53 EMR Revenue Breakdown by Geography, Cyclicality and End Market (2012) By Geography By End Market By Cyclicality Early Middle HVAC & Cycle East/ Africa Refrigeration Latin 19% 5% 17% America Power Gen Late Cycle 6% Other 9% 60% Process 14% United States Asia Oil & Gas 45% 24% 12% Mid Cycle Other 21% Industrial 20% Technology Appliances 25% Europe 20% 2% Source: Company data, Morgan Stanley Research Company Description Key Management Incorporated in Missouri in 1890, Emerson Electric Co. (NYSE: EMR) has Dave Farr serves as CEO (since 2000) and Chairman (since 2004). grown from a regional manufacturer of electric motors and fans into a Ed Monser serves as President (since 2010) and COO (since 2001). diversified global technology company. Charlie Peters serves as Senior EVP (since 2000) and is responsible for helping Emerson develop innovative global business models. Emerson provides technology and engineering products and services to Frank Dellaquila serves as CFO (since 2010). industrial, commercial and retail customers globally. The company’s Steven Sonnenberg, Jay Geldmacher: EVP, Emerson Process largest end markets are Industrial, Infrastructure, Construction, and Management. Consumer, and sales are largely made via direct sales force networks Mark J. Bulanda: EVP, Emerson Industrial Automation. and, to a lesser extent, through independent sales representatives and D. Scott Barbour: EVP, Emerson Network Power. distributors. During FY11, Emerson employed an average of Edgar Purvis, Jr.: EVP, Emerson Climate Technologies. approximately 133,200 people. Patrick Sly: EVP, Emerson Storage Solutions & Professional Tools. Exhibit 54 EMR Detailed Segment Breakdown 2012 2012 % of Seg. % of Seg. Revs Op. Profits End Markets Revs Geographies Revs Key Products & Services Key Brands Competitors Process $7,899 $1,618 Oil & Gas 40% US & Canada 39% Process control systems, analytical instrumentation and AMS Suite, CSI, DeltaV, Ovation, ABB, Honeywell, Management 31% 38% Chemicals 16% Asia Pacific 24% measurement products, valves, actuators and regulators. PlantWeb, Daniel, Micro Motion, Invensys, Yokogawa, Power & Utilities 14% Europe 20% PlantWeb digital plant architecture collects and analyzes Rosemount, Baumann, Bettis, Fisher Siemens Refining 9% MEA 9% plant asset and process data. Other Process 21% LatAm 8% Industrial $5,188 $898 General Industrial 56% US & Canada 41% Electric motors, AC and DC electrical variable speed ASCO Numatics, Browning, Control ABB, Cummins, Regal Automation 21% 21% HVAC 13% Europe 36% drives, power generating alternators, power transmission Techniques, Leroy Somer, Kop-Flex, Beloit Power 12% Asia Pacific 16% solutions, fluid control, and materials joining equipment. McGill, Morse, System Plast Construction 8% MEA 4% O&G 6% LatAm 3% Auto 5% Network Power $6,399 $677 Computing 42% US & Canada 38% Uninterruptible power systems, embedded power Emerson Network Power, Aperture, Eaton 25% 16% Communication 30% Asia 36% supplies, embedded computing systems, precision Avocent, Artesyn, ASCO, Astec, Service 16% Europe 17% cooling, inbound power systems, integrated data center Knurr, Liebert, Netsure, Semflex, Industrial 6% LatAm 6% monitoring, control devices and software. Stratos Other 6% MEA 3% Climate $3,766 $679 R-HVAC 43% US & Canada 55% Air conditioning compressors, thermostats, monitoring Copeland, Vilter, Fusite, White- Johnson Controls, Technologies 15% 16% Refrigeration 32% Asia Pacific 23% equipment, heating system electronic controls, gas Rodgers, Emerson Climate Ingersoll Rand, Carrier C-HVAC 23% Europe 12% valves for furnaces and water heaters, temperature Technologies, Dixell, Computer (UTC) Solns & Svcs 7% LatAm 6% sensors and , facility monitoring services and energy Process Controls MEA d li d lti 4% Commercial & $1,877 $405 Retail 43% US & Canada 83% Hand and power tools, pipe working tools, shelving RIDGID, Emerson Tool Company, Apex (Cooper/Danaher Resi Solns 7% 9% Commercial 25% Europe 8% systems, home/office organizers, cabinets, bins, ClosetMaid, METRO, Flo JV), Stanley Black & Industrial 20% Asia Pacific 4% workstations, food service equipment, food waste Healthcare, InSinkErator, Emerson Decker, Snap-on Healthcare 8% ROW 5% disposers, ceiling fans, and hot water dispensers. Appliance Solutions Resi 4% Source: Morgan Stanley, Company Information. 87 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry EMR Key Financial Statistics Exhibit 55 Exhibit 56 EMR – Organic Growth vs. EE/MI (1Q06/2Q13) EMR – EPS Growth vs. EE/MI (1Q06/2Q13) Organic Grow th EPS Grow th 70% 18% EE/MI Median EE/MI Median 13% 50% 8% 30% 3% -2% 10% -7% -10% -12% -30% -17% -22% -50% 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 Source: Company Data, Morgan Stanley Research estimates Source: Company Data, Morgan Stanley Research estimates Exhibit 57 Exhibit 58 EMR vs. EE/MI – Core Operating Margin (2006/13e) EMR vs. EE/MI – Core Incremental OM (2006/13e) 70% 19% Core Incremental Op. Margin Core Op.Margin EE/MI Median EE/MI Median 60% 18% 17% 50% 16% 40% 15% 30% 14% 20% 13% 10% 12% 11% 0% 2006 2007 2008 2009 2010 2011 2012 2013 10% 2006 2007 2008 2009 2010 2011 2012 2013 Source: Company Data, Morgan Stanley Research estimates Source: Company Data, Morgan Stanley Research estimates Exhibit 59 Exhibit 60 EMR vs. EE/MI – Revenue per Employee (2006/12) EMR – Capital Allocation (2008/12 cumulative) 300 Revenue/Employee EE/MI Median Acquisitions 250 26% Share Repurchases 200 22% 150 100 50 Capex Dividends 19% 0 32% 2006 2007 2008 2009 2010 2011 2012 Source: Company Data, Morgan Stanley Research Source: Company Data, Morgan Stanley Research 88 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry EMR 3Q13 Earnings Call Transcript Quarterly Detail – Pat Fitzgerald, Investor Relations Sales down modestly to $6.3bn, underlying sales declined 1%, due to sluggish global growth, cautious levels of biz investment and difficult comps related to Thai flooding recovery in 3Q12. EM grew 2%, more than offset by declines in mature markets. Signed agreement to sell 51% stake of the EC&P biz to Platinum Equity. Transaction proceeds and repatriated cash expected to be deployed for $600m incremental share repurchase. Charges related to the biz recognized in 3Q EPS of $0.97 ex-goodwill & repatriation tax charges and $0.27 including charges FCF up 20% Y/Y to $902m GM of 40.5%, flat Y/Y, as cost containment offset by unfavorable product mix and volume deleverage Op profit down 9% Y/Y, OM down 140bps Y/Y to 18.5%, driven by $30m Y/Y increase in stock comps and $12m increase in pension expense. EBIT down 53% Y/Y, EBIT margin down 180bps Y/Y ex-EC&P related charges. Sales by geography o US -3%, o EU -6%, o Asia -3%, China down 4% o LatAm +8%, o Canada +4%, o MEA +18% FX/divestitures was 1ppt headwind Reported sales down 2%. Ex-EC&P, sales were flat and modestly positive in China. CFOA up 17% Y/Y to $995m, driven by WC improvement. FCF conversion of 121% ex-charges. W/cap was 17.4% of sales, up 60bps Y/Y - higher A/R elevated WC from last year. 120bps sequential improvement. Segment margin down 130bps Y/Y to 17.2%, due to tough prior year comps due to $37m dumping duties and Thai flooding recovery Corporate was $623m, including $503m goodwill impairment and $30m increase in stock comp. Underlying tax rate ex-charges was 29% ex-impairment charges. Process Management o Underlying sales up 3%, including 7ppts impact due to prior year Thai flooding shipment, with US down 4%, Asia up 8%, EU flat, LatAm up 17% and MEA up 24%. o O&G, power and chemical markets continued to grow o Underlying orders grew 8%, led by DD growth in systems and solutions, with robust growth in power & water, as well as improvement in NA and 13% growth in China. o Segment margin down 160bps Y/Y on Flooding recovery tough comps o Global project activity remains robust, supports solid growth momentum into next year. Industrial Automation o Underlying sales down 7%, with US down 5%, Asia flat, EU down 13%, LatAm down 4%, MEA down 2% o Industrial goods markets remained weak, especially in Europe. o Particular weakness in power generating alternators, but channel inventory destocking has beginning to slow and orders are expected to turn positive soon. o Margin down 270bps Y/Y or flat Y/Y ex-dumping duties, with cost containment offset volume deleverage. o Demand for industrial goods appears to be stabilizing that's expected to be remains low in the near-term particularly in Europe Network Power o Underlying sales down 5%. US down 1%, Asia down 13%, EU down 4%, LatAm up 6%, MEA up 19%. Slow demand continued in global IT & Telecom o NP systems down slightly, as data center growth offset Telecom weakness 89 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry o Embedded computing/power sales declined DD, o Segment margin down 220bps, due to volume deleverage and unfavorable price. o End markets appear to be improving, but difficult comparisons from prior year’s project in Australia will likely limit near term growth. Climate Technologies o Underlying sales down 2%. US down 4%, Asia -2%, EU -5%, LatAm +3%, MEA +21% o US HVAC down modestly, due to paused Resi growth and inventory destocking. Asia declined, driven by China (up DD last qtr); Europe remained weak. Global refrigeration improved, with recovery in Transportation. o Margin up 80bps, cost deductions offset by unfavorable mix o Growth is expected to resume in resi and refrigeration in the near-term. Commercial & Residential Solutions o Underlying sales down 2% (Knaack divestiture was 6ppts headwind). US +6%, Asia +3%, EU -4%, LatAm -1%, MEA -11% o Resi in NA continued to grow, more than offset weak commercial demand o Margins unchanged Y/Y o Growth expected to continue, with solid Resi and improving non-resi demand in the US and stabilization in EU. 2013 Outlook o $300m cash proceeds from EC&P sale, retaining 49% of non-controlling equity interest. o Proceeds and $300m repatriated cash are expected to be used for $600m share repurchase. o Orders growth resumed in June, near-term business investment will remain cautious, but slowly improving. o Energy and Resi expected to remain to solid, with slow but improving demand for industrial goods and IT. o Updated FY13 guidance Reported/underlying sales up 1% EBIT margin expansion flat Y/Y ex- goodwill charges EPS trending towards the lower end of $3.48-3.55 or $2.78-2.85 incl. charges CFOA of $3.4 and FCF of $2.7bn Closing Remarks – Dave Farr, CEO June orders resumed growth and July orders expected to be positive based on early indication. NP systems continued to see weaker sales from China and weak IT demand in the US and EU. Also negatively impacted by negative mix, particularly in China. Restructuring started to pay off and EU has stabilized and started to see positive growth. Weak government spending also negatively impacted this biz. FY13 margin performance will be weaker than prior expectations, but based on recent order trends, mgmt sees sequential improvement going forward. PM continued to see strong order growth; orders and sales up DD ex-Thai flood impact. Working on bolt-on acqns in this area as well. CT has been more volatile than usual, but orders have turned up in Europe, Asia and US, so mgmt expects to see good growth in 4Q and early FY14. IA continued to be impacted by large customer inventory destocking, but started to see some improvement. Expect positive growth in 2014. The biz was able to protect its profitability, with margins ex-anti dumping duties remaining flat Y/Y. CR&S continued to benefit from NA resi recovery. Expect a strong year of op cash flow, with $850m planned repurchases, plus $600m related to embed sale, $100m M&A this year, but mgmt expects to investment to tick up to $1bn in 2014 based on bolt-ons it is working on now. Do not have any large acqn on the table currently. Expect to return to positive top line growth in the coming months. Q&A EM trends: saw strong growth in MEA and LatAm, but continued to see weakness in China (weakened throughout the quarter). Mgmt looks for 4-5% growth in EM GFI over the next few years. China’s liquidity issue has moderated and overall biz ex-Embedded did well in China during the quarter. Remaining 49% interest of the EC&P biz: planning to get out the biz over the next 3-4 years. 90 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Industry consolidation in the Process market: mgmt thinks it’s a positive opportunity for EMR and believes it will take time for the competitors to integrate their installed base. Macro Outlook: not forecasting robust growth in Europe, but following several years of dis-investment, mgmt has started to see some investment in this region. Japanese government is also trying to encourage biz investment. Overall, the company expects a slight upward momentum in 2014 with modest global growth. Project trends: seeing a lot of investment in O&G (large projects picking up) and a return in Power (driven by demand for system integration). MRO has been the weakest part this year. Datacenter projects: seeing a lot of quoting activities going on, consistent with competitor’s commentary. Restructuring plan: looking for $85m in FY13 and around the same level in FY14 ($85-90m). CapEx: pickup in 4Q due to spending timing, but probably less than $700m guidance in FY13. Strength in Power & Water: mostly driven by gas upgrade & conversion; not much going on in coal. Also seeing a lot of investment in security driven by regulation requirement. Picked up the Water biz from the Westinghouse acqn, and the company is also seeing some recovery in the waste water biz. Climate competitive landscape: There has been a lot of underinvestment in EU refrigeration, which should start to pick up. Asia refrigeration has been doing well and should start to see some pickup in transportation. NA competitive environment hasn’t changed much – orders were reasonable and started to see some recovery in CHVAC. Players are now coming into the VS motor market, but doesn’t expect to any significant change until mid next year. Toshiba works closely with Carrier, but EMR believes Daikin has the most completive offering. EU macro trends: EU indicators have been positive for the past 4-6 months. Mgmt has started to see some investments in EU, but doesn’t expect any robust recovery, maybe up ~1%. EU restructuring: IA restructuring got ahead of the downturn, but the restructuring in NP has been more painful, as rationalization happened at the same time as the market turned down. Destocking in HVAC: had huge recovery last quarter (+20% in NA resi in 2Q13) and saw OE slowing down this quarter. Has started to see things coming back QTD, up MSD. Embedded sale: the company did look at selling in pieces, but eventually decided that selling the whole biz was the best option. Had to repatriate cash to offset earnings dilution related to the sale. IA margins holding despite weak volumes: a lot of restructuring was focusing on overcapacity and was structural, rather than temporary; might put back some investment if volumes start to pick up. Climate margin: reasonable mix this quarter and expects to report record margins for the whole year. Margins will further expand if refrigeration and transportation comes back. NP pricing: saw negative mix in the cooling biz – planning to launch new products to improve pricing. Also had some pricing pressure in China during the quarter. PM in NA: MRO orders in NA haven’t picked up yet and currently doesn’t expect a recovery in FY13. 91 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry EU & EM growth outlook: ~2% underlying growth in EU GFI will drive modest growth in EMR sales (~2%). EM GFI is expected to growth LSD, which is likely to drive 4-5% growth fro EMR; a growth rate in the range of 6-8% will lead to premium for EMR. US up LSD YTD: certain biz has tapered off in FY13 following a strong year in FY12. Mgmt expects to see better growth in US and EU in FY14 vs. FY13; looking for LSD growth in China, HSD growth in APAC. Overall, up 2-4% in FY14. Precision Cooling restructuring: expects to get back to prior margin level through restructuring. PM labor shortage: haven’t seen a problem yet. Will have to see very strong growth for labor shortage to cause a problem. FY14 corporate: interest flat, will see $50m tailwind in pension and lower stock comps ($30-35m tailwind). Price/cost: mgmt expects to see the inflection point of negative price/cost in the next few quarters – started to see negative price and less negative net materials inflation. Getting out of EP&C will help on this front and mgmt is also closely watching raw material inflation in Climate. Data center competitive dynamic: the company still be focusing on its core installed base for now. M&A: large strategic deals are getting more expensive now, while CapEx: plans to ramp up investments in FY14 ($750-760m), which will be broad-based. Repurchase plan for FY14: planning for $800-900m next year, plus $600m incremental buyback related to the embedded sale. Margin outlook for 4Q13: expects restructuring cost savings to offset mix headwind. The company also typically has nice op leveraging in 4Q. Weakness in power generating alternators: the impact from large customers was pretty big, but the trend is getting close to reversing. 92 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry EMR Summary of Guidance Exhibit 61 EMR – Detailed 2013 Guidance 2013e FY13 Old FY13 New Comments Total Revenue $24.7-25.0bn - Organic Revenue Growth 1.5-2.5% ~1% Mgmt noted that business environment appears to be improving, supported by orders growth resuming in June FX - - Based on $1.30-1.31 USD/EUR spot rate. M&A Contribution - - EBIT Margin 16.1% 16.1% Flat Y/Y, lowered from up 10-20bps Y/Y originally Restructuring expense $70 - 80m ~$85m Stock Comp Overlap $100 - 120m - 40-50bps headwind. Incremental Pension Expense $60m - ~20bps headwind. - Tax Rate 31 - 32% - Compares to 31% in FY12. Based on guidance provided in Feb 2013 GAAP EPS $3.48-3.58 $3.48-3.55 Mgmt is guiding towards the low-end of this range CFOA $3.3 - 3.4bn $3.4bn Represents 8-11% Y/Y growth. CapEx $0.7bn <$0.7bn Budget could be taken up if organic growth comes in higher than expected M&A Investment $0.4 - 0.5bn ~$0.1bn Mainly bolt-on acquisitions and not seeing any desirable large properties in the pipeline currently. Mgmt expects M&A to tick up to ~$1bn in FY14 Share Repurchases $0.8-0.9bn $0.8-0.9bn Mgmt announced an additional $600m share repurchase to offset dilution related to the EC&P sale Pension Funding - - In line with 2012 funding. Source: Company Data, Morgan Stanley Research; *Note: Management plans to provide updated guidance on segment level at the EPG conference in May 93 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry This page has been intentionally left blank 94 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry General Electric Morgan Stanley is currently acting as sole financial advisor to GE Capital International Holdings Corporation ("GE Capital") with respect to GE Capital’s shareholding in Bank of Ayudhya Public Company Limited (“Krungsri”). The Bank of Tokyo-Mitsubishi UFJ, Ltd (“BTMU”) will launch a Voluntary Tender Offer (“VTO “) and GE Capital will, pursuant to the Share Tender Agreement with BTMU, participate and tender its entire shareholding in the VTO. The proposed VTO is subject to regulatory approvals, corporate approvals and other customary closing conditions. This report and the information provided herein is not intended to (i) provide advice with respect to the tender offer, (ii) serve as an endorsement of the tender offer, or (iii) result in the procurement, withholding or revocation of a tender in the exchange or any other action by a security holder. Please refer to the notes at the end of the report. 95 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry GE Question Bank QTD Trends How is the Major Equipment backlog trending (increased from $56bn to $57bn in 2Q) – are you continuing to see particular strength in Oil & Gas? How is the mix of Equipment vs. Services trending – are you seeing any signs of improvement in Power Services? Orders in China were strong again in 2Q (+20%), which combined with US (+20%) offset weakness in Europe (+2%) - are you seeing that momentum sustained in 3Q? Have we now seen the end of project push-outs given continued strength in global PMI? Are you feeling any impact from ongoing measures by the Chinese govt. to reduce industrial capacity? Is currency volatility (Yen in particular) leading to any demand or pricing dislocations? How is the price/cost gap trending relative to the $376m realized in 2Q? How is price cost trending by business? What impact is mix having on your major businesses? What is your assumption for pricing on new orders and commitments through the balance of the year? Are you continuing to see stable asset quality across the Capital portfolio - are there any signs that rising rates are having any impact? How do you expect GECC spreads to trend in a higher interest rate environment? What is outlook for CRE and other Capital gains during the quarter? What sort of GECAS impairment charges should be expect from the annual RV review during 3Q? 2013 Outlook Are you still more comfortable at the lower-end of the 2-6% growth bracket in 2013 – how does this look by Major Equipment and Service revenues? How should we think about the sensitivities to that range if Europe or P&W does better or worse than you expect? Do you still see double digit growth from O&G and Transportation? Where are you tracking versus your guidance for 70bps of margin expansion in 2013 and can we discuss the major margin levers in 2013 – product mix, service mix, price/raws, simplification? How does the 70bps benchmark look by business? To what extent is the 70bps impacted by acquisition dilution during 2H13 and the impact of prior year gains?What is your expectation for value gap in 2013, and what is the upside/downside levers to that number? What is the latest view on the outlook for GE Capital in 2013? Can we review some of the puts and takes: asset attrition (-), NIM (?), loss provisions (-), tax rate (+) and gains (+)? Where do you believe GE Capital stands vs. its outlook for “flat to slightly up” earnings in 2013? What is the outlook for gains during 2H13, viz. planned Bank of Ayudhya exit? How is the tax rate tracking vs. ~5% guidance? Have Lake interest cap claims normalized ($76m of add’l reserves in 2Q13 vs. $557m reserve as of June 2013)? Can you provide an update on the WMC litigation ($128bn of new claims in 2Q13 vs. $787m reserve)? M&A/Capital Redeployment How much of the $10bn of planned share repurchased this year has been completed YTD? Can you provide an early read on what the number could be for 2014? To what extent is this contingent on asset sales? Given excess industrial cash on hand ($19bn at end of 2Q13), has there been any serious discussion about a special dividend at Board level? Is the ambition to execute a higher mix of industrial M&A going forward in order to accelerate the rebalancing of earnings? Which sub-segments are leading candidates for incremental M&A growth capital? You have moved above your $1-3bn deal sweet-spot for both Avio ($4.3bn) and Lufkin ($3.3bn). Would you consider an even larger deal for the right price/ fit? 96 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Can you provide some early thoughts on Lufkin and Avio post-close? What, if anything, has surprised you the most to the upside and downside? Do you see the potential for more supply chain integration deals (Avio is a major supplier of aviation engine parts)? Given recent US capacity investments and recovering housing market, should we view Home & Business solutions as core or does recent core growth deterioration underline increasing commoditization in this segment? What lessons have been learned from the long contingent liability tail at Lake and WMC following their disposal – with hindsight, were these expenses avoidable and what internal controls have been implemented to avoid repetition of these long tail contingencies? GECC Regulation How is the tone of the conversation with the Federal Reserve – to what extent are they influencing financial reporting and accounting decisions? Does your formal classification as a SIFI have any impact? What proposed regulations have the potential to significantly impact capital and leverage ratios? Do you see possibility of stepping up the GE Capital dividend beyond 30% payout in 2014? Can we assume that equity released from major GECC disposals will be returned to GE or does this also need to be approved by the Federal Reserve during the normal annual cycle? It appears that you are currently managing towards a Basel 1 CT-1 ratio of ~10% - is this a good long-term planning assumption? What is your best estimate of your ratio under the Basel 3 framework? Do you still expect to maintain $40-50bn cash buffer at Capital? Corporate Structure & Management Can you provide more detail on the recent long-term performance awards? Specifically, what is the assumption embedded in that target for M&A vs. dividends and share buybacks? It doesn’t seem like you’ll make a lot of progress towards the 65% industrial EPS mix target in 2013 given weakness in Power/Water. Do you think you can still achieve that in the near-term organically, and at what point do you evaluate changing the portfolio to get to 65%? Does this goal inevitably lead to sub-optimal EPS growth longer-term? How should we interpret the more volatile industrial revenue performance and guidance volatility towards the back end of 2012 – is there a need to further streamline reporting structures? Are you satisfied with information flow around the group? In a perfect world, would GE opt to retain a more focused financial subsidiary (focused commercial lending and leasing) or would you prefer to be a pure-play industrial? Can you discuss the major barriers to a separation of GE Capital - depressed financial valuations, lack of M&A liquidity, tax friction, capital requirements, GE guarantee? How focused is the GE Board on succession planning? Can you discuss the recent management changes at GE Capital in that context? Has the Board identified the next CEO? What sort of time frame should we be thinking about this? Do you see the potential to split the Chairman and CEO roles over a longer term time frame? Miscellaneous Supply chain complexity: Is the Avio deal an attempt to de-risk the supply chain? If so, do you see vertical integration as a key secular trend? To what extent do you expect recent 3D printing to reduce complexity and reduce cost longer term? 97 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Competition: Where do you believe GE has the greatest and least competitive advantage? Do you see increasing threats from emerging market players in gas and healthcare markets, in particular? Do you believe there is upward pressure on R&D longer term? Simplification: How are you tracking on the $1-1.3bn of G&A cost savings by 2014 and $2bn longer term? How much restructuring will be required to achieve these cost savings – do you still plan on 2c of net restructuring expense in 2H13? Pension: How does the GAAP pension expense track in 2014 at current discount rates and plan returns? Where is the pension PBO deficit at current rates ($19bn deficit on principal pension plans and $4bn deficit on other pension plans at YE12)? Corporate Items: How do you allocate expenses between the segment and corporate level and does this typically vary from quarter to quarter? To what extent is a greater burden of E&D and product development costs being borne by corporate? How do you expense Corporate Items to track in 2014 vs. 2013 ex-items? Taxes: What is driving down the GE Capital tax rate this year (~5%)? What are you hearing on corporate tax reform in the US and how might GE benefit/suffer from current proposals to eliminate many deductions? Do you see low-20s tax rate for Industrial and 10-15% for GE Capital as sustainable in the long run? Power & Water Equipment vs. Service Growth. Do you still see a high single digit decline in revenues during 2013? What is your base case assumption for Equipment and Service revenue and order growth in 2013 given recent backlog trends? Are you seeing stability in European Thermal Service and how are (high margin) Advanced Hot Path upgrades tracking vs. plan? Are you still seeing evidence of project deferrals given global growth concerns? US Gas Turbine Outlook. How would you characterize tone of conversations with US utilities – do you still expect to see a pick up in commitment activity given 2014/15 project outlook? What influence are EPA rules/uncertainty having on utility decisions? How is utilization of GE’s US installed base trending and are you continuing to see MRO benefits from higher HDGT utilization in the US? How is Aero-derivatives demand trending - what is the typical lag between Aero-derivative and HDGT demand? Overseas Thermal Outlook: Where do you see strength outside of the US viz. China? Given weakness in gas turbine orders (27 YTD), can you comment on the 2H ramp to get to your guidance for 100-115 orders in 2013? What is your visibility on commitments currently, and what is your outlook for overseas projects? How is overseas Thermal Service tracking Competition. How concerned are you by more aggressive competition in the HDGT market and can you comment on Siemens recent H-series turbine order announcement with PennEnergy?? How do you respond to claims that Mitsubishi and Siemens have a lead in base load turbine technology andwhat is the timeline on GE’s “big block” 9-series turbine? Are you seeing increasing spares competition now that more turbines are rolling off warranty/service periods? Wind Outlook. Can you remind us why Wind deliveries were seasonally weaker in 2Q, and can you comment on whether 3Q deliveries are trending to plan? Your 2H guidance implies a significant ramp in Wind shipments in 2H. How much of that volume is already embedded in your backlog, and what is your outlook for Wind orders in 2H13? Can you walk through the outlook for Wind shipments in the US, Europe, China and Brazil? What is GE’s technology evolution – is bigger better, or are you content to remain in the 1.5-3MW range? What is your offshore strategy? How realistic are you growth targets in Europe and what investments are you making to grow 2x in Germany by 2015? Margin outlook: Can you add more precision to your guidance in 3Q for Power and Water op margins should be modestly lower than 2Q? What are the sensitivities to that guidance based on your expectations for HDGT upgrades and wind turbine shipments? What is the value gap assumption embedded in that guidance? Can you provide an early view on how we should think about 2014 margins? 98 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Oil & Gas Growth outlook. What is the 2013 outlook by business – Turbomachinery, Subsea, Drilling and Production/Control? How sustainable is the order strength at O&G (up 24% in 2Q13) viz Subsea? How does the project pipeline look? Service continued to underperform equipment in 2Q13 – what caused it? You highlighted strong order growth in the North Sea in 2Q, can you comment on the drivers behind that, and whether you see that continuing into 2014? M&A/ Are you able to approach the O&G industry as a systems supplier? If not, what do you need to do in order to integrate your approach? Where do you see the best opportunities for acquisitions? Please provide an update on the integration of recent acquisitions (Dresser, Wellstream, Lufkin)? What is the US and international growth playbook for Lufkin? Margin outlook. Do you expect better operating leverage as acquisition activity normalizes? Can you comment on recent pricing trends? Where do you see long term margins? What is differential between equipment and service margins? Energy Management Growth outlook. What is the 2013 outlook by business – Digital Energy, Power Conversion, Industrial Solutions and Motors? What is the service opportunity? XD Electric. Can you comment on how the XD Electric deal will strengthen your market positions in Power Generation and Digital Energy? How has the partnership performed thus far in the different geographies? What is the timing on the sale of the Prolec JV to XD Electric? Intelligent platforms. Seems like acquisition activity has picked up in the automation industry recently. Can you comment on GE’s competitive positioning, particularly in light of your lack of installed base? M&A. Where do you see opportunities for acquisitions in MV/HV Electrical and Automation markets? Please provide an update on the integration of ConverTeam and Lineage? Margin outlook. What is the reason for such low margins at Energy Management – how does this look by sub-segment? Can we review some of the supply chain and productivity gains you have targeted? Where do you see long term margins? Aviation 2013 Outlook. How are you planning for FY13 between Large Commercial Engines, Large Commercial Spares, MRO and Defense? Please provide a further breakout of the Defense outlook between OE vs. A/M – which programs are most at risk from budget cuts? How much risk is there from sequestration? Spares Orders. Have you seen momentum from the strong spares growth in 2Q (+19%) carry into 3Q? Do you believe that inventories have finally bottomed? How have MRO shop visits been trending, and how did spares growth in 2Q look by engine? How much of the spares growth this year is attributable to initial provisioning on the GEnx? What sort of price realization do you expect to see in 2013 on spares? What is your expectation for flight hours growth in 2H13 and 2014? GEnx Platform. Do you still expect to ramp up to 200 GEnx shipments in 2013? Where is GEnx on the learning curve and what EBIT benefit per engine do you see in 2013 from improved GEnx profitability? Do you see any supply chain bottlenecks that could lead to manufacturing inefficiencies as BA expands production to 10/mo by the end of 2013? Where do you see long-term market share shaking out versus the Trent? E&D/Leap-X. What is the outlook for E&D spend this year – do you still see E&D declining as a proportion of sales and what is the disconnect between GE and Safran which appears to be ramping up E&D investment? What are the major drivers of E&D spend going forward and how much flexibility do you have on timing? How is Leap-X engine development progressing vs. plan? Are you 99 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry still on track to achieve first flight during 2014? What financial support are you providing to COMAC and Boeing on the C919 and 737MAX programs? How does winning the position on the 777X change the outlook for the development timeline and costs? M&A: Please discuss how the integration of Avio is proceeding and the strategic rationale for this acquisition? To what extent are you leveraging Morris technologies (additive manufacturing) in your engine businesses and where do you see the opportunity longer term? What is the strategic rationale for the JV with Parker Hannifin (Advanced Atomization technologies)? Margins. How do you see Aviation margins trending over the long run? Will it continue to fall within the 18-19% range for the foreseeable future? Do you see mix as a margin tailwind in 2H13/14 and to what extent does Avio influence OM over this time frame? How does E&D trend over 2014/15? Healthcare Revenue Outlook. What are you seeing in equipment and services by region and modality? 