A Wall Street Perspective for the Valve Manufacturers ......NAHB Housing Market Index 8 Economic Indicators & Outlook The U.S. housing market is improving and made a positive contribution

A Wall Street Perspective for the

Valve Manufacturers Association

January 18, 2013

John R. Moore, CFA

Senior Vice President & Senior Research Analyst

414-847-6246/[email protected]

1

Required disclosures on page 39-41

CL King & Associates Nine Elk Street Albany, New York 12207 (518) 431-3555

2

Introduction to C.L. King


Headquartered in Albany with Major Presence in New York City

CL King Overview – 4 Divisions 100% of profit/loss accrues to the women owners listed below

● WBENC Certified (Women’s Business Enterprise National Council)

OWNERS

Candace King Weir, Founder/CEO

Amelia Weir, Paradigm Portfolio Manager

Katherine Weir, Non-Employee

C.L. King &

Associates, Inc.

Paradigm Capital

Holdings, Inc.

100% 100%

Sister firm to CL King

Traditional institutional

asset manager

$2 billion assets under

management

Investment

Banking

Capital Markets

Corporate Services

Strategic Advisory

Fixed

Income

Sales & Trading

Wholesaler to Retail Broker-Dealers

Syndicate

Equities

Research

Sales & Trading

Syndicate

Professional

Investor

Services

Prime Brokerage

Registered Investment Advisors

Correspondent Clearing

Full-service investment bank

Self-clearing broker-dealer

105 employees in 6 offices

Strong capital base to handle

large underwriting

commitments

3

Introduction to C.L. King


Biography: John R. Moore, CFA

-Joined CL King in December 2011

- Coverage universe focuses on industrial fluid

handling companies

- Prior to joining CL King, Mr. Moore was with

CMJ Partners, LLC, where he co-managed a long-

short equity hedge fund with a value-based strategy

- Prior to CMJ, Mr. Moore was a research analyst

with Robert W. Baird & Company, where he

followed the Process Controls Sector

- Bachelor of Science in Industrial Engineering

from Northwestern University

- MBA from The University of Chicago Booth

School of Business

- CFA charter holder since 2007

Coverage List:

A.O. Smith (AOS)

Colfax Corporation (CFX)

CIRCOR (CIR)

Crane Co. (CR)

Dresser-Rand (DRC)

IDEX (IEX)

Flowserve (FLS)

Robbins & Myers (RBN)

SPX Corp. (SPW)

Xylem (XYL)

4

Agenda


• Introduction to CL King & Associates

• Economic Indicators & Outlook

• Industrial Stocks & the PMI

• Sector Investment Strategy

• End Market Assessment

• Company Snapshots

Quarterly Real GDP Growth

5

Economic Indicators & Outlook

GDP growth likely slowed in 4Q12 as uncertainty over a deal to avoid the fiscal cliff caused companies to keep a lid on spending.

GDP growth should accelerate in 1H13 but will likely remain near 2% as fiscal policy

tightens.

GDP growth should continue to accelerate in 2H13 and may reach levels of 3% or more by year-end as business investment, the housing market and state/local budgets all improve

following the fiscal cliff resolution.

Source: U.S. Department of Commerce , The Conference Board, CL King & Associates


-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%Recession Real GDP

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%Recession Real GDP

Annual Real GDP Growth

Capital Goods Orders

6


Business confidence and investment has been negatively impacted by the recent

fiscal uncertainty but should reaccelerate throughout 2013 now that a deal has

been reached.

Source: U.S. Census Bureau, CL King & Associates


0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000Recession

Nondefense Capital Goods Orders Ex Aircraft ($millions)

Treasury Spread (10YR less 2YR)

7


The treasury spread remains positive and is consistent with

historical mid-cycle levels.

The yield curve typically inverts several months prior to a recession

and is a strong leading indicator.

Source: FactSet, CL King & Associates


-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%Recession

Yield Curve (10YR - 2YR)

NAHB Housing Market Index

8


The U.S. housing market is improving and made a positive contribution to GDP

growth in 2012 for the first time since 2005.

This is a critical factor that has been missing in the recovery thus far.

Source: NAHB, CL King & Associates


0

10

20

30

40

50

60

70

80

90

Jan

-85

May

-86

Sep

-87

Jan

-89

May

-90

Sep

-91

Jan

-93

May

-94

Sep

-95

Jan

-97

May

-98

Sep

-99

Jan

-01

May

-02

Sep

-03

Jan

-05

May

-06

Sep

-07

Jan

-09

May

-10

Sep

-11

State & Local Tax Revenue

9


State and local governments should become less of a drag as tax revenues rise and

budget shortfalls subside.

Source: U.S. Census Bureau, CL King & Associates


State Budget Shortfalls

Source: www.statehealthfacts.org, CL King & Associates

0

10

20

30

40

50

60

$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

FY09 FY10 FY11 FY12 FY13E

No. States Facing a Budget Gap

Total Shortfall Amount (millions)

-15%

-10%

-5%

0%

5%

10%

15%

1Q

87

1Q

88

1Q

89

1Q

90

1Q

91

1Q

92

1Q

93

1Q

94

1Q

95

1Q

96

1Q

97

1Q

98

1Q

99

1Q

00

1Q

01

1Q

02

1Q

03

1Q

04

1Q

05

1Q

06

1Q

07

1Q

08

1Q

09

1Q

10

1Q

11

1Q

12

Recession

State & Local Tax Revenue

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%Recession

Industrial Production

Industrial Production (YOY % Change)

10


The YOY change in Industrial Production slowed to 2%-3% in late-2012 from 4%-5% in early-2012 due to reduced confidence in the economic outlook.

Growth should accelerate back to 4%-5% in late-2013 with a recovery in

business confidence and investment.

Source: Federal Reserve, CL King & Associates


ISM’s Purchasing Managers Index (PMI)

11


The PMI is slightly above 50 at 50.7 in December and indicates expansion. The PMI is up from

49.5 November. The near break-even level of the PMI further evidences the impact of recent

uncertainty regarding government regulations, taxes, and the global economic outlook.

The PMI breaks 50 several months prior to a recession and is a leading indicator. The PMI also

breaks 50 at least once between recessions during the “mid-cycle slowdown”.

Source: Institute of Supply Management, CL King & Associates


30

35

40

45

50

55

60

65

70

Recession ISM PMI

20

30

40

50

60

70

80Recession

ISM PMI

ISM Purchasing Managers Index (PMI)

12


Mid-cycle

slowdown Mid-cycle

Slowdown #1

Mid-cycle

slowdown

Mid-cycle

slowdown

Mid-cycle

slowdown???

22

months

Dot-com

bubble

35

months

49

months

42

months

43

months

48

months

At 48 months past the trough, the recent drop below 50 would not be

an unusual “mid-cycle slowdown.”

Source: Institute of Supply Management, CL King & Associates


0%

2%

4%

6%

8%

10%

12%Recession

US2YR

30

35

40

45

50

55

60

65

70

Recession ISM PMI PMI and U.S. 2-Yr. Treasury Rate

13


However, the mid-cycle slowdown

has historically occurred after or

concurrent with a rise in short-

term interest rates.

