Transcript Slide 0

SDSU
“Intervention in the Boardroom”
Lessons Learned from Relational
Investors Founder David
Batchelder
June 27, 2013
Relational does not seek to obtain material non-public information from our communications with the company. Representatives of the company are obligated to
comply with Regulation FD and, in the event material non-public information is disclosed to us, the company shall make the necessary disclosures and filings.
Introduction
 Relational formed in 1996
 First activist investor with institutional monies
 Started with $200 Million – now $5 Billion
 Over 100 Projects
 Principals have been on 24 public company boards
including Home Depot, Waste Management, Mattel,
HP and Intuit
 When not on the board, working behind the scenes
with management and the board at companies like
Pepsi, ITW, Deere and SPX
Introduction con’t.
 Clients are large public pension funds – generally
indexed
 Historically passive
 1996 – KKR founded, leading to an era of LBO’s
 Sell low/buy high
 Institutional S/H’s – Largely passive, largely indexed
needed a way to “fix” companies while remaining public
 1987 – CalPERS starts focus list
 1994 – CalPERS effect shows outperformance
 1996 – CalPERS funds first activist fund – Relational
Investors
Characteristics of an Active Investor
 Concentrated portfolio – generally less than 20 stocks
 Invests with an agenda designed to correct
undervaluation
 Galvanizes support of institutional shareholder base
around agenda
 Prepared to seek board representation using short slate
rule (1992) if necessary
3 Most Common Failures of Public
Company Boards
 Capital allocation – balancing growth versus returns
 Compensation structure
 Succession planning
Temptation to Chase Growth
Valuation vs. Growth
60x
P/E Multiple
50x
40x
30x
20x
10x
0
.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 7.0 7.5 8.0 8.5
Perpetual Growth Rate (%)
Note: Assumes 9% cost of equity and 20% ROE.
Growth at Lower Returns Will Be
Value Destructive
Valuation vs. Returns
25x
P/E Multiple
20x
15x
10x
5x
0x
30
28
26
24
22
20
18
16
14
12
10
Return on Equity (%)
Note: Assumes 9% cost of equity and 5% growth.
8
6
4
2
Home Depot Chases Growth
 Opened another 500 stores – most with returns below
their cost of capital
 Expanded into the wholesale business, acquiring their
way in with returns of about 8%. Again, below their
cost of capital
 Squeezed profitability from their retail stores by –
 Reducing staffing
 Under – investing in distribution and IT
Growth at Lower Returns
Will be Value Destructive
Valuation vs. Returns
16x
Core Retail Business
Implied P/E Multiple
14x
12x
HD Supply
Business
10x
8x
6x
New Stores
4x
2x
0
25
23
21
19
17
15
13
11
Return on Equity (%)
Note: Assumes 9% cost of equity and 3% growth.
Capital Allocation Best Practice
STEP 1
Forecast Long-term Growth and Return Targets
Establish Valuation Based on Business Plan
STEP 2
Establish Credit Characteristics and Liquidity
Objectives, and Adjust Debt/Cash as Indicated
STEP 3
F
Fund Maintenance Capex, Pension
and Benefit Plans, and Regular Dividend
STEP 4
Allocate Excess Capital to Highest Riskadjusted Return Alternative that Exceeds WACC
STEP 5
Organic
Growth
Initiatives
Acquisitions
Repurchase
Shares
Increase
Regular
Dividend or
Pay Special
Allocate capital to the most accretive alternative using share repurchase as a benchmark
Components of Executive Compensation
 Base salary
 Annual cash bonus – short-term (1 year) metrics
 Long-term incentive plan –
• Stock options – time vested
• Restricted stock – effectively time vested
 Performance units – payable in cash and/or
restricted stock – metrics range from 1 to 3 years;
performance measured by growth in revenue,
operating income, EPS, ROIC and/or TSR.
Intuit Example
Base Salary
Annual Bonus
Metrics:
Long-Term Incentive Plans
Stock Options-time
vested
Restricted stock-time
vested
Time Based
Performance Units
Metrics
Before Relational
Yes
Yes
Revenue
Non GAAP Operating Income
After Relational
Same
Same
Same
Same
40%
15%
30%
15%
70%
30%
30%
70%
Revenue Growth over 1 year Revenue growth over 3 years* (35%).