2Q orders bounced back from a weak 1Q. Should we view 2Q trends as run-rate, or was there some catch up related to weakness in 1Q13? Developed Markets: Europe seems particular choppy (orders +7% in 2Q vs. -9% in 1Q. Is there anything we can read into here? Can you remind us what’s driving the weakness in Japan (-8% ex. FX)? Emerging Markets: EM seems more bifurcated now than has been the case over the past two years (China +16%, India +1%, during 2Q13) – what is causing this and how do you assess the risk of a slow down in EM growth? given recent volatility in EM currencies? US hospital capex: What is the outlook in 2H13/14, in light of recent spending push-outs? To what extent are lower reimbursement rates impacting capex decisions? Can you comment on the installed base of equipment and the replacement cycle? What are the opportunities and challenges presented by ObamaCare? Do you view US hospital consolidation as a positive or negative in the short to medium term? New product launches. Can you describe how recent major new product launches – Silent MRI, low dosage CT, ultrasound therapies – are tracking? How will E&D trend as Healthymagination initiatives continue to focus on best-cost vs. best-technology solutions? Healthcare IT: Can you discuss recent growth rates in your healthcare IT business? Can you size the market opportunity in HCIT in light of the recent EHR mandates? What is your plan to build share in this arena, and is there ways to leverage other parts of the healthcare business to do that? Competitive Environment: Which modalities are you seeing the biggest uptick in competition – is it Ultrasound? Do you view Samsung as a viable competitive force in CT/MRI/PET over the longer term? Do you see the potential for emerging market competitors like Mindray to become a broader threat longer term? M&A. How does the Healthcare M&A pipeline look? Which direction is GE looking to pursue? Do you see the potential for larger deals? Do you need a larger footprint in Life Sciences? Margin Outlook. Describe the pricing environment in Healthcare markets? Can you describe confidence in the 1ppt+ margin outlook in 2013, in light of +50bps achieved during 1H13? How much of the $100m impact from the US Excise Tax can be passed along to customers? How does E&D trend from here? Where do you see long-run margins trending? Transportation Equipment vs. Service Outlook. What is the outlook for revenues and orders for Equipment, Signaling and Mining/Other in 2013? Where do you see significant opportunities for freight project awards? Where do you expect locomotive deliveries and margins to peak this cycle? What impact does the increasing mix of “kit” deliveries have on peak revenue and margin potential? 100 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Mining. The acquisitions of Industrea and Fairchild took GE into underground mining equipment for the first time - what is the attraction and what are your long-term aspirations in Mining? How is Industrea tracking vs. plan in light of downside pressure on Mining investment? Do you see the downturn in Mining capex as an opportunity to make further acquisitions at depressed multiples? What opportunities do you see to grow your non-rail businesses (e.g. off-highway construction, marine)? Market expansion. What do you see as the opportunity in the European freight market? Will this be serviced by the Turkish JV? Do you have ambitions in the Electrical and High Speed train markets? Do you have ambitions to expand in rail signaling? Can you talk about the product development cycle (e.g. Hybrid, Tier-4, Natural Gas)? Competitive Landscape. How do you think the competitive environment shifts now that CAT owns EMD? GE Capital Asset Growth and ROI. What is your base case expectation for ENI attrition during 2013 and is $300bn (vs. $391bn at 2Q13) still a realistic long term target? How are margins on new originations trending – are you seeing increased competition from traditional banks? Do you still view 2% ROI as an appropriate long-term return target? Real Estate. What is current book value of equity real estate investments and by when would you expect to exit the equity real estate investment business? Regarding recent reports that Blackstone bought a majority stake in ~80 apartment complexes – what is the rationale for keeping a minority stake? You commented that real estate gains will taper off – is this because the more marketable assets have now been sold? What is the ROI for the CRE debt financing book – is this a core business? GECAS. Do you remain comfortable with residual values at GECAS in light of recent competitor write-downs and downside pressure on lease rates? Will impairments pick up as new narrow-body platforms ready for launch in 2015/16? Contingent Liabilities. Please provide an update on the interest cap claims in Japan – are they tracking to plan? Do you feel comfortable with current WMC reserve levels in light of recent FHMA mortgage settlement? Rate environment. What is the sensitivity of GE Capital’s net income to a 100bps increase in discount rates? What is the sensitivity by business? Does a rising rate environment impact the cadence of potential divestitures? Global R&D Research vs. Development: Which businesses are currently driving an increasing share of the global R&D budget? Where does GE have a real competitive edge on technology research e.g. Aero thermal, materials and where does GE need to investment further in resources e.g. Software? What does the typical time to market look like - is this cycle generally getting shorter? Technology Outlook by Business: what are key focus areas in each core GE business - Thermal Power, Wind, O&G, Aviation, Diagnostic Imaging, Life Sciences, Molecular Diagnostics and Locomotives? What about emerging technologies such as Battery, Energy Storage, etc? Leap-X: Where is the Leap-X on the development curve and what is the timeline towards first flight? What are the pros and cons of the Leap-X vs. the competing GTF engine? How do maintenance costs look given the significantly higher core operating temperature? Could you help us understand the key CMC material technology and the IP around this? What other applications do you envisage? Thermal Power: what have been the major factors that have prevented commercialization of GE's H Series turbine? What are the pros and cons of GE's H Series vs. Siemens H and Mitsubishi J Class turbines? What is the key technology and competitive advantage in the GE Flex turbine? What is development path for IGCC and CCS? 101 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry EM Competitors: How closely are you able to monitor the rate of technology competence from your competitors in EM viz. China? In which BU's is the technology gap narrowing most quickly? Where do you feel you have a wide and sustainable technology advantage? 102 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry GE Company Background Exhibit 62 GE Revenue Breakdown by Geography, Cyclicality and End Market By Geography By End Market Commercial Aerospace No Cy cle & Def By Cyclicality 21% US Commercial Finance 20% 14% 47% Def ense ROW Water 8% 2% 5% Late Early Power Gen 55% Other 8% 15% Americas Consumer Finance 9% 12% Mid General Industrial Oil & Gas Europe 11% Pacif ic 6% 10% 19% Basin Process Equipment Rail 17% 2% Healthcare 3% 13% Appliances & Lighting 5% Source: Company data Company Description Key Management Incorporated in Delaware and headquartered in Fairfield, Connecticut, Jeffrey Immelt serves as Chairman & CEO of GE (since 2001). He joined General Electric (NYSE: GE) is one of the largest and most diversified GE in 1982 and has held several leadership positions. technology and financial services corporations in the world. Jeff Bornstein, former CFO of GE Capital, was named CFO in June 2013. Keith Sherin, former CFO, was named CEO of GE Capital in June 2013. With products and services ranging from aircraft engines, power John G. Rice: President & CEO of GE Global Growth & Operations generation, water processing, and household appliances to medical imaging, business and consumer financing and industrial products, GE Charles Blankenship: President & CEO of GE Home & Business serves customers in more than 100 countries and employ approximately Solutions. 287,000 people worldwide as of year end 2010. John M. Dineen: President & CEO of GE Healthcare (since 2008). David L. Joyce: President & CEO of GE Aviation (since 2008). Lorenzo Simonelli: President & CEO of GE Transportation (since 2008). Daniel C. Heintzelman: President & CEO of GE Oil & Gas (since 2005). Steve Bolze: President & CEO of GE Power & Water (since 2005). Daniel Janki: President & CEO of GE Energy Management (since 2008). Exhibit 63 GE Detailed Segment Breakdown 2012 Revs 2012 Op. Divisions Key Products & Services 15,241 1,924 Turbo-Machinery Equipment 22% Surface/subsea drilling & production systems, equip for floating production platforms, compressors, turbines, Oil & Gas 10% 8% Drilling Equipment 10% turboexpanders, high pressure reactors, industrial power generation & auxilary equip for apps from drilling & Subsea Equipment 10% completion through production, LNG pipeline compression & inspection, downstream refineries & petrochemical Measurement & Control Equipment 7% processing. Services 50% Power & 28,299 5,422 Thermal 48% Water 19% 24% Wind 24% Wind turbines, solar technology, aircraft engine derivatives, gas turbines & generators, Integrated Gasification Jenbacher/Gas Engines 5% Combined Cycle (IGCC) systems, steam turbines & generators, nuclear reactors, fuel and support services, oil Aeroderivatives 12% & gas extraction and mining motors and control systems, water treatment solutins, water purification systems, Water 7% maintenance and other aftermarket services. Nuclear 3% Energy 7,412 131 Power 28% Management 5% 1% O&G 9% GE Digital Energy, grid automation, electrical power distribution & protection, GE Industrial Solutions, power Marine 9% conversion technologies, critical power, advanced motor, drive and control technologies. Industrial 29% Technology & Commercial 24% 19,994 3,668 Services 50% Jet engines, turboprop & turboshaft engines & parts for military applications & commercial aircraft; airborne Aviation 13% 16% Commercial Engines 25% platform computing systems, power generation & distribution products, mechanical actuation products, landing Systems 15% gear & engine components for use in both military and commercial aircraft; maintenance, component repair and Military Engines 10% overhaul services (MRO). 18,290 2,893 Services & IT 35% Diagnostic imaging systems (MR, CT, PET, X-Ray, nuclear imaging, digital mammography & molecular Healthcare 12% 13% US Equipment 20% imaging); patient & resident monitoring systems, diagnostic cardiology, ultrasound, bone densitometry, Life Sciences 20% anesthesiology & oxygen therapy, neonatal & critical care devices; disease research, drug discovery & EM Equipment 15% biopharma manufacturing technologies; diagnostic imaging agents for medical scanning, drug discovery, Japan & Europe 10% biopharma manufacturing, protein & cellular analysis; A/M service. 5,608 1,016 Services 35% High-horsepower diesel-electric locomotives, motors/engines for large haulage trucks used in the mining Transportation 4% 4% NA Equipment 25% industry and drilling rigs, marine power and stationary power generation, train control products, railway Global Equipment 15% management services, and signaling systems; repair services, locomotive enhancements, modernization, Mining 10% remote monitoring and diagnostics. Home & 7,967 311 Appliances 55% Home appliances (refrigerators, ranges, dishwashers, washers & dryers, microwaves, room air conditioners, Business 5% 1% Lighting 35% residential water systems); lamp products (incandescent, halogen, fluorescent, HID, LED, auto); plant Solutions Intelligent Platforms 10% automation, hardware, software & embedded computing systems, motion control & operator interfaces. 46,039 7,401 Commercial Lending & Leasing 40% Collateralized loans, leases & other services for major equip & capital assets. Private-labe credit cards, persnoal Capital 31% 33% GE Money 37% loans, auto loans & leases, mortgages, home equity loans, small/medium enterprise lending, aircraft, engine & GECAS 12% parts leasing & financing, airport equity & debt financing. Structured equity, debt, leasing & financing to the Real Estate 8% energy & water industries. Capital solutions for acquisition, development, fixed & floating rate mortgages for new Energy Finance 3% acquisitions/re-capitalizations of commercial real estate. Source: Company Information. 103 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry GE Key Financial Statistics Exhibit 64 Exhibit 65 GE – Organic Growth vs. EE/MI (1Q06/2Q13) GE – EPS Growth vs. EE/MI (1Q06/2Q13) Organic Grow th 100% EPS Grow th 20% EE/MI Median EE/MI Median 80% 15% 60% 10% 40% 5% 20% 0% -5% 0% -10% -20% -15% -40% -20% -60% 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 Source: Company Data, Morgan Stanley Research Source: Company Data, Morgan Stanley Research Exhibit 66 Exhibit 67 GE vs. EE/MI – Core Operating Margin (2006/13e) GE vs. EE/MI – Core Incremental OM (2006/13e) 40% Core Incremental Op. Margin 18% Core Op.Margin EE/MI Median EE/MI Median 30% 16% 20% 10% 14% 0% 12% -10% -20% 10% -30% 8% -40% -50% 06 07 08 09 00 01 02 03 20 20 20 20 21 21 21 21 6% 2006 2007 2008 2009 2010 2011 2012 2013 Source: Company Data, Morgan Stanley Research Source: Company Data, Morgan Stanley Research Exhibit 68 Exhibit 69 GE vs. EE/MI – Revenue per Employee (2006/12) GE – Capital Allocation (2008/12 cumulative) Share Acquisitions 400 Revenue/Employee EE/MI Median Repurchases 26% 350 22% 300 250 200 150 100 Capex 19% 50 Dividends 0 32% 2006 2007 2008 2009 2010 2011 2012 Source: Company Data, Morgan Stanley Research Source: Company Data, Morgan Stanley Research 104 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry GE 2Q13 Earnings Call Transcript Opening Remarks – Jeff Immelt, CEO Environment improved slightly with EM resilient, Europe stable. US orders strong at+20% growth, overall orders up 4% Eps of $0.36 solid, with 2c of net restructuring.. $0.38 on a sustained basis, YTD EPS up 6% Ops strong, margins up by 50bps, on track for 70bps in 2013. Simplification efforts will result in $1bn of cost out in 2013 $10bn returned to investors. On track for $18bn goal Avio and Lufkin on track for 3Q close, accretive to earnings +4% orders, backlog $223bn, services grew in 5 of 6 businesses. Orders growth accelerated in US China and Europe. Aviation and O&G strong – combined backlog up 7B. Aviation spares +19% HC equip +9%, Energy mgmt orders up 19%.. Heavy gas turbines still headwind, but signs of strength Orders pricing up 0.9%, positive price past 6 quarters, Org growth -1%, due to wind. Ex that sales were +5% Services +2%, broad based strength. Strength in aviation, O&G and transportation. Transpo services +28% Impacted by sluggish Europe for GT services and US sequestration Paris Air Show $26b in wins P&W shipments will help 2H, 70% of gas and wind turbines will ship in 2H 50bps margin expansion. All grew except H&BS, company remains on track for +70bps for the year One of the strongest value gaps in history R&D will be managed to flat for the year, reduce G&A by a $1b P&W volume growth will be a driver of margins in 2H Indus CFOA up 50% ex NBCU taxes. Announced in quarter that GECC will pay up to $6.5bn div to parent. On track for CFOA goals. $9.9bn returned to investors, on the way to 18bn goal. $89bn cash with $19b at parent Quarterly Detail – Keith Sherin, CEO GE Capital Cont ops $35b, down 4% y/y. Indus $24.6b down 2%, GECC $11b down 3%., Op earnings of $3.7b down 8%. EPS of 36c was down 5%. Inc. 2c of net restructuring items and no NBCU earnings which was 2c in 2Q12 CFOA was $3.7b plus $1.9b of GECC dividends 17% tax was below guidance due to audit resolution with the IRS. Might have other audit resolutions. Expect high teens to 20% for full yr Capital rate down from forecast. Mid single digit for the year, with some variable with IRS audits and tax on other dispositions. Industrial profit +2%. Ex. P&W was +12%. GECC profit was down, but inline with lower assets. Other Items o 3c of restructuring, 2c from Industrial side in corporate, 1c in GECC. Lower headcount should be a nice tailwind in 2H. o 1c charge impairment from Brazil investment, also in corp line. o Two 1x benefits - favorable IRS settlement was 4pts of tax rate and 1c of Indus benefit. Exited fleet platform in Canada 1c benefit in quarter. o WMC $128mn in new pending claims, down from run rate. Added $47mn of reserves in the quarter o Grey zone, $76mn of add’l reserves, $557mn of reserves total. o Expect an addition 2c restructuring in 2H. NBCU gain and restructuring should be offset for the full year. 105 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Power & Water o Orders $6bn, -1%. Europe down 40%. Ex. Europe, orders were up 6%. Equipment down 5%. 24 HDGT orders vs. 30 Y/Y. Renewables up 55%, distributed power +3%, service +2%. Services ex. Europe +13%. Orders pricing up 1.6% o $5.7b revs was -17% on lower volume. o Equipment down 50%, shipped 19 turbines v. 31 y/y. 351 wind turbines vs. 726 y/y. o Service revs down 3%. Power gen services down 1%. o Segment profit of $1087mn down 17% driven by lower volume, margins improved by 10bps. o Higher volume in 2H. Expect to deliver to total year framework O&G o O&G strong, orders up $5.1b +24%. Equipment of $2.8b up 42% Turbomachinary +74%, Subsea +30%. Services up 8%, Subsea services +44%, Measurement and Controls -1% o Backlog up by $1.1b to $18b, order pricing up 80bps o Rev of $4b, +9%, equipment +11%, services +6% o Profit of $532mn +14%, 70bps of margin expansion Aviation o Order $5.8b up 4%, equipment up 7%. Commercial engine orders up 81% driven by CFM and Leap orders. Military orders -73% due to lapping of Saudi F-110 orders. Services up +1%, commercial services +11%. o 2Q average daily spares order rate $24.6mn, +19% on fleet utilization +2.6% globally, higher shop visit and buying more normalized behavior. Military services down on flight hours. Order pricing +2.5% o Revs of 5303mn were +9%, Equipment +12%. Shipped 596 engines for the quarter +5%. 280 military engines +8% y/y. Service revs +6%, commercial services +12% offset by military -6% o Profit of $1067mn +16%. Margins +110bps. Healthcare o Orders of $4.8b +2%, equipment of $2.8b +4%. DM +3% with the US+5%, Europe +7%, Japan -26% on F/x (ex. FX was -8%). EM +8%, China +16%, Latam +4%, India +1%. o Orders by modality – MR +14%, CT -6%, ultrasound +13%, life science -1%, diagnostic -5%. Services orders -2% o Revs of $4490mn was flat. o Profit of 726mn was +5%, restructuring offset lower pricing. Margins +80bps Transportation o Orders of $1b, -23%, Equipment of $0.4b -45% on soft NA locomotive and global mining equipment margins. Services +7%. Pricing +40bps o Revenue of $1597mn +2%. Services and parts offset signaling revs which was -11% o 170 locomotives shipped during quarter v 243 y/y o Profit of $313mn was +11% on value gap and services, margins +160bps Energy Management o Orders of $2.3b +19%, digital energy +24%, power conversion +20%. Strong growth in digital meters. o Revs of $1981mn +6%, on power conversion +7% offset by lower digital energy o Profit of $31mn was flat Y/Y. Margins +140bps Home & Business Solutions o Revs of $2.1b is up 5%, 8% appliances offset -4% in lighting o Profit of $83mn is +5%. Appliances +31% offset by lighting. Margins were flat o Seeing strength in housing, both single and multi. 106 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry GECC – Jeff Bornstein, CFO o Revs of just under $11b was -3% on lower assets partially offset by higher gains o Assets down 7% o Net income down 9% driven by lower assets o Cash benefits were flat y/y o $391bn ENI, down $40b y/y (-9%) and $11b Q/Q. o NIM up 18bps Y/Y to 5%, flat w/ 1Q o Tier 1 on Basel 1 up to 11.2% o Asset quality improving. Non earning assets, down $600mn from 1Q o CLL $174bn of assets down 6% y/y 7bn lower non core, 4bn lower core assets driven by asset sales New business returns remain attractive – 2% ROI $825mn of earnings strong across all regions +31% overall. Quality improving with delinquencies down 15bps Y/Y and non earnings down 30% Y/Y. o Consumer $136b of assets +1% Y/Y, Net income of $828mn down 9% due to removal of reserve seasonality in US business. o Real Estate Assets down 28%. Sold 180 properties with 1.9B BV for 200mn of gains driving 2x increase in Y/Y profit Asset quality improving o GECAS Assets down 3% to $48b, Profit of $304mn is -1%. Lower gains on aircraft sales. Returns still attractive on new volume o EFS Assets down 6% to 18bn, and profit down 50% to $60mn on less gains. o 300mn of tax provisions offset tax benefits in segments. Feeding into higher 2Q corporate charge y/y o Expect mid-single digit tax rate. o GECC still on plan for $1.8 to $1.85b in earnings 2013 Framework – Jeff Immelt, CEO 2013 Framework o No change in 2013 operating framework, not planning for an improving environment. o Solid industrial earnings growth for the year driven by solid margins o No change in corporate or cash framework o Still planning for double digit EPS growth for year. o Planning for 70bps of margin improvement for the year. o Expect 6.5b of divs from GECC o Org growth should be at low end of 2-6% guidance, with P&W a headwind. Rest of business should be in the +5-10% range Question and Answer Confidence in 70bps margin goal given 50bps in 2Q – it does improve confidence, value gap on track to be significantly positive, R&D levels, mix levels, P&W are in backlog, feel confident in the ramp there. \Order growth (up 5%s ex-wind) 107 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry implies unit volume tailwind – yes, definitely implies that. P&W will strengthen, and other businesses are already demonstrating momentum: aviation (spares tail wind), oil & gas (4 or 5 segments with DD order growth). Loss in Brazil – EBX, Eike Batista, investment One-time gains in industrial segments contributing to margin improvement – small disposition in Aviation, but it was immaterial. Total impact across industrial was zero. Y/Y rise in corporate – no reclassification, corporate 2Q number is $1.883bn, take out non-operating pension of $661bn, gets you to$1.2bn, then $280 pre-tax restructuring in corporate ($0,02), then impairment of $1.08mn, and then the GE preferred dividend $135m. This gets you to a run rate of about $3bn for the year. WMC Japan run rate going forward – WMC statute of limitations runs 6 year from date of securitization, mostly completed all securitizations, which is probably why there is a slowing of pending claims. Currently in negotiations on the claims and will update over time. From a Japan perspective, there is a contractual discussion/negotiation opportunity in the first quarter with Shinsei. Net gains for the year–TranDigm benefit was immaterial in the segment, it was zero in the quarter across industrial segments, not zero Y/Y. Power pricing (service vs. order) – equipment pricing up 3.5%, service down 30bps, overall up 1.6%. Thermal and PGS was down 2.2%, Renewables up 11%. Thermal service in Europe – US was a bright spot in the quarter, US PGS, the orders were up 29%. Europe PGS had challenging quarter, down 59% - US felt benefits offsetting Europe fleet drag. Corporate vs. segment impact, restructuring and other charges – adjust for the non-operating pension, out of the $1.2 billion, $280 million of restructuring (pretax) is Industrial. 1c from Capital in corporate (results in 3c, 2c is in Industrial and 1c is in Capital). NBC gain in 1Q - restructuring would be in corporate throughout the year, to book the accounting charge for the downsizing, it needs to be done over more than one quarter. 4c of restructuring in the first quarter, 2c in the industrial segment, and in the 3rd and 4th quarter there is about 1c, which is the remaining. GE Capital Commercial RE gains - $200 million in the quarter, team has done a pretty good job reducing the book down by about $17 billion. Will get more difficult to generate the same level of gains with improvement in the asset sales market. Signs of life in Europe, UK and France (long way to go). Japan a bit better. Provisions in the quarter – +$300 million Y/Y, $200 million associated with retail (US). Reserve model change removed seasonality. Added $100 million of reserves in CLL. Energy management and intelligent platforms growth plan – regarding recent commentary on transactions, the one that has been recently discussed does not fit in plans. GE Capital SIFI Capital Requirements – have been working in parallel with all the processes the big banks are doing, capital and processes in good shape, don’t think designation will mean that much to the business EPG comments on business exit – strategy outlined is still on track Price/Cost Benefit vs. plan over balance of the year – pricing on order, 6Q of OPI across the company, came through on revenue this quarter and should continue, OPI strong on new orders coming in - this year there is significant deflation. Doing a lot of work to lock in prices on a forward basis. This will be better than the plan. 108 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Power & Water Margins – Service business was up slightly on Op profit, despite down a bit on revenue. GE Capital Dividend – $1.5bn in 3rd and 4th quarters is the plan now Gas Turbine Orders – hunch is that orders for the year will be in the 100-115 range, but they come in buckets (China and Middle East probably best, US a little better). Fair amount of visibility here. Advanced gas upgrades – still more to come in the second half, goal of 50 for the year, 14 to date, 8 in the backlog and a number that are currently working. Simplification of cost cutting savings – $200m 1Q, $468m at the half way mark, at least a billion target. Would be disappointed if it was not above $1m. Services outlook for the year – the goal is still around 5% for the year, mix is still equipment driven on total revenue. Europe – big improvement, but mixed: positives, oil and gas, up 37%, a lot of which was in the Nordic regions, aviation up 26%, both equipment and services orders, healthcare had a nice turn around. Impact of rising interest rates at GECC – issue about 28bn of debt YTD (29bn with preferred). Most of borrowing for the year is done. Long-term higher interest rates have been good, margins tend to expand, and spreads expand. From a liability perspective in good shape (match fund book). Healthcare equipment strength in North America – product line is pretty good right now, positioning is pretty good, not counting on US market to be super robust. On the outpatient side, reimbursement pressure is not new. Seems like a better run rate for growth. Orders pricing in P&W – Equipment, Thermal down 5.5%, but Renewables up 12%, Distributor Power ~Flat. Renewable pricing dynamic – in the wind business, new product introductions is driving better pricing. It is really product by product and business by business. Favorable trade in the short term between pricing and inflation. Japan competitive implications – have not seen Japanese companies becoming more competitive. Well established supply chain in Japan results in pretty solid hedge from a cost perspective. Healthcare pricing and improvement in demand – healthcare business is on the electronics cost curve, physics and electronics. Fairly rapid new products, which offsets pricing on margins. 109 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry GE Summary of Guidance Exhibit 70 GE – FY13 Guidance Summary (Changes Highlighted) 2013e GE Guidance Comments GE Industrial Organic Revenue Growth +2% to +6% Likely at the low-end of the range, and includes 3ppts negative impact from Wind (expiry of PTC driving Wind revenues down ~30-40% Y/Y); up 5-9% ex- Wind. Growth markets up ~10%, Service up ~5%. Revenue Growth by Segment: Power & Water - Y/Y decline driven by Wind cycle. Growth expected to be driven by EM, continued growth in natural gas and distributed power. Developed markets will remain slow. Oil & Gas ++ Market growth remains strong, especially in unconventional fuels (GE believes it is gaining share in subsea). Energy Management + O&G and renewable/distributed generation growth remains strong. US Commercial and Europe remains challenging. Aviation + Management forecasts continued growth in passenger traffic and believes freight volumes are finding a bottom; spares expected to rebound. Improved profitability at Airlines will drive improving CapEx trends. This is all partially offset by declining Defense budgets. Home & Business Solutions + US housing market is improving (expect modest industry growth), but growth remains slow; however, the global lighting industry has slowed (Europe and non- LED lighting will remain tough). Healthcare + Growth markets remain robust, but US healthcare reform is still challenged. Uncertainty remains in Europe, where the market is down ~20% from 2010 levels. Transportation ++ Global infrastructure build has continued, but the NA coal market is slowing and commodity price declines are curtailing short-term growth. Expect NA locomotive market to stabilize. GE Capital Revenue Growth -5% to 0% ENI expected to fall Y/Y. GE Industrial Earnings +/++ GE continues to target 70bps+ GE Industrial margin expansion. Value gap expected to remain positive (++); improving Service mix and Simplification benefits also drive expansion. R&D spend expected to remain flat Y/Y. SG&A/Sales expected to decline by 100bps (to ~17%). Earnings Growth by Segment: Power & Water - Operations excellence driving productivity improvements, but management noted excess capacity in developed markets. Oil & Gas ++ Data & analytics capabilities drive enhanced productivity. Global services growth drives mix benefit. However, GE noted that execution requirements are high. Energy Management ++ Power Conversion synergies are coming in ahead of plan. Driving margin expansion through streamlined footprint and infrastructure (investing in restructuring). Service capability expansion drives mix benefit. Aviation +/++ Strong supply chain momentum. Rebound in spares drives improving mix. Management plans to manage engine development and launch costs. Home & Business Solutions ++ Simplifying structure across the portfolio. Pricing continues to offset higher material costs. Healthcare +/++ Simplifying cost structure. Negative impact from Medical Device tax expected to be offset by productivity gains. Expected to be up 150-200bps over 2012/14e. Transportation ++ Strong productivity and pricing. GE Capital Earnings + Management expects mid-market growth with high returns on originations. Portfolio rebalancing will continue; ENI will be down Y/Y. Europe remains volatile, slow growth in US. Uncertainty over tax reform embedded within Fiscal Cliff negotiations. GE Industrial CFOA $17 - 20bn Planning Industrial CFOA and GE Capital dividend ($17 to $20bn) offset by ~$3.2bn of taxes related to the NBCU exit. Source: Company Data, 110 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Honeywell 111 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry HON Question Bank QTD Trends How are you tracking during 3Q relative to 1% core growth reported in 2Q13 and the 2-4% plan for 2013? Where are book/bill ratios accelerating/ decelerating? How are you tracking relative to guidance for $1.20-1.25? Are you seeing any major core revenue variances by segment: Aero (1-3%), ACS (2-4%), PMT (up 3-6% core) and TS (up 2-4%). Have you seen sequential improvement in Fluorines? Have you seen any pressure from extended plant shutdowns in Europe? Have European production rates normalized? Have you seen Space & Defense improve relative to the 8% decline reported last quarter? How is US trending vs. stable results in 2Q? Have you continued to see positive growth in Europe? How sustainable is the mid-teens growth you reported in China during 2Q? How does timing of Intermec deal impact the 3c of dilution you have in the plan for 3Q? 2013 Outlook How are you tracking relative to the 1-2% organic growth plan for 2013? What are the major puts and takes between the 16-16.2% segment margin target? Aside from restructuring, what other margin levers do you have in 2013? How will price/cost and mix trend over the next several quarters? Where do you see the most upside/ downside risk to plan at this stage? Your FCF guidance remains flat even though you got more constructive on EPS, which implies slightly weaker FCF conversion. What geographies and which businesses are capital investments being focused? What are the upside/downside risks to capex? What is the rationale for scaling up capex in such a low-growth environment? Do you still expect there to be no impact from NARCO related payments to your 2013 earnings and cash guidance? Can you talk about the assumptions that go into your reserve balance (currently >$1B)? When do you expect to have enough data to assess whether your reserve is adequate? Long Term Targets How are you thinking about the outlook beyond 2014? Do you see a similar framework or should we expect a more aggressive M&A growth strategy, given a more solid fundamental foundation? Do you plan to remain with absolute revenue targets or make them more GDP contingent? How is the planning process different under Tom Szlosek vs. Dave Anderson? Do you think that the cadence of profitability and productivity beyond 2014 will necessarily slow? Or conversely do you believe that the foundation of margin expansion is now more solid and therefore Honeywell can accelerate initiatives? You continue to identify and fund restructuring projects (an additional $70m in 1H). How does your restructuring pipeline currently look by segment, and how much runway is there for further repositioning actions in 2014 and 2015? Given how much you’ve done already, does the payback math change on the upcoming restructuring? How should we think about the operating upside re-invested in restructuring actions? What is your outlook for environmental and asbestos expense in 2014 and beyond? Is there a line of sight on finalization of Lake Onondaga and New Jersey Chrome super-site liabilities? 