Source: Institute of Supply Management, Federal Reserve, CL King & Associates


14


Conclusion 2013 • Real GDP growth likely slowed to less than 1% in 4Q12 due to the fiscal uncertainty. • Real GDP growth should accelerate in 1Q13 and 2Q13 but will likely be just 1%-2% as fiscal policy tightens. • Positively, Real GDP growth should accelerate throughout 2013 and reach levels of 3% or more as…

1) business investment reaccelerates due to more confidence in the global outlook 2) the housing market continues to improve, a critical factor that has been missing this recovery 3) state and local government cutbacks become less of a drag.

• The greatest risk in 2013 remains Europe. • The issues of 2012 including slower economic activity in emerging markets such as China and the fiscal cliff

situation in the United States appear to be resolved. • Accelerating GDP growth and low interest rates has historically been a good environment to own stocks. Conclusion 2013 and beyond • The economic cycle is likely still in the early to middle stage • The moderate economic recovery should strengthen now that housing is contributing and tax revenues are

rising while interest rates remain at historical low levels. • The recent slow-down was not the typical mid-cycle slowdown that many are comparing it to. • Multiple mid-cycle slowdowns are likely this cycle often present good opportunities to buy stocks.

• Last summer’s slowdown was triggered by concerns regarding Europe. • The late-2012 slowdown was caused by uncertainty ahead of the fiscal cliff. • Europe remains fragile and could cause another slowdown in 2013. • The classic mid-cycle slowdown driven by a rise in interest rates is likely several years out.


15

Industrial Stocks & The PMI

• Classified every month since January 1, 1995 into the following eight buckets based

on the trend in the PMI versus the prior month: • 1) <=45 & Rising; 2) 45-50 & Rising; 3) 50-55 & Rising; 4) >=55 & Rising; 5) >=55

& Falling; 6) 50-55 & Falling; 7) 45-50 & Falling; 8) <=45 & Falling

• Example: The December 2012 PMI was 50.7, up from 49.5 in November. Thus, the

December 2012 return was included in the 2nd bucket “45-50 & Rising”.

• Calculated monthly total returns for the S&P 500 and the S&P 500 sub-index for

Industrial Machinery.

• Example: In December 2012 the S&P 500 returned 0.7% and the Industrial Machinery

Industry returned 1.3%.

• Standardized all the monthly total returns and calculated the average for each bucket.


Study Methodology:

-0.25

-0.20

-0.15

-0.10

-0.05

0.00

0.05

0.10

0.15

0.20

0.25

<=45

& R

isin

g

45-5

0 &

Ris

ing

50-5

5 &

Ris

ing

>=55

& R

isin

g

>=55

& F

allin

g

50-5

5 &

Fal

ling

45-5

0 &

Fal

ling

<=45

& F

allin

g

-0.25

-0.20

-0.15

-0.10

-0.05

0.00

0.05

0.10

0.15

0.20

0.25

<=45

& R

isin

g

45-5

0 &

Ris

ing

50-5

5 &

Ris

ing

>=55

& R

isin

g

>=55

& F

allin

g

50-5

5 &

Fal

ling

45-5

0 &

Fal

ling

<=45

& F

allin

g

16


The performance of the S&P 500 and

the recent trend in the PMI are not

clearly related. This is expected

given the inclusion of sectors such as

Retail, Healthcare, and Financials

whose performance is not

necessarily related to PMI levels.


S&P 500 Standardized Return Versus PMI Trend Industrial Machinery Standardized Return Versus PMI Trend

The performance of Industrial

Machinery stocks however, is

clearly related to the recent trend

in the PMI. Industrial Machinery

stocks typically generate above

average returns when the PMI is

above 50.

25

30

35

40

45

50

55

60

65

70

75

80

0

25

50

75

100

125

150

175

200

225

Jan

-96

Au

g-9

6

Mar

-97

Oct

-97

May

-98

De

c-9

8

Jul-

99

Feb

-00

Sep

-00

Ap

r-0

1

No

v-0

1

Jun

-02

Jan

-03

Au

g-0

3

Mar

-04

Oct

-04

May

-05

De

c-0

5

Jul-

06

Feb

-07

Sep

-07

Ap

r-0

8

No

v-0

8

Jun

-09

Jan

-10

Au

g-1

0

Mar

-11

Oct

-11

May

-12

De

c-1

2

PMI

Industrial Machinery Index

Industrial Machinery Index Vs. PMI

17




Industrial Machinery stocks move before the PMI breaks 50.

20

25

30

35

40

45

50

55

60

65

70

75

80

8

9

10

11

12

13

14

15

16

17

18

19

20

Jan

-96

Au

g-9

6

Mar

-97

Oct

-97

May

-98

De

c-9

8

Jul-

99

Feb

-00

Sep

-00

Ap

r-0

1

No

v-0

1

Jun

-02

Jan

-03

Au

g-0

3

Mar

-04

Oct

-04

May

-05

De

c-0

5

Jul-

06

Feb

-07

Sep

-07

Ap

r-0

8

No

v-0

8

Jun

-09

Jan

-10

Au

g-1

0

Mar

-11

Oct

-11

May

-12

De

c-1

2

PMI (right) Industrial Machinery Sector Fwd P/E Average Fwd P/E

Industrial Machinery Valuation Vs. PMI

18




The stocks’ forward valuation rises above historical averages first.

Stocks today are predicting a meaningful acceleration in the PMI.

Periods in which GDP growth is accelerating and interest rates are low have

historically been good times to own stocks.

Periods in which the PMI is above 50 and rising have historically been good

times to own the Industrial Sector.

Valuations are above historical averages so look for pull backs and be selective

when initiating new positions.

Focus on later-cycle names with exposure the mega-trends. These stocks will be

more resilient during the upcoming mid-cycle slowdown.

19

Sector Investment Strategy


20

End Market Assessment

Oil & Gas - Upstream:

• North American rig count declined

modestly in late-2012 due to uncertain

global economic outlook.

• However, a reacceleration in 2013 is

likely as North America is becoming

increasingly important due to deep

water, oil sands, and shale resources.

• The shift to oil from gas and to

horizontal/directional methods from

vertical is clear.


North American Rig Count

Source: Baker Hughes

-150%

-100%

-50%

0%

50%

100%

150%

0

500

1,000

1,500

2,000

2,500

3,000

Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12

Oil

24%

Gas

76%

2008

Oil

73%

Gas

27%

2012

Horiz.

51%

Vertical

49%

2008

Horiz.

73%

Vertical

27%

2012

21


Oil & Gas Downstream:

• Major projects have failed to release and

oil company and E&C customers have

deferred orders due to the uncertainty

regarding the near-term global economic

outlook.

• Investment should improve in 2013 and

remain at healthy levels over the long-term

due to the significant need for energy

infrastructure over the next 30 years.

• Crude oil prices remain elevated and

support continued investment while natural

gas prices remain depressed but have

recovered.