TSR over 3 years* (35%)
*Based upon rolling 3 year business
plan
Home Depot Example
Base Salary
Bonus
Metrics
Restricted Stock Time Vested
Performance Vested
Metric
Stock Options Time Vested
Performance Vested
Performance Units
Metric
Other
Total
Severance Package
CEO Before Relational
$2,200,000
$7,000,000
Annual Revenue Growth
Annual EPS Growth
CEO After Relational
$1,000,000
$500,000
Annual Revenue Growth
Annual EPS Growth
$14,700,000
$3,000,000
3 Year TSR
$8,100,000
$2,400,000
EPS Growth over 3 years
$3,500,000
$37,900,000
$2,000,000
$1,300,000
EPS & ROIC Growth over 3 years
$500,000
$8,300,000
$210,000,000
$15,000,000
Conference Board Succession Plan
Recommendations
 Assign responsibility to a standing board committee




of independent directors
Make succession planning continuous and integral
to business strategy and culture
Integrate succession planning into the top-executive
compensation policy
Integrate succession planning into risk management
Make succession planning transparent, internally
and externally
Your Responsibility As Managers
 Capital allocation
 Compensation structure
 Succession planning
SPX Corporation (SPW)
Meeting with
Christopher J. Kearney
Chairman, President, and Chief Executive Officer
J. Kermit Campbell
Lead Director and Chairman of Compensation Committee
Emerson U. Fullwood
Chairman of Governance Committee
Michael J. Manusco
Chairman of Audit Committee
May 14, 2013
Relational does not seek to obtain material non-public information from our communications with the company. Representatives of the company are obligated to
comply with Regulation FD and, in the event material non-public information is disclosed to us, the company shall make the necessary disclosures and filings.
Relational Investors: Overview
 Privately owned asset manager
 Founded in 1996
 $5 billion in assets under management
 Registered investment adviser, regulated by the SEC
 Ninety-nine percent of our assets under management are from large
public and corporate pension funds
 Manage a concentrated portfolio
 Major projects involve a 2-5 year investment horizon
Relational Investors: Experience
 Advised boards and executives and/or served as principals of 120
investments involving strategic planning, capital allocation, business
solution optimization and/or corporate governance challenges
 Served on boards of 24 public companies
 Served as Chairman of four public companies, including one Fortune 100 and
two Fortune 500 companies
 Chaired and served on all major committees
 Chaired and/or served on multiple special committees involving change of
control, executive searches, internal investigations
Relational Investors: Areas of Expertise
Focus
Objectives
Business Strategy
Focused on increasing long-term
shareholder value
Business Operations
Profit margins and asset turns
Capital Allocation
Maximize return on invested capital
Capital Structure
Optimal use of cash, debt, and equity
Governance
Transparent, responsive, and accountable
Compensation
Aligned with shareholders
Communication
Timely, accurate, consistent, and realistic
Why We Invested in SPX
 Leader in high value-added flow equipment for oil & gas, industrial, and food
& beverage sectors
 Considerable operational and share price underperformance
 Trades at a discount to fair value based on sum-of-the-parts and free cash
flow generation
 Opportunity to create significant shareholder value by:
 Improving margins in flow and transformers businesses through restructuring,
improved execution, aftermarket penetration, and end market demand
 Divesting thermal and non-transformers industrial businesses
 Implementing capital allocation discipline and ensuring effective deployment of
excess cash
 Aligning management compensation to improvements in profitability and proper
capital allocation
 Communicating to the Street that SPX will continue to rationalize its portfolio
around flow business and improve margins
1-Year Share Price Underperformance of 54%
40%
TSR Relative to S&P MidCap 400
Proxy Peers
28%
30%
20%
10%
S&P MidCap 400
Industrials
3%
-(10%)
(20%)
(30%)
SPW
(26%)
(40%)
Note: Peer group is based on companies specified in 2013 proxy: ITT, ROK, CMI, CR, TKR, FLS, PH, DOV, TXT, IR, CSL, DHR, ROP, HSC, PNR, PLL,
SNA, ETN, and GLW.