112 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Capital Redeployment You recently commented that the M&A backlog was the strongest seen since 2005 – is this still the case? How does the M&A backlog look by business? How would you assess the probability of a larger deal ($2-3bn or greater) over the next 12 months? How should we think about the pipeline of opportunities by business and should we expect to see more aerospace deals? Are you still opposed to share repurchases (in addition to offsetting stock option dilution) given clear investor preference for cash-return stories? What would cause you to tilt towards share repurchases – is this share price dependent? What is strategy for your ~6% stake in BE Aerospace? Are you prepared to be opportunistic here? Conversely, should we think about the embedded $150m gain as a hedge against unexpected charges e.g. NARCO liability re-measurement? Miscellaneous What is the outlook for E&D spend in 2013 and beyond? How does this break out between HON and customer funded E&D? How is non-aerospace E&D spend trending and where do you see potential headwinds and tailwinds? Can you comment on the recent management changes at ACS and Finance and what is the timeline on CFO and ACS President transition? What is the organizational philosophy on developing bench strength and succession planning? Has the board identified an eventual successor to Dave Cote? What potential risks and benefits do you see from corporate tax reform as it relates to Honeywell? How is Honeywell able to keep the ETR so stable at 26.5% ex-MTM pension charge – is it overseas cash repatriation? Do you see opportunity to lower the tax rate into the sub-25% range longer term? How should we think about pension income / expense over the next two years based on current discount rates and market returns? How is HOS implementation progressing by segment? What is the payback from HOS implementation from Bronze to Silver tiers? Where is HON in the ERP implementation process by segment and are you still on track for 100% sales coverage by YE14? Automation & Control Solutions ESS: Please provide an update on QTD trends by major business (ECC, Life Safety, Security, Sensing, Safety, S&M) vs. 3% reported in 2Q? Are you continuing to see outperformance in F&S and ECC sub-segments? Have you continued to see strength in China? How are the other geographies tracking? Do you see upside vs. your low-single digit core growth outlook for 2H13 (+3% organic in 2Q13)? Process Solutions: What is your revenue growth outlook for 2H13 (vs. -1% in 1Q & +3.5% in 2Q)? It sounds like the sales force is really being more selective on projects, can you give us some examples of recent work that is being rejected – why is this a new initiative? Are you continuing to see project deferrals and backlog erosion – where are the positive and negatives by vertical? What is driving better margins in the HPS backlog – how much more runway do you see beyond low double digits margins for HPS? Building Solutions & Distribution: Do you still expect slow organic growth in 2H13 (vs. +1.5% organic in 2Q)? Are you seeing any signs of a pick up in non-residential investment activity and/or energy retrofit work? How is Americas Distribution tracking vs. low single digit growth in 2Q? 113 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Margins: ACS margins hit a new peak of 14.1% in 2012 and appear to be on track for >15% by 2014. What level of payback do you expect from ERP implementation and restructuring actions over the next 1-2 years? Do you expect positive ESS/Solutions mix to have a positive influence on margins during 2013? Where do you believe ACS margins can peak? You mentioned that the backlog has converting at higher margins has been a lift in 2Q, can you comment on whether you expect that benefit to continue for the balance of 2013? Intermec: Can you discuss the concerns from the DoJ on the Intermec acquisition? Do you still expect the acquisition to close in 3Q, and how could a potential delay impact the dilution math for 2013. Can you give us an update on the longer-term revenue and cost synergy potential from the acquisition? How does the Intermec product and customer portfolio dovetail with HON’s S&M footprint? Do you expect Intermec to be margin accretive in 2014? M&A pipeline: How does the M&A pipeline look at ACS? Do you see more deals within existing value clusters or do you see the opportunity for new branches? Aerospace & Defense 2013 outlook: Do you still feel comfortable with your outlook for 1-3% revenue growth and 50-70bps margin expansion? OEM: What does backlog suggest for 2H13 OEM growth? How does your high single digit growth outlook break out between ATR and BGA? Do you see any material impact from the Emergency Beacon investigation on 2013/14 growth outlook? What impact do you see when A350XWB, A320neo and 737MAX start ramping in 2014 to 2017? Do you have any campaigns underway to ensure you get your fair share on the 777X? Aftermarket: How is QTD trend looking relative to your mid-single-digit growth outlook for 3Q13? Where do you see spares levels right now vs. +4% in 2Q? What are you seeing at ATR vs. BGA? What is the current split between Mechanical vs. Avionics and Spares vs. MRO? Are you seeing differing trends in these areas? Have you seen an increased appetite for retrofits as a result of better profitability at the operators? What trends are you seeing on the heavy overhauls? Are airlines still deferring maintenance, or has the trend normalized? Have you received any large mandates recently, and how would you characterize recent discussions with customers? Part Outs. Have you seen any impact increased part-out activity from the lessors? What components are being impacted the most? Do you expect this trend to accelerate? Business Jet: When do you start ramping on the new Embraer E-Jet and how many other new platforms remain in the pipeline? Should we factor in a pickup in support payments over the next 12-18 months? How is your win rate tracking? How do you view the competitive environment in Avionics – how is your win rate trending? Do you view Garmin as a threat in the medium/ large business jet segment? Do you have plans to offset this? What is your view on Rockwell Collins’ acquisition of ARINC? Defense & Space: Do you continue to forecast a 4% decline in 2013 assuming a fully sequestration impact and relative to the 8% decline realized in 2Q? Many of your defense peers commented that given the cycling of the backlog, 2014 could be the watershed year for revenue declines - can you provide an update on your 2014 outlook? Do you still expect a Y/Y decline but at lower rate than 2013? How will another continuing resolution this fall impact sales? Which major programs do you see as most at risk due to sequestration? What is the international sales mix currently, and how should we think about the longer-term opportunity for international sales to offset domestic pressure? R&D Outlook: How do you expect R&D expense to trend over the next few years as a proportion of segment sales? What are the major puts and takes? M&A: You have commented that the EMS acquisition has exceeded expectations? Does this presage further Aerospace deal flow? Which sub-segments and deal size appeal? 114 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Margins: Where can Aero margins peak over the next cycle? Do you still view 21-22% margins as achievable for 2014 – what are the major puts and takes here? What assumptions are you making for mix in that guidance? Does it assume that a favorable mix tailwind from better aftermarket? Performance Materials & Technology UOP: How is UOP bidding/ quoting activity trending QTD and what does the current backlog (a record $2.7bn in 2Q, +10% Y/Y organic) imply for 2H13 and 2014 growth? Do you still see growth deceleration vs. 10% organic growth in 2Q as comps get tougher? Which regions are showing strength/ weakness? How is the mix trending between Equipment, Catalysts and IP? Are you seeing incremental opportunities in the US given competitive advantages of the low natural gas price within the petrochemical sector? To what extent is the Russian refining investment program already reflected in backlog? What is your outlook in China given the massive investment cycle over the past five years? Advanced Materials: How is business trending QTD vs. expectation for mid single digit growth – a significant rebound vs. 6% decline registered in 2Q? What trends are you seeing in Resins & Chemicals vs. 1H results (sales were down in 1H due to planned plant outages)? Has production come back at Fluorine Productions as well? Can you talk about your net raw material exposure there, and how were should think about the sensitivity of recent commodity weakness on margins? M&A: How does the M&A pipeline look in PMT and/or could there be scope for some divestiture activity? How is the integration progressing and what is the revenue cross opportunity between Thomas Russell and UOP? How many more bolt-on opportunities do you see in the UOP complex? Margins: Do you remain comfortable with your outlook for 18.4-18.6% margin in 2013? How much of your raw material exposure is protected by pass-through agreements? How much longer do your current raw material pass-through contracts last? Do you expect more favorable price/ raws in 2013? How important is the lower natural gas price as an input cost for Resins? Transportation 2013 Outlook: How is core revenue growth tracking vs. 2-4% target for 3Q? Do you still expect EU LV auto production to be flat to down slightly in 2H13? How is European diesel penetration tracking? What is your exposure to the Commercial Vehicle segment and what are your assumptions there? There are multiple tailwinds heading in 2H – easing compares and new platform wins atop more constructive forecasts from Global Insight and EDS. How are those playing out so far? Have we seen normal plant closures during the summer? New Platform Launches: What is the outlook for new turbo platform launches by region? Do you still believe that US LV penetration will grow from 10% to 20%? How does this translate into platform launches during 2013 and 2014? How is your overall win rate tracking, specifically on smaller platforms? Competitive Landscape: Can you discuss how the competitive landscape has changed – how is your market share tracking? Are you seeing pressure from new entrants such as Continental and Bosch? Are you winning share with the Japanese transplants? Are US platform gains by Mitsubishi (viz. GM) an emerging competitive concern? Does this lead to more pricing pressure longer term? Margins: Given your outlook for 12.5-12.7% margins in 2013, do you still feel your guidance for 14-15% margins in 2014 is achievable? How does this compare to the prior cycle ex-CPG? Can you describe the restructuring actions taken in this business? Do you still expect 1ppt segment margin benefit from Friction restructuring actions by 2014? To what extent do these actions benefit 2H13? 115 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry HON Company Background Exhibit 71 HON Revenue Breakdown by Geography, Cyclicality and End Market By Geography By Cyclicality Early By End Market Other ACS APAC 10% Defense 14% 16% Defense Fire & Security 8% 15% EMEA 14% 24% Aerospace Process Control Mid 16% 9% No Cycle 13% 11% UOP/ Auto (Turbo/ Refining Friction) 6% America Specialty s 11% Late Building Chemical 60% Controls & Soln Commodity 47% 6% 17% Chemical 3% Source: Company data, Morgan Stanley Research. Note: Geographic breakdown based on 2010 pro forma revenue; end-market and cyclicality breakdown based on 2011 MSE revenue Company Description Key Management Incorporated in 1985 in Delaware, Honeywell International Inc (NYSE: Dave Cote serves as Chairman and CEO (since 2002) of Honeywell. HON) is one of the largest US Industrial Conglomerates, serving Previously, he was Chairman and CEO of TRW Inc., from 2001/02. customers worldwide in key end-markets such as Aerospace & Defense, Dave Anderson was named SVP and CFO in 2003. Before that, he Automotive & Transportation, Energy Efficiency, Oil & Gas, Safety and served as SVP and CFO of ITT Industries. Fire Protection. Roger Fradin: President and CEO of Automation & Control Solutions since 2003. In 1999, Honeywell merged with AlliedSignal and moved its headquarters from Minneapolis, Minnesota to Morristown, New Jersey in the same Andreas Kramvis: President & CEO of Performance Materials and year. As of year-end 2012, Honeywell had a total workforce of Technologies since 2008. approximately 132,000 employees, including approximately 52,000 in the Tim Mahoney: President & CEO of Aerospace since 2009. US. Terrence Hahn was appointed President & CEO of Transportation Systems in April 2013. Exhibit 72 HON Detailed Segment Breakdown 2012 2012 Type of % of Seg % of Seg Revs Op. Profits Rev Revs Divisions Revs Key Products & Services Key Competitors Aerospace $12,040 $2,284 Product 54% Air Transport & Regional 37% Turbine propulsion engines, auxiliary power units, United Technologies, Rockwell 32% 39% Service 41% Business & General Aviation 17% environmental control systems, avionics systems, electric Collins, Goodrich, Rolls power systems, engine systems accessories, aircraft lighting, Royce/Allison, General Electric, Defense and Space Sales 46% control products & subsystems, management & technical Safran, BAE, Parker Hannifin, services, and landing systems Boeing, L3, Raytheon Automation & $15,880 $2,214 Product 84% Energy, Safety & Security 51% HVAC control systems, lighting & home automation; ABB, Emerson, Invensys, Control 42% 38% Service 14% Process Solutions 19% home/building control & optimization; sensors, switches, Siemens, Yokogawa, Johnson Solutions controls & instruments for measuring pressure, air flow, Controls, United Technologies, Building Solutions & Distribution 29% temperature & electrical current; security, fire and gas Bosch, Danfoss, Eaton, GE, detection; personal protection equ Omron, Tyco, 3M, Phillips, Yamatake, Cherry, Pelco, Hubbell, Datalogic Performance $6,184 $1,142 Product 82% UOP 34% Fluorocarbons, hydrofluoroolefins, caprolactam, resins, BASF, Dow Chemical, Dupont, Materials & 16% 19% Service 10% Fluorine Products 19% ammonium sulfate for fertilizer, specialty films, waxes, Sinopec, UBE, Mexichem Flour, Technology additives, advanced fibers, customized research chemicals Solvay, Arkema, Solvay, Ineos, Air Resins & Chemicals 21% and intermediates, electronic materials and chemicals, Products, Axens, Atotech Specialty Products 23% catalysts, and adsorbents Transpiration $3,561 $235 Product 108% Turbo Technologies 79% Turbochargers & charge-air systems, exhaust gas coolers, Borg-Warner, ITT Corp, Holset, Systems 9% 4% Service - Friction Materials 21% charge-air coolers, aluminum radiators, aluminum cooling IHI, MHI, Behr, Modine, Valeo, modules, brake, hard parts and other friction materials Advics, Akebono, JBI, TRW Source: Morgan Stanley, Company Information. 116 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry HON Key Financial Statistics Exhibit 73 Exhibit 74 HON – Organic Growth vs. EE/MI (1Q06/2Q13) HON – EPS Growth vs. EE/MI (1Q06/2Q13) 110% EPS Grow th 15% Organic Grow th EE/MI Median EE/MI Median 90% 10% 70% 5% 50% 0% 30% -5% 10% -10% -10% -15% -30% -20% -50% 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 Source: Company Data, Morgan Stanley Research Source: Company Data, Morgan Stanley Research Exhibit 75 Exhibit 76 HON vs. EE/MI – Core Operating Margin (2006/13e) HON vs. EE/MI – Core Incremental OM (2006/13e) 16% 40% Core Op.Margin Core Incremental Op. Margin EE/MI Median EE/MI Median 15% 35% 14% 30% 13% 25% 12% 20% 11% 15% 10% 10% 9% 5% 8% 2006 2007 2008 2009 2010 2011 2012 2013 2006 2007 2008 2009 2010 2011 2012 2013 Source: Company Data, Morgan Stanley Research Source: Company Data, Morgan Stanley Research Exhibit 77 Exhibit 78 HON vs. EE/MI – Revenue per Employee (2006/12) HON – Capital Allocation (2008/12 cumulative) 310 Revenue/Employee EE/MI Median 290 Share Repurchases Acquisitions 270 32% 17% 250 230 210 Dividends 190 29% 170 Capex 150 22% 2006 2007 2008 2009 2010 2011 2012 Source: Company Data, Morgan Stanley Research Source: Company Data, Morgan Stanley Research 117 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry HON 2Q13 Earnings Call Transcript Opening Remarks – Dave Cote (CEO) Sales of $ 9.7bn, up 3%, 1% organic, near the high-end of guidance. EPS up 8% to $1.22 normalized for tax benefit Segment margin of 16.1%, up 30bps Y/Y, driven by restructuring savings. Funded over $60m of new repo program, which more than offset OPEB curtailment gain; more than $100m repo funded YTD. Continued to make growth investments, including R&D and capacity expansion. LC biz continued to benefit from strong backlog, with $50.5bn backlog at the end of 2Q Order trends were mixed: US stable, EU slightly positive in both SC and LC biz, China up mid-teens, with inflection point seen in June – solid growth in both L&S cycle biz in ACS and TS continued its growth momentum. Raised low-end of 2013 guidance by 5c to $4.85-4.95, up 8-11% Y/Y Quarterly Details – Dave Anderson (CFO) Sales of $9.69bn, up 3% reported, 1% organic. EU was good overall, up 1%. US flat, driven by lower D&S. China up 14%, mainly driven by short-cycle improvement, particularly driven by SC improvement viz. ESS in ACS and TS Profit up 4%, Segment margin of 16.1%, up 30bps Y/Y. Margin expansion >60bps in all segments ex-PMT, which was largely due to prior year licensing sales. Recognized OPEB curtailment gains of $40m, more than offset by $60m REPO funding. Effective tax rate was 23.1% vs. 26% in 2Q12 due to timing of tax payments. Continue to plan for 26.5% in FY13, suggesting 11% favorable tax rate seen in 1H will be offset in 2H, likely in 4Q. EPS of $1.28, up 12%. Ex-tax benefit, EPS was $1.22, up 8% FCF of $1.14bn, 112% conversion Aerospace o Sales down 1% organic, driven by D&S declines. o Commercial OE up 8%, driven by strong OE build rates (particularly in large transport market, but also seeing healthy demand in small/mid cabin aircraft) and favorable platform mix. o Commercial A/M up 3%, driven by improved ATR flight hour growth (+4% in 2Q vs. <2% in 1Q), strong uptake of RMUs in BGA, partially offset by fewer maintenance events. Spares growth is slightly ahead of utilization rate in 2Q, but mgmt expects improving utilization to support continued growth in A/M. o Defense & Space down 8%, driven by planned program ramp-downs and program delays in the US, partially offset by international sales. Continue to look for 4% decline in FY13. o Segment margin up 90bps to 19.5%, driven by productivity and commercial excellence. ACS o Sales up 3% organic, with growth in all regions. o US up 2%, driven by Resi recovery, offset by tough industrial comps. While non-resi sales remained depressed, order trends have improved. EU up slightly, outperforming the overall market, with ESS growth partially offset by BS weakness due to weak econ conditions. China up 6%, good growth in both LC and SC markets. o ESS up 3% organic, driven by solid growth in Security, Fire and ECC (all up >5%, new products, geographic expansion and US resi recovery); S&C is stabilizing and HLS is improving o HPS up 4% organic, driven by adv solutions uptake and services growth. Strong sales conversion due to higher margin backlog o BSD up 1% organic, driven by American distribution and building services. o Margin up 110bps to 14.4%, >50% conversion, mainly driven by HGRs. Performance Materials & Technology o Sales up 9%, flat organic, growth driven by UOP. 118 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry o UOP up 39% or 11% organic, driven by catalyst and equipment sales (strong demand in Petrochem and gas markets). Backlog remained robust at $2.7bn, up 10% organic. o Advanced Materials down 6% organic, due to soft end market demand. Fluorine was weak due to a slow start to the cooling season (expected to start pick up now) and plant shut-downs (resumed operation in July). R&C also saw lower production primarily due to planned outage and soft demand in China. o OM down 360bps to 19%, primarily driven by impact of lower UOP licensing sales, lower Adv Mat volumes, and Thomas Russell dilution (expected to lap the headwind in 4Q). Continue to look for 18.4-18.6% margins. Transportation Systems o Sales up 5% organic, turbo up HSD, driven by higher turbo gas penetration, new platform launches and improving China commercial vehicle sales, which more than offset by EU LV production decline (-1%) – LV production stabilized, but new car registration continued to be weak, so risk of inventory contraction in 2H. o OP margin up 60bps to 13.3%, driven by strong productivity and favorable pricing. o Completed FM facility closure in June, which has started to provide benefits in 2Q, and will continue to Restructuring update: YTD executed $70m of existing projects and funded $100m new REPO projects. Have funded >$200m REPO over the past 6 quarters, which is expected to drive $130m savings in 2013 and $220m ($90m incremental) in 2014. 3Q12 Outlook o Sales up 5-7% to $9.8-10bn, up 2-4% organic o EPS of $1.2-1.25, up 5-10% normalized for tax benefits o Aerospace: Sales up 1-3%, driven by commercial growth - Comm AM up MSD on easier comps, partly offset by MSD decline in D&S o ACS: Sales up 5-7%, up 2-4% organic. Intermec expected to be closed in 3Q13, which together with the RAE acqn, is expected to drive 100bps dilution to segment margin. Expecting 20-30bs Y/Y margin contraction in 3Q. o PMT: Sales up 13-16%, UOP M&A expected to contribute 10ppts revenue, but this will represent another quarter margin headwind UOP up MSD Av Mat up MSD, driven by improved production volumes in R&S and FP o Transportation Systems: Sales up 2-4%, driven by new launches and higher turbo penetration. EU LV expected to be down 3%, assuming an inventory correction Margin expansion driven by Friction footprint transition. Expect margin sequentially flat to slightly down. FY13 Outlook o Assumptions: Comm Aero will lap easier comps. Assume A/M sales largely in line with utilization ESS up LSD, assuming no change in the overall macro environment. UOP growth expected to moderate, due to sequentially lower Petrochem sales in 2H. Assume pricing stable at the mid-point. Turbo: watching OEM summer shut-down. Mid-point assumes EU LV down slightly; China Up HSD Continue to assume $1.25 EUR. o Total sales up 3-4%, or 1-2% organic to $38.9-39.3bn (reported revenue depends on Intermec timing) 119 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry o Raising margin guidance by 10bps at the low end to 16-16.2%, expecting 50bps M&A headwind in 3Q (Thomas Russell & Intermec), representing 3c EPS headwind. Full year margin guidance at low-end of FY14 targets. o Raising low-end of EPS range by 5c to $4.85-4.95 o Tax rate assumption unchanged at 26.5%, flat Y/Y. Due to timing of tax payment, expecting 11c tax headwind in 4Q o FCF 100% conversion, $3.5bn Summary o Not expecting 2H acceleration in market growth, while seeing pockets of SC improvement and easier comps. Quoting activity in the non-resi market showed signs of improvement. o EM is not expected to accelerate in the near term. o Overall, expect macro environment being stable. Q&A Pricing & productivity more than offset inflation in 2Q13. D&S down 8%, in-line with expectations. Assumed 80% of sequestration impact in FY13 guidance, which suggests 4% decline in D&S in FY13. 787 ELT updates: Prefer to wait till the final results come out and mgmt does not expect any significant financial impact. Capital allocation: bought back 6m shares in 2Q and will close Intermec in 3Q (~$600m). M&A pipeline is very attractive now and HON believes it is very well positioned to driven inorganic growth – a full pipeline allows the company to be even more disciplined with acquisitions. Mgmt also noted the importance of dividend payout. UOP will always see Q/Q lumpiness, but the company believes it has good visibility of Y/Y growth. UOP has been outgrowing the end-market for a while. The outperformance is not only driven by good end market growth, the biz is also benefitting from R&D and other growth investments made in the past. Aerospace growth investments: supporting all biz in the Aero segment and continues to make growth investments, ~8% of sales in R&D. Mgmt likes both the mechanical and electronic business, and is seeing particularly attractive opportunities in mechanical components ESS: saw good growth in ECC up 5%, Fire up 6%, and HSG up 7% globally, with growth higher in the US, partly driven by the US housing market. The only biz that is lagging in the ESS group is S&C, largely due to weak industrial environment. FY13 revenue guidance update: revenue guide up $100m at the low-end. Aerospace up $50m at the midpoint vs. prior guidance, ACS of $16.5-16.4bn (up slightly at the midpoint), PMT of $6.8-6.9bn, ~$100m lower at the mid-point, and TS is on track, assuming some impact from inventory correction. China macro outlook: HON mgmt continues to be a believer in China over the long-term, looking for 6-7% GDP growth, but also seeing opportunities in terms of market penetration. China was up 14% in 2Q, driven by good growth across the board - Aero R&O, ACS short cycle & long cycle, UOP (completed 2 projects in 2Q), TS (turbo sales seeing a rebound in commercial vehicle market) Restructuring opportunities: continue to roll out HOS, currently at the point of 70-80% Bronze certified and there is still more run way for further improvement. Mgmt sees additional opportunities from functional transformation. The company also starts to see the benefits from investment in the ERP systems, particularly in ACS. 120 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Aero A/M growth by region: Large transport A/M up 2% (spares up 4%, R&O down slightly). China continues to see the same dynamic as 1Q, with spares down LDD, partly offset by M-Tns growth in R&O; overall, China A/M down slightly. R&O growth was solid in the US and EMEA. Defense outlook: expect continued decline in D&S in 2014, but at a lower rate than 2013. Defense is more of a sales channel rather than a separate market, so it’s pretty easy for the company to shift engineering/manufacturing resources to other end-markets. Electric taxi program: mgmt is very confident in this product and is seeing increasing interest from customers. Europe trends: SC showing improvement and encouraging trends, but mgmt is not ready to declare victory on this yet. New product introduction in this region has also helped. CapEx: will probably see a ramp-up in CapEx in 2H, which is likely to drive lower operating cash flow in 3Q12 than historical level. 121 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry HON Summary of Guidance Exhibit 79 HON – 3Q13 and FY13 Guidance 3Q13 4Q13 2013 Old 2013 New Comment Sales $9.8-10bn $10.1-10.3bn $38.8-39.3bn $38.9-39.3bn Assuming EUR @ $1.25 Total Growth 5-7% 5-7% 3-4% 3-4% Reported revenue growth depends on timing of Intermec closing Organic Growth Up 2-4% Up 3-4% 1-2% 1-2% Segment Margin 15.8-16.0% 15.9-16.3% 15.9-16.2% 16.0-16.2% FY13 up 1ppt at the low-end. Compared to 2012, up 40-60bps Y/Y or up 60-80bps Y/Y ex- acquisitions Tax Rate ~11c headwind 26.5% 26.5% FY13 guidance unchanged, suggesting higher ETRs in 2H13 Proforma Net Income $3.8-4.0bn Restructuring benefit $130m $130m Expecting $220m benefit in FY14 EPS $1.20-1.25 $1.16-1.21 $4.80-4.95 $4.85-4.95 Assuming 3c M&A dilution in 3Q and 11c tax headwind in 4Q Cash Flow from $4.9bn - Up 7% Y/Y, ex-expected NARCO payments; no US Operations pension contributions expected in 2013. This compares to $4.6bn CFOA in 2012, which includes $1bn pension contribution CapEx $1.2bn - Compares to $900m in 2012 FCF $3.7bn - Source: Company Data, Morgan Stanley Research Exhibit 80 HON – 3Q13 and FY13 Guidance – Segment Details Segment Details 3Q13 Note 2013 Expectations vs. prior guidance Aerospace Revenues Up 1-3% Comm A/M up MSD, partly offet by Up 1-3% Up $50m at the mid-point D&S down MSD (-4% in FY13) Up 50-70bps Unchanged Automation And Control Solutions Revenues Up 5-7% Up 2-4% organic Up 3-5% Up slightly at the mid-point Margin ~100bps headwind from M&A Up 10-40bps Slightly lowered due to M&A dilution dilution Performance Materials & Technology Revenues Up 13-16% ~10ppts contribution from UOP Up 11-13% Down $100m at the mid-point acqn; expect improved production at R&C and FP Margin Thomas Russell dilution in 3Q Flat - Up 20bps Slightly lower due to volume deleverage Transportation Systems Revenues Up 2-4% EU LV production down 2% in 2H, Flat - Up 3% Unchanged assuming some inventory headwind Margin Margin expansion driven by Up 30-60bps Slightly higher due to strong 2Q Friction outperformance Source: Company Data, Morgan Stanley Research 122 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Hubbell 123 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry HUBb Question Bank FY13 Expectations You reiterated guidance for 1-3% organic growth in 2013; is 3Q trending in line with this guidance? This requires significant improvement to the mid single digits by 4Q – what gives you confidence in this outcome? Do your daily order reports support this outcome? Should we model normal seasonality from 2Q into 3Q? Within your 2013 end market guidance (Resi +15%, Non Resi +1-3%, Industrial +0-2%, Utility +2-4%), where do you see the modest upside/ downside risk? Are you seeing any evidence of growth inflections in non-residential and utility markets? Is the HV test accelerating as expected? You are also guiding for 40bps Y/Y margin expansion in 2013 vs. 60bps of realized expansion in 2012. Are comps getting more difficult or is margin expansion slowing given volume growth is expected to decelerate? How is price/cost trending? How should we think about the net impact of improving mix (Industrial/HV Test), restructuring payback and easing comps? Competitive Dynamics Have you observed any major change in competitive dynamics following the two recent major industry consolidation events (ABB/ Thomas & Betts, Eaton/ Cooper)? Do you view this as a share-gain opportunity and if so, are you seeing a corresponding positive impact? Which one of the combinations do you view as more threatening and why? Have you seen any evidence of ABB moving IEC product into the US? How do you plan to respond if they gain traction with this initiative? M&A Pipeline What was the rationale for the recent acquisition of Trientics and CMC? What capabilities do they bring to the organization and what impact do you expect them to have on 2H13 and 2014 revenue and EPS? How is the M&A pipeline currently, and where are you most interested in growing via acquisitions? What is your deal “sweet spot” from an annualized revenue perspective? What are your thoughts on expanding into international markets via acquisition? Do you see the opportunity for more bolt-on acquisitions before year-end? FCF Allocation Over the past few years, acquisition activity has been limited, yet you are clearly targeting a more aggressive acquisition strategy going forward; what gives you the confidence that you will be able to execute on your acquisition targets (especially within Electrical)? If M&A opportunities do not come to fruition, how willing are you to step up share repurchase activity in light of your strong balance sheet or are you prepared to be patient to keep your powder dry for a large (but rare) deal opportunity? Based on your target list of opportunities, would you say that you are more confident in closing a larger deal ($100m+ revenues) over the next 12 months? What is your view on the dividend – do you see scope for the payout ratio to increase over time? 124 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Dual Class Structure How involved is the Hubbell & Roche trust (36% effective control via the A-shares as of the last proxy)? To what degree do the trustees influence board decisions? How do the beneficiaries of the trust view their continued involvement with the company? How much active discussion is there at board level relating to collapsing the share structure down to one class of shares? Would the trust be interested in this since the A-shares trade at a modest discount to the B-shares? Can you talk about the fiduciary duties that the trust has to the B class shareholders with regards to corporate governance decisions? International Expansion Do you have a targeted contribution from non-US markets? Specifically, which markets are you targeting for growth – is Europe off the table? Can you expand geographically via organic investment, or do you need to make acquisitions to do so? What geographies are most attractive in your view? Channel Inventories Are there any product areas where channel inventories are substantially out of kilter with typical seasonal levels? Have you been impacted by de-stocking activity and if so where and how long do you expect these head winds to persist? How do you view current levels of distributor and OEM inventories? Margins How is price/ cost trending and how does this compare to plan – do you still expect a small benefit from price and raw material deflation for FY13? Within which segments are you seeing the most significant benefits? What is the price/ cost outlook into FY13 at current spot prices? Do you see a margin ceiling or, at the very minimum, do you believe the productivity cadence will begin to taper off? What measures can you talk to continue prior benefits realized from plant consolidations and ERP implementations? Conversely, do you believe that you can reach best-in-class comp levels with your current portfolio (Legrand at 20.2% in 2012)? What will drive margin expansion over the next few years, assuming low volume growth? What sort of mix head wind should we expect if non-residential end markets recover as hoped? Approximately what percentage of your COGS comprises direct material spend currently? What percent of this is sourced from low-cost countries? Do you have a target for low-cost sourcing? What level of savings are you typically able to achieve (in percent terms) by moving from developed to low-cost region sourcing? Electrical QTD Trends. What are you seeing by major end market vs. 2Q results - Non-Residential Construction (flat in 2Q), Industrial (sluggish), Utility (down low single digits) and Residential Construction (double digit growth)? Within Non-Resi, what are you seeing within Institutional vs. Commercial? Have customers continued to hold off on purchases given macro uncertainty? How are Lighting, Electrical Products and Wiring trending QTD? Have you seen signs of stabilization in Harsh & Hazardous, and are you still looking for a pick-up in 2H? Long-Term Growth Target. You are targeting a 9% CAGR over 2012/14e for Electrical Systems Products. What are the key drivers of this? You also noted that you want to complete $100m of deals per year – can you elaborate on the areas where you want to acquire? 