0

2

4

6

8

10

12

14

16

0

20

40

60

80

100

120

140

160

Dec

-84

Jan-

86

Feb

-87

Mar

-88

Apr

-89

May

-90

Jun-

91

Jul-9

2

Aug

-93

Sep

-94

Oct

-95

Nov

-96

Dec

-97

Jan-

99

Feb

-00

Mar

-01

Apr

-02

May

-03

Jun-

04

Jul-0

5

Aug

-06

Sep

-07

Oct

-08

Nov

-09

Dec

-10

Jan-

12

WTI ($/bbl - left) Nat Gas ($/Mmbtu - right)

Source: Energy Information Administration

Crude Oil and Natural Gas Prices

Source: FactSet

U.S. Refinery Capacity Utilization

70

75

80

85

90

95

100

Jan-

85

Apr

-86

Jul-8

7

Oct

-88

Jan-

90

Apr

-91

Jul-9

2

Oct

-93

Jan-

95

Apr

-96

Jul-9

7

Oct

-98

Jan-

00

Apr

-01

Jul-0

2

Oct

-03

Jan-

05

Apr

-06

Jul-0

7

Oct

-08

Jan-

10

Apr

-11

Jul-1

2

22


Power:

• Global energy demand is expected to rise

by more than 35% by 2035 driven by rising

living standards in China, India, and the

Middle East.

• Capital investment activity will be strongest

in these developing regions while

service/retrofit activity will remain healthy

in the developed markets.

• India’s power infrastructure remains

significantly under-invested.

• Investment in Gas fired plants in the U.S.

will grow meaningfully driven by shale

gas.


Source: International Energy Agency World Energy Outlook 2012

Global Energy Demand

Share of Global Energy Demand

0%

20%

40%

60%

80%

100%

1975 2010 2035

Rest of non-OECD

Middle East

India

China

OECD

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

1975 2010 2035

Source: International Energy Agency World Energy Outlook 2012

23


Water/Wastewater:

• Capital investment projects in developed

markets remain weak due to lower

economic activity and lower municipal

budgets.

• Maintenance and replacement work in

developed markets remains resilient.

• Major capital investment projects in

emerging regions continue to rise driven by

population growth and urbanization.

• The need for storm/flood management is

growing (i.e. dewatering) after events such

as Super Storm Sandy.

• Many emerging regions have focused

primarily on clean water infrastructure

thus far and underinvested/not invested in

wastewater infrastructure.


Source: U.S. Census Bureau

U.S. Water & Sewer Construction Spending

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

$45,000

$50,000

$55,000

$60,000

Jan

-02

Sep

-02

May

-03

Jan

-04

Sep

-04

May

-05

Jan

-06

Sep

-06

May

-07

Jan

-08

Sep

-08

May

-09

Jan

-10

Sep

-10

May

-11

Jan

-12

Sep

-12

U.S. Water & Sewer Construction Mo. YOY % Chg.

Source: Federal Reserve

60

65

70

75

80

85

90

Jan

-86

Ap

r-8

7

Jul-

88

Oct

-89

Jan

-91

Ap

r-9

2

Jul-

93

Oct

-94

Jan

-96

Ap

r-9

7

Jul-

98

Oct

-99

Jan

-01

Ap

r-0

2

Jul-

03

Oct

-04

Jan

-06

Ap

r-0

7

Jul-

08

Oct

-09

Jan

-11

Ap

r-1

2

24


Chemical:

• Investment rebounded faster than most industries after the economic downturn because the chemical industry lagged during the last up-cycle.

• Investment should remain robust over the near to medium term driven by a reacceleration in emerging market growth particularly China.

• Unconventional gas resources/shale is providing the North American chemical industry with a significant cost advantage versus the rest of the world.

• The large volumes of ethane obtained as a by-product in shale gas production is causing idled plants to be restarted and more capacity to be added in North America.


Natural Gas Prices

Source: FactSet

0

2

4

6

8

10

12

14

16

May

-90

May

-91

May

-92

May

-93

May

-94

May

-95

May

-96

May

-97

May

-98

May

-99

May

-00

May

-01

May

-02

May

-03

May

-04

May

-05

May

-06

May

-07

May

-08

May

-09

May

-10

May

-11

May

-12

Natural Gas Futures ($/Mmbtu)

U.S. Chemical Capacity Utilization

25


Residential Construction:

• The U.S. housing market is improving

meaningfully with housing starts up more

than 25% versus the prior year in 2Q12

and 3Q12.

• Housing starts are forecast to nearly reach

1.2 million by 2014-2015. We view this as

a critical level in which new construction

demand and remodeling activity

accelerates meaningfully.


Source: National Association of Home Builders (NAHB)

NAHB Housing Market Index

Source: NAHB

U.S. Housing Starts

0

10

20

30

40

50

60

70

80

90

Jan

-85

May

-86

Sep

-87

Jan

-89

May

-90

Sep

-91

Jan

-93

May

-94

Sep

-95

Jan

-97

May

-98

Sep

-99

Jan

-01

May

-02

Sep

-03

Jan

-05

May

-06

Sep

-07

Jan

-09

May

-10

Sep

-11

0100200300400500600700800900

1000110012001300140015001600

2007 2008 2009 2010 2011 2012F 2013F 2014F

New construction demand likely accelerates when starts rise above 1.2M.

26


Commercial Construction:

• Non-residential construction activity in the

U.S. is improving but not at the same rates

as the residential market.

• Non-residential construction growth in

2013 is expected to remain modest at

roughly 3% similar to 2012’s 2.9% growth,

according to AIA.

• Improving economic activity and

accelerating GDP growth should enable the

non-residential construction market to post

more significant growth in 2014.


Architecture Billings Index

Source: The American Institute of Architects

30

35

40

45

50

55

60

65

70

De

c-9

5

Sep

-96

Jun

-97

Mar

-98

De

c-9

8

Sep

-99

Jun

-00

Mar

-01

De

c-0

1

Sep

-02

Jun

-03

Mar

-04

De

c-0

4

Sep

-05

Jun

-06

Mar

-07

De

c-0

7

Sep

-08

Jun

-09

Mar

-10

De

c-1

0

Sep

-11

Jun

-12

Billings Inquiries

27


Trends:

• The rising population and expanding

prosperity in developing nations will drive

significant need for investment in energy

infrastructure over the next 30 years.

• The world’s population is expected to

increase from roughly 7 billion in 2010 to

roughly 9 billion in 2040 with the majority

of the growth in developing countries.

• 75% of the world’s population will reside in

the Asia Pacific region (including China

and India) and Africa. India will have the

largest population by 2030.

• Urbanization is expected to continue to

increase in developing countries and

developed countries such as China.

Invest in companies with exposure to the emerging markets


450 480 610

1,030

210 280

3,790

550 580 630

1,790

320 270

4,590

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

2010 2040

World Population (Millions of people)

Source: ExxonMobil Energy Outlook

28


Trends:

• Global energy demand is expected to increase 35% during 2010-2040 driven entirely by

developing/non-OECD nations.