3-Year Share Price Underperformance of 47%
TSR Relative to S&P MidCap 400
30%
20%
S&P MidCap 400
Industrials
16%
10%
--
Proxy Peers
7%
(10%)
(20%)
(30%)
(40%)
SPW
(40%)
(50%)
Note: Peer group is based on companies specified in 2013 proxy: ITT, ROK, CMI, CR, TKR, FLS, PH, DOV, TXT, IR, CSL, DHR, ROP, HSC, PNR, PLL,
SNA, ETN, and GLW.
5-Year Share Price Underperformance of 85%
TSR Relative to S&P MidCap 400
40%
20%
--
(20%)
Proxy Peers
2%
S&P MidCap 400
Industrials
2%
(40%)
(60%)
(80%)
SPW
(83%)
(100%)
Note: Peer group is based on companies specified in 2013 proxy: ITT, ROK, CMI, CR, TKR, FLS, PH, DOV, TXT, IR, CSL, DHR, ROP, HSC, PNR, PLL,
SNA, ETN, and GLW.
Chasing Growth at the Expense of Returns
Industrial
35% Products Ex.
Transformers
31.7%
30%
Over 90% of SPX’s portfolio is generating
returns below its cost of capital
2012 Return on Assets
Total Segment ROA: 6.4%
25%
Cost of Capital: 9.3%
20%
Dotted line represents ROA
before adjusting for
goodwill & intangibles
Transformers
14.9%
Flow Technology
11.6%
15%
10%
13.0%
Thermal ROA Management
Long Term Target = 8.5%
Thermal Equipment
6.7%
~$2B Spent on Acquisitions
6.1%
5%
5.8%
5.5%
0%
0%
10%
20%
30%
60%
50%
40%
% of Identifiable Assets
70%
80%
90%
100%
Even if Thermal Equipment achieves Management’s long-term margin targets, it will still
earn a below cost of capital return
Note: Return on Assets = Operating Income*(1-Tax Rate)/Segment Assets adjusted for goodwill & intangibles
Total Segment ROA = Segment Operating Income*(1-Tax Rate)/ Segment Assets
SPX’s Returns and Margins
are Significantly Below Peers
2012 Return on Invested Capital
45%
2012 Return on Invested Capital
40%
39%
Returns explain
~70% of SPX’s
valuation
35%
30%
30%
24% 23%
25%
22% 21%
20%
20%
18%
Median
13%
13% 13%
12%
15%
11% 11% 10%
10%
7%
6%
6%
5%
4%
4%
0%
ROK CMI
CR
PLL TKR PH
FLS TXT DOV
IR
CSL SNA DHR ROP SPW GLW ETN PNR HSC
2012 Operating Margin
30%
Margin improvement
is 5x more valuable
than revenue growth
25%
2012 Operating Margin
25%
20%
15%
18%
17% 17%
16%
16%
14% 14% 14%
Median
13%
13% 13% 12% 12%
11% 11%
10% 9%
10%
8%
6%
4%
5%
0%
ROP GLW DHR PLL ROK DOV TKR FLS SNA CMI PH
CR CSL PNR
IR
ITT ETN TXT SPW HSC
Note: Peer group is based on companies specified in 2013 proxy. Operating Income is adjusted for nonrecurring impairment charges
Return on Invested Capital (ROIC) = Operating Income*(1-Tax Rate)/(Equity + Net Debt)
SPX’s Flow Operating
Metrics are Well Below Peers
2012 Operating Margin
2012 Asset Turns
25%
1.6x
21%
20%
20%
1.4x
20%
20%
1.5x
18%
17%
1.3x
1.2x
1.2x
1.2x
1.2x
16%
15%
15%
15%
13%
13%
1.1x
1.0x
1.0x
13%
11%
11%
10%
0.9x
0.9x
0.9x
0.8x
0.8x
0.8x
10%
0.8x
0.7x
9%
10%
0.6x
5%
0.4x
0.4x
5%
0.2x
0%
IEX
EMR Weir
CAM
FLS Alfa
2015 Laval
Target
FLS
SPX XYL
High
Target
CR
GEA
SPX RBN
Low
Target
SPX
PNR
ITT Sulzer KSB
0.0x
Sulzer
CR
CAM
2012 Return on Assets
Alfa
Laval
EMR
FLS
RBN
XYL
GEA
ITT
IEX
25%
20%
19%
16%
14%
15%
14%
12%
12%
12%
11%
10%
10%
10%
10%
8%
8%
7%
7%
6%
6%
5%
3%
0%
CAM
EMR
Alfa
Laval
FLS
2015
Target
FLS
IEX
CR
Weir
GEA
XYL
Sulzer
SPX
High
Target
RBN
SPX
Low
Target
ITT
SPX
KSB
PNR
Flow Margin and Asset Turns Improvement Will Drive Returns and Multiple
Note: Peer operating metrics use Flow segment operating income, identifiable assets, and sales as provided in 2012 Annual Filings
Return on Assets = Segment Operating Income*(1-Tax Rate)/Segment Assets.