125 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Non-Resi Drivers. You noted some positive signs in Non-Resi quoting activity during the 2Q call; has this converted into orders? Would you say that the bulk of your Non-Residential Construction growth continues to be driven by retrofit/ replacement rather than new construction? High-Voltage Test. Sales were weak in 2Q but do you continue to look for inflection during 3Q13? What is driving this improvement and what is the underlying long-term driver of demand? LED. Of your total Lighting activity, what percentage is currently driven by LED (>20% in 2Q)? Do you view 35-40% as a viable adoption rate by 2015e? What types of projects and light fixtures are you seeing LED adoptions and are we seeing bifurcation between new project and retrofit activity? How would you characterize the LED cost curve and how this compares to traditional lighting solutions? Lighting Controls. What percent of your Lighting business is currently driven by Controls, and where might this go over time? Of your total Lighting activity, what percentage is incorporating Controls currently? Do you need to acquire a controls platform in order to become a more serious player in this space? Non-Resi Mix. Should Non-Resi new construction begin to pick up, would this have a negative margin mix vs. retrofit/ replacement sales? You are already trending above prior peak margins in the Electrical segment. Where will peak margins go during the current cycle, and aside from volume leverage, what can drive margin expansion? Margin Differentials. Is there a substantial margin gap between Lighting, Electrical Products and Wiring? Within Lighting, is there a substantial margin differential between traditional lighting, LED and controls? Power QTD Trends. Growth remained negative in 2Q at -2%. When might growth in this business turn positive and what gives you confidence you can still achieve 2-4% for FY13? How was book-to-bill within Power during 2Q, and how has order activity tracked QTD? Utility budgets: Utilities appear to be more cautious this year - can you describe current trends within transmission vs. distribution? How is MRO activity trending? Why do you think utilities are being so cautious – is it rate case uncertainty, higher rates, macro concerns? Why isn’t residential construction activity lead to a more robust distribution spending environment? Competitive environment: Have you seen any pick up in competitive intensity since Eaton’s acquisition of Cooper? How would you describe the overall pricing environment? Smart Grid. Can you quantify the percent of your Power revenues tied to sales of Smart Grid products? What is your outlook for the Smart Grid business from here, and what is driving investment? Restructuring activity. Your margins were negatively impacted by facility consolidation charges during 1H to the tune of 30bps. What sort of payback should we model during 2H13 and how much more work is there to be done on the manufacturing footprint? Peak Margins. Your margins reached a new peak of 18.1% in 2012 – can margins within Power move any higher as volume grows, or are margins fairly tapped out at this point 126 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry HUBb Company Background Exhibit 81 HUBb Revenue Breakdown by Geography, Cyclicality and End Market By Geography By End Market By Cyclicality Early Mid 5% International 30% 17% Utility 23% Non-Resi 41% Industrial 31% US Late 83% Resi 65% 5% Source: Company data, Morgan Stanley Research Company Description Key Management Hubbell (NYSE: HUB-B) is engaged in the design, manufacture and sale of David Nord is CEO (since 2013), President and COO (since 2012) of electrical and electronic products for a range of non-residential and Hubbell. Nord previously served as CFO. Before joining the company in residential construction, industrial and utility applications. HUBB has a 2005, he spent nearly 10 years working at United Technologies. dual-class structure; Class A shares retain 73% of voting rights and 12% of William Sperry was appointed as CFO and Senior Vice President in June shares outstanding. 2012. He joined Hubbell in 2008 and previously served as VP of Corporate Strategy & Development. Headquartered in Shelton, Connecticut, and founded in 1888, Hubbell Scott Muse: Group Vice President – Lighting Products. operates in two main segments. The Electrical segment, which accounts William Tolley: Group Vice President – Power Systems. for 70% of revenues, comprises electrical equipment and lighting products. Gary Amato: Group Vice President – Electrical Systems. The Power segment includes distribution, transmission, substation, and telecommunications products, and represents the remaining 30% of sales. Exhibit 82 Detailed Segment Breakdown 2012 % of Seg. 2012 Revs Op. Profits End Markets Revs Key Products & Services Key Brands Competitors Electrical $2,115 $304 Non-Residential 53% Cable reels, cable glands & fittings, connectors & tooling, floor Hubbell, Kellems, Bryant, Burndy, Wejtap, Implo, Cooper, ABB, Eaton, Segment 69% 64% Industrial 40% boxes, gorund fault devices, wiring devices & accessories, Raco, Bell, Weigmann, Killark, Hawke, Chalmit, Acuity Brands, Philips, switches & dimmers, pin & sleeve devices, electrical motor Victor, GAI-Tronics, Gleason Reel, Haefely, Legrand, Ferraz Residential 7% controls, steel & plastic electrical enclosures, junction boxes, Hipotronics, Austdac, Kim Lighting, Sportsliter Showmut, Littelfuse, plugs & receptacles, datacom connectivity & enclosures, Solutions, Kurt Versen, Beacon, Architectural Area Leviton, Pentair, EGS speciality communications equipment, high voltage test systems, Lighting, Security Lighting Systems, Sterner Lighting, (EMR/SPX), mining communication and controls, various LED and non-LED Prescolite, Precision-Paragon, Spaulding Lighting, Honeywell, Stahl light fixtures, occupancy, dimming & daylight haresting sensors Alera Lighting, Dual-Lite, Progress Lighting Power $930 $168 Utility 100% Arresters, Cutouts and fuse links, Lineman tools, hoses & gloves, Ohio Brass, Fargo, Quazite, Electro Composites, Hot Cooper, ABB, Eaton, Segment 31% 36% Helical anchors & foundations, Overhead & pad mounted Box, Chance, Hubbell, Quadri*sil, USCO, PCORE, Legrand, Schneider, switches, High voltage bushings, Insulators, Cable terminations & Anderson, Polycast, Comcore, CDR, Delmar General Electric accessories, Formed wire products, Splices, taps & connectors, Grounding equipment, Programmable reclosers, Sectionalizers, Pole line hardware, Polymer concrete & fiberglass enclosures and equipment pads Source: Morgan Stanley, Company Information. 127 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry HUBb Key Financial Statistics Exhibit 83 Exhibit 84 HUBB – Organic Growth vs. EE/MI (1Q06/2Q13) HUBB – EPS Growth vs. EE/MI (1Q06/2Q13) 20% Organic Grow th 50% EPS Grow th EE/MI Median EE/MI Median 15% 40% 30% 10% 20% 5% 10% 0% 0% -5% -10% -20% -10% -30% -15% -40% -20% -50% 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 Source: Company Data, Morgan Stanley Research Source: Company Data, Morgan Stanley Research Exhibit 85 Exhibit 86 HUBB vs. EE/MI – Core Operating Margin (2006/13e) HUBB vs. EE/MI – Core Incremental OM (2006/13e) 45% Core Incremental Op. Margin 18% Core Op.Margin EE/MI Median EE/MI Median 40% 16% 35% 30% 14% 25% 12% 20% 15% 10% 10% 8% 5% 0% 2006 2007 2008 2009 2010 2011 2012 2013 6% 2006 2007 2008 2009 2010 2011 2012 2013 Source: Company Data, Morgan Stanley Research Source: Company Data, Morgan Stanley Research Exhibit 87 Exhibit 88 HUBB vs. EE/MI – Revenue per Employee (2006/12) HUBB – Capital Allocation (2008/12 cumulative) 300 Revenue/Employee Dividends EE/MI Median 26% 250 Capex 200 13% 150 Share 100 Repurchases 19% 50 Acquisitions 42% 0 2006 2007 2008 2009 2010 2011 2012 Source: Company Data, Morgan Stanley Research estimates Source: Company Data, Morgan Stanley Research estimates 128 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry HUBb 2Q13 Earnings Call Transcript Opening Remarks – David Nord, CEO Mixed end markets trends, makes things hard to predict Sales up 3%, largely due to M&A, Lighting saw good growth Electrical ex-acquisitions was flat Non-Resi a little bit better, mainly from renovation, not any meaningful new construction activity Resi continues to be solid, but lumpy Utilities, weaker on both transmission and distribution, but tough comps Industrial was mixed – core is sluggish High voltage down slightly, confident in an inflection, good activity for 3Q and 4Q expected Harsh and hazardous, weak in 2Q but good improvements in the beginning of 3Q Expanded Gross Margins 50bps on favorable pricing, in light of raw material cost inflation - this helped offset facility consolidation costs Closed acquisitions in June and one earlier this week Visited with Trinetics last week, thinks the products, teams and integration have been very positive, strong indicator of the type of acquisitions they are doing New products – a lot of innovation in lighting business, 2 awards (LED, Building Automation) Facility consolidation, completed Mexico facility closure, most of the costs are behind them Pricing is competitive, still pushing price to offset other cost inflations despite more favorable raw materials – varies by market Electrical – weak markets in harsh and hazardous and high voltage, will turn positive in second half, helped by acquisitions and price/cost Lighting – new construction, pockets of activity, but lumpy, LED component continues to increase Power is challenged, distribution down slightly – transmissions and substation, down LDD, challenging comps, some project deferrals although some may be pulled back and in 2H13 – business continues to soften, quoting activity is down o Continue to maintain price discipline is this business, could contribute to share shift in a competitive environment o Some continued inventory destocking, particularly in the North East region (should abate in the 3Q, since this is likely a Sandy impact) o Distribution business has been stronger which has contributed to the margins (better mix) Closed on continental deal in January Closed on Connector Manufacturing Company (CMC) in 2Q, $44m acquisition, extension to their grounding business This week, closed on small lighting deal Quarterly Detail – Bill Sperry, CFO Second quarter sales $801m, up 3%, driven mostly by acquisitions 5 different acquisitions contributing to this quarter Organic sales o Organic end markets tier, flat organic o Non-Resi – continue to wait for rebound in construction market, not there yet Bifurcation between private (growing a bit) and the public (no growth) Balance between markets is closer to 60/40 now, private to public, vs. 50/50 at the peak (believes this is healthier) Renovation and re-light is the strongest part of the Non-Resi segment o Industrial story is mixed Metal and mining down, oil and gas more favorable, the real drag is from high voltage test equipment (though inflecting) o Utilities – transmission is volatile 129 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry o Residential – latest data points had multifamily down and people trying to determine whether it was weather related - continue to see DD positives in the space, a bright spot o 50bps pick up in gross margin o Better higher margin products in the power business o Second driver was a little bit of pulling of price, and tailwinds from material cost side, productivity was balanced with inflation o On the S&A side, an increase to $140m, 3% increase, largely in line with sales o The dollar increase comes from acquisitions, still mindful of integration costs o Operating Profit, up 6% to $132m, 50bs pickup to 16.5%, driver of nearly all of the move on the gross line o Other expenses, up a little less than $1m, driven by FX o Tax rate, favorable by 40bps, 32.4% (R&D tax credit in 2013, not 2012) o Net income of $82m, up $6m, higher OP and taxes driving that o 6% increase to $1.37 on the EPS line, only modest share acquisition in the quarter Electrical o Sales up 5%, $565m, acquisitions adding 3% to that, volume adding 2% o Acquisitions - good activity, 4 different deals contributing to the quarter across harsh and hazardous, connector and weather proof boxes o Organic volume of 2% led by Resi (lighting up 13%) o 60bps higher on OP margins, $89mn, 15.7% o Benefited from price and material cost tailwind, productivity and inflation offsetting Power o 2% decline in sales to $237mn, but with 2% coming from acquisition of Trinetics, implies volume down 4%, vs. tough 15% 2012 comp o Customers face challenges Demand – impact of conservation of electricity Regulations – buffered by ability to get rates locally Input costs – dramatic swings in fuel prices, creates focus on generation fleet (gas vs. coal) o Lower distribution spending, transmissions large projects have been down since 2012 and that has effected sales o OP up 30bps to 18.2%, favorable product mix (absent large transmission) o Facility consolidation costs (closed two facilities, largely completed and a headwind to margin performance in 2Q) Cash flow improved slightly over prior year, driven by net income Working capital usage up a bit Capex up is positive from companies prospective, new product development and the need to keep that and productivity going forward 6-months Performance 2012 – $1.05bn sales OP margins down 20bps, first quarter drove this down – industrial mix EPS increase of 6% to $2.47 for the year today period Seem to be making money with no real market help, done through managing price/cost and good innovation Electrical - 4% growth, 3% from M&A, 1% from volume, same drivers as 2Q OP Margins flat at 13.9%, did well on pricing and productivity (as an offset) Power – flat sales, YTD 2012 was up 14%, flat against tough comps o Acquisitions +2%, volumes 1-%, FX -1% o $79mn of OP, 40bps decline in margin, driven by facility consolidation Cash flow – improvement of net income, usage of working capital, desirable increase in Capex On track to deliver 1x FCF Conv. for the year 130 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry WC at around 18% to 19%, prefer to see that around 18% o Inventory and payables will be a focus looking ahead Capital structure – debt to cap of 26%, capital is there for supporting business development and Capex 2013 Outlook By End Market o Resi: +15% sales growth (same as previous, favorable views from customers) o Non-Resi: not changing (1-3% sales growth) o Industrial: LSD, not a change (high voltage should inflect, good for volumes and margins) o Utilities: reduced outlook by 2ppts (range now at 0-2%) By Segment o Power – 2-4% sales growth o Electrical – 5-7% sales growth (4% from M&A, 1-3% organic) o Results in 1-3% organic outlook, 3% from M&A 4-6% total sales growth outlook 2013 Outlook – David Nord, CEO Top-line – 4-6% sales growth and 3ppts from acquisitions o Pipeline has been good, still more in the pipeline Likely at least one but potentially more in 2H, similar size range to historical deals o Margins +30bps, down from prior guidance, impact from early periods of acquisitions, to date this has been to helped by price cost and productivity, but could get more from productivity o There is an element of easy comps in the second half of the year o Volume uncertainty leaves them even more focused on cost management o So far through July, orders are OK – not supporting a big uptick in the third quarter, but tough to draw conclusions from due to holiday schedules Q&A Size of recent deals: CMC adds about 1% to the second half of the year ($44m purchase price), lighting deal was mid-teens Utilities growth outlook: moving off peak levels, big drop-off in quoting activity which was anticipated, so this should turn down (still at high levels but not at growth levels) Consolidation charges and payback – small amount in the third quarter, not explicit about the payback yet, but attractive in companies eyes Sales outlook vs. 30bps margin expansion, what are puts in takes on second half margin - this is volume dependent (4% growth would be more challenging), second quarter margin helped by mix, which is not consistent or continual (i.e. lighting growth wouldn’t really be an incremental margin contributor), its also a difficult pricing environment (this is what they are concerned about, believing competitors are unpredictable) Distribution benefits from new construction in residential – still not seeing impact this quarter or anticipating much this year, maybe next year, once they outgrow install infrastructure it should drive benefits in distribution business Construction breakout - Resi lighting up 13% - Non-Resi up 6% revenues, full platform up 8% Inflection in high voltage – high voltage is less data reliant, long-lead time, so they use backlog, which helps in determining turnaround. Expect the second half will largely offset first half declines (flat on the year) 131 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Areas where they may look to cut more costs given outlook – nowhere in particular, its more broad based, meaning cost and spending discipline – other actions would only really occur if the market significantly slowed Capital allocation update – not much share repo this quarter ($7mn) – acquisitions remain as the big area of focus (9 companies in last two years, so average of 4.5 and adding 3ppts sales per year). That is a ramp up over the years prior, hopefully similar trend going forward. Impact on margins from acquisitions – should be more trued up to corporate margins rates after a year International performance – South America power business contracted along with the total business Backlog vs. orders in high voltage –activity is improving as well New Non-Resi Outlook – still don’t see the inflection, retained outlook Transmission lead time between quotes and project – break it up into MRO (more regular order pattern and shipping, more book to bill) and large project (longer lead time, could be building up orders and seeing 3mo-1yr lead time) Canada as an opportunity in transmission – most activity in this arena is in Canada, but HUBB market share there lags total US market share. 132 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry HUBb Summary of Guidance Exhibit 89 HUBb – 2013 Guidance (Yellow denotes changes) 2013e HUBb Guidance Comments Total Revenue Growth 4 - 6% Embeds 1-3% organic growth and 3ppts contribution from M&A. (3-5% previously) Expect volume growth to be more weighted toward 2H13 due to anticipated market strengthening and more favorable comps. Revenue Growth by Segment: Electrical Up 2 to 4% Acquisitions contribute 2% with organic growth flat to +2 driven by (up 3-5% previously) strong international partially offset by flattish distribution and transmission down slightly Power Up 5 to 7% Acquisitions expected to contribute 4ppts to growth with organic up 1- (Up 4-6% previously) 3%. Slow growth in non-resi with industrial mixed and residential strong. Growth by End Market: Resi Up 15% Some choppiness on recent multi-family indicators, but data from customers still endorse double digit view. Non-Resi Up 1 - 3% Positive for private non-resi, slightly down for public with the growth helped by renovation and relighting. Industrial Up 0 - 2% High voltage will start to inflect in 3Q Utility Flat to 2% Utilities being impacted by dramatic swings in input prices, and (Up 2-4% previously) regulatory challenges on pricing (FERC looking to reduce rate of returns). Transmission down from high levels of 2012. Have seen some project deferrals in 1H that might be pulled back in 2H, but quoting activity is down dramatically. Operating Margins Up 30bps Acquisitions will not be accretive to overall margin. Expansion driven (Up 40bps previously) by volume leverage, productivity gains and modestly lower pension expense. Expect price/cost to be neutral to 50bps tailwind (expect slightly more challenging pricing environment). Tax Rate 31.5% FCF Conversion 100% Source: Company Data, 133 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry This page has been intentionally left blank 134 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Ingersoll-Rand 135 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry IR Question Bank Outlook How is business trending relative to your guidance for 2% to +4% Y/Y revenue growth in 3Q13? What level of growth is embedded in your forecast for each of your businesses? What trends are you seeing by geography and major business? Have the momentum from strong resi HVAC growth in 2Q carried into the quarter? Has EM volatility had any impact on the outlook? What are the major upside and downside risks to your outlook for 1-4% core revenue growth in 2013, by business and geography? Are you seeing any signs of recovery in EMEA, given that this is baked into your revenue growth outlook? Do you maintain the view that Non-Resi Construction is unlikely to see a recovery in 2H13 and are you seeing any break in Commercial/Industrial and Institutional trends? Are you still confident in guidance for up low-single-digit in China for the full year? Do you still expect US Thermoking to decelerate in 2H? Any you seeing any stability in Air demand? What is your early read of 2014? Would you expect it to return into your 4-6% planning zone? Your 80-110bps longer-term margin plan is based on 4-6% organic growth; how does this look in a world of low-single digit core growth? How is this influenced by negative mix (TK, Security), and lower price/ cost benefits? How does price/cost look at current price and raw material levels vs; expectation for 50bps? How are productivity initiatives trending? Given the changes to your organic growth targets in 2Q, can you provide an update on your margin targets by segment? Do you still feel confident in +50bps target for Industrial given 1H weakness? Do you still expect a 23% tax rate for 3Q and the full year? What are the puts and takes on the tax rate in 2013 and beyond? Could the spin put upward pressure on the tax rate though 2014, particularly for the Security Spinco? Portfolio Changes and Capital Allocation Do you believe that the portfolio/ capital structure plan set forth in December is in its final form, or might we see major additional actions over the next 12-24 months? Are you happy with the IR NewCo portfolio as it stands, or could there be additional disposals, e.g. Club Car? How did you come to the conclusion that 2.0-2.5x and 2.75-3.25x gross debt/ EBITDA are the right target leverage ratios for “New IR” and Allegion, respectively? Do you expect to remain in these zones going forward? Are you still on track to to complete your entire $2bn repurchase authorization by 1Q14 and how much do you expect to complete pre-spin? What is your early view on the share repurchases vs. M&A mix beyond the $2bn program – could we see additional share repurchases in 2H14? Do you still expect to reach a dividend payout ratio comparable to peers (~30%) by year-end 2013? Productivity Initiatives Please run through where IR is currently on productivity initiatives by businesses – which are leading and lagging? What are the major barriers to running faster? Can you provide some examples of successes and challenges in these initiatives? Is there any evidence that the margin differential vs. Carrier, Goodman, Atlas Copco etc is being narrowed in businesses where lean and supply chain initiatives are most advanced? Can we run through the major branches of your productivity initiatives – footprint reduction, value stream productivity, supply chain excellence and ERP implementation? Where are you in each stage of these processes? What have been the successes and challenges to date? How has the involvement of Trian changed/ stepped up your margin efforts, if at all? 136 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry How are you tracking on your value stream productivity initiatives – are you still on track with your year-end 2012 targets (32 value streams in 2013 covering 40% of the cost base versus 24 and 24% at the end of 2012)? How are you tracking vs. 40%+ reduction in cycle time, 66% past due days, and 2.5ppts margin improvement for value streams completed during 2012? What quality and supply chain management changes have you initiated and what need to implement to effect further organizational improvement? Do you still expect this program to run through 2016? Can you provide an update on your centralized sourcing initiatives? What have you achieved in terms of supplier rationalization and unit cost decreases? What are your goals and cost saving targets for low cost country sourcing? To what extent are you in-sourcing manufacturing? What opportunities do you see in IT system consolidation? Where are the major areas of improvement, by business and geography? How does the Oracle system phase in and how do cost and capex investments phase through 2013-2017? What sort of payback should we model? Management How much progress has been made in identifying a successor to CFO Steve Shawley? What qualities in the candidate are you looking for and would you expect this to be an internal or external hire? Do you still expect to have made the transition by year-end? To what extent have margin targets been included in annual bonus and LTIP programs? Have these margin targets (previously 2ppts p.a.) changed internally since you revised your externally communicated productivity plan? Miscellaneous What is the latest on the recent IRS ruling on disallowing the deductibility of prior interest expense? The 2002 liability came in above your prior range, and the 2003/2006 is near the top-end of your estimates. In your view, what’s surprised you during the examination process that drove the increase above your estimates ($665m for the ‘03/06 tax years vs. $400 – 600m originally)? Do you anticipate additional liabilities for the 2006+ tax years? What is the next stage of this process and could be there a settlement on the horizon? What is the status of subsequent tax filings? To what extent are you reserved for this issue? How is Hussmann performing and what changes have been implemented by CD&R to improve performance? Do you believe this business is still losing share to Hill Phoenix and if so, how do you plan to address this issue? When might you seek to monetize that investment? Can you provide an update on the $0.50-$0.60 of spin-related EPS impact and provide color on different buckets (restructuring, debt re-financing, advisory fees)? Do you still expect to incur 25c during 3Q13? Climate Solutions Trends & Outlook: Your full year guidance (+1 to 3% vs. +5% reported in 1Q) is predicated on a strong recovery in NA and Asia comm. HVAC. Can you discuss recent trends and whether your outlook has changed since 2Q earnings? What is the early read on the 2014 outlook? Trane Commercial: How is bidding and quoting activity trending QTD, and how does this compare with low single digit growth seen during 2Q13? How do trends vary by geography? Have you seen NA booking trends tick back up after the decline in 2Q? How does that split between equipment and service – any signs of stability in retrofit? What are you seeing in Applied (weak in 2Q) vs. Unitary (strong) markets; Equipment vs. Service? Where are Trane margins, and what level of incremental margins should we model? How are product quality and warranty costs trending? How does the new product pipeline look? How is market share trending, specifically vs. Carrier and JCI? 137 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Thermo King: Can you comment on QTD trends within the US and European Transport markets – do you still expect TK revenues to show moderate growth in NA and mid-single digit declines in Europe during 2013? All in, what level of growth do you expect to see in 3Q13 and 2013? What are you seeing in Truck vs. Bus vs. Container? What is the outlook for Container – do you expect to see more customers vertically integrating in this market? Where are TK margins currently and would you expect to benefit from positive mix during 2H13 Margins: Can you break out your forecasted 50bps projected margin expansion in 2013 between volume, price, mix and productivity? Specifically, can you comment on the sensitivity of the margin guidance to volume? What was your price/cost benefit in 1H, and how do you see that trending in 2N and 2014? Can you comment on your expectations for HVAC and TK margins in 2013? What pricing actions are we seeing in the market, if any? What has caused the sharp divergence in performance between Trane and Carrier margins (15-16%) over past 3 years? Residential Solutions QTD Trends & Outlook: How is 3Q tracking relative to plan? Given strength in 2Q (+7%) and positive data on housing starts and from HARDI, are you still comfortable with your revise reduced full-year guidance (+4 to 6% ex. product line transfer)? What are you observing in terms of mix trends for Ingersoll and the market as a whole? What is your base case assumption for volume and mix in 2013? What are you seeing in terms of distributor inventory levels? Have you put any pricing increases into effect? R-HVAC Mix. How is 13SEER and R22 mix trending vs. plan? Do you expect mix to stabilize during 2H13 given easier comps? How much of your underperformance vs., market can be attributed to negative mix in the market i.e. how is your share trending in >15SEER product? Can you comment on how Ameristar is performing vs. expectations? Residential Security: R-Security was strong in 2Q with a +low-teens comp. Can you parse out the drivers of the upside? I.e., easing comps, the new builder channel in S. America, big box revs? Can you comment on longer-term share in the market? Have you recently been hurt by big box inventory reductions? How is order activity trending in 3Q and what is embedded in your 2013 guidance for this business? Can you comment on your Home Automation strategy? How do you intend to keep management focused on performance during the spin process? Margins: Can you break out the 200bps projected margin expansion in 2013 between volume, price, mix and productivity? Can you comment on your expectations for HVAC vs. Security margins in 2013? Can R-HVAC be a low- /mid-teens margin business if the US unitary market returns to the 7m shipment level? What pricing actions are we seeing in the market, if any? Do you expect mix to become a tailwind in 2013? What actions are you taking on low cost material sourcing and manufacturing? Industrial Technologies QTD Trends: How are Air & Productivity sales trending by geography? Have you seen a pickup commensurate with accelerating industrial production trends given 2Q weakness (Air down MSD)? How is your market share trending vs. major comps such as Atlas Copco and GDI? Are you still seeing mix headwinds (shift to Tools in 2Q)? Club Car. How is Club Car trending QTD? What is your expectation for the rest of the year? What’s the lead time on sales? Where are margins tracking? How strategic is this business? What is the tax basis? How do CC margins compare to fleet average? New Product Introduction: Can you comment on how new product differs to legacy product, in terms of common platforms, parts etc? What market share and margin improvement are you seeing on new product? Why is this product superior to that of your competitors? Can you comment on your progress in the more profitable oil-free segment? 