• OECD energy demand is expected to remain relatively flat through 2040 despite an 80%

increase in economic output due to declining energy intensity or a greater use of energy

efficient products and applications.

Energy efficiency is critical in developed markets


Energy Intensity by Region (Toe per thousand $2011 GDP)

Source: BP Energy Outlook 2013

The global economy must invest significantly in energy infrastructure over the next 30 years.

• The IEA estimates $38T needs to be invested in energy infrastructure by 2035. Approximately two-thirds of this investment is expected in developing regions.

• Oil and gas infrastructure accounts for nearly $20T.

• Power infrastructure accounts for most of the remainder with more than 40% for transmission and distribution networks.

• This is a secular driver for FLS, DRC and SPW, all of which have significant exposure to the oil & gas or power markets and developing regions.

Energy demand in developing/non-OECD nations will rise by 65% during 2010-2040 driven by growing prosperity and expanding economies.

• Global energy demand will grow by 35% during this period as the world population expands from 7 billion to 9 billion led by growth in Africa and India

• Companies with significant exposure to developing markets include AOS, DRC, FLS, and XYL.

Electricity generation will represent the largest driver of demand for energy.

• Through 2040 electricity generation is expected to account for more than half the increase in global energy demand.

• The IEA estimates $1T will need to be invested in the U.S. transmission and distribution infrastructure before 2035 to keep pace with demand.

• The average transformer age in the U.S. today is more than 35 years, while the critical age at which the risk of failure increases significantly is 25 years.

• SPW is a leader in the medium-size power transformer market and recently expanded into the large power transformer market.

Energy efficient products and practices will be key to solving energy challenges in developed/OECD nations

• High-efficiency natural gas power plants, hybrid vehicles, etc. will help keep energy use essentially flat in developed economies despite robust economic growth

• DRC sells and services compressors and turbines for natural gas applications globally.

New technology such as horizontal drilling and hydraulic fracturing has enabled the development of new energy reserves in the United States.

• The U.S. is now the fastest growing producer of oil and natural gas in the world, according to the Manhattan Institute, and there are no signs that production

growth will end over the next decade.

• RBN, GDI, and CIR sell critical equipment into the North American upstream oil & gas markets.

The “Golden Age” for natural gas. Oil will remain the No. 1 global fuel but natural gas will overtake coal for the No. 2 spot.

• The IEA has estimated global consumption of natural gas could rise by more than 50% by 2035 and natural gas could account for more than 25% of global energy

demand versus 21% today.

• DRC and FLS sell, repair and overhaul equipment used in power plants, petrochemical facilities, and fertilizer plants.

The U.S. water and wastewater infrastructure is in need of significant investment

• The EPA’s 2002 Clean Water and Drinking Water Gap Analysis Report estimated that “if investment in water and wastewater infrastructure doesn’t increase to

address anticipated needs, the funding gap over the next 20 years could grow to $122B for Clean Water capital costs and $102B for Drinking Water capital costs.”

XYL generates 90% of its revenue from water infrastructure projects and applications globally.

29

Mega-trends (Now – 2040)


Dresser-Rand (DRC) – Strong Buy - $70 INVESTMENT THESIS:

• Buy an energy infrastructure investment pure-play. Dresser-Rand generates nearly 80% of its New Unit

bookings from infrastructure investments in the oil, gas, chemical and refining markets (60% in upstream

applications) and roughly 17% of its new units bookings from infrastructure investments in the

environmental and power markets.

• Top-three supplier in its markets. Dresser-Rand maintains a ~20% share in each of its major product lines,

including centrifugal compressors, reciprocating compressors and steam turbines. The company successfully

competes with well-capitalized multinational industrial companies such as GE and Siemens due to its focus

on technology, new products and customer responsiveness.

• Aftermarket revenue comprises 47% of total revenue and can generate operating margins of more than

25%. We believe aftermarket revenue can grow more than 10% annually as management focuses on gaining

market share (servicing competitors installed base) and expanding its network of global service centers to

60-70 from 49 today.

• Outsourced model reduces earnings cyclicality. Dresser-Rand subcontracts/outsources 35%-40% of its

direct labor costs. This flexible operating model enables to appropriately size the highly cyclical New Unit

business during economic downturns and thus reduces earnings volatility.

RISKS:

• Global economic conditions and commodity prices. Dresser-Rand’s customers include oil, gas and

petrochemical companies, all of which are sensitive to economic cycles and commodity prices.

• Large competitors. Dresser-Rand’s competitors include large, well-capitalized, multinational OEMs with

broad product portfolios including General Electric, Siemens and Mitsubishi.

• Debt pay down. Dresser-Rand’s balance sheet is somewhat levered with a net debt-to-capital ratio of 46%.

Oil and Gas

Production32%

Gas

Transmission11%

Refining and

Chemical36%

Environmental

17%

Other

4%

North America

31%

Latin America

18%Europe

22%

Middle

East/Africa14%

Asia

Pacific/Southern Asia15%

30 Source: Company reports, FactSet, CL King & Associates


Dresser-Rand Robbins & Myers

Ticker DRC

Rating SB

Price Target $70

Trading Data Trading Data

Last Price (1/09/2013) $57.17

52-Week High (1/04/2013) $59.69

52-Week Low (6/26/2012) $41.01

Market Cap. (MM) $4,308

Shares Out. (MM) 75.669

3 Mo. Avg. Vol (MM) 0.521

Earnings Estimates Earnings Estimates

(000) Q1 Q2 Q3 Q4 FY

FY14E $0.99 $1.09 $1.11 $1.35 $4.53

FY13E $0.66 $0.91 $0.94 $1.17 $3.68

FY12E $0.31 $0.45 $0.54 $1.13 $2.43

FY11 $0.00 $0.14 $0.51 $0.90 $1.53

FY10 $0.27 $0.43 $0.46 $0.64 $1.80

Valuation Valuation

Multiple Curr FY Next FY Next FY @ PT

P/E 15.6 12.7 15.4

EV/S 1.5 1.2 1.5

EV/EBITDA 9.1 7.4 8.9

CIRCOR (CIR) – Strong Buy - $50 INVESTMENT THESIS:

• Operational and strategic turnaround is under way. CIRCOR has advanced its implementation of Lean

and supply chain initiatives (particularly in the Energy division), upgraded the management teams in each of

its divisions, and eliminated its asbestos exposure and expense in the last five years. Management now aims

to drive Lean practices throughout the company, expand its highly engineered product offering for the

energy and power markets and complete accretive acquisitions that further enhance the portfolio.

• We see normalized EPS at $5.50 or more. In 2010, CIRCOR set goals to double revenue by 2015 and

ultimately achieve operating margins of 14%-16% in each of the three segments. We believe both targets are

achievable and estimate they would equate to normalized earnings per share of $5.50 or more.

• Well positioned in global oil and gas markets. CIRCOR generates roughly half its revenue and half its

operating income from the global energy markets. The short-cycle North American energy business is a

leading provider of valves used for land-based well hookups. The large international project business is a

leading provider of highly engineered valves for energy infrastructure projects.