See Appendix A for detailed comparison of SPX with specific Flow Peers
KSB
Weir
SPX
PNR
Clyde Union Performance Has Been
Significantly Below Management Expectations
$715
2012 Operating Profit ($m)
$800
2012 Revenue ($m)
$700
$571
$600
$500
$400
$300
$200
$100
$0
Promised
$100
$90
$80
$70
$60
$50
$40
$30
$20
$10
$0
2012 EPS Accretion
$0.35
$72
5%
Margin
$27
Promised
Delivered
$0.40
10%
Margin
Delivered
$0.35
$0.30
$0.25
$0.20
$0.15
$0.10
$0.05
$0.0
$0.00
Promised
Delivered
Note: Estimates of Clyde Union performance are based on public filings and transcripts of SPX earnings calls and investor presentations.
Failed Execution on Clyde Union
“What we anticipated with respect to Clyde Union is what we got.” – Chris Kearney, 1Q12 Earnings Call
What SPX Management Anticipated
This year [2011], Clyde Union is expecting revenue to grow about
50% to approximately $650 million, primarily driven by organic
volume growth. Next year…we are projecting revenue to grow by
at least 10% or more on an organic basis… Clyde Union’s 2011
operating margin is expected to be between 10% and 11%.”
“We expect this acquisition to be accretive to earnings per share by
$0.30 to $0.40 next year.”
“Clyde Union is a well-managed organization with an outstanding
leadership team and employee base. As such, we do not expect to
incur any meaningful restructuring charges or working capital
investments.”
What SPX Management Got
“For the full year [2012], Clyde Union reported $571 million of
revenue at a 5% margin.”
-4Q12 Earnings Call
“And for the full year, we now expect Clyde Union's aggregate
impact to be neutral to earnings per share.”
-3Q12 Earnings Call
“We took aggressive actions to address the operational execution
challenges that ClydeUnion faced prior to our acquisition of this
business...As part of this process, we made a significant
working capital investment in the business to accelerate
component supply.”
-1Q12 Earnings Call
“In Q1, we recorded $5 million of incremental charges on legacy
contracts that were part of the acquired backlog.”
-1Q13 Earnings Call
“The difference here is that this business is very well-established
and run, and has really an outstanding management team with a
great track record…this doesn't require the kind of heavy lifting that
we've had to do in the past in terms of some of the acquisitions that
we've done.”
We are on track, it's never easy; it's a lot of hard work. But I think
the things that we're doing are the right things and I think the
business [Clyde Union] is showing very steady sequential
improvement and we expect that to carry into 2013…I guess the
people who are actually doing it…would not like me to characterize
things as heavy lifting being over. They view that as a challenge
every day.