138 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Margins: Do you still feel comfortable with ~50bps projected margin expansion in 2013 between volume, price, mix and productivity given YTD weakness? Why do you believe there is such a significant margin gap between your Air/ Productivity business and that of Atlas Copco’s Compressor Technique segment (mid-20s) and other competitors (>20%)? Is there a structural reason why you will not be able to close this gap over time? Can you continue to expand margin in a low single digit organic growth environment? Allegion Commercial Security: Can you comment on QTD order growth within Security in light of the order rebound in 2Q (+LSD vs. negative in 1Q)? What is embedded in your 2Q13 guidance for this segment? Are you seeing any signs of stabilization in US Institutional and European non-residential markets? What is your expectation for Non-Resi recovery in 2013? Are you seeing signs of project deferrals in China? How do you believe your share is trending this quarter? What’s causing the order volatility the last several quarters (bookings up MDD in 4Q12, down MSD in 1Q13, +MSD in 2Q13)? Residential Security: R-Security was strong in 2Q with a +low-teens comp. Can you parse out the drivers of the upside? I.e., easing comps, the new builder channel in S. America, big box revs? Can you comment on longer-term share in the market? Have you recently been hurt by big box inventory reductions? How is order activity trending in 3Q and what is embedded in your 2013 guidance for this business? Can you comment on your Home Automation strategy? How do you intend to keep management focused on performance during the spin process? Electronic Security: Why is IR’s mix of electronic security (~20% sales) so much lower than the overall market, and is this a focus for growth? Does becoming a standalone company help in terms of innovation and speed to market? Did you disinvest during the downturn and is there a need to ramp up on sales & marketing? Could you build a larger electronic security platform organically, or would you need to do via acquisition? Long-term Strategy: Can you comment on broader strategic priorities for Allegion? What are the opportunities for the international mix to growth beyond the current 28%? Do you think the standalone structure is conducive for accelerating international growth? What growth markets are you targeting for increased investment? Do you see scope for Allegion to growth via acquisition, or do you view it as a cash return vehicle longer-term? What are the puts and takes of maintaining an investment grade credit rating? Are you comfortable with leveraging the business beyond the ~3x target? Margins:? What are the opportunities to increase Americas operating margins beyond the current 26%? Do you believe you have invested adequately in the US business over the past five years? How leveragable do you think the cost structure is to a construction rebound? Can you decompose the YTD margin performance in the Americas between volume, mix and price, and cost? Are there any structural reasons why margins in EMEIA (3.3% ex. Restructuring in 2012) and Asia Pac (7.8% in 2012) could not reach the level of the Americas? What is the geographic mix of production currently, and how would you characterize the opportunities to offshore production? Taxes: Why are taxes so much higher at Allegion (37.3% in 2012 vs. IR at ~20%) given Allegion will be domiciled in Ireland? 139 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry IR Company Background Exhibit 90 IR Revenue Breakdown by Geography, Cyclicality and End Market By End Market HVAC Club Car Spares / By Cyclicality By Geography 4% Service No Cycle North Air 16% Mid Cycle 17% America Compressor 18% s 62% 16% Residential HVAC Commercial 12% Security 12% Late Cycle 29% Latin Europe/ Transport Early Cycle Refrigeration 36% America Middle Commercial 13% East HVAC 6% Residential Asia 24% 18% Security 14% 3% Source: Company data, Morgan Stanley Research. Company Description Key Management Headquartered in Ireland (re-domiciled from Bermuda in 2009), Ingersoll Mike Lamach serves as Chairman (since June 2010), CEO (since Rand (NYSE: IR) provides products, services and solutions that address February 2010) and President (since February 2010) of Ingersoll Rand. customer needs around air quality and comfort, security, food Prior to this role he served as COO. Lamach joined Ingersoll Rand in transportation, and industrial productivity and efficiency. 2004 as President of Security Technologies. Steve Shawley serves as CFO. Shawley previously served as SVP and Ingersoll Rand’s largest end markets include HVAC/R, Commercial President of Climate Control Technologies. Steve plans to retire by year Construction, Transportation, Consumer and Residential, and products end 2013. are marketed through dealer/distributors, builders, and retail. As of FY12, Didier Teirlinck: President, Climate Solutions since 2009. Ingersoll Rand employed approximately 49,000 people globally. Robert Zafari: President, Industrial Technologies since 2010. Gary Michel: President, Residential Solutions since 2011. John Conover: President, Security Technologies since 2009. Exhibit 91 IR Detailed Segment Breakdown 2012 2012 % of Seg. Revs Op. Profits End Markets Revs Key Products & Services Key Brands Competitors Climate $7,409 $778 HVAC 74% Air conditioners, air clearners, heat pumps, humidifiers, Thermo King, Trane Johnson Controls, Solutions 53% 46% Truck/Trailer 17% furnaces, boilers, refrigeration systems, air handlers, coils Lennox, Carrier, Commercial 9% and condensers, building management systems. Rheem, York Refrigeration* Industrial $2,946 $463 General Industrial 84% Utility vehicles, golf vehicles, rough terrain vehicles, air Club Car, Ingersoll Rand, Atlas Copco, Technologies 21% 27% Leisure 16% compressors & accessories, material handling equipment, ARO Yamaha, fluid-handling equipment, air balancers, air treatment, Cushman, Harley- blowers, lubrication equipment. Davidson, Graco Residential $2,055 $116 HVAC 75% Air conditioners, air exchangers, air cleaners, heat pumps, American Standard, Goodman, Carrier, Solutions 15% 7% Fire & Security 25% furnaces, humidifiers, package heating and cooling systems, Schlage, Trane Lennox, Rheem, unitary systems, door locks, latches and locksets, electrical York, Nordyne security products, electronic access-control systems. Security $1,626 $336 Fire & Security 100% Door locks, latches and locksets, door closers and controls, CISA, LCN, Schlage, Von Stanley, Assa Technologies 12% 20% doors and door frames, electrical security products, electronic Duprin Abloy, Kaba, access-control systems, exit devices, biometric access Dorma control systems. Source: Morgan Stanley Research estimates, Company Information. 140 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry IR Key Financial Statistics Exhibit 92 Exhibit 93 IR – Organic Growth vs. EE/MI (1Q06/2Q13) IR – EPS Growth vs. EE/MI (1Q06/2Q13) Organic Grow th 180% 20% EE/MI Median 15% 130% 10% 80% 5% 0% 30% -5% -10% -20% -15% EPS Grow th -70% -20% EE/MI Median -25% -120% 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 Source: Company Data, Morgan Stanley Research Source: Company Data, Morgan Stanley Research estimates. Note: Ingersoll Rand reported EPS growth of -108.7% in 1Q09, of -175% in 1Q10, and of 601% in 1Q11. Exhibit 94 Exhibit 95 IR vs. EE/MI – Core Operating Margin (2006/13e) IR vs. EE/MI – Core Incremental OM (2006/13e) 18% Core Op.Margin 50% Core Incremental Op. Margin EE/MI Median EE/MI Median 16% 40% 30% 14% 20% 12% 10% 10% 0% 8% -10% 06 07 08 09 10 11 12 13 6% 20 20 20 20 20 20 20 20 2006 2007 2008 2009 2010 2011 2012 2013 Source: Company Data, Morgan Stanley Research estimates. Note: Ingersoll Rand registered a core incremental operating margin of 1418.1% in 2009. Source: Company Data, Morgan Stanley Research estimates Exhibit 96 Exhibit 97 IR vs. EE/MI – Revenue per Employee (2006/12) IR – Capital Allocation (2008/12 cumulative) 350 Revenue/Employee EE/MI Median Share 300 Repurchases 18% 250 200 Dividends 7% 150 Acquisitions 100 64% 50 Capex 11% 0 2006 2007 2008 2009 2010 2011 2012 Source: Company Data, Morgan Stanley Research Source: Company Data, Morgan Stanley Research 141 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry IR 2Q13 Earnings Call Transcript Opening Remarks – Mike Lamach, CEO Completed milestones related to security spin and debt offering Revenues were up 3% vs. ‘12 , ex-FX, top line performance above guidance range Revenues up in residential, climate and securities and industrial orders up 2% Adjusted EPS was $1.14, 6c above mid point guidance Better performance from operations delivered the upside to guidance Adjusted margin up 20bps y/y to 13% Operating Margins with corporate unallocated costs increased by 80bp Residential delivered 300bp improvement in margins, Security up 50bps Lower revenues a headwind for industrial in the quarter Corporate costs up due to higher benefit costs and increased investments in RIT transformation 11c from restructuring costs in the quarter Repurchased ~9mn shares ($480m), still plan to spend $2bn of authorized for FY $1.55bn debt offering in June at attractive interest rates and maturities Quarterly Detail – Steve Shawley, CFO Orders were up 2% on reported basis, up 1% ex-FX Climate orders up 4%, global commercial HVAC bookings were up LSD, industrial orders flat, Transport orders were up mid-teens, order growth in the Americas offset by lower bookings in Europe and Asia Residential bookings down 3% on comparable basis, result of improvements made in HVAC product delivery cycles over the past year Commercial Security order up 3% on comparable basis Total 2Q revenues up 3% on reported and ex-FX basis Climate revenues increased 5%, HVAC revenues up LSD and transport revenues up HSD Industrial revenues down 3%, Residential revenues up 7% on comparable basis Commercial security revenues were up 3% on a comparable basis Revenues were up 4% in America, while Europe and Asia down 1% ex-FX Negative mix and FX created a 50bp headwind to margin, productivity 50bps accretive, 70bps from price/cost Leverage was 21%, leverage in the sectors was 40% Operating ex-corporate increased adjusted margins by 80bps Climate o Revenues were $2.1b, up 5% reported and ex-FX o Commercial HVAC up LSD, down in the Americas but up in Europe and Asia o HVAC revenues were up in the Americas, Europe, ME and Asia o Commercial HVAC equipment revenues up MSD, while HVAC parts services solutions revenues were down slightly versus prior year Impacted by lower contracting revenues o ThermoKing up mid-teens o Adj. OP margin, 13.4%, 90bps higher than 2Q12, due to volume, productivity and pricing Industrial o Revenues were $763mn, down 3% on reported, 4% ex-FX o Air and productivity revenues were down MSD versus last year o Revenues in the Americas down slightly, Europe and Asia down low-teens. o Air and productivity orders down LSD o Higher orders in the Americas and Asia offset by lower orders in Europe 142 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry o OP Margin down 100bps, pricing and productivity more than offset by lower volumes and inflation Resi o Revenues were $713m, up 9% compared to last year, adjusted for product line move, up 7% o Residential HVAC revenues up MSD vs. last year. o Revenues for the residential security up low-teens o Increases in new builder channel and South America partially offset by lower big box revenues o Increases in new builder channel o OP Margins at 11.2%, up 330bps compared to 2012, pricing, volume and productivity more than offset inflation and adverse mix Security o Revenues were $399m, down 3% reported, up 3% adjusted for product line move o Americas up MSD, revenues down MSD in Europe, Up DD in Asia o Bookings up LSD o Op Margins 21.6%, up 50bps from last year Working capital of 3.5% of revenues YTD Cash Flow is $100mn higher than 1H12 Guidance – Mike Lamach, CEO Security spin still expected in 4Q Construction starts put in place trends shifted a little since prior guidance, total put in place outlook slightly lower and a mix change Commercial and industrial expected growth got a bit stronger, more than offset by lower institutional outlook Institutional markets expected to be down for the year by 5% vs. down 3% in the prior market forecast Commercial and industrial put in place raised from 8% to 9% Increases in bank and office buildings and retail support view of a stronger 2H vs. 1H in unitary HVAC Applied forecast was lower based on lower institutional outlook, overall Trane and commercial outlook slightly lower than prior Expect LSD growth in NA commercial HVAC Flat to LSD decline in North American commercial security NA truck/trailer markets flat on unit basis US Resi new construction shows growth R-22 lower % of market, expected to be down 20ppts vs. last year Asian HVAC expected to be flat o China, up LSD Good HVAC bookings progression Industrial saw softening in the quarter, China in particular, uptick did not occur as expected, adjusted outlook down accordingly Asian security should be up HSD for the year Outlook for Europe, ME and Africa, up slightly 2013 Guidance o Revenue outlook now $14.2-$14.4bn, $100mn reduction to mid point (1-3% growth) o Climate: +1-3% (same) o Industrial: -1% to +1% (from up 1%-4%) o Residential: 8%-10% reported, 4%-6% on comparable (same) o Security: down 3-4% on reported, up 1-2% on comparable basis (adjusting top end of revenue range down slightly to reflect lower upside forecast in 2H) 143 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry o Full EPS midpoint maintained, $3.50-$3.60 o 23% FY tax rate, excludes one time cost in restructuring o Expect FCF of $1.1bn 3Q13 Guidance o $3.65bn-$3.75bn, up 2-4% vs. 3Q12 o Adjusted EPS $1.07 – $1.12, assuming share count of 295m, and tax rate of 23% o One time cost expected to be 25c in the quarter Q&A EBIT Bridge Full Year – expect to see about 50bps coming from the difference between pricing and inflation. A slight increase in gross productivity in the back half of the year and a tame inflation environment. 40-60bps from net price and inflation in 3Q and 4Q. 1Q looks a little better from wage inflation. Mix in 2H – generally better than 1H – residential mix down of SEER leveling out. Bottoming of the average SEER rate. Good mix at ThermoKing. If there is a mix problem, it’s in the industrial sector, in addition to volume (down), it’s shifting to tools. European Commercial HVAC – doing business across entire region, low expectations in Western Europe were better than expected, solid booking in the ME. Unitary in EMEA up nicely due to new products and being more competitive. Climate solutions segment margin performance – Trane commercial has made new leverage highs over the last 3 years (plant consolidations, co-location of manufacturing, new product development, focus on service business). Both Trane and TK over 30% incremental margins should see a good run rate going forward. Better OP leverage out of TK in back half of the year. Climate outlook for full year – placed a bet on China, which was rewarded, inline for the industrial business. Commercial (HC, Hotels) saw a nice bookings growth. Europe strength helps. Despite good performance in unitary, it’s just not enough to overcome the institutional base. The $100m drop on revenue for the whole business, most comes from the industrial segment. China and Asia HVAC strength as a lead for Security – biggest China businesses are infrastructure related. Fastest growing business is hardware and more traditional mechanical and electronic security business. China order growth always been lumpy overall since it is based on timing and large infrastructure projects. Absolute price and price cost by segment – price was about 1ppt for the company (90bps), net 70bps. Positive across the board. Residential: 1.5pts, Security: 30bps, Climate: ~1pt from price, -20bps from inflation, Industrial: 70bps price, 50-60bps inflation. Climate Solutions margin outlook – 1H was influenced by Tier 4 engine conversion. ACT trailer forecast says market up ~8% for the year, suggesting activity will slow down in the second half, which is included in the forecast. TK outside of NA, surprisingly strong in truck/trailer in Europe, expecting that to moderate. Bus and container in the second half was mostly flat. Overall Margin (Pricing vs. Productivity vs. Investments) – more volume than expected and converted on it. Nice job around price and productivity, investments are one time and impact should continue in 3Q and 4Q. RemainCo margin expectations – no change for industrial, no change for climate, still working on Residential, will try to update the potential numbers late this fall and perhaps be more specific. 144 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Elevated investment spending – April went live with first phase of common system transformation, entire cost structure fell into an expense category while being implemented. 3Q will be phase two, so some expense will be capitalized and there will be spiking throughout he year phases move. Should peak out in 15 and abate in 2016. Higher D&A 2013-2016, and then net out in 2017-2018. Residential (mix and margin potential) – release of pent-up demand, better structure, new product, makes a 15% EBITDA margin in the cards in next couple of years Parts and Service (energy retrofit and upgrades in 2H) – scheduled and unscheduled is performing nicely, the part that’s lower is the current turnkey contracting business, which makes sense at a macro level because you find more customers opting for traditional procurement. Industrial margins over balance of the year – still looking for margin improvements (50bps is doable). Restructuring is a big part of what is going (lean, productivity, new product development), but looking for ways to protect the 50bps expansion plan. SEER mix - 13 SEER is about 60% of mix today and if you put in 14, it is about 15% (75% total) Thermo margins – best leverage days are still ahead, will be up Y/Y no matter what. Residential HVAC sensitivity to degree cooling days – the effect normalizes Q/Q over time, tough to trade stock on that and it won’t really move the needle from a company perspective. Inventory in the channel – inventory is down by design, strategy has been to have dealers inventory less, makes everyone more competitive, purposeful working down inventory and working on speed of fulfillment. Restructuring and spin costs split out – maybe $50m placeholder for now as far as restructuring unrelated to the split, will adjust this as needed (this is in the context of the RemainCo). Savings from debt refinance – paid off the 2013 and 2014 securities this past week will see interest benefits starting in late July through the end of the year, small impact to 2013. Margins – Security (relatively flat), Residential (2ppts improvement), Climate (no reason not to see 50bps improvement), Industrial (50bps improvement) 145 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry IR Summary of Guidance Exhibit 86 IR – Detailed FY13 Guidance (highlighted rows denote changes) 3Q13 Guidance FY13 Guidance Old FY13 Guidance New Note Headline EPS $1.07 - 1.12 $3.45 - 3.65 $3.50 - 3.60 Restructuring/ Spin Charges $0.10 $0.40 - 0.60 $0.50 - 0.60 Early retirement of debt charge $0.15 $0.15 GAAP EPS $0.82 - 0.87 $2.85 - 3.25 $2.75 - 2.95 Revenue $3.65 to 3.75bn $14.2 - 14.6bn $14.2 - 14.4bn Revenue growth Up 1 - 4% Up 1 - 4% FX contribution Organic growth EMEA revenue up slightly overall; APAC HVAC flat (China up LSD - MSD) and Security up HSD. Total commercial construction up 8%, institutional down 10% Tax Rate 23% 23% 23% Share Count ~295m ~300m ~298m Mgmt expects $900mn of repurchases for the full year, and $1.1b in 1Q14 Dividend $0.84/share Available Cash Flow $1.1bn $1.1bn Segment Guidance Organic growth by segment: Climate Up 1-3% Up 1-3% NA Commercial HVAC up LSD, NA truck trailer flat Y/Y Industrial Up 1-4% -1% to 1% Flat in US, down in Asia Residential Up 8-10% Up 8-10% Up 4-6% on comparabel basis Security Down 2-4% Down 3-4% Up 1-2% on comparable basis. Segment Margins: Climate Industrial Residential Security Source: Company Data 146 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Illinois Tool Works 147 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry ITW Question Bank Outlook How is 3Q tracking relative to your 1% core growth guidance? What are you seeing by major geography vs. trends seen in 2Q (NA -1%, Europe -1%, Asia +3%)? Are you seeing any inventory headwinds? If so, in which areas? What trends are you seeing in Equipment (vs. -4% in 2Q) and Consumables (vs. +1%)? Overall, how comfortable do you feel with 3Q guidance of $1.06-1.16 and 2013 guidance of $4.10-4.30? What is the typical seasonal step-up from 2Q to 3Q, and do you expect 3Q13 to be in-line with historical norm? Can you run through the upside and downside risks to your revised plan for -1 to +1% organic growth for 2013? How does your growth outlook by geography compare to the previous expectations (NA & APAC up 2-4%, Europe flat)? Where do you have the most/ least visibility? What are the puts and takes to your 60-100bps margin expansion outlook for 2013? You noted that simplification and strategic sourcing drove 60bps margin tailwind in 2Q13; what percentage of margin expansion in 2013 is expected to be driven by these initiatives? Can you provide more granularity here? Across your businesses, have you seen any major changes in pricing activity – either internally or competitive? How is price/ cost trending relative to the 50bps benefit achieved in 2Q13? What is your target into 2013? What sort of environment are you planning for in 2014? What do you see as the major puts and takes and in which divisions/end markets do you expect to see the greatest level of growth variance in Y/Y growth, both positively and negatively? Long-Term Outlook To what extent are you concerned by the lack of total revenue growth (1-3%) envisaged in the plan through 2017? Why is there so little variability in your core growth outlook of 3.5-5.5%, based on your planning scenario of 2-4% global industrial production growth? How confident are you that you can achieve >20% operating margins by 2017? How much of the 4ppts margin expansion is coming from organizational structure change, sourcing and divestment of lower margin BU’s (the discontinuation of $600m businesses in 1Q13 drove ~40bps margin tailwind; excluding Industrial Packaging from the portfolio would result in another 110bps margin benefit)? Where do you see the most opportunity for cost reduction – functional costs, material sourcing, ERP? You have called out $600-800m total savings from the three enterprise initiatives - can you quantify the potential savings by category; over what period of time will they be achieved and how much do you expect in 2014? What level of investment is required to capture these savings? Simplification The culture of ITW is unique and deeply embedded; how do you plan to keep the entrepreneurial, decentralized culture, while simultaneously employing many of the tools of a more centralized operating company (joint sourcing, common platforms)? What steps have you taken to reduce the number of divisions from ~800 to ~100? How much of this reduction was achieved via inorganic vs. organic means? How does this impact the reporting structure? How many divisions do you currently have and how many headcount reductions have you made? Do you expect to take any further actions – can you break this out in as much detail as possible? 148 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry What is the cost saving potential on the $11bn global procurement budget and how does this break out between enterprise-led spend (53% of total) and segment-led spend? What are the early savings from wave 1 implementation (logistics, energy, travel, communications, steel, fasteners)? How do cost savings phase in between waves 1-5 through 2012/17 and what scope do you have to accelerate this process? Portfolio Can you provide color on how the portfolio breaks out between Accelerated Growth (40%), Market Rate Growth (35%) and Commoditized (25%)? Why do you believe such a high proportion of your portfolio has become commoditized – was it a case of underinvestment? Where do you see the strongest competitive threats across the portfolio? Equally, where do you believe you have the best protection? Over what timeframe do you believe you can complete the divestment of the $600m non-core businesses that were moved to disc. operations? What percentage of the proceeds is expected to come into the US (and thus be available for repurchases)? Do you believe the portfolio rationalization process can be achieved without EPS dilution (recent Dec Surfaces deal resulted in 20c EPS dilution)? Can you provide an update on the strategic review of Industrial Packaging? Is the entire business up for sale? What structure of divestment is it likely to be (i.e. spin-off, asset sales, JV)? Have you received any interest in these assets? What are your estimated proceeds, and do you still expect 50% to come into the US? M&A You have noted that M&A is not a priority this year given your focus on the strategic initiatives. What would be a good placeholder for M&A spend during 2013/14 and what would be the associated annualized revenues? You have previously highlighted a number of focus areas for growth – EM, Automotive A/M, T&M, Electronics – can you comment on progress? Has your thinking in these areas changed in any material aspect as you undertook your portfolio review? Can you please provide an update on your M&A strategy going forward - do you plan to focus on larger deals going forward? Is it going to be a more centralized process, and do you need to build an enterprise level M&A department? Share Repurchases You have increased 2013 share repurchase forecast to at least $1bn ($650m YTD). How do you expect this to phase throughout the year? Do you see further upside potential to this target in light of asset disposals? How are you thinking about your $2.7bn overseas cash balance? What are your options – to what extent is this becoming a Board level conversation? Can you explain why some proceeds are stranded overseas when assets are sold e.g. Decorative Surfaces? Given your comment on 1Q13 conference call that “all options are on the table”, are you willing to lever up your balance sheet to ramp up share repurchase? How much flexibility do you have on leverage? How are your conversations with rating agencies? What is the ceiling on Debt/EBITDA without risking a credit rating agency downgrade? Miscellaneous Can you provide an update on the CFO search? What profile of candidates are you seeking? When would you hope to make an announcement? Can you comment on the relationship with Relation Investors? How active and granular is the discussion? 149 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry What is the division of responsibilities between Scott Santi, CEO and David Parry, vice-Chairman? What drove the re-segmentation? What does this tell us about how your capital allocation priorities are shifting? For example, does this signal a desire to do more Automotive OEM, Test & Measurement and Electronics acquisitions? How should we model income from Decorative Surfaces in 2014? Do you still expect flat income in 2013? What opportunities exist to reduce your tax rate from current ~29% level? Do you have any plans to increase your rate of overseas cash repatriation? Test & Measurement and Electronics Segment Growth: How are you tracking relative to 9% organic decline seen in 2Q? Do you still view 1-3% core growth as achievable in this segment for 2013? How do you see growth by vertical (T&M and Electronics) this year? T&M Trends: Can you comment on QTD trends by geography vs. 2% core decline during 2Q? What is the key driver of extreme Instron T&M sales volatility? Are you seeing any improvement in capital spending trends? Electronics Outlook: How is Electronics tracking by major vertical? When might you expect Electronics to return to positive growth? What are you seeing in terms of inventory trends? Margins: Where are T&M margins currently tracking vs. prior peak and trough levels? How much upside remains? To what extent is mix a factor? How much of a drag is Electronics on total segment margins, if any? What is normalized operating leverage in this segment? Portfolio: What does the movement of T&M into its own segment tell us about your growth ambitions in this space? Automotive OEM Segment Growth: How is 3Q trending vs. +12% core growth in 2Q? Given YTD outperformance (+8%), do you see upside to the high-end of your 5-7% organic growth outlook for FY13? OEM Production Outgrowth: What is your base case assumption for auto build rates in 2013 and to what extent do you believe you can continue to outgrow OEM production (+12% vs. +3% in 2Q13)? What is your current content per vehicle by region, and where can go over time? With which major OEMs have you gained the most share and what has driven this success? Should penetration rates broadly equalize over time? New Vehicle Launch Cycle: How will your revenues be impacted by the current (and continuing) new vehicle launch cycle – is this driving higher content per vehicle? What is your view on the long-term viability of electric vehicles? Margins: Can you quantify peak margins within this segment? Do you believe you can exceed prior peak in the current cycle, and if so, why? What is the mix impact of US vs. international? Polymers & Fluids Segment Growth: How is the segment currently trending vs. 4% organic decline in 2Q? Are you still looking for flat to 2% core decline in FY13? How does this outlook break down by major category: Polymers, Fluids, Auto Aftermarket? Polymers & Fluids Outlook: Polymers & Fluids sales remained very weak in 2Q, both down 4%; to what extent was this impacted by inventory headwinds and the exit from low margin SKUs? When might you expect P&F to return to positive growth? 150 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Auto A/M Trends: How are you tracking vs. 2% core decline in 2Q? What are you seeing by major geography? How material was the loss of product line with a retail customer referenced last quarter? What is your growth outlook for FY13? Margins: What is the impact of product line rationalization and favorable resin input costs – when do these anniversary? Are you seeing any signs of pricing pressure? What is normalized operating leverage in this segment? Portfolio and M&A: What is the rationale to combine the P&F and Auto A/M businesses – what synergies exist? How does the M&A pipeline look? Is recent weak revenue performance causing you to reassess the long-term growth potential in these markets? Food Equipment Trends by Geography: How is business trending relative to 1% core growth in 2Q13? Have you seen any signs of stabilization in international equipment sales (-7% in 2Q)? Has strength in North America (+5% in 2Q) continued into 3Q? Are you still targeting 1-3% core growth for 2013? What are your assumptions by geography and key end market (institutional, restaurant, convenience, lodging)? Equipment vs. Service mix: Service trends remained encouraging in 2Q (NA up 5%, International up 7%) – what is driving this performance? Are customers extending the life of their equipment? How does the 2013 outlook compare for Equipment vs. Service? Where can Services go as a percent of segment sales over time? Is this a higher margin business? Are you continuing to expand your Service footprint? Margins: FS margins appear to be on an upward path (+180bps in 2012; +300bps in 2Q13) despite anemic growth – is this Service mix? Where can margins go over time in this segment? What is normalized operating leverage? Portfolio: What was the strategic rationale behind the Gold Pattern acquisition ($90m revenue, acquired in 2Q13)? Would you have the appetite for a larger deal? Does it make sense to be a global Foodservice provider? Are you looking to drive further into the restaurant and lodging sectors – if so, how can this be achieved? Welding Growth Outlook: What is the outlook in your key welding markets? Have you seen any signs of improvement in North America heavy equipment? Are you seeing any signs of stabilization in international markets (-2% in 2Q)? What trends are you seeing in equipment vs. consumables? Do you still look for 4-6% core growth in 2013 (vs. -3% in 1H)? Margin Outlook: What drove the 60bps Y/Y margin expansion seen during 2Q13 despite flat organic growth – mix, restructuring benefits, pricing? Did the 1Q12 margin of 28% represent cyclical peak levels for this segment? Where is the ceiling on margins within this segment? What level of incremental margins would be a good assumption over the long-term? Competitive landscape: Have you seen, or do you expect to see, any significant changes in the competitive landscape within Welding following the acquisition of Charter by Colfax? Have you seen any major customer dislocation since the deal closed; have you gained share? Are you seeing more aggressive/ competitive Chinese welding competitors, both inside and outside of China? Construction Products Growth Outlook: Segment core growth in North America (+2% in 1H13) has lagged the general construction recovery. Do you expect this trend to continue into 2H13? Are you seeing improving trends in US as more construction workers are hired? How do trends compare between tools vs. consumables? Is Europe (-4% in 2Q) and Australia stabilizing? Do you still expect 1-3% core growth in 2013? 