RISKS:

• Cyclical end markets including oil & gas, petrochemical, power, aerospace, and HVAC. The oil & gas and

petrochemical markets are the largest and are highly dependent on commodity prices.

• Operational execution. Our financial estimates and investment recommendation for CIRCOR is largely

dependent on management’s ability to improve profitability in all three divisions.

• Pricing. CIRCOR’s North American short-cycle energy business and several product lines within the Flow

Technologies and Aerospace divisions manufacture more standardized products and compete with numerous

industrial companies.



Energy

48%

Flow

Technologies35%

Aerospace

17%

Oil & Gas

Upstream64%

Oil & Gas

Midstream & Downstream

28%

Other

8%

CIRCOR Crane Co.

Ticker CIR

Rating SB

Price Target $50

Trading Data: Trading Data:

Last Price (1/09/2013) $40.32

52-Week High (2/03/2012) $42.79

52-Week Low (8/02/2012) $27.85

Market Cap. (MM) $686



Earnings Estimates: Earnings Estimates:

(000) Q1 Q2 Q3 Q4 FY

FY14E $0.84 $0.90 $0.94 $0.97 $3.64

FY13E $0.55 $0.70 $0.78 $0.87 $2.90

FY12E $0.49 $0.64 $0.76 $0.51 $2.40

FY11 $0.49 $0.43 $0.62 $0.59 $2.13

FY10 $0.31 $0.44 $0.69 $0.53 $1.96

Valuation Valuation


P/E 12.3 9.8 13.7

EV/S 0.7 0.6 0.8

EV/EBITDA 7.3 5.0 7.3

Flowserve (FLS) – Buy - $160 INVESTMENT THESIS:

• Organic revenue growth should approximate 6%-7% long-term Flowserve generates 55% of its revenue from infrastructure investments in the global oil & gas and power markets and more than 45% of its revenue from emerging markets. We expect this favorable market exposure to drive organic revenue growth of 6%-7% or more.

• Aftermarket revenue comprises more than 40% of total revenue, is recurring in nature and generates operating margins that are 2x that of OE. Flowserve spent the past 10 years growing its aftermarket presence by establishing a global network of QRCs. The benefits of this investment are higher margins and lower earnings volatility.

• Significant operating margin improvement potential. We estimate operating margin could expand another 300 bps over the next three years as SG&A is reduced to 18% from 20%, IPD operating margins rise to 14%-15% from 8%-9%, volumes increase, and project pricing continues to improve.

• Strong cash generation and commitment to returning cash to shareholders. Flowserve has a policy of returning 40%-50% of running two-year average net income to shareholders through share repurchases and dividends. The company is in the midst of a $1B share repurchase program as part of its new corporate structure in which it is targeting a leverage ratio of 1.5x debt/EBITDA versus 1.0x as of 6/30/2012.

RISKS:

• Exposure to commodity prices. The oil & gas market comprises more than 40% of Flowserve’s revenue. Demand in this market is dependent on the capital budgets of major refiners and oil and gas equipment companies which are ultimately driven by oil prices.

• Foreign currency translation. Flowserve generates more than 70% of its revenue from international markets and is therefore subject to fluctuations in foreign currencies. Flowserve expects to absorb a $1.00 per share impact from foreign currency translation in 2012.



Flowserve Dresser-Rand

Ticker FLS

Rating SB

Price Target $160

Trading Data Trading Data

Last Price (1/09/2013) $154.59

52-Week High (1/08/2013) $155.16

52-Week Low (6/04/2012) $98.41




Earnings Estimates Earnings Estimates

(000) Q1 Q2 Q3 Q4 FY

FY14E $2.40 $2.82 $2.98 $3.60 $11.79

FY13E $1.99 $2.45 $2.61 $3.18 $10.20

FY12E $1.69 $1.98 $2.07 $2.75 $8.43

FY11 $1.72 $1.76 $1.92 $2.25 $7.64

FY10 $1.42 $1.62 $1.84 $2.00 $6.88

Valuation Valuation


P/E 15.2 13.1 13.6

EV/S 1.8 1.5 1.5

EV/EBITDA 10.3 8.5 8.7

Industrial

40%

Public Utility

35%

Commercial

13%

Residential

9%

Agricultural

3%

Europe

36%

US

37%

Asia Pacific

11%

Other

16%

Xylem (XYL) – Buy - $34 INVESTMENT THESIS:

• Xylem is a water industry pure-play as it generates more than 90% of its revenue from investments

in water infrastructure and water-related applications. The global water industry grows 3%-5%

annually due to several strong fundamental drivers including population growth and urbanization,

particularly in emerging regions, aging water infrastructure, primarily in developed regions, and globally

increasing government regulation regarding water quality.

• Organic revenue growth should accelerate meaningfully into 2014 as emerging market growth re-

accelerates (20% of revenue) and demand improves in the industrial (40% of revenue), commercial (13%),

and residential (9%) markets. The public utility market (36%) should also remain healthy.

• Acquisitions could add another 4%-6% to revenue growth over each of the next 2-3 years. The global

water industry is highly fragmented and Xylem has a solid acquisition track record, generates strong free

cash flow, and its balance sheet has minimal leverage with a net debt-to-capital ratio of 24%.

• Operating margin can expand 50-75 bps annually driven by higher volumes, management’s operational

initiatives and a mix shift toward higher-margin businesses such as dewatering.

RISKS:

• Exposure to Europe. Xylem generates approximately 36% of its revenue from Europe, including

approximately 8% of revenue from Southern Europe. Economic conditions in this region have deteriorated

markedly over the past two years and are expected to remain depressed near-term.

• Weather conditions: Dewatering and irrigation-related equipment comprises roughly 15% of Xylem’s

total annual revenue. Heavy flooding drives increased demand for dewatering pumps while drought

conditions increase demand for pumps and equipment used in irrigation applications.



Xylem

Ticker XYL

Rating B

Price Target $34

Trading Data:

Last Price (1/09/2013) $27.00

52-Week High (3/16/2012) $28.87

52-Week Low (8/02/2012) $22.43




Earnings Estimates:

(000) Q1 Q2 Q3 Q4 FY

FY14E $0.46 $0.60 $0.58 $0.64 $2.28

FY13E $0.36 $0.51 $0.52 $0.55 $1.94

FY12E $0.36 $0.49 $0.44 $0.46 $1.76

FY11 $0.43 $0.56 $0.54 $0.40 $1.93

FY10 $0.27 $0.40 $0.43 $0.38 $1.47

Valuation


P/E 13.7 11.7 14.9

EV/S 1.5 1.4 1.6

EV/EBITDA 8.8 7.9 9.1

Crane Co. (CR) – Buy - $49 INVESTMENT THESIS:

• Operating margins in 2012 are likely to be 13%, or 200 bps higher than the 2007 peak on roughly the

same revenue base. Operating margins could expand further as Crane benefits from : 1) the recent

completion of three major Aerospace development programs; 2) the realignment of the Fluid Handling

segment ; and 3) a significant reduction in the structural costs within its shorter-cycle segments.