-3Q12 Earnings Call
6.2%
7.3%
8.3%
9.3%
10.4%
11.4%
12.4%
13.5%
14.5%
Percent Change in
Margin
Corresponding 2015E
Margin
Achieving Management’s Long-term
Margin Targets Creates Significant Value
(40% )
(30% )
(20% )
(10% )
-10%
20%
30%
40%
2.3%
2.7%
Corresponding 2012-2017 Growth CAGR
3.2%
3.6%
4.1%
4.5%
5.0%
5.4%
5.9%
(50% )
$74
$85
$96
$106
$117
$128
$138
$149
$160
(40% )
$75
$86
$97
$108
$119
$130
$141
$152
$162
(30% )
$76
$88
$99
$110
$121
$132
$143
$154
$165
(20% )
$78
$89
$100
$112
$123
$134
$146
$157
$168
With no margin improvement, SPX
stock is fairly valued in the $80’s
6.3%
6.8%
% Change in Growth
(10% )
-10%
$79
$80
$81
$90
$92
$93
$102
$103
$105
$113
$115
$117
$125
$127
$129
$137
$139
$141
$148
$151
$153
$160
$162
$165
$171
$174
$177
40%
$84
$97
$110
$123
$136
$148
$161
$174
$187
50%
$85
$99
$112
$125
$138
$151
$164
$177
$190
20%
$82
$94
$107
$119
$131
$144
$156
$168
$180
30%
$83
$96
$108
$121
$133
$146
$158
$171
$184
Hitting the midpoint of management’s margin
targets by 2015 drives 50% increase in value
A 20% improvement in returns creates 5.6x more value than a 20% improvement in growth
Significant Improvement in Returns
Implied by SPX’s Long-term Operating Targets
Return on Invested Capital
25%
ROIC (%)
20%
SPX outperformed
proxy peers by 222%
150 %
Improvement
SPX underperformed
proxy peers by 77%
15%
10%
5%
0%
Margin and Asset Turn Improvements Drive Return on Invested Capital From 9% to 22%
Note: Pre-Tax ROIC is calculated as Operating Income/(Equity + Net Debt). Operating income excludes one-time impairment charges.
SPX performance vs. proxy peers is for the following periods – 9/8/2004 to 6/13/2008 and 6/13/2008 to 12/13/2012
SPX Will Generate
Significant Discretionary Cash Flow
Projected Discretionary Cash Flow*
Unallocated Cash Flow
$600
Dividends
Share Repurchases
$500
$477
$450
Free Cash Flow ($mil)
$422
$400
$333
$300
$254
$200
$100
$0
2013E
2014E
2015E
2016E
2017E
SPX will generate 51% of its market cap over next 5 years
*Discretionary cash flow defined as operating cash flow before changes in working capital less capex. Projections assume SPX returns $200m to shareholders
through repurchases during 2013 and grow its dividends at 7%.
Returns Drive Valuation
S&P 500 ex Financials
14.0x
R² = 70%
EV/ Total Invested Capital
12.0x
10.0x
8.0x
6.0x
4.0x
2.0x
-(2.0x)
(20.0%)
(10.0%)
--
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
CFROI Spread = CFROI - Cost of Capital
(1) Cash ROI spread is the difference between a company’s projected Cash ROI in the next fiscal year based on consensus EPS forecasts and the company’s specific
discount rate. A spread of > 0.0% implies that the company is expected to create economic profits in excess of required returns on capital
(2) Enterprise Value to Total Invested Capital is defined as economic value divided by inflation adjusted net assets and is similar to a “real” market-to-book ratio. An EV /
Invested Capital ratio >1.0x implies that the market is expecting future profitable growth from the company.
Source: Credit Suisse HOLT.
Growth at Lower Returns is Value Destructive
Valuation vs. Returns
21.0x
2017E ROE
Investing
Here
Destroys
Value
18.0x
Implied P/E Multiple
15.0x
12.0x
9.0x
2012 ROE
6.0x
3.0x
0.0x
30.0% 28.5% 27.0% 25.5% 24.0% 22.5% 21.0% 19.5% 18.0% 16.5% 15.0% 13.5% 12.0% 10.5%
9.0%
7.5%
Return on Equity
Note: Assumes 9% cost of equity and 5% growth. 2017 ROE assumes margin improvement and repurchases shown in Appendix C.