151 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Margins: Can we run through the 1ppt margin expansion seen during 2Q in more detail? Construction margins reached a record level of 14.5% in 2Q13 - where can margins go over time – do you have an explicit target? What is normalized operating leverage in this segment? Specialty Products Growth outlook: How are businesses trending QTD vs. 2% core growth in 2Q? Can you describe recent trends by end market (Appliances, Consumer Packaging) and by geography? Has strength in global packaging systems continued into 3Q? Do you still expect to deliver flat to 2% growth in 2013? What is your growth assumption for this segment over the long-term? Margins: Where are current margins trending vs. prior peak levels? What is normalized operating leverage? To what extent is mix a factor? Industrial Packaging Also refer to the Portfolio section for questions on the strategic review of Industrial Packaging Organic Growth Outlook: How is North America trending relative to 3% core decline in 2Q13? International sales improved to +1% in 2Q13 vs. -7% in 1Q – what drove this sequential improvement? Has this trend continued into 3Q? Are you still targeting -1% to +1% core growth in FY12? Would you expect a construction recovery to help given exposure to lumber and other building materials? Are you seeing any sign of pent-up demand on the Equipment side? Margins: Industrial Packaging margins contracted 60bps Q/Q in 2Q13 despite stronger volumes - what drove this – mix, raw materials? Do you expect the same level of impact in 2H13? Portfolio: Where are you in the process of the divestment? Have you identified a set of potential buyers? 152 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry ITW Company Background Exhibit 98 ITW Revenue Breakdown by Geography, Cyclicality and End Market Food Equipment Other By Geography Asia By End Market 10% 6% Late 12% By Cyclicality Construction Tools 10% Europe Australia& 10% Other Industrial 28% New - 21% zealand Electronics 5% Other NA 3% Early 7% Auto Industrial Packaging 27% Other 13% 5% 12% Truck/Trailer US 2% Welding Equipment Mid 43% Commercial 9% 63% Building Specialty Chemical 7% 7% Source: Company data, Morgan Stanley Research. Company Description Key Management Scott Santi serves as President (since Oct 2012) and CEO (since Nov Illinois Tool Works (NYSE: ITW) was founded in 1912 and incorporated in 2012) of ITW. Mr. Santi joined ITW in 1983 and has spent his entire 1915; the company is headquartered just outside of Chicago, Illinois. career with the company. ITW is a multinational manufacturer of a diversified range of products and Ron Kropp has served as Senior VP & CFO of ITW since 2009. He has equipment, with approximately 825 operations in 52 countries. These decided to resign in August 2013 and ITW is still in search for a replacement. businesses are internally reported as 60 operating segments, and have Segment CEOs: Timothy Gardner (Consumer Packaging), Craig been aggregated into eight external reportable segments. The company Hindman (Industrial Packaging), Roland Martel (Automotive, Appliance employed more than 60,000 people worldwide in 2010 with more than and Industrial), Steven Martindale (Test & Measurement & Electronics), half of its revenues generated outside of the United States. Sundaram Nagarajan (Welding), Christopher O’Herlihy (Food Equipment), Juan Valls (Performance Polymers & Fluids) Exhibit 99 ITW Detailed segment breakdown 2012e 2012e % of Seg. % of Seg % of Seg End Markets Products Product Type Geography Revs Profits Revenue Revenue Revenue $ 2,171 $88 Auto OEM/Tiers 85% Consumables 100% NA 47% Auto OEM Metal/plastic components, fasteners & assemblies for autos & light trucks; polyester 13% 15% General Industrial 7% EMEA 35% coatings, patch & repair products for the marine industry Other 8% APAC/Other 18% $ 2,396 $66 General Industrial 24% Industrial Packaging 15% 12% Primary Metals 23% Consumables 80% NA 48% Steel & plastic strapping and related tools & equipment; plastic stretch film & related Beverage & Food 14% Service & Parts 8% EMEA 34% equipment; paper & plastic products that protect goods in transit; metal jacketing & Construction 8% Equipment & Tools 12% APAC/Other 18% other insulation products. Paper Products 9% Other 22% $ 1,847 $56 General Industrial 33% Welding 11% 10% Energy 16% Consumables 40% NA 67% Shipbuilding 12% Service & Parts 7% EMEA 12% MRO 9% Arc welding equipment; metal arc welding consumables and related accessories; Equipment & Tools 53% APAC/Other 21% Commercial Construction 6% Primary Metals 4% Other 20% $ 1,939 $47 Food Institution & Restaurant 44% NA 52% Food Equipment Ware washing & cooking equipment, including ovens, ranges and broilers; 12% 8% Service 35% refrigeration equipment, including refrigerators, freezers and prep tables; food Service & Parts 35% EMEA 40% Food Retail 16% processing equipment, including slicers, mixers and scales; kitchen exhaust, Equipment & Tools 65% APAC/Other 8% ventilation and pollution control systems; food equipment MRO. Other 4% Construction $ 1,761 $57 Residential 46% Fasteners, anchors & related tools for wood, metal & concrete applications Consumables 84% NA 32% Products 11% 10% Renovation 30% applications; metal plate truss components & related equipment/software; packaged Service & Parts 3% EMEA 36% Commercial 24% hardware, fasteners, anchors & other products for retail. Equipment & Tools 13% APAC/Other 32% $ 2,071 $83 Auto A/M 39% Adhesives for industrial, construction and consumer purposes; chemical fluids which Polymers & Fluids 13% 15% General Industrial 19% clean or add lubrication to machines; epoxy and resin-based coating products for Consumables 98% NA 49% Construction 8% industrial applications; and pressure sensitive adhesives and components for Service & Parts 1% EMEA 29% MRO 10% telecommunications, electronics, medical and transportation applications; fluids, Equipment & Tools 1% APAC/Other 22% Other 24% polymers, fillers & putties for auto A/M. T&M and $ 2,299 $87 General Industrial 27% Electronics 14% 15% Electronics 27% Equip & software for T&M of materials & structures; metal solder materials for PC Consumables 34% NA 41% Auto OEM & Tiers 6% board fabrication; equipment and services for microelectronics assembly; electronic Service & Parts 12% EMEA 21% Energy 5% components and component packaging; and airport ground support equipment. Equipment & Tools 54% APAC/Other 38% Other 35% $ 1,871 $89 Food & Beverage 27% Plastic reclosable bags& packaging for consumer storage; plastic consumables that Specialty Products 11% 16% Truck Remanufacturing 16% multi-pack cans/bottles and related equip; plastic and metal fasteners & components Consumables 59% NA 56% General Industrial 16% for appliances, furniture & industrial uses; swabs, wipes & mats for clean room usage; Service & Parts 11% EMEA 29% Consumer Durables 12% foil, film & related equip to decorate consumer products; product coding & marking Equipment & Tools 30% APAC/Other 15% equip; paint spray & adhesive dispensing equip; line integration, conveyor systems & Airlines 4% Other 25% line automation for F&B. Source: Morgan Stanley, Company Information. 153 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry ITW Key Financial Statistics Exhibit 100 Exhibit 101 ITW – Organic Growth vs. EE/MI (1Q06/2Q13) ITW – EPS Growth vs. EE/MI (1Q06/2Q13) Organic Grow th 125% EPS Grow th 15% EE/MI Median EE/MI Median 100% 10% 75% 5% 50% 0% 25% -5% -10% 0% -15% -25% -20% -50% -25% -75% 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 Source: Company Data, Morgan Stanley Research Source: Company Data, Morgan Stanley Research estimates. Note: Illinois Tool Works registered an EPS growth of 189% in 1Q10. Exhibit 102 Exhibit 103 ITW vs. EE/MI – Core Operating Margin (2006/13e) ITW vs. EE/MI – Core Incremental OM (2006/13e) 20% 50% Core Op.Margin Core Incremental Op. Margin EE/MI Median EE/MI Median 40% 18% 30% 16% 20% 14% 10% 12% 0% 10% -10% 8% -20% 06 07 08 09 00 01 02 03 20 20 20 20 21 21 21 21 6% 2006 2007 2008 2009 2010 2011 2012 2013 Source: Company Data, Morgan Stanley Research. Note: 2012 core incremental margin is 357.5% in 2012. Source: Company Data, Morgan Stanley Research Exhibit 104 Exhibit 105 ITW vs. EE/MI – Revenue per Employee (2006/12) ITW – Capital Allocation (2008/12 cumulative) 310 Revenue/Employee EE/MI Median Acquisitions 290 Share 31% Repurchases 270 34% 250 230 Capex 210 12% Dividends 190 24% 2006 2007 2008 2009 2010 2011 2012 Source: Company Data, Morgan Stanley Research Source: Company Data, Morgan Stanley Research 154 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry ITW 2Q13 Earnings Call Transcript . Opening Remarks – Scott Santi (CEO) Margin improvement offset by lower than expected revenue growth, delivering EPS at guidance mid-point. Organic revenue flat Y/Y, 100bps below the company’s original expectation, due to softer demand in NA IP and challenging comps in Electronics. NA organic revenue down 1%. Auto OEM continued to benefit from product development and customer penetration. OM of 17.4% up 40bps Y/Y, driven by 60bps contribution from Enterprise initiatives. Maintained full year EPS guidance on operating basis, but adjusted down EPS guidance to account for 5c pension charge in 2Q. EPS of $1.03, or $1.08 adjusted for pension charge. Quarterly Details – Ron Kropp (CFO) 2Q13 included $34m pension settlement charge, primarily due to higher lump sum pension payments related to the exit of Dec Surfaces employees from ITW pension plan. Not expecting any significant impact for the rest of the year. 2Q12 comparison excludes Dec Surfaces results. 2Q13 Highlights: o Revenues of $4,219m, up 1%, M&A contributed 1ppt. o Operating income of $736m, up $26m Y/Y, ex-$34m pension settlement charge, o OM of 17.4% ex-items, up 40bps Y/Y. o EPS of $1.03 or $1.08 adjusted for pension charge. o Organic revenue was flat, with NA down 1%; NA would have grown 1.7% ex-Electronics Assembly. Int’l up 1%, EU down only 1%, while APAC up 2.6%, led by China and India. Global equipment sales were down 4%, while consumer sales grew 1%. o Margins of 17.4% up 40bps Y/Y Base biz up 100bps, driven Enterprise initiatives drove 60bps margin expansion (largely Simplification, partly strategic sourcing). Price/cost added 50bps 2Q restructuring expenses of $38m, $25m higher Y/Y, 60bps headwind to margins. o Trade receivables 62 days, slightly up Y/Y o Adj. ROIC of 16.1%, up 70bps Y/Y. ROIC continued to track towards 20% 2017 target. o CFOA of $509m, CapEx of $89m. o FCF of $409m, up 35% Y/Y, representing 119% conversion. Continue to target 100% conversion in FY13. Invested Capital o Continued to focus on organic investment, especially key enterprise initiatives. o Dividends payment of $171m YTD, >2% dividend yield. o Repurchased $310m shares in 2Q, ~$700m YTD. Increased full year buyback target to $1bn+ vs. $850m+ previously. Will also use US after tax proceeds from divestitures to repurchase shares. $1.2bn remains in the authorized program. o Acquired $174m annualized revenue for $95m YTD. Bought a Chinese food equipment company and a EU consumer packaging supplier in 2Q. Total debt/EBITDA ratio of 1.5x. Segment Details – John Brooklier (Investor Relations) 2Q13 total revenue grew 1%, organic flat - NA down 1% organic, Int’l up 1%, EMEA down 1%, APAC up 3% (China up 13.5%, India up DD and Australia/NZ up 2.1%), Brazil up 19%. Total company organic growth would have been 130bps higher assuming flat core revenue in T&M and Electronics. 155 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry T&M and Electronics o Organic down 9.1% o WW T&M down 2%, as demand for capital equipment continued to be weak, particularly in NA. o Electronics down 16%, due to difficult comps and softness in the electronics assembly biz (-38%). 3Q will also be a challenging quarter due to large order from one OEM customer in 3Q12. o OM down 200bps Auto OEM o Organic up 11.6%, outpacing global auto production growth of 3%. Strength driven by new product innovation and penetration gains. o NA organic revenues up 7% vs. auto production growth of 6% o International up 16% Europe up 11%, outperforming auto build growth of 1%. APAC up 21%, with China up 40% (vs. auto production growth of 11%) o OM up 70bps Y/Y Polymers & Fluids o Organic down 3.6%. Expecting PLS impact to diminish throughout the year. o WW Polymers & Hygiene down 4%, due to continued product line simplification. Expects comps to ease in 2H14 o WW Fluids down 4% o Auto A/M down 2%, driven by PLS and loss of a key customer. o OM up 150bps Food Equipment o Organic up 1.4%, with improvement in NA offset by continued weakness in EU o NA organic up 5% Equipment up 4%, higher cooking revenue from customers in restaurants, lodging, nursing facilities and schools. Service up 5% o International down 2% Equipment down 7% organic, due to weak demand for cooking & refrigeration in France, Italy and UK. Service up 7% o OM up 230bps Y/Y Welding o Organic flat o NA up 1%, driven by new product launches for commercial welding (MRO and small construction customers) o International down 2%, APAC remains challenging (repositioning the portfolio from ship building to O&G and infrastructure), both in Asia and Australia. o OM up 60bps Construction Products o Organic revenues largely flat. o NA up 2%, growth in resi & renovation offset by continued weakness in commercial. Resi up 2% Renovation 8% Commercial down 2%, softness in metal and PLS activities. o International down 1% EU down 4% vs. -10% in 1Q. APAC, +3% vs. -1% in 1Q. o OM up 40bps 156 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Specialty Products o Organic up 1.6% o Consumer packaging up 2%, driven by global packaging systems growth (strong demand for warehouse automation, up 12% in ground support). o Appliance down 4% o OM up 40bps Industrial Packaging o Organic down 1% o NA down 3%, due to moderating IP and softness in F&B market o International up 1%, first positive growth since 4Q11. o OM down 80bps Outlook Summary – Ron Kropp (CFO) FY13 forecast o EPS of $4.10-4.30 vs. $4.15-4.35 previously, down 5c due to pension settlement charge. o Revenue growth of (0.5-2.5% vs. 2-4% previously), -1% to +1% organic growth. o Mid point of EPS guidance up 14% Y/Y o OM unchanged at 16.9-17.3% 3Q13 forecast o EPS of $1.06-1.16; revenue up 3-5% o Midpoint of range up 9% Y/Y o Restructuring of $40-45m Q&A FY13 guidance: the only change in FY EPS guidance was 5c pension settlement charge. T&M: Quoting activity remains good in the T&M space, while Electronics continued to be weak. Also saw some customer hesitation when making capital investment, but expect demand trends to improve as the overall market recovers. Auto OEM: mgmt believes it is well positioned to drive solid growth in the next few years, with benefits from new platforms launches. Don’t expect big change in auto production. Given the value proposition of its products, the company also believes its ~20% segment margin is sustainable. International Industrial Packaging: international upside was mainly driven by India and China, while EU was still down modestly. Equipment demand was still relatively sluggish in 2Q. Food Equip was solid, while Welding continued to see moderated growth. Sequentially, trends have improved. Construction: NA commercial construction growth has largely been in-line with the overall market. Enterprise initiatives had 60bps benefits in 2Q, and mgmt expects to see continued sequential ramp-up, suggesting larger impact in 3Q vs. 2Q. NA Welding: heavy equipment demand was softer than O&G, particularly on the new equipment side, although mgmt is not projecting any significant decline at this point. Europe: Mgmt has relative confidence that Europe has bottomed, but not calling for a big recovery. Expect the auto biz to continue to ramp up, and will watch the other biz closely. European construction came in line with expectation. 157 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Food equipment margin expansion: price/cost drove 80bps, enterprise initiatives added 70bps, overhead control added 30bps, and also favorable mix of higher service revenue. 2H13 margin expansion: expecting 2H margins largely in line with 2Q13 level, with benefits from enterprise initiatives partly offset by higher restructuring costs. 3Q margin comps will be tougher, but expect to see substantial Y/Y improvement in 4Q. Auto OEM outperformance: ITW has been focusing on major global OEMs, it is also seeing increasing demand for higher quality products in China, which drives stronger demand for ITW products. Enterprise initiatives progress update: around 15% done with BSS and is in the very early stage of strategic sourcing. Guidance: 3Q13 guidance includes 1% organic growth and 2ppts M&A contribution. 2Q-end share count was 447m. Full year organic growth guidance was lowered by 1ppt, driven by both NA and the International markets. Increased repurchase target by $150m, with upside mostly expected in 4Q (minimal EPS impact). Expecting restructuring expenses in 2H to be $20m higher Y/Y and slightly up on a Y/Y basis in 2014. Food equipment acquisition: Strategy in the food market is mainly to driven innovation based organic growth. The Chinese food equipment acquisition brought local R&D capability and increased ITW’s scale in China. Acquisition going forward will focus on biz with differentiated technology across the board. YTD, the company has acquired a Welding biz in Europe and also some consumer packaging biz. Welding: mgmt don’t’ believe ITW has lost share in NA and the 2Q weakness was mainly driven by weak end market demand. Is Electronics a core biz? ITW has been very selective in terms of which spaces it wants to play in the Electronics market. The biz is also accretive to overall margins (high-teens), so mgmt still consider Electronics as a core part of ITW’s portfolio. Pricing: put in place price increases in April and does not expect any further pricing action in 2013. 158 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry ITW Summary of Guidance Exhibit 106 ITW 3Q13 & FY13 Guidance Guidance Summary 3Q13 FY13 Old FY13 New Change (%) Total Revenue Growth Up 3-5% 2-4% Up 0.5-2.5% Total growth on proforma basis Organic Revenue Growth 1% 0-2% Down 1% - up 1% Down 1ppt OM 16.9-17.3% 16.9-17.3% Unchanged Restructuring $40-45m $120-135m $120-135m $130m driven by Business Simplification, 5c EPS headwind Tax Rate 28.5-29.5% 28.5-29.5% Unchanged EPS $1.06-1.16 $4.15-4.35 $4.10-4.30 Includes 5c one-time gain in 1Q and 5c pension settlement charge in 2Q Share Repurchases $850m+ $1bn+ Up $250m EPS Bridge 2012 Adj. EPS (Proforma) $3.70 $3.70 Base Business $0.32 $0.32 ~50% driven by Enterprise Initiatives Acquisitions/ Divestitures $0.02 $0.02 Restructuring ($0.05) ($0.05) Pension settlement charge - ($0.05) Non-Operating $0.03 $0.03 Taxes $0.05 $0.05 Shares $0.18 $0.18 2013 EPS Forecast $4.25 $4.20 Organic growth by segment Industrial Packaging -1% to 1% T&M and Electronics 1-3% Automotive OEM 5-7% Polymers & Fluids -2% to flat Food Equipment 1-3% Construction Products 1-3% Welding 4-6% Polymers & Fluids flat to 2% Source: Company Data, Morgan Stanley Research 159 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry This page has been intentionally left blank 160 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Lennox International 161 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry LII Question Bank QTD Trends and 2013 guidance What have you seen within your key end markets QTD (R-HVAC, C-HVAC, Refrigeration, Service) and how does this compare to 2Q results? Can you provide an update on how the institutional and commercial end markets are trending QTD? How is Non-Resi trending in Europe? Are you seeing any softening in demand through the US homebuilder channel (+13% during 2Q) commensurate with recent macro data? What is your current view of inventory levels in the market (distributors, big box, etc)? Are there any divergent mix trends vs. 2Q? Are you seeing any differences between your internal and external dealers? 2Q revenue was again strong (+9%) and you lifted your revenue estimates for the year to 6-8% (vs. 3-6%). Can you comment on your expectations for share gains vs. market improvement given that most are calling for a markedly stronger 2H? Your 2013 guidance implies incremental margins of nearly 35% - what gives you the confidence that you can deliver this level of operating leverage since this has not been done since the days of the housing bubble? What are the key puts and takes that can drive this performance? Are you still expecting to capture $20m of cost savings during 2H13 – are there any takes from that target? FCF Allocation How do you feel about the portfolio post-Hearth Products and Service Experts divestitures? Is there any more work to be done here? You have mentioned a broad appetite for acquisitions across the portfolio ($100-$150m deals in the Refrigeration, Commercial Service, Unitary NA HVAC and Resi/Light Commercial) – can you comment on the M&A pipeline as it stands and on the sort of multiples you are seeing in the space? Are you prepared to be a consolidator in the residential HVAC market? Do you view JCI as a buyer or seller in this market? How should we think about the flex in the guidance for $100m of share repurchases? There’s plenty of room in your authorization ($388m at end of 2Q13). Do you have a target level of balance sheet leverage? How do you expect to balance FCF allocation between M&A, share repos, and dividends (increased by 20% in 2Q) over the next several years? Pricing You increased your estimate for pricing benefits for the full year to $30m (vs. $20m prior), which is being helped by lower commodities ($15m benefit vs. $10m prior) - can you provide an update on what you’re seeing as far as pricing environment - both internally and within the broader channel? Do you anticipate any pricing increases over the balance of 2013? Do these trends differ by residential and commercial products/end markets? Can you comment on 2014 hedges in place? How much planned copper and aluminum is locked in, and based on that, how do you feel about the 2014 price/cost dynamic at this juncture? Residential HVAC You mentioned the end market environment is still 25-30% below peak shipment levels for the industry, indicating some degree of pent-up demand? Are you hearing anecdotally from your dealer s that aged equipment is now being replaced? How much of the 17% growth in replacement during 2Q was driven by share gains vs. a pick up in the replacement market? 162 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Why do you think Lennox has been taking share in Resi HVAC – how much is driven by mix of new construction? You commented in 2Q that your PartsPlus strategy may be tracking ahead of plans on share gains – is this driving momentum and if so, can it continue? Why do you believe PartsPlus stores are having such a meaningful market impact and what is the typical pay back period on a new store? If you achieve your target of 215 stores by YE15 (vs. 127 today), where do you believe your market share can go? Residential product mix was up during the second quarter, leading you to move your mix estimates for the year to negative $5m (vs. -$10m prior). Given the upside in 2Q in NA Resi HVAC shipments (up HSD vs. LSD estimates), pent-up demand and continued strength in new housing, do you see runway for this to surprise to the upside again? Are there differing dynamics within those numbers in the cooling vs. the warming season? Mix (particularly +14SEER) was up in the second quarter after several years of mix down (bolstered by add-on and replacement, +17%) – are you continuing to see better mix trends improving through the third quarter and what is driving improving mix e.g. better sales tactics, wealth effect of rising house prices? How is mix trending at the very high (16+) SEER levels? Do you see scope for the mix head wind to further narrow from current $5m EBIT estimate (vs. prior $10m)? You commented that R22 dry-ships were now less than 10% of sales. Where do you believe they stand for the overall market and do you believe it will continue to mix down? How does the push-out of the proposed furnace standard impact your business? When might this go into effect? Do you see any potential impact on the 2015 regional SEER standards? Are you seeing any changes in the competitive dynamic following Daiken’s acquisition of Goodman? Are there any signs of a strategic shift at Goodman e.g. a move up the efficiency and performance curve? Are they making any visible changes to their material sourcing? Do you view Daikin/Goodman as a more formidable competitor? Your 2014 margin target is 11-14% vs. 11.5% MSe for 2013. How confident do you feel in your ability to achieve that the upper end of that target range? What measures are you taking to reduce material cost? To what extent do you see scope to ramp up low cost sourcing of motors, blowers and compressors? Commercial HVAC Commercial segment volume was up 3% in 2Q - have you observed any signs of a sustainable recovery in this end market? What about regional trends, NA (+HSD revenues in 2Q) and Europe (-HSD)? By how much does a C-HVAC recovery typically lag an R-HVAC recovery? The Raider rooftop product hit in early March and you mentioned it has paid dividends already within the emergency replacement business. Can you give us a deeper read on customer acceptance and the volume ramp? What other segments of the market do you see opportunities for organic expansion e.g. higher tonnage cooling? Along those lines, regional and local distribution is critical for the emergency replacement market. Can you comment on plans to expand the network beyond 2014? What scale of investment is required to expand from 27 centers at the end of 2Q to 32 by the end of 2013? Is there a sense for continued expansion plans through 2014? Your 2014 margin target is 13-15% vs. 13.3% MSe for 2013. How confident do you feel in your ability to expand margins to the upper ends of the target range? Where will the majority of margin improvement stem from – material cost, initiatives, pricing, volume, etc? 163 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Refrigeration Refrigeration segment revenues were quite divergent by region in 2Q (LatAm +20%, Asia-Pac up HSD, Europe and NA down MSD). Has this dynamic shifted and how would you describe the competitive environment by region? Segment margins improved Y/Y on flat revenue, which was attributed to strong improvements on the cost side – how far can you see margins going if volumes were to pick up, particularly by each individual segment long-term (current 2013 MSe at 11.5% for Resi Heating & Cooling, 13.3% for Comm. Heating & Cooling, and 11.9% for Refrigeration)? Is there more room for improvement on the cost side or is this reaching a plateau at constant volumes? Margin Outlook You have quite bullish 2014 segment margin targets (11-13% based on current revenue mix) driven by restructuring payback; do you still view these targets as achievable? Can you provide an update on the “Distribution Excellence” program – what cost savings do you expect to achieve? Can you quantify other cost savings initiatives, e.g. low-cost sourcing, copper/ aluminum substitution, common platforms? How much restructuring is required? 164 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry LII Company Background Exhibit 107 LII Revenue Breakdown by Geography, Cyclicality and End Market By End Market By Cyclicality By Geography Canada Mid Late 8% Cycle Cycle 24% 20% Europe 10% HVAC/ Refrig No Asia 100% Cycle Pacific 16% 7% United South Early States America Cycle 72% 3% 40% Source: Company data, Morgan Stanley Research. Company Description Key Management Founded in 1895 in Iowa and reincorporated in Delaware in 1991, Lennox Todd Bluedorn serves as CEO (since April 2007). Previously, Bluedorn International Inc. (NYSE: LII) is a provider of climate control solutions. served in numerous senior management positions at UTC. The company designs, manufactures and markets a broad range of Joseph Reitmeier serves as CFO (since July 2012). Prior to this role, products for the HVAC/R markets. Reitmeier served as VP and CFO of Lennox’s Commercial Heating and Cooling segment since 2007. Lennox employs a range of distribution channels: distributors, Douglas Young: EVP, President and COO, LII Residential Heating & independent and company-owned dealer service centers, other installing Cooling. contractors, wholesalers, manufacturers’ representatives, OEMs and Terry Johnston: EVP, President and COO, LII NA Commercial Heating direct to national accounts. The company had approximately 12,000 & Cooling. employees as of year-end 2012. David Moon: EVP, President and COO, LII Worldwide Refrigeration. Michael Blatz: EVP, President and COO: Service Experts Exhibit 108 LII Detailed Segment Breakdown 2012 2012 % of Seg. Revs Op. Profits End Markets Revs Key Products & Services Key Brands Competitors Residential $1,376 $103 HVAC 100% Furnaces, air conditioners, heat pumps, packaged Lennox, Armstrong Air, Ducane, Aire- Goodman, Carrier, Trane, Heating & Cooling 47% 36% heating and cooling systems, indoor air quality Flo, AirEase, Concord, Magic-Pak, York, Nordyen, Daikin equipment, pre-fabricated fireplaces, freestanding Advanced Distributor Products, Superior, stoves. Country Stoves, Security Chimneys Commercial $785 $98 Unitary heating and air conditioning equipment, applied Lennox, Allied Commercial York, Trane, Carrier, Daikin Heating & Cooling 27% 35% systems. Refrigeration $788 $82 Commercial 100% Condensing units, unit coolers, fluid coolers, air cooled Heatcraft Worldwide Refrigeration, Hussmann, Carrier, 27% 29% Refrigeration condensers, air handlers, process chillers, Bohn, Larkin, Climate Control, Chandler Emerson, GEA Group, Alfa compressorized racks. Refrigeration, Friga-Bohn, HK Laval Refrigeration, Hyfra, Kirby, Frigus-Bohn Source: Morgan Stanley, Company Information. 165 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry LII Key Financial Statistics Exhibit 109 Exhibit 110 LII – Organic Growth vs. EE/MI (1Q06/2Q13) LII – EPS Growth vs. EE/MI (1Q06/2Q13) Organic Grow th 165% EPS Grow th 20% EE/MI Median EE/MI Median 15% 115% 10% 65% 5% 0% 15% -5% -10% -35% -15% -85% -20% -25% -135% 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 Source: Company Data, Morgan Stanley Research Source: Company Data, Morgan Stanley Research. Note: Lennox International registered an EPS growth of -303% in 1Q09, and of -165% in 1Q11, and of -591% in 1Q12 Exhibit 111 Exhibit 112 LII vs. EE/MI – Core Operating Margin (2006/13e) LII vs. EE/MI – Core Incremental OM (2006/13e) Core Op.Margin 50% 16% Core Incremental Op. Margin EE/MI Median EE/MI Median 14% 40% 12% 30% 10% 20% 8% 10% 6% 0% 4% -10% 2% -20% 06 07 08 09 00 01 02 03 20 20 20 20 21 21 21 21 0% 2006 2007 2008 2009 2010 2011 2012 2013 Source: Company Data, Morgan Stanley Research estimates Note: Lennox International registered core operating margin of 178.1% in 2007 Source: Company Data, Morgan Stanley Research estimates. Exhibit 113 Exhibit 114 LII vs. EE/MI – Revenue per Employee (2006/12) LII – Capital Allocation (2008/12 cumulative) 280 Revenue/Employee EE/MI Median 260 240 Acquisitions Share 8% Repurchases 220 37% 200 180 160 Capex 21% 140 120 100 Dividends 2006 2007 2008 2009 2010 2011 2012 34% Source: Company Data, Morgan Stanley Research Source: Company Data, Morgan Stanley Research 166 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry LII 2Q13 Earnings Call Transcript Opening Remarks – Todd Bluedorn, CEO Total market environment still 25% to 30% below peak shipment levels for the industry 2Q revenue was up 9% Y/Y and total segment profit margin grew 200bps to 11.6% Adj. EPS from continuing operations was $1.31, up 34% GAAP EPS from continuing operations was $1.26, up 31% Growth led by Residential business, revenue up 16% in 2Q, driven by replacement business and new construction Resi profit was up 58% Despite cooler weather in the US, replacement business revenue was up 17% Strong growth in replacement business driven by stabilization in unemployment and improvement in consumer confidence, home values and existing home sales Replacement accounts for more than 75% of Residential business Resi new construction revenue up 13% Improvements in both price and product mix led by replacement business growth 14+ SEER shipments were up 4ppts to 36% of cooling product shipments (first increase since 2010) 13 SEER equipment shipments and R-22 equipment down. Commercial business revenue and profit up 4% Commercial growth led by NA, Europe soft and down in the quarter Strong growth from Lennox National Account Service business Refrigeration profit up 22%, Revenue flat on the timing of National Account Businesses in NA, soft Europe, strong in S. America and APAC S. America revenue up >20%, APAC/Australia up HSD (expanded refrigerant sales), China revenue up >30% Added 12 more LII PartsPlus stores to distribution network in (Resi), on track to add 28 in 2013 127 PartPlus stores (3/4 of sales are HVAC equipment, balance are parts and supplies). In Commercial, new Raider product line came out in March, launch going well 27 Commercial regional distribution centers at end of 2Q, on track for 32 distribution centers in place by the end of ‘13 Increased dividend by 20% in 2Q, repurchased $33m of stock ($100m buy back plan for full year) $338m remaining under authorization Quarterly Detail – Joe Reitmeier, CFO Residential Heating & Cooling o Revenue was $476m, up 16% o Currency neutral, volume up 13%, combined price and mix up 3% o Segment profit of $66 million, up 58% o Segment profit margin of 13.9%, up 370bps o Positively impacted by higher volume, favorable price and mix and lower material costs with partial offsets from higher SG&A and investments in distribution expansion Commercial Heating & Cooling o Revenue was $230 million, up 4% o Currency neutral, volume up 3%, combined price and mix up 1% o North America equipment and service revenue up HSD, led by emergency replacement market and Lennox National Account Services o Europe revenue down HSD o Segment income was $35 million, up 4% o Profit margin was 15.1%, up 10bps o Positively impacted by higher volume, favorable price and mix and lower material costs, partially offset by higher SG&A and investment in distribution expansion 167 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Refrigeration o Revenue was $207 million, flat Y/Y o Currency neutral, volume down 2%, combined price and mix up 2% o S. America up >20%, APAC up HSD, NA and Europe down MSD o Income was $26 million, up 22% o Profit margin was 12.4%, up 220bps o Positively impacted by favorable price and mix and lower material cost, partially offset by lower volume and higher SG&A $1.6m charge for restructuring, $500k net change in unrealized losses on open futures contracts, $100k for other items SG&A was $151m, up on higher selling expenses and incentive comp Corporate expense was $21m CFO was $49m, Capex was $11m, FCF was $38m Debt was $537m, debt /EBITDAR ratio was 1.7 (targeted range of 1 to 2) Cash was $45 at end of June 2013 Guidance o Expect NA Resi HVAC shipments up HSD, up from prior LSD o NA Commercial unitary shipments up LSD (same) o Europe HVAC and Refrigeration shipments down LSD (same) o New revenue guidance of 6% to 8% (up from prior of 3% to 6%) o FX neutral (same) o Resi product mix up in 1H – no longer see $10m of negative mix in FY, now see $5m negative Resi mix for 2013 o Still see $30 million in cost savings from sourcing initiatives and engineering lead cost reductions (2/3 of benefit in 2H) o Now $30m benefit from price and lower commodity cost (vs. prior $20m - 45% of benefit in 2H) o Increasing corp. expense guidance from $70m to $85m for FY on higher incentive compensation (both annual and LT programs reflecting financial performance in 1H) o Raising adj. EPS from continuing ops from $3.25-$3.55 to new range, $3.45-$3.75 o Expect net interest expense of $15m for FY, tax rate of 34%-35% diluted share count of ~51 million shares o Expect ~$60m Capex in 2013 Q&A PartsPlus strategy progress – initial plan of $25m 2013 savings from logistics costs, $12.5m-$30m from share gains via distribution network – tracking on course on logistics side, market share gains a bit better than expected Resi mix shift (up): drivers – ad-on and replacement was stronger for new construction (+17%), stronger American consumer (SEER up when confidence is up and home values) – about time for a mix up after 2-3 years of decline, comps easier too Replacement strength sequentially in 2Q – strong all quarter despite cooling degree-days down 10%, June was warmer Y/Y which helped July to date – through July cooling degree-days down 15% in NA (warm summer in 2012), broadly speaking momentum continued. Commercial backlog looks good but shipments have been choppy so far M&A – no change in thinking, will invest in Kaiser-type acquisitions to bolster commercial service and refrigeration ($100-$150m deals). Believe if opportunity opened up in NA unitary (Resi or Commercial) then consolidation at right valuation makes sense. 