• Late-cycle exposure attractive today. Crane Co. generates more than 70% of revenue and roughly 80% of

operating income from late-cycle markets served by the Fluid Handling and Aerospace & Electronics

segments. These businesses typically sell into longer lead-time projects that are less sensitive to short-term

disruptions in global economic conditions. Crane Co.’s products are typically incorporated in projects once a

significant investment toward completion has already been made. Thus, cancellation risk is low.

• Asbestos issue remains, but visibility has improved. Crane Co. remains a defendant in numerous asbestos-

related personal injury claims; however, the number of claims continues to decline each year and now stand

at less than 58,000 versus more than 90,000 in 2006. Furthermore, settlement costs per claim have stabilized

and the company’s insurance agreements remain secure. We expect asbestos-related defense costs and

settlements, net of taxes and insurance, to be $40MM-$50MM for the next 10 years and substantially lower

in the subsequent 10-year period as new claims fade.

RISKS:

• Asbestos Litigation. Crane Co. is subject to numerous lawsuits for asbestos-related personal injury. Any

increase in the number of claims filed or an increase in legal defense or settlement costs would adversely

affect the company’s financial results.

• Economic conditions and cyclical end markets. Crane Co. generates roughly 42% of its revenue in the

United States and results are therefore particularly sensitive to trends in domestic economic conditions.



Fluid Handling

45%

Aerospace &

Electronics27%

Merchandising

Systems15%

Engineered

Materials9%

Controls

5%Crane Chem

Pharma26%

Crane Energy23%

Crane Building Systems

27%

Crane Supply

17%

Crane Pumps

& Systems7%

Crane Valve

Group76%

Crane Co. A.O. Smith

Ticker CR

Rating B

Price Target $49


Last Price (1/09/2013) $47.20

52-Week High (1/20/2012) $51.48

52-Week Low (7/12/2012) $34.89





(000) Q1 Q2 Q3 Q4 FY

FY14E $1.10 $1.11 $1.16 $1.17 $4.54

FY13E $0.98 $1.00 $1.06 $1.06 $4.11

FY12E $0.88 $0.93 $0.99 $0.96 $3.76

FY11 $0.81 $0.84 $0.87 $0.89 $3.41

FY10 $0.56 $0.67 $0.70 $0.68 $2.60

Valuation Valuation


P/E 11.4 10.3 10.8

EV/S 1.1 1.0 1.1

EV/EBITDA 6.8 6.0 6.6

SPX Corp (SPW) – Buy - $77 INVESTMENT THESIS:

• Strategic realignment focused on Flow Technology. SPX has transformed itself since 2004 from a

diversified industrial manufacturer serving multiple industries to a focused supplier of highly engineered

equipment primarily for the power, energy and food and beverage markets. The Flow Technology segment is

the growth driver going forward and management’s continued focus for acquisitions. This segment should

comprise 53% of total revenue in 2012. versus just 14% in 2004. We expect it to become an even larger

portion of the company in the future.

• Organic revenue growth should be 2x global GDP growth going forward. SPX’s realigned portfolio

generates more than 60% of its revenue from several late-cycle infrastructure markets with strong long-term

fundamentals and roughly 30% of its revenue from emerging regions.

• Operating margins should reach 12%-15% versus 11% today and 12% historically. Segment operating

margins should increase by 200- 400 bps over the next 3-5 years, driven by the Flow Technology and

Industrial Products and Services segments. Flow Technology margins should rise from 11.5% in 2012 to

13%-15% as volumes improve and management integrates the recent ClydeUnion acquisition. Industrial

Products and Services margins should rise from 13.5% in 2012 to 15%-20% as transformer volumes and

pricing improve.

RISKS:

• Acquisition integration. The integration of ClydeUnion is behind plan due to a low-margin backlog booked

in the downturn that is now shipping. We believe the issue is largely contained and should negatively impact

only 2012.

• Pricing. SPX operates in several highly competitive markets including the U.S. transformer market. Pricing

in this market deteriorated meaningfully in the downturn due to the businesses’ high fixed-cost nature.

Food & Beverage19%

Power & Energy19%

Industrial15%

Thermal

Equipment & Services

28%

Industrial

Products & Services

19%

Flow Technology

53%



SPX Corp Colfax

Ticker SPW

Rating B

Price Target $77


Last Price (1/09/2013) $69.70

52-Week High (5/11/2012) $79.42

52-Week Low (8/02/2012) $56.31





(000) Q1 Q2 Q3 Q4 FY

FY14E $0.87 $1.37 $1.84 $2.43 $6.50

FY13E $0.54 $1.01 $1.46 $2.07 $5.07

FY12E $0.01 $0.78 $1.06 $1.53 $3.35

FY11 $0.37 $0.76 $0.99 $1.83 $3.95

FY10 $0.37 $1.00 $1.11 $1.13 $3.62

Valuation Valuation


P/E 13.7 10.7 11.8

EV/S 1.0 0.6 0.7

EV/EBITDA 9.7 5.8 6.3

IDEX (IEX) – Neutral INVESTMENT THESIS:

• Organic revenue growth targeted at GDP+300 bps or more long-term. IDEX consistently delivers organic

revenue growth that far outpaces GDP growth in its underlying markets through its focus on product innovation

and niche markets such as instrumentation and life sciences, refined fuels, specialty chemicals and water.

• Operational excellence drives industry-leading profitability. IDEX is relentlessly focused on low-cost

sourcing and mixed model lean practices. Each business within the company holds multiple kaizen strategy

events each year to continuously improve. This commitment drives incremental operating margins that average

30%-35%.

• Strong cash flow generation funds proven acquisition-oriented growth strategy. IDEX consistently generates

free cash flow that meets or exceeds net income and then deploys this excess cash to make strategic acquisitions.

IDEX has acquired and successfully integrated more than 25 companies since 2001.

• Diversification by end market and geography provides steady results. IDEX is well diversified across several

end markets with strong secular themes. It generates nearly half its revenue outside North America. Management

is focused on growing its presence in emerging markets, which now account for 17% of revenue.

RISKS:

• Global economic conditions. IDEX’s portfolio is sensitive to global economic conditions. Orders have slowed

during periods of economic uncertainty, such as now, and declined meaningfully during economic downturns.

• U.S. Municipal spending. IDEX’s North American water infrastructure businesses within FMT (about 7% of

revenue) and the Fire Suppression businesses within FSD (about 5% of revenue) are dependent on municipal

budgets and tax revenue in the United States. We expect this market to remain weak into 2013.