Return on Equity (ROE) = Net Income/Average Equity. 2012 Net Income is adjusted for non-recurring items.
6.0%
4.5%
3.0%
SPX’s Capital Allocation Strategy
Creates Low Hurdle for Acquisitions
SPX’s current level of return on assets implies that
acquisition returns are well below the cost of capital
Note: Slide is from 2013 SPX Analyst Day.
Capital Allocation Best Practice
STEP 1
Forecast Long-term Growth and Return Targets
Establish Valuation Based on Business Plan
STEP 2
Establish Credit Characteristics and Liquidity
Objectives, and Adjust Debt/Cash as Indicated
STEP 3
F
Fund Maintenance Capex, Pension
and Benefit Plans, and Regular Dividend
STEP 4
Allocate Excess Capital to Highest Riskadjusted Return Alternative that Exceeds WACC
STEP 5
Organic
Growth
Initiatives
Acquisitions
Repurchase
Shares
Increase
Regular
Dividend or
Pay Special
Allocate capital to the most accretive alternative using share repurchase as a benchmark
Share Repurchases
Represent High Hurdle for Acquisitions
Effect of Repurchases on Stock Price
Future Value of SPX Stock
$255
$235
$215
$195
$175
$155
$135
$115
$95
$75
Today
No Repurchase
2013
2014
2015
$200m per year
Repurchase Per Year ($m)
IRR
2016 Net Debt/EBITDA
$ -21.4%
(0.2x)
2016
$500m per year
$200
25.0%
0.7x
$500
31.0%
2.1x
Acquisitions must exceed high risk-adjusted hurdle
Note: All scenarios assume SPX achieves mid-point of management margin targets by 2015 and P/E multiple remains constant over time.
See Appendix B for repurchase details.
Selling Thermal Now at a Low
Price Will Benefit SPX’s Stock Price
Impact on Stock Price of Selling Thermal Now at 4x 2014 EV/EBITDA
$8
$10.62
$7.12
Multiple Re-rating
Net Gain
$6
$4
$2
$ -($2)
($4)
($3.50)
($6)
Loss on Sale of Thermal
Note: “Loss on Sale of Thermal” is calculated as the difference in value of 1) selling Thermal today for 4.0x 2014E EBITDA and 2) the present value of selling
Note: Thermal on 12/31/2014 for 6.0x 2015E EBITDA assuming 9% 2015E EBIT margin. Both scenarios assume $400m tax basis and 35% tax rate.
“Multiple Re-rating” assumes a 1.0x increase in EV/EBITDA multiple for the remaining businesses and assumes 2015E segment margins at the mid-point
Note: of management targets.
Recommendations
 Focus on improving returns and margins to peer levels
 Communicate SPX’s discipline for allocating approximately $1.9 billion of
discretionary cash flow through 2017 (51% of current market cap)
 Benchmark all acquisitions to share repurchases
 No large deals

Ensure that compensation plans support management program to improve
operating profitability and proper capital allocation
 Continue to divest assets and focus on core businesses
 Divest Thermal segment given inability to achieve cost of capital returns
 Divest Industrial businesses other than Transformers
Recommendations on
Executive Compensation
SPX’s Share Price Has
Underperformed by 56% During CEO’s Tenure
TSR Relative to S&P MidCap 400
100%
80%
Proxy Peers
60%
60%
40%
S&P MidCap 400
Industrials
30%
20%
--
SPW
4%
(20%)
Note: Peer group is based on companies specified in 2013 proxy: ITT, ROK, CMI, CR, TKR, FLS, PH, DOV, TXT, IR, CSL, DHR, ROP, HSC, PNR, PLL,
SNA, ETN, and GLW.
History of CEO Compensation
2012
2011
2010
2009
2008
2007
2006
2005
Total
Total Compensation ($m)
$13,267
$12,662
$10,703
$13,267
$16,970
$10,860
$8,166
$5,695
$91,591
SPX’s CEO Compensation as % of Market Capitalization is in the 90th Percentile of Proxy Peers
While Total Return to Shareholders is in the 33rd Percentile
Compensation Plan for NEOs

Eliminate executive annual bonus plan