168 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Margin improvement – calling for $30m tailwind from pricing and commodities - $15m from lower commodities and material cost reduction. Real driver was design out and movement into China and Asia low cost sources. 25 SEER product helps the mix up. Will grow SG&A at half the rates of volume growth to get leverage. Mix peak – second quarter of 2010 was mix peak, at 45% 14+ SEER. Total mix will be a little worse this year but going to more historic levels going forward (40-45%) Refrigeration and commercial backlog – solid backlog, not necessarily good – still have a view for national accounts closing in 2H Europe – no major trend from results, but hit a bottom and bubbling back up. Some large projects in Eastern Europe pushed out to 2H. US business – strong demand, investments in emergency replacement, distribution and new Raider product paid dividends. Industry pricing discipline – the industry tends to be disciplined with similar motives – sense is that price moves for now are done regardless of commodity price action, which can move up and down quickly Planned vs. emergency replacement – very little planned replacement in Resi. 85-90% of replacements are done when the unit breaks. Replacement revenues up 17% as result of share gain and market growth, despite cooling days down. Also up from pent-up demand. Long-term margin view in Resi – 11-14% remains the target $30m benefit from price / cost – 55% of benefit seen in 1H. Copper down helps. Steel is more volatile and spiked recently due to supply. Will have better view of 2014 trends in December. R-22 – R-22 down to about 10% of sales from 15% last year. Resi synergies from an acquisition – synergies would be less on distribution, more on factory side, materials purchasing, R&D (expenses in engineering), some SG&A. PartsPlus investment – at 127 now, target 136 by year-end and 215 by 2016. Costs from sourcing – had lagged larger international competitors (Trane, Carrier, York) and played catch up regarding supply environment in Asia. Benefits from acquiring would be case specific as far as how each company complements one another for sourcing. Sourcing momentum – expected to continue into 2014 and 2015 by moving within China or Asia to different suppliers or out of China to lower cost sources. Continue to drive design out cost through platform redesigns – now a way of life. 2H earnings as % of total annual – there would be some buffer to earnings due to variable expenses if revenue was very strong (top of range). Still a lot of macro risks to be concerned about (fiscal uncertainty domestically and in Europe, interest rates rising), so remain cautious confident. Channel inventories – 80% from internal distribution, inventory is fine there. Independent Allied brands had strong quarter so inventory should have sold through. Capacity vs. growth – have not missed any deliveries due to demand – tend to build up inventory over stronger quarters due to seasonality. Supply base has supported well, So far transition to managing furnace supply has been good on the internal and supply side. 169 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry SEER mix – 42% 14+ SEER in 1Q, a bit misleading given the higher volumes in 2QCY Passing through pricing – when commodities spike, cannot raise prices fast enough to avoid the negative windfall on margins, So keep prices steady even when commodities fall. No expectation to lower prices because copper is down cause it would take 18 months to really drive price back through the system. 170 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry LII Summary of Guidance Exhibit 115 LII FY13 Guidance (yellow denotes changes) ($m) Prior Guidance New Guidance Comments Revenue Total growth 3-6% 6-8% This is predicted on end market assumptions of: NA Resi HVAC +HSD, up from LSD NA Comm Unitary HVAC +LSD (unchanged) Europe HVAC -LSD Refrigeration -LSD FX Neutral Unchanged Share Count 50mn 51mn Adj EPS from Continuing Ops $3.25-3.55 $3.45-3.75 Corporate Expenses 70 85 Compares to $60m in 2012. Increased on higher annual and long-term incentive comp expense Price/cost tailwind 20 30 About 45% of the benefit to be realized in 2H Material cost reduction tailwind 30 30 Expect 2/3 to be realized in 2H13 Residential mix shift headwind 10 5 Compares to $15m in 2012 per guidance. Net interest expense 15 Tax Guidance 34-35% 34-35% Unchanged FCF 150 Compares to $170m in 2012 Capex 60 60 Compares to $50m in 2012 Stock repurchase 100 100 Compares to $50m in 2012 Source: Company Data, Morgan Stanley Research 171 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry This page has been intentionally left blank 172 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Regal-Beloit 173 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry RBC Question Bank QTD Trends Within your guidance for $1.10-1.18 EPS (ex restructuring) for 3Q13, how much growth have you embedded within your key businesses – NA Resi HVAC, Commercial & Industrial, Mechanical? At the mid-point, guidance implies flat earnings with 2Q versus a normal seasonal step-down. Even ex. non-recurring items 3Q guidance seems more aggressive than normal. What is driving that confidence? What are you seeing by geography QTD, and how does this compare to 2Q13 results and your 3Q13 plan? You cited challenging conditions in Europe, India and Asia during 2Q while China was sequentially better – have these trends continued into 3Q? What is your expectation for US end-market demand, and the flow-through to your business? Can you describe some of the discrete puts and takes that we might need to consider related to 3Q earnings – do you expect any meaningful LIFO adjustments or impacts from currencies? What level of costs savings should we factor in from the plant consolidations and other restructuring actions through 3Q? Portfolio Organic growth and EPS has underperformed the vast majority of your peers through 2011/13. How much of this can be described as end market challenges and how can be attributed to execution? With hindsight, are there any decisions would have taken differently? Did the EPC integration cause distractions? Are there any management changes under consideration? Are you happy with the portfolio, or would you consider any of your businesses to be non-core? Does RBC actively consider asset sales? Are you seeking to develop a broader industrial and electrical footprint, or are you content to keep consolidating the motors industry? Do you view parts of the motors portfolio as more commoditized and structurally challenged? Competitive Landscape Sales of high efficiency products declined for the first time ever in 2Q13. To what do you attribute this? How are high efficiency sales trending in 3Q? What is the margin differential between high and low efficiency products? We have heard several major HVAC OEMs comment that Chinese motor manufacturers (viz. Broad Ocean) are coming up the technology curve, even with respect to higher efficiency motors. Do you believe you are losing share? How do you maintain share going forward? Beyond China, are you seeing other competitors (viz. WEG) take share? You commented during the 1Q13 call that you lost ~$40m of annualized revenue from one particular hermetic motor customer; do you know what third party manufacturer picked up the share that you lost? Do you see risk of similar customer losses playing out over the next 12 months? What are you doing to prevent this type of attrition? What is the competitive outlook between the standard and premium motor segments, and what is your mix currently between the two? To what extent is the premium segment more protected? What are the key IP protections on the ECM technology? Energy Efficiency Legislation. Can you discuss the global legislative environment with respect to energy efficiency? Do you believe legislators still view this as a priority given the focus on more pressing issues? What are you hearing on regional furnace and SEER standards? How were you impacted by the push-out of regional furnace standard implementation? 174 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Are there any major C&I motor standards coming into play in the near-term? FCF Allocation You sold 3.2m shares in late 2013 in order to increase balance sheet flexibility – how close are you to a sizeable deal? Can you provide some qualitative detail on how the M&A backlog has trended since the end of the second quarter? Can you provide any further color on why a deal didn’t materialize in 2Q despite significant due diligence costs? What was the inhibiting factor? Does the collapse of that potential transaction move the potential for meaningful deal flow to the right? What are your priorities for future transactions – end markets, geographies? Would you consider adding another growth platform outside of Electrical/ Mechanical? If deals do not come through as expected, what are your other priorities for FCF allocation? Would you look to step up share repurchase activity? Do you have a target for dividend payout and/ or growth? M&A Integration How is the EPC integration tracking vs. plan? In 2012, you increased your cost synergy guidance to $38m and shortened the time frame to three years – do you see further upside to this target over time, or do you believe this is now the right target? Do you have a higher internal target? What were run-rate cost synergies at the end of 1Q13? Can you remind us of cross-selling potential within EPC and your legacy business? At what stage do you begin to push these revenue synergies? What has been the largest surprise during the integration process? How is the Milwaukee Gear integration progressing? What level of accretion will this acquisition add in 2013? Can you comment on how Milwaukee Gear fits into your existing portfolio? Do you see the potential for revenue synergies? HVAC What caused RBC to underperform broader OEM industry shipments during 1H13, and how likely will this underperformance continue in 2H13 and 2014? Can you rank your rough exposure to the leading OEMs (e.g., Lennox, Trane, York, Rheem, Carrier)? What is the mix between RHVAC and CHVAC? How would you characterize current OEM inventory levels? Are you seeing OEMs moving to more of a just-in-time inventory approach? What are the production challenges for Regal associated with this? HVAC OEMs are referring to positive mix trends in the US market with 14SEER and R410a sales growing ahead of the fleet average? Why is this is not benefitting Regal Beloit? Has OEM pricing pressure waned now that copper prices are off their lows? How would you describe pricing discussions with customers that are not on material pricing contracts? What are you hearing on the furnace standard push-out? When might this take effect and is there risk that it could be postponed indefinitely? If the standard is adopted, can you quantify the potential benefit to your HVAC business? Do you see risk to the implementation of regional SEER standards in 2015? Margin Dynamics Based on current spot prices and your outstanding hedges, what do you anticipate you price /cost impact to be over the next 12 months? How and for what commodities hedged are you for the next 12m? 175 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Can you update us on recent MPF adjustments? Are you seeing an increase in customers not in MPF contracts asking for price concessions? Do you expect these conversations to increase in frequency over the next 6-12 months? You have discussed simplification initiatives in the past – when do you plan to quantify costs and benefits associated with this? How are you analyzing the payback to margins? How many years might an initiative like this take to complete? What has been completed to date, and what types of projects are in your pipeline? What inning are you now in? You guided for $0.02 of restructuring during 3Q13 – how is this progressing? What are the main elements of restructuring spend? How much payback is this expected to drive, and over what period? How much restructuring do you expect to complete in the full year? Electrical Margins: Do you expect margins to return to a more normalized level? What are the big margin puts and takes throughout FY13? Is there reason to believe the segment can return to prior peak levels of 12%+ margins? Could there be further upside from this level over time? Mechanical Margins: Your Mechanical margins reached 14.7% in 2Q12. Could you get back to this level? Is there any reason to believe you cannot reach prior peak levels of 15.7% in the current cycle? Could there be further upside to prior peak? Globalization. You have said that 32% of pro-forma sales are now being generated outside the US – but you are targeting a 50/50 split by 2015. What is your strategy to get to 50/50? Within which geographies are you most focused on expansion? In Asia, is it becoming more difficult to grow due to the presence of indigenous competitors like Broad Ocean? Currently, nearly 50% of your production is located in Mexico; do you believe you now have the right geographic footprint within your manufacturing base? Is there reason to believe you might bring capacity back to the US given lower energy costs and EM wage inflation? New Products. What is your plan for new product launches in 2013 vs. the 60 launched in 2012? What areas of the portfolio are the greatest focus for innovation? How do you balance between introduction of new products and cannibalization of the old? 176 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry RBC Company Background Exhibit 116 RBC Revenue Breakdown by Geography, Cyclicality and End Market By Geography By End Market By Cycle Late Rest of 16% Commercial World 27% Industrial 33% Early 34% United 37% States 67% Mid 47% Residential 39% Source: Company data, Morgan Stanley Research. Company Description Key Management Headquartered in Wisconsin and founded in 1955, Regal-Beloit (NYSE: Mark Gliebe serves as CEO (since May 2011) and Chairman (since RBC) is a global manufacturer of electric motors and controls, electric January 2012) of Regal-Beloit. Gliebe joined RBC in 2005 as VP and generators and controls and mechanical motion control products used in President – Electric Motors Group. commercial, residential, and industrial applications. Regal has two Jon Schlemmer serves as COO (since May 2011). Schlemmer joined segments, Electrical (90% of 2011 revenues) and Mechanical (10% of RBC in 2005 as Global VP of Technology. 2011 revenues), each comprising a number of individual business units. Chuck Hinrichs serves as CFO (since September 2010). Prior to this role, he served as CFO of Smurfit-Stone Container Corporation. Regal’s products are marketed through distributors, as well as directly to Mike Wickiser: Sr. VP Commercial & Industrial Motors/Generators. OEM’s and end-users. Each business unit has its own branded product Paul Goldman: VP, HVAC Motors. offering and sales organization. As of 2012 year-end, the Company had Steve O’Brien: VP, Pump & General Purpose. 144 manufacturing, service and distribution facilities (132 for the Duke Sims: VP, Mechanical. Electrical segment and 12 for the Mechanical segment) and 23,800 John Kunze: VP, Air Moving Commercial Refrigeration Motors. employees globally. Dan Drexler: VP, Hermetic Motors. Exhibit 117 RBC Detailed Segment Breakdown 2012 2012 % of Seg. Revs Op. Profits End Markets Revs Key Products & Services Key Brands Competitors Electrical $2,870 $274 Residential 60% Fractional and integral horsepower motors, electronic variable Marathon Electric, Rotor, Broad-Ocean Motor Co., Welling 91% 88% Commercial 25% speed controls and blowers used in HVAC applications, Dutchi Motors, Fasco, Elco, Holding Limited, ABB Ltd., Johnson Refrigeration 15% integral horsepower AC and DC motors, hermetic motors Unico, LEESON Electric, Electric Holdings Limited, Siemens used in air conditioning and refrigeration systems, electric Genteq, Hwada Motors, Lincoln AG, Toshiba Corporation, Leroy- generators and controls ranging from 5KW-4MW, capicitors Motors, Morrill Motors, Somer (a subsidiary of Emerson for use HVAC systems, high intensity lighting and other Thomson Technology Electric), McMillan Electric applications, automatic transfer switches and parelleling Company, Bluffton Motor Works. switchgear, oil and gas artificial lift system pumping equipment. Mechanical $297 $39 Commercial/ 100% Mechanical motion control products including: standard and Mastergear, Durst, Velvet Drive Boston Gear (dividion of altra 9% 13% Industrial custom worm gears, bevel gears, helical gears and Transmissions, Grove Industrial Motion), Dodge concentric shaft gearboxes, marine transmissions, custom Gear/Electra-Gear, Hub (subsidiary of ABB Ltd.), Emerson gearing, gearmotors, manual valve actuators, and electrical City/Foote-Jones, Marathon Electric, and Winsmith (division of connecting devices. Special Products, Sankey Peerless-Winsmith). Source: Morgan Stanley, Company Information. 177 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry RBC Key Financial Statistics Exhibit 118 Exhibit 119 RBC – Organic Growth vs. EE/MI (1Q06/2Q13) RBC – EPS Growth vs. EE/MI (1Q06/2Q13) 25% Organic Grow th 160% EPS Grow th EE/MI Median 20% EE/MI Median 15% 120% 10% 80% 5% 0% 40% -5% -10% 0% -15% -20% -40% -25% -30% -80% 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 Source: Company Data, Morgan Stanley Research estimates Source: Company Data, Morgan Stanley Research estimates. Note: Rockwell reported an Eps Growth of 259% in 2Q10. Exhibit 120 Exhibit 121 RBC vs. EE/MI – Core Operating Margin (2006/13e) RBC vs. EE/MI – Core Incremental OM (2006/13e) 35% Core Incremental Op. Margin EE/MI Median 16% 30% Core Op.Margin EE/MI Median 15% 14% 25% 13% 20% 12% 11% 15% 10% 10% 9% 5% 8% 7% 0% 2006 2007 2008 2009 2010 2011 2012 2013 6% 2006 2007 2008 2009 2010 2011 2012 2013 Source: Company Data, Morgan Stanley Research estimates Source: Company Data, Morgan Stanley Research estimates Exhibit 122 Exhibit 123 RBC vs. EE/MI – Revenue per Employee (2006/12) RBC – Capital Allocation (2008/12 cumulative) 300 Revenue/Employee EE/MI Median Capex 250 18% 200 150 Dividends 100 8% Acquisitions 50 74% 0 2006 2007 2008 2009 2010 2011 2012 Source: Company Data, Morgan Stanley Research Source: Company Data, Morgan Stanley Research 178 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry RBC 2Q13 Earnings Call Transcript Opening Remarks – Mark Gliebe, CEO Overall top-line performance was as expected C&I slightly better than 1Q, and HVAC sales inline with expectations given customer losses in 1Q Strength in other residential markets outside of HVAC due to better end market conditions Gross margins remained resilient from weaker demand with benefits from synergy programs. EPC synergy work competed with final facility closure. FCF was 127% of Net income, on track with 2013 goal of >100%. 17 new products launched during the quarter, 20 in 1Q. 1/3 of sales from products launched in T5yrs $3mn of expense in 2Q related to due diligence. Continue to remain aggressive, yet prudent in M&A. 3Q guidance reflects HVAC seasonality offset by 2Q dynamics. Expect slight improvement in C&I and modest growth in China. Quarterly Detail – Chuck Hinrichs, CFO EPS was $1.13/sh, restructuring charges were $1.4m, 2c to EPS Tax credit of $900k or 2c / share. Net of these two items, adj. EPS was also $1.13 Pricing down 70bps Y/Y due to two-way MPFs and F/X was a 70bps headwind overall. 230bps to international sales. COGS included $3.6mn of higher inv cost from VEB devaluation, and $2.1mn of LIFO benefit. $1mn of the $1.4mn of restructuring was in COGS Incurred $2mn of acq. due diligence cost in Other Op Expense and $1.4mn of bad debt expense S&GA also include $400k of restructuring exp and $200k of exp from acquired businesses. Capex was $26.6mn, on track for $100mn in full year 2013. Adj. tax rate was inline with guidance. ETR expected to be 26.5% in 3Q and 4Q FCF was $65mn, 127% of NI. Debt was $769mn. Interest exp in 3Q should decline to $9mn. Credit metrics continue to improve – debt to EBITDA was below 1.9x, net debt-EBITDA below 0.9x Operations Overview – Jon Schlemmer, COO Revs for the quarter was as expected. C&I off to a slow start. Total revs down 3.8% ex. impact of divested business Slight improvement in agriculture, commercial food, industrial pump, and slight improvement in CHVAC. Weak end markets include comm. construction, distribution, oil and gas and muni water and highway construction. Decline in mechanical business driven by reduced demand in O&G. NA HVAC down 6.8% driven by 1Q customer dynamic and MPF pressure. Europe, India and Australia still challenged, and saw Q/Q improvement in China. Increased focus in LatAm and growth there is helping offset weakness in Europe and Asia. 17 new products in quarter, 37 for the year on top of 60 in 2012 and 50 in 2011. Q&A Trends in the C&I market. Slow start, and improvement through the back half of the quarter. Easing comps in 2H, so won’t see the same level of deterioration in 2H as 1H. Channel inventories were normal. How was HVAC normalized growth in the quarter? Core growth at the customer was probably HSD, and probably MSD for the year. Are customers increasingly asking for price give-backs? Most of the pricing discussed are MPFs. People starting to ask questions, but quite volatile right now. 179 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Due diligence cost was a big number. Was the decision to pull back price-related? Not going to get into specifics on M&A. Does that push to the right the potential for a larger deal to come through? Our pipeline remains active. How are pricing dynamics outside of MPF? More questions on pricing given copper volatility, but ebbing and flowing Chance for positive organic growth in 3Q given easing comps? C&I beginning to stabilize and expect slight growth in 3Q, but have $40-45mn of annualized headwind from customer losses. Can you quantify benefit from new product sales net of cannibalization? Fairly significant, with 1/3 of revenue from new product sales, but not seeing the momentum yet to offset other headwinds. What were the HVAC growth numbers adjusted for the loss? Adjusted for the losses, growth was probably flat. What are some of the hurdles in the M&A market right now? Has to be a perfect match, so there’s a variety of reasons why a deal didn’t happen. Why are the decrementals so challenging? Hard to comment without looking at analysis, but wouldn’t put any change in price of input costs into the analysis. What is the outlook for price/cost into 2H? Would expect the price vs. material balance to remain pretty well balanced as in 1H. Practically no mix impact in the quarter Where in the bottoming process is Milwaukee gear? There are some positive signs, but there’s still some inventory that customers are shipping out. Which of the one-time items surprised the most? The diligence expense was in excess of expectations. The VEB deval was hard to quantify so was not in the guidance. Restructuring was spot-on. LIFO is an evolving calculation based on commodity forecast, How much due diligence should we expect going forward? Not really able to give an estimate on that number. Pipeline continues to be active. High efficiency down more than the whole company, why? Headwinds in the O&G market was the largest factor. Opex seems to be higher ex the one-timers, outlook for 2H? Should expect it to come down. How much of the $15mn of restructuring goes to the bottom line? Typically some give back, but majority will drop through. How has July HVAC order activity been? Strength has held through July with most customers talking fairly positive about 2H dynamics carrying over the 2014. Inventory appears stable. How much of the cash is acquisition ready? With the credit line, many analysts have estimated close to $1bn of acquisition buying power. What is the normalized capex number for 2014? Number will not increase materially from the $100mn guidance for 2013. Could be down a little bit. 180 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry What kind of incremental margins if growth was mid single-digits? In the 20-25% range. How is the aftermarket effort going? Feel good about it. Experienced growth in the HVAC aftermarket during the quarter. What was the price effect on HVAC? Just quantified for the overall business. What is the size of the alternators business? Roughly $125mn. Has been down for a number of quarters, but so a small improvement in 3Q. 181 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry RBC Summary of Guidance Exhibit 124 RBC 3Q13 and FY13 Guidance Post 2Q13 Results 3Q13 Guidance Initiated FY13 Guidance Tax Rate 26.5% Capex $100mn EPS ex-Restructuring $1.10 - 1.18 EPS Including Restructuring $1.08 - 1.16 Source: Company Data, Morgan Stanley Research 182 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Rockwell Automation 183 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry ROK Question Bank 4Q Trends How is the quarter tracking vs. your +0.5% implied core guidance? You commented during 3Q earnings that you expected a stable market environment through year-end. Has volatility during the last several months changed that thinking at all? To what extent have project delays and inventory reductions impacted YTD results, and have you see that abate this quarter? Which end markets are performing at the high and low end of the spectrum and how do these compare vs. plan? Are there any major mix shifts underway that could see OM performance substantially deviate from the trend seen last quarter? Have you succeeded in executing on your growth investments and can you provide some details around your hiring plans here? How are you thinking about FY14? To what extent are the improving global PMIs being reflected in your order book and how does this look by geography? What are you hearing from customers and how is the front log trending? What sort of growth rate are you planning for in FY14 with regard to hiring and capacity decisions? View on the Cycle Do you still view this as a normal 5-6 year cycle? How does this cycle look and feel compared to those you have seen over the past 30 years? Do you think a normal growth rate is lower this cycle than those seen in the past? Do you expect FY14 core growth to approximate a trend growth level? Conversely, do you believe that this extended period of stagnation presages a more extended period of slow growth? If this cycle is a more drawn-out period of slow-growth, how would that change the way you manage your business, allocate capital and growth investments? How is the pervasive macro uncertainty and volatility impacting ROK’s plans around investments and discretionary cost management? Are you making decisions that are atypical at this stage of the cycle e.g. deferring investment plans, reducing sales footprints, curtailing travel budgets etc.? Trends by Geography Have you continued to see notable outperformance in Latin America and Canada? Has China continued to accelerate? Are you seeing improving trends in Asia ex-China? Can you comment on large project activity by region? The 5% improvement in China during 3Q was a surprise given your comments that there’s still evidence of project push outs. How is your win rate in China trending – is it stable? How are your key end markets tracking vs. the broader industrial automation market in China? To what extent have you suffered from distributor inventory de-stocking in China? How is your distribution capability evolving in China and the Emerging markets? Does your lack of CNC, building controls, etc. disadvantage you particularly in the Emerging Markets? In what ways are you taking advantage of the consumer “sweet spot” in China? You do not appear to be believers in the US manufacturing renaissance theory but growth in US over past 1-2 years has been better than vast majority of regions – why is that? Are you seeing any investments related to shale-driven expansions in the chemical, petrochemical and LNG projects? 184 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Competition Can you describe how recent industry consolidation have and might impact the competitive environment? Do you believe that the Wonder Ware MES platform can be integrated into their PLC offering, to make them a more credible competitor and potentially displace your installed base over time? Where are you seeing the most aggressive competition? Are you seeing credible competition from Chinese new entrants like Hollysys? How would you compare the competitive environment within Process and your core Discrete markets? Has the hybrid market become more competitive following new product launches from some of the larger European players? Is there any evidence that the Japanese automation players (Mitsubishi, Yokogawa) are leveraging the weaker Yen to take market share? Do you see this risk evolving? Logix How is Logix tracking relative to the +3% comp registered in 3Q? How do you expect Logix growth to look relative to the overall A&S platform in 2014? What is the growth outlook within your key Logix end markets during 2014: Process, Machine OEM and Safety? Is the rise of Chinese machine builders putting pressure on this end market? Can you comment on how the new mid-size controller (CompactLogix) is performing relative to Logix overall? Is this cannibalizing ControlLogix and are you comfortable with this dynamic? Are CompactLogix margins comparable to ControlLogix? When is the next major Logix release and what functionality is being added? What do you think is the replacement cycle for Logix – what benefits would accrue to a customer with (say) a 5-10 years old system? What is the currently installed base for pre-Logix PLCs (SLC5, PLC5) and what trends are you seeing on upgrades in this base? Approximately what proportion of legacy controllers are replaced with competitive offerings? Process Market You posted 2% growth at Process during 3Q13; do you think you can post a positive comp in 4Q as well? How is the front log tracking? Can you decompose growth by end markets and geographies? What is your win rate in Process/ Hybrid RFP’s and have your Process win rates deteriorated over the past 6-9 months given most underperformance vs. peers? Do you believe that over time, Process could become such a significant piece of your portfolio that your cyclicality could change? How quickly might this occur based on current growth rates? How is the relationship with Endress & Hauser evolving? Do you believe that a more integrated automation/field instrumentation offering could be a competitive advantage in larger projects? Have you lost projects to integrated players like ABB and Emerson because they are better able to offer a broader system capability? How do Process margins compare to Discrete? Is there any evidence of pricing pressure? Software What is the current annualized revenue contribution from software, and how is growth trending? How does the quality of your software suite (FactoryTalk) compare to competitors (e.g. GE Proficy, Siemens S7)? 