Chem/Industrial32%

HST Instrumentation19%Fire & Rescue

10%

Water9%

Energy12%

Paints7%

Agriculture3%

Pharma2%

Other6%

North America53%

Europe26%

Emerging Markets17%

Other4%



IDEX SPX Corp

Ticker IEX

Rating N

Price Target N/A

Trading Data Trading Data:

Last Price (1/09/2013) $48.22

52-Week High (1/08/2013) $48.61

52-Week Low (7/24/2012) $34.06




Earnings Estimates Earnings Estimates:

(000) Q1 Q2 Q3 Q4 FY

FY14E $0.77 $0.83 $0.88 $0.93 $3.41

FY13E $0.67 $0.73 $0.77 $0.83 $3.00

FY12E $0.66 $0.67 $0.66 $0.68 $2.67

FY11 $0.58 $0.62 $0.71 $0.65 $2.56

FY10 $0.46 $0.50 $0.50 $0.54 $1.99

Valuation Valuation


P/E 16.1 14.1 N/A

EV/S 2.3 2.1 N/A

EV/EBITDA 10.4 9.2 N/A

Colfax (CFX) – Neutral INVESTMENT THESIS:

• Organic revenue growth is targeted at GDP+1%-2%. Colfax generates nearly half of its revenue from higher

growth emerging markets (China, Brazil, and Russia) and roughly 60% of its revenue from several strong end

markets with secular drivers (power generation, energy, and mining). Management expects this end market

exposure combined with its focus on new product introduction and aftermarket expansion will drive significant

organic revenue growth over the next several years.

• Operating margins targeted in the mid-teens versus less than 10% currently. The recently acquired ESAB

business (54% of total revenue) generates operating margins of just 9%-10% today, well below the 12%-13%

level achieved in 2006-2008 and the 11%-12% level of its nearest competitor . Several restructuring initiatives

are underway aimed at reducing footprint and headcount and improving operational efficiency..

• Aftermarket work and consumables provide a recurring revenue stream. Aftermarket sales and welding

consumable sales together comprise 55% of total revenue and are largely recurring in nature. Aftermarket parts

and service comprise approximately 35% of Howden revenue and nearly 30% of the legacy pump business’

revenue and generate operating margins that are roughly 20 percentage points higher those of original equipment.

RISKS:

• Global economic conditions. CFX’s portfolio is dependent on global economic conditions. ESAB is

particularly dependent on industrial activity and GDP growth. This business is also short-cycle in nature and

could turn quickly.

• Slowing emerging market growth. Colfax’s organic revenue growth goals are largely dependent on growth in

emerging regions (44% of revenue). Slower-than-anticipated growth in these regions will likely cause Colfax’s

organic revenue growth to fall below management’s 10% target.

Europe32%

North America

20%

South America

14%

Asia17%

ROW17%

ESAB54%

Howden28%

Fluid Handling

18%



Colfax CIRCOR

Ticker CFX

Rating N

Price Target N/A


Last Price (1/09/2013) $40.91

52-Week High (1/03/2013) $42.44

52-Week Low (7/12/2012) $24.43





(000) Q1 Q2 Q3 Q4 FY

FY14E $0.39 $0.51 $0.60 $0.73 $2.24

FY13E $0.29 $0.40 $0.49 $0.62 $1.80

FY12E $0.23 $0.35 $0.33 $0.38 $1.30

FY11 $0.21 $0.29 $0.30 $0.40 $1.19

FY10 $0.14 $0.18 $0.22 $0.39 $0.92

Valuation Valuation


P/E 22.4 18.1 N/A

EV/S 1.2 1.1 N/A


NA residential47%

NA commercial

18%

Lochinvar11%

China20%

Europe/UK3%

India1%

United States

63%Canada

9%

China

24%

India

1%

Europe/Middle

East3%

Rest of World26%

North America74%

A.O. Smith (AOS) – Neutral INVESTMENT THESIS:

• Strategic portfolio transformation underway. A.O. Smith sold its lower-growth/lower-margin electric motor

business in 2010 and significantly expanded its presence in the higher-growth/higher-margin commercial water

heater market through the 2011 acquisition of Lochinvar. Management estimates it has roughly $800MM in

spending capacity currently and is actively looking for acquisitions. Potential acquisitions must be 1) capable of

growing at rates in excess of U.S. GDP; 2) accretive to margins; and 3) accretive to earnings in first year.

• Organic revenue growth should be 7% or more through 2015. Management is targeting revenue of $2.43B in

2015 versus $1.84B in 2011 driven by A.O. Smith’s continued expansion in China, the trend toward higher

efficiency products in the commercial business (Lochinvar), and a recovery in U.S. construction.

• Operating margins are targeted at 14% in 2015 versus 12.7% in 2012. The increase will be driven by a

greater mix of China and Lochinvar sales and volume leverage within the North American residential business.

• EPS is targeted at $5.00 in 2015, including $0.70 from acquisitions or share repurchases. We believe this

target is achievable assuming: 1) U.S. residential construction recovers and housing starts rise above 1.2 million

units per year; 2) non-residential construction activity improves; and 3) China GDP growth remains robust.

RISKS:

• Housing recovery fails to materialize. A.O. Smith’s 2015 targets assume housing starts rise above 1.2 million.

• Slowing growth in China. China has been a primary growth driver for A.O. Smith over the last decade and

management expects this region to continue to grow at rates of 15% or more.

• Acquisition integration. We see significant risks associated with integrating a large foreign acquisition.



A.O. Smith Flowserve

Ticker AOS

Rating N

Price Target N/A


Last Price (1/09/2013) $64.45

52-Week High (1/02/2013) $65.73

52-Week Low (1/24/2012) $40.44





(000) Q1 Q2 Q3 Q4 FY

FY14E $0.88 $0.96 $1.07 $1.16 $4.07

FY13E $0.75 $0.81 $0.89 $0.95 $3.40

FY12E $0.66 $0.75 $0.71 $0.80 $2.93

FY11 $0.54 $0.50 $0.37 $0.68 $2.09

FY10 $0.46 $0.43 $0.35 $0.46 $1.71

Valuation Valuation


P/E 19.1 15.9 N/A

EV/S 1.5 1.3 N/A


39 CL King & Associates Nine Elk Street Albany, New York 12207 (518) 431-3555

Risks

CIRCOR International (CIR) SB\$50: CIRCOR serves several highly cyclical end markets including oil, gas, petrochemical, power, aerospace and HVAC.

The oil, gas and petrochemical markets are largely dependent on commodity prices while the petrochemical, power, aerospace and HVAC markets are

highly sensitive to global economic conditions. Our financial estimates and investment recommendation for CIRCOR are largely dependent on

management’s ability to improve profitability in all three divisions. CIRCOR’s North American short-cycle energy business and several product lines within

the Flow Technologies and Aerospace divisions manufacture more standardized products and compete with numerous industrial companies. Decreased

market demand typically results in excess manufacturing capacity and more aggressive pricing among industry participants. The military market comprises

roughly 40% of revenue within CIRCOR’s Aerospace division. This revenue stream is highly dependent on spending by the U.S. military and thus military

defense budgets.

Crane Company (CR) B\$48: Crane Co. is subject to numerous lawsuits for asbestos-related personal injury. Legal costs and settlements associated with

these lawsuits after taxes and insurance has been $35MM-$55MM in each of the last five years; they are expected to be $40MM-$50MM a year for at least

the next 10 years. Any increase in the number of claims filed or an increase in legal defense or settlement costs would cause this figure to rise and could

adversely affect the company’s financial results. Demand for Crane Co.’s products is highly dependent on global economic conditions, thus its results will be

significantly impacted if macroeconomic conditions deteriorate. Crane Co. generates roughly 42% of its revenue in the United States and results are

therefore particularly sensitive to trends in domestic economic conditions. The costs of certain raw materials and Crane Co.’s ability to achieve price

increases can have a significant impact on profitability. The Engineered Materials segment is dependent on the cost of resins and fiberglass material while

the Fluid Handling and Merchandising Systems segments are dependent on the cost of steel and copper.

Dresser-Rand Group, Inc. (DRC) SB\$64: Customers include oil, gas and petrochemical companies, all of which are sensitive to economic cycles and

commodity prices. A global economic slowdown or significant decline in commodity prices will likely cause these customers to cancel or delay large capital

projects, which would negatively impact the sale of Dresser-Rand’s new units. DRC provides 55% of the supplier-provided aftermarket parts and service

needs of its own manufactured products. Increasing this aftermarket capture ratio is a key revenue growth initiative for the company, the success of which is

dependent on its ability to take market share from competitors and its customers’ willingness to outsource more aftermarket services. Dresser-Rand competes

with several large multinational OEMs including General Electric, Siemens and Mitsubishi, which have better access to capital and additional products,

such as large gas turbines, that they can offer in a bundled solution. Dresser-Rand intends to grow in part through acquisitions. Acquisitions and the

integration of new companies within an organization carry risks that could disrupt operations.

Flowserve Corporation (FLS) SB\$145: Flowserve is a global industrial company. A severe global economic recession or downturn could result in the

delay or cancellation of several large capital projects, which would negatively impact results. The oil & gas industry is the company’s largest end market at

more than 40% of revenue. Flowserve has significant exposure to the capital budgets of major refiners and oil and gas equipment companies which have

capital budgets are largely dependent on commodity prices, including the price of crude oil. Flowserve generates nearly three-quarters of its revenue outside

the U.S. and is therefore subject to fluctuations in foreign currencies, particularly the euro. For example, Flowserve expects to absorb a $1.00 per share

impact from foreign currency translation and hedging in 2012.


Risks

IDEX Corporation (IEX) B\$43: IDEX is a globally diversified industrial company; Europe comprised 26% of revenue in 2011 and revenue, thus earnings

could be negatively impacted by a European-led global economic slowdown. IDEX’s North American water infrastructure businesses within FMT (about 7%

of revenue) and the Fire Suppression businesses within FSD (about 5% of revenue) are dependent on municipal budgets and tax revenue in the U.S. This

exposure has negatively impacted revenue growth in recent years and is likely to remain a drag in 2012. The Dispensing Equipment business within FSD

(about 6% of revenue), severely impacted by the residential housing collapse and economic recession, has continued to struggle .The large order received in

Q1 quarter is encouraging and we believe this business will begin to experience stronger demand and profitability in 2013.

SPX Corporation (SPW) B\$77: SPX, which generates more than half its revenue outside North America, has been and will be adversely impacted by a

global slowdown. The acquisition of ClydeUnion significantly increased SPX’s exposure to the global oil and gas markets ,and management intends to

further increase its presence in these markets, both organically and through acquisitions, going forward. Demand for ClydeUnion’s products are highly

dependent on capital investments and maintenance spending of large oil and gas companies ultimately driven by crude oil and natural gas prices. SPX

operates in several highly competitive markets where participants do become price-aggressive, particularly during difficult economic periods. Acquisitions,

which are a key component of SPX’s long-term growth strategy, are inherently more risky than organic growth.

Xylem (XYL) B\$34: Xylem generates approximately 36% of its revenue from Europe, including approximately 8% from Southern Europe. Economic

conditions in this region have deteriorated markedly over the past two years and are expected to remain depressed near-term. While roughly 40% of Xylem’s

revenue stems from public utility spending and is largely non-cyclical, the remaining 60% of revenue is dependent on economic conditions and will be

negatively impacted by slower GDP global growth. Dewatering and irrigation-related equipment comprises roughly 15% of Xylem’s total annual revenue.

Heavy flooding drives increased demand for dewatering pumps while drought conditions increase demand for pumps and equipment used in irrigation

applications. Thus, weather conditions can cause results to fluctuate meaningfully during a quarterly period. Xylem has stated it intends to deploy roughly

$300MM per year to complete bolt-on acquisitions. Management is targeting acquisitions that can fill certain product gaps in its portfolio or provide it with

greater channel depth. Investors should be aware that the water industry is highly fragmented and it may be difficult for Xylem to achieve this target each

year. Additionally, an acquisition-oriented growth strategy carries significant risks in terms of integration.


Required Disclosures ANALYST CERTIFICATION

I, John R. Moore, CFA, certify that all views expressed by me in this research report regarding the securities, as named herein, and its issuers accurately reflect my personal views. I further certify that I have not and will not receive compensation directly or indirectly related to any specific recommendations or views expressed in this research report.

REQUIRED DISCLOSURES

CL King & Associates, Inc. does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. The information contained herein was obtained from sources, which we believe to be reliable but we do not guarantee its accuracy or completeness. This material is for your information only and does not constitute an offer to buy or sell, or the solicitation of any offer to buy or sell any securities. CL King & Associates, Inc., and/or one or more of its officers or employees may have positions in, and may, as principal or agent, buy or sell the securities mentioned herein, and may from time to time maintain a market in these securities. It can neither be guaranteed nor should it be assumed that future recommendations will equal the performance of past recommendations or be profitable. Member FINRA/SIPC.

** Designates companies in which CL King & Associates currently maintains a market.

^^ The covering analyst owns shares of the company. ‡ CL King & Associates has received compensation from the subject company for investment banking services in the past 12 months.

Additional information available upon request.

Risk Considerations and Ratings Charts for individual stocks can be found in the most recent research note.

CL King Rating System* % of Companies

Under Coverage

With This Rating

% of Companies for which CL King has

performed services for in the last 12 months

Investment Banking Brokerage

Strong Buy (SB)

Analyst believes shares will appreciate by 20% or more over the next 6-12 months

and should significantly outperform the broader market averages.

Analyst believes the risk of long-term capital impairment is below-average.

19.40% 0.75% 1.49%

Buy (B)

Analyst believes shares will appreciate in a range of 10% to the upper teens over

the next 6-12 months and will outperform the broader capital market averages.

Analyst believes the risk of long-term capital impairment is below-average, but

not as low as it is for Strong Buy.

35.07% 0.75% 0.75%

Neutral (N)

Analyst believes the current stock price fairly discounts the company’s prospects

over the next 6-12 months, give or take 10%, and will trade in-line with the

broader market averages.

Analyst believes the risk of permanent capital impairment is about average.

44.03% 0.75% 1.49%

Sell (S) Analyst expects the stock price to decline 10% or more over the next 6-12 months

and to underperform the broader market averages. 1.49% 0.00% 0.00%

Documents

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