185 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Would you still consider software to be one of your major growth drivers over the long-term? Is software a major driver of Q/Q margin volatility? Capital Deployment Is the $400m share repurchase plan fully absorbing your US free cash flow? What would cause you to significantly increase/ decrease the repurchase program? How much flexibility do you have to raise leverage within the confines of your investment grade credit rating? In the event that favorable tax legislation does not pass, what are your plans for the overseas cash balance (90% of cash balance) – have you considered repatriation? Can you comment on how the recent JZE acquisition in China is tracking? What does this company bring you in the Medium Voltage drives market? What other opportunities do you see in your M&A backlog – do you see the potential to deploy a significant amount of your overseas cash balance? What geographies/ markets/ technologies are you most focused on? Can you describe how your JV’s with Fanuc (CNC) and Endress + Hauser (process field instrumentation) work and how they are evolving? Are you considering any other JV-type relationships and why is M&A not the right way to approach these white spaces? Operating Margins Can you give us an early read on the 2014 margin outlook? Margins are near cyclical highs, where can things get better? What opportunities do you have in mix? How have R&D been trending? Do you feel confident that momentum from 2H13 margin gains can be sustained into 2014? Can you quantify how much YTD margins were helped by lower incentive comp and restructuring savings? Have you seen any major changes in the competitive pricing dynamic QTD, viz. Europe (given macro weakness)? Is price/ cost currently a margin tailwind? What is your expectation for the price/ cost gap for the full year? Longer-term, what do you expect to be the major factors offsetting the continued negative mix shift toward lower-margin Solutions and Process revenue? How do you expect incremental margins to trend over the next 1-2 years? You mentioned that growth investments will pick up in 4Q13. Is that still the case, and what sort of margin headwind should we expect as we move into 2014? Given the direction of discount rates, pension expense should be a significant tailwind in 2014. Are you considering a move back towards GAAP pension accounting for the sake of simplicity? 186 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry ROK Company Background Exhibit 125 ROK Revenue Breakdown by Geography, Cyclicality and End Market Latin By Geography America By End Market Automotive By Cyclicality Asia- 10% 8% Pacific Machinery Early Mid 12% 5% Cycle Cycle Water 15% 39% Other Europe, 5% Industrial Middle 39% East, Healthcare 5% No Africa Cycle 21% Oil & Gas 10% 10% Canada United Other Late 8% States Process Cycle 51% 26% 36% Source: Company data, Morgan Stanley Research. Company Description Key Management Rockwell Automation (NYSE: ROK) was incorporated in Delaware in Keith Nosbusch serves as CEO (since February 2004) and Chairman of 1996 as part of the reorganization in which the former Rockwell Rockwell Automation. Prior to this role, he served as President of International Corporation (RIC) divested its Aerospace & Defense Rockwell Automation Control Systems since 1998. business to Boeing and contributed all other businesses to the Company. Ted Crandell serves as SVP and CFO (since October 2007). Prior to this role, Crandell served as SVP, Control Products & Solutions. Rockwell provides industrial automation control and information solutions Frank Kulaszewicz: SVP, Architecture & Software. that support optimization across a range of industries. Rockwell’s Blake Moret: SVP, Control Products & Solutions. offerings are sold to customers via a unique distribution model in which the Company’s direct sales force operates in conjunction with independent distributors that do not market competing product. As of FY12, Rockwell had approximately 22,000 employees globally. Exhibit 126 ROK Detailed Segment Breakdown 2012 2012 % of Seg. Revs Op. Profits End Markets Revs Key Products & Services Key Brands Competitors Architecture & $2,650 $714 General Industrial 39% Control platforms, controllers, electronic operator Allen Bradley, A-B, Siemens AG, Software 42% 61% Other Process 26% interface devices, configuration and visualization Rockwell Software, Mitsubishi Corp., Auto 10% software, rotary and linear motion control products, FactoryTalk ABB, Honeywell, Oil & Gas 10% sensors and machine safety components. Emerson Electric Control $3,609 $450 Healthcare 5% Low and medium voltage electro-mechanical and Allen Bradley, A-B, ICS Siemens AG, ABB, Products & 58% 39% Water 5% electronic motor starters, motor and circuit protection Triplex Honeywell, Solutions Construction/Ag/Mining devices, configured drives and motor control centers, Emerson Electric 5% automation and information solutions, total life-cycle support services Source: Morgan Stanley, Company Information. 187 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry ROK Key Financial Statistics Exhibit 127 Exhibit 128 ROK – Organic Growth vs. EE/MI (1Q06/2Q13) ROK – EPS Growth vs. EE/MI (1Q06/2Q13) 220% EPS Grow th Organic Grow th 30% EE/MI Median EE/MI Median 170% 20% 120% 10% 70% 0% -10% 20% -20% -30% -30% -80% 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 Source: Company Data, Morgan Stanley Research estimates Source: Company Data, Morgan Stanley Research estimates. Note: Rockwell reported an EPS Growth of 259% in 2Q10. Exhibit 129 Exhibit 130 ROK vs. EE/MI – Core Operating Margin (2006/13e) ROK vs. EE/MI – Core Incremental OM (2006/13e) 45% Core Incremental Op. Margin EE/MI Median 18% Core Op.Margin 40% EE/MI Median 17% 35% 16% 30% 15% 25% 14% 20% 13% 15% 12% 10% 11% 5% 10% 0% 9% -5% 2006 2007 2008 2009 2010 2011 2012 2013 8% 2006 2007 2008 2009 2010 2011 2012 2013 Source: Company Data, Morgan Stanley Research estimates Source: Company Data, Morgan Stanley Research estimates Exhibit 131 Exhibit 132 ROK vs. EE/MI – Revenue per Employee (2006/12) ROK – Capital Allocation (2008/12 cumulative) 300 Revenue/Employee Share 280 EE/MI Median Repurchases 37% 260 240 Acquisitions 220 8% 200 180 160 Capex 140 21% 120 100 2006 2007 2008 2009 2010 2011 2012 Dividends 34% Source: Company Data, Morgan Stanley Research Source: Company Data, Morgan Stanley Research 188 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry ROK 3Q13 Earnings Call Transcript Opening Remarks – Keith Nosbusch, CEO Sales grew 4% organically, sequential growth in all regions and both segments (consistent with expectations) US and Canada solid, oil & gas best vertical in both regions EMEA grew 3% despite continued recession in W. Europe, oil & gas strong, mining weak APAC down 8% Y/Y, but up 20% sequentially, the largest Q/Q improvement by region o China showed largest improvement in region, up 5% Y/Y, though still seeing project push outs into FY2014 (liquidity, decline in exports, overcapacity, weak investments) – Still bullish on long term prospects (consumer sweet spot) All other countries in APAC were down in the quarter, ex-Japan LatAm up 23%, Mexico and Brazil strong, oil & gas, auto and consumer verticals strongest Process Sales grew 2%, negatively impacted by project delays in Asia – ex Asia, process up 9% Logix up 3% in 3Q (slightly ahead of A&S) Segment operating margin expanded both sequentially and Y/Y in the quarter Would like to have spent more in the quarter and will spend more in 4Q On YTD basis, margin expanded 30bps to 19% Outlook Expect stable market environment through year end Full Year sales in lower end of previous range, expected to be $6.3bn, 1% organic growth Raising midpoint of Adj. EPS, narrowing EPS guidance range and maintaining high-end of adjusted EPS at $5.50 – $5.70 Automation Fair in Houston in 2013, Investor Conference on November 14 – will focus on Oil & Gas processes Quarterly Detail – Ted Crandall, CFO Revenue was $1.624bn, up 4% Y/Y organically, FX and acquisitions was negligible Segment operating earnings were $318m, up 9% Y/Y General Corporate net of $20.9m in 3Q13, vs. $18.3m in 3Q12 Adj. effective tax rate was 22% vs. 22.6% in 2013 (lower in 3Q due to a discrete tax event) Through 9 months, adj. effective tax rate was 24% Adj. EPS of $1.54 vs. $1.37 in 2012, up 12% Y/Y 140.4m DWAC Repurchased 1.2m shares ($104.3m), $618.6m available on $1bn authorization Through first nine months, repurchased ~3.8 million shares, repurchases ahead of expected run rate Sales increased 7% sequentially Segment operating earnings increased 11% sequentially Segment operating margin was 19.6%, up 0.9pts Y/Y and sequentially, primarily due to volume leverage and productivity (savings from restructuring actions in 4Q12 – not fully deployed savings from actions) Intended to spend more in the quarter and did not add headcount as fast as planned Trailing 4Q ROIC was 31% at the end of the quarter Architecture & Software o Sales increased 1% YOY, to $671m, 1% organic, sales increased 5% sequentially o Segment operating margin was 28.1%, up 0.2pts Y/Y, up 1.5pts sequentially o Segment operating earnings up 2% Y/Y Control Products & Solutions o Sales increased 6% Y/Y, to $953m, 6% organic, sales increased 8% sequentially o Sales in Products businesses and Solutions & Services businesses were both up ~6% Y/Y 189 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry o 11% sequential increase in the Solutions & Services businesses o Book-to-bill for Solutions and Services was 1.0, do not expect same level of Q/Q sales increases in 4Q o Segment operating earnings of 13.6%, up 21% Y/Y, up 1.7pts Y/Y, 0.6pts sequentially, primarily due to volume leverage and productivity Geographic o US up 4% Y/Y and sequentially – stable market environment, through 9-months Y/Y organic growth also 4% o Canada up 10% Y/Y in 3Q, up 14% sequentially – YTD Canada up 3% o LatAm, highest growth regionally, up 23% in 3Q, up 18% sequentially, YTD up 12% o EMEA, up 3% Y/Y and 2% sequentially, down 1% through 9 months o Asia-Pac down 8% Y/Y in 3Q, growth in China and Japan outpaced declines in the rest of the region APAC up 20% sequentially, down 12% YTD China was up 5% Y/Y, down 8% through 9 months. Other Items o FCF was $263.6m, YTD conversion on adj. income of 104%, conversion expected to be above 100% for the full year FY2013 Outlook o Updated guidance given 3Q sales and ending backlog o Sales of $6.3bn (0-2% organic growth, narrowed from 0-3%), FX and M&A ~0% o Versus previous guidance, lost ~$30m of revenue for full year due to FX o Segment Operating Margin for FY of 19%, up from 18.9% in previous guidance, estimates are inclusive of expectations for higher spending in 4Q o Adj. EPS of $5.50 to $5.70, narrowed range and increased midpoint o Expect full year expected tax rate of 24% (vs. previous 25%), adds about 3-4c to FY EPS guidance o Still expect to spend about $400m on share repurchases for the full year o General corporate expense expected to be ~$83m for full year Q&A Expand on China, specifically project delays in process vs. discrete – Majority of delays are in project businesses, and process is overweight on the project side. China is a meaningful part of process business in the region. Bit of growth in discrete OEM, particularly in tire OEMs. Discrete grew 5%+ in the quarter? Yes, discrete would have grown more to offset process driven by OEM and automotive. Why do you expect a more modest CPS uptick in 4Q given the same book: bill as 3Q12 (1.0x). Last two years were unusually large sequential increases. Timing of backlog does not suggest a sequential increase in 4Q, and something more normal ex. the last two years. How are you thinking about the overseas cash balance? Look for ways to repatriate each year, but ~90% of overseas cash balance is not easily available, and hope that corporate tax reform will make it easier to bring cash back. It will be avail for overseas M&A. What are you seeing in Automotive capex trends in US and Europe. Not much capex in Europe. Starting to see announcement of closings there. However, many of the Europeans are investing outside of the region. Seeing a high level of capex in the US, not growing but stable. Ford and GM performing reasonably well, and Chrysler continues to be the star performer. Investment in Americas continue to be strong and see that continue at a good level over time. 190 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry CP&S margins improvement due to productivity, or mix? Project teams are doing well closing successful projects and driving productivity. Some positive mix in the solutions area. A mix of both, but importantly, good execution. Modest growth this year has been in CP&S, so a little bit of volume leverage as well. Margins in 4Q is down Q/Q on incremental spend. Is that spending the new run-rate? Yes, goal is to establish a new run-rate exiting 4Q. Wanted to create the opportunity to create some targeted investments in development engineering and selling resources. Expect 4Q margins to be slightly below 3Q margins. How did trends play in April / May / June? 2Q is the most consistent quarter, start to finish, and saw that this quarter. Pretty steady throughout the quarter. 4Q is the most back-end loaded quarter. So far, July matching expectations for the quarter, but August will be difficult, and that’s why Sept is important. Autos said they’re not doing as much shutdowns, is that true? Not sure, but strong sales should support that. It might hurt because the shutdowns are when they do a lot of maintenance. Net net, does not mean a lot. Probably a slight negative on MRO. Does pension rate increase free up cash in 2014? No mandatory contributions in 2013 or 2014, so no impact on cash. What are you spending more on, and what areas do you need to invest in geographically. Targeting to invest in product development (majority in A&S segment) and selling resources. Investments in selling resources will be globally, but less than normal in Asia. Good opportunities in select areas in Europe as well. Are Solutions orders targeted at the build out of the gas chain? Strong presence in intelligent motor control and product safety offerings. Targeted more in the upstream area. Have meaningful solutions capabilities for the high-growth segments, if those projects are allowed to proceed. Is solutions book: bill expected to be below 1 in 4Q? Very typical for the company to have a <1 book: bill in 4Q given shipments tend to be higher. Are there specific reasons why solutions book: bill falls through the year. Some of it is the lumpiness of the solutions business. Orders rates now are at a more normalized level. Not one of two big projects driving it. Timing of the projects is the wildcard, but haven’t seen any uptick in delays except in China. How did mining do in the quarter. Mining is about 8% of sales. Have the least participation in Coal, so not seeing the weakness in the market overall. In general, mining is slowing. Some of growth in LatAm this quarter is due to shipments flow through, but Australia and Brazil slowing down due to their supplier relationship with China. Seeing continued slowness in South Africa due to labor unrest and pricing of precious metals. Mexico strong. Canada is strong, but starting to see it slow. Mixed bag at this point. A lot of cash on the balance sheet. Assuming there’s no tax reform, why does ROK need that level of cash? Money is available to do acquisitions. If it becomes clear that there’s no tax reform, then will consider alternatives, but now does not appear to be that time. What is the biggest issue in China? Depends on the industry. Infrastructure is overcapacitized, especially in steel. Liquidity is starting to hurt the larger companies. Gov’t making a larger effort to deal with the shadow banks, which is now impacting SOEs. OEM market has been hurt by decline in exports, particularly in exports to Europe. Margins are the cycle highs. Where can things get better from a mix perspective? Big factors are volume, and mix between products and solutions. Expecting flat Q/Q conditions into 4Q, but not ready to talk about 4Q. Longer-term, expect solutions to growing faster than product driven by process and emerging markets. Can up spending because confident that market will not decline. 191 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry What was product sales growth within CP&S? Up 6%. Where have R&D spending been? Have been running at ~4%. EMEA up 2% sequentially. Is that Europe, or mostly Mid East and Africa? Growth is mostly Mid East and Africa. Europe better in Northern countries, and Eastern and Western Europe not materially different. Not seeing any kind of consistency in Western Europe. Choppiness in Western Europe starting to impact Eastern Europe. What does the acquisition horizon look like in the next 12 to 24 months? Trying to focus M&A work outside the US. Continue to expand the search, and focusing on smaller companies in EM that continue to mature. Looking at areas with technology gaps, areas for domain expertise, services, and software. 192 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry ROK Summary of Guidance Exhibit 121 ROK – 2013 Guidance (changes versus prior guidance highlighted in yellow) Guidance summary FY13 Prior FY13 New Comments Implies 1% organic growth for the year. F/X Revenue $6.25 - 6.45bn $6.3bn and M&A were negligible Organic growth Up 0 - 3% 1% FX/M&A ~0% ~0% Full year guidance inclusive of expectations Segment margin 18.9% 19.0% for higher spending in 4Q Down 1ppt on lower 3Q13 rate. Adds about 3-4c Tax rate 25% 24% to FY EPS guidance. General corporate net expense $83m $83m Flat Y/Y. Share repurchase $400m $400m Expect to repurchase 5-5.5m shares. Share count 141m Raised 10c at the low-end. Guidance excludes Adj. Diluted EPS $5.40 - 5.70 $5.50 - 5.70 45c of net non-operating pension costs. FCF ~100% of Net Income ~100% of Net Income Source: Company Data 193 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry This page has been intentionally left blank 194 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry SPX Corporation 195 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry SPW Question Bank Outlook How is business trending relative to your flat to low-single digit core growth outlook for 3Q? What level of growth is embedded within your forecast for each business unit? What trends are you seeing by geography and major business? Where do you see the major upside and downside risks relative to the down 2% to up 2% core growth outlook for 2013? How much revenue visibility do you currently have in backlog by segment? Do you expect any major impact from the continued depreciation in the South African Rand? Have you been impacted by labor unrest in South Africa. Can you give us an early read on 2014? What are the moving parts to the growth assumptions by segment? What is expectations for volume, mix and price? How should we think about incremental margins by segment? What is an appropriate tax rate to use for 2014? What are your thoughts on share repurchases vs. dividends vs. M&A? Portfolio Relational recently boosted its stake to 15%. Is there an active dialog with them? If so, what is the tone of conversation and how active is this dialog? What is the benefit of becoming a pure-play Flow company, in your eyes? Is it primarily the growth outlook, stability or the premium multiples these assets attract? Do you envisage further asset disposals as you evolve into a pure play Flow business? Are you willing to divest later-cycle businesses (viz. Waukesha) before a firm recovery takes root? What is your view on the non-transformer Industrial portfolio? Are you a net seller of these assets over time? What do recent management changes tell us about the direction of the portfolio? Does the strategy to retain Thermal and improve profitability preclude the possibility of divesting niche parts of that portfolio e.g. Weil Mclean (residential boilers), Marley (roof top HVAC condensers)? Capital Allocation Do you see upside to your $200m share repurchase target this year, given that $145m was already completed by end of 2Q13? How should we model the cadence through 2H13? Do you expect it to be fairly linear? How concerned are you by your low share count and resultant EPS volatility and stock illiquidity? Do you believe that the 43m shares repurchased since 2005 have created shareholder value? Why did you decide to fully fund the US pension plan at record low discount rates? This was an EPS accretive move but doesn’t it create the risk of over-funding if rates recover? Management Structure How long is CEO Chris Kearney committed to remain at the company? Who are the natural CEO successors? Which parts of the senior executive bench need to be strengthened? 196 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry How is executive compensation evolving to more closely align management and shareholder’s interests? We noticed that you have recently added some internal metrics (operating margins and FCF) to your LTIP – can you disclose what the targets are for those metrics in 2013? How do you respond to claims that senior management is over-compensated relative to similarly sized US industrial companies? Can we talk in more depth about the leadership changes made at Thermal and Clyde Union? What are their main targets and over what time frame have they been set? What is the rationale for moving to a matrixed management structure at Flow Technologies (3 end market Presidents and 2 operational Presidents). How do you see this improving efficiency and enhancing focus? Do you expect to transition other segments into this type of management structure? Margin Outlook With the exception of Industrial, your long term segment margin targets are all below prior peak levels: 13-15% at Flow, 8-10% at Thermal and 15-22% at Industrial? How do Flow margins look excluding acquisition dilution? Do you believe you could have done a better job defending profitability at Thermal? What was the negative impact of the “distressed” backlog at Clyde Union during 2Q13 and how much drag do you foresee over the remainder of the year from the remaining backlog ($15m)? How confident are you that the $5m charge recorded in 1Q covers the extent of backlog engineering re-work? How is restructuring progressing in ClydeUnion and Thermal? How are you tracking vs. your $5-10m target in 3Q13? Are you still on track to realize $15m benefits in 2H13? Is there scope for further restructuring actions? What opportunities do you see to materially reduce your cost base? What was the price/ cost impact to 1H13 margins? How is pricing trending across the portfolio, and how much pricing impact have you baked into your 2013 outlook? Competitive Environment Has the slowdown in the F&B systems and OE pumps markets led to increasing pricing pressure? How does the margin on current bookings compare with legacy backlog? How is the competitive environment evolving within EM? Are you seeing Chinese players (viz. Harbin) bidding for projects outside of China? Is increasing prevalence of Asian E&Cs a concern? Has the expansion of US transformer manufacturing capacity led to a structural supply/demand imbalance? What impact is the import tariff imposed on the Korean OEMs having on US transformer pricing across the spectrum? How does pricing power look within the Medium and High Voltage segments? Miscellaneous How is EGS performing? If Emerson were to exit this partnership, would you be a buyer or would you seek to monetize as well? The tax rate is expected to fall to 24% in 2013. What opportunities do you see to further reduce your long-term tax rate? 197 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Industrial Medium Voltage Transformer Trends: What is your MV revenue target relative to the 20% transformer growth guidance for 2013 – how much of this is already in backlog? What is the latest update on transformer pricing – is pricing still stable or is it turning down? Is it realistic to assume that you will recover the 30% price lost during the last downturn or is additional domestic manufacturing capacity depressing pricing power? How are backlog lead times for the Waukesha and MV industry trending (vs. 6 months in 2Q)? What is the mix of open market vs. negotiated pricing? What are you hearing from utility customers regarding scheduled replacement demand for 2014? Large Transformer Ramp-Up: What level of revenue contribution do you expect from large power transformers – how many units? Do you still expect Large Power to be earnings neutral in 2013 i.e. 15c accretive vs. FY12? How is the order pipeline looking and do you still believe that $150-200m revenue contribution is achievable in light of US capacity ramp-up from Japanese and Korean manufacturers, as well as GE’s distribution agreement with XD Electric? Are you seeing a price and market share benefit from Korean import tariffs in High Voltage? Why is your High Voltage target margin (~15%) so much lower than your historical MV margins (~30%)? Niche Businesses: How are the hydraulic tools, aerospace, comms, solar, T&M and fare collection businesses trending and what is your revenue growth outlook for 2013? You called out weakness in Comms – what caused this and over what period do you expect this head wind to persist? Have the shorter cycle hydraulic tools and T&M businesses been negatively impacted by the US/ Europe slowdown? Have you seen an increase in sales at Genfare (Farebox systems) as envisaged? Do you envisage any further asset disposals within the non-Transformer industrial portfolio? Margins: Have you embedded any price benefit within your FY13 segment margin guidance of 14.3-14.6%? This compares to 13.4% in 2012; how much of the 100-130bps forecasted expansion is coming from lean initiatives and transformer volume? Within this target, where are MV and HV transformer margins relative to fleet average? Outside of transformers, in which businesses do you see the potential for upside or downside vs. plan? Thermal QTD Trends. How is bidding/ quoting activity trending QTD vs. the 9% Q/Q growth in 2Q13 backlog ex-Eskom? How should we think about 3Q revenues relative to low-single digits total company revenue growth guidance? Where do you see the most opportunities by territory – are you seeing any pick-up in US MRO activity? How much of the 7-9% forecasted decline in revenues is attributable to Eskom project wind down and how much is European weakness? When do you expect the BalckeDuerr business to stabilize? Shanghai Electric: How is the Shanghai Electric JV performing vs. plan ($170m contracts awarded since January 2012 inception)? What is the outlook for 2013 & 2014? To what extent is the SE JV bidding outside of China? How much EBIT contribution should we plan per $1m of project execution via the SE JV? Eskom: You have noted that just under $200m of your 2Q ending Thermal backlog was related to the remaining portion of the SA projects? What is the update on how the backlog converts over 2013-2015? What is the revenue outlook for 2014/15? Do you see incremental opportunities in South Africa over the planning horizon? How you seen any deviations from plan on SA Rand depreciation or labor unrest? MRO/Service businesses: The European service business has been a major headwind this year - would you expect to see similar development in the US or other developed markets? What is your longer-term outlook for the retrofit market in both developed and developing markets? Can you quantify the revenue potential over the next few years? How important could US environmental legislation be over 2014/16? What are you hearing from utility customers? New Leadership: What is the mandate for the new management team? Describe the near, medium, and long-term goals for the business? What mistakes did the prior management team make? 198 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry Long Term Margins: What has changed since the last cycle to cause you to lower long term margin targets to 8-10% - does this reflect negative product mix or lower pricing/ competitive pressure? Do you see risk that industry profitability could decline further? What is the downside risk to margins in the current cycle relative to the 5.6-5.9% expected in FY13 – how much influence is mix having here? With hindsight, should you have been more proactive in rightsizing the cost base and changing leadership? Flow QTD Trends: Can you comment on recent trends in Food & Beverage, Oil & Gas and Industrial end markets as well as geographic mix? Are you continuing to see large F&B project deferrals in APAC? Have you seen any impact from problems at Fonterra? Has strength in Oil & Gas components continued into 3Q? FY13 Revenue Outlook: How are your tracking relative to your 0-3% core growth target for FY13? What gives you confidence that you can meet the high-end of your guidance given 3% decline in 1H? ClydeUnion: How is the mix of large project vs. aftermarket orders evolving? How is CU pricing on new orders trending? Do you expect to take any further charges related to the legacy low-priced backlog? How much of the distressed backlog is expected to be shipped in 3Q? How does your CU revenue outlook compare to the 0-3% segment target for FY13? Are you now fully comfortable with CU’s supply chain infrastructure? Can you comment on CU integration plans and revenue/ cost synergies achieved vs. plan? Over what timeframe do you believe you can return CU margins to >10% on an annual basis? Margins: How should we model incremental leverage given increasing mix of (low margin) Solutions and contribution from ClydeUnion? How much of the 80-110bps margin expansion forecasted in FY13 will be contributed by ClydeUnion given depressed comps? To what extent is the different mix of the portfolio the reason for the reduced 13-15% long-term margin range vs. prior 16.4% cyclical peak? How would you describe execution on projects versus 2Q? 199 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry SPW Company Background Exhibit 133 SPW Revenue Breakdown by Geography, Cyclicality and End Market By End Market Auto Tools Pow er Gen\ By Cyclicality 0% No Cycle Defense By Geography A-Pac Other Process Cooling 1% 2% 20% 13% Early 19% 12% Mining Other Pow er Gen APAC 3% Equip MEA 14% 16% 12% Defense 1% Pow er Late Mid Electrical Test Transformers 62% 23% S. 4% 4% America 2% Food & Bev Chemical 14% 3% N. O&G America C-HVAC 10% Comm. 3% 46% General Industrial Heating 8% 5% Source: Company data, Morgan Stanley Research. Company Description Key Management Incorporated in Delaware and headquartered in Charlotte, North Chris Kearney serves as Chairman (since 2007), President and CEO Carolina, SPX Corporation (NYSE: SPW) is a global manufacturer of (since 2004) of SPX. He joined the company in 1997 as Vice President, highly specialized, engineered solutions with operations in over 35 Secretary and General Counsel. countries and sales in over 150 countries globally. The company was Jeremy W. Smeltser was appointed as CFO of SPX on August 6, 2012. founded in 1912 as a manufacture of piston rings for automotive engines He joined SPX in 2002 and previously served in variance roles for the in Michigan. company, most recently as VP, Finance Gene Lowe: was named as President of Thermal Equipment and Since 2004 under the leadership of CEO Chris Kearney, SPX has Services in May 2013. completed 18 divestitures and honed the focus of its business from 9 platforms in 2004 to three key end-markets: global infrastructure (power Dave Kowalski was named president, Global Manufacturing Operations, and generation, HVAC, etc.), diagnostic tools and process equipment. in August 2013 and segment president, Industrial Products and Services, in August 2011. Exhibit 134 SPW Detailed segment breakdown 2012 % of Seg. 2012 Rev Op. Profits End Markets Revs Key Products & Services Key Brands Competitors Flow $2,682 $285 Power & Energy 33% High-integrity pumps, valves, filters, Waukesha Cherry-Burrell, GEA Group, Flowserve, Alfa Technology 52% 56% Food & Beverage 35% homogenizers, heat exchangers, fluid Lightnin, Copes-Vulcan, M&J Lava AB, Pentair, Sulzer and Industrial Flow Process 32% mixers, chemical injection and dehydration Valves, APV, Pneumatic IDEX equipment. SPX announced acquisiton of Products. ClydeUnion Pumps in Aug 2011. Thermal $1,498 $107 Power & Energy 68% Dry, wet and hybrid cooling systems and Marley, Balcke-Duerr, Evapco, GEA, Alstom, Equipment & 29% 21% HVAC 29% thermal components for power generation, Ceramic, Yuba, Ecolaire and Siemens AG, Hamon & Cie, Services General Industrial 4% refrigeration, HVAC and industrial markets; Recold Baltimore Aircoil, Thermal boilers and HVAC products for the Engineering, Harbin Air commercial and residential markets. Conditioning, Beijing Longyuan Colling, Shouhang IHW Resources Saving $930 $114 Power & Energy 45% Mid-sized transformers; industrial tools and Waukesha, GFI, ABB (Kuhlman Electric), GE- Industrial hydraulic units, precision machine Radiodetection Prolec and Hyundai Heavy 18% 23% General Industrial 27% Products & components for Aerospace; Crystal growing Industries Telecom & Other 17% Services machines for solar; TV, cell phone and data Commercial Aerospace 12% transmission broadcast antenna systems; Fare box systems, precision cable and pipe locato Source: Morgan Stanley, Company Information. 200 MORGAN STANLEY RESEARCH September 4, 2013 Multi-Industry SPW Key Financial Statistics Exhibit 135 Exhibit 136 SPW – Organic Growth vs. EE/MI (1Q06/2Q13) SPW – EPS Growth vs. EE/MI (1Q06/2Q13) 20% Organic Grow th 100% EPS Grow th EE/MI Median EE/MI Median 15% 80% 60% 10% 40% 5% 20% 0% 0% -5% -20% -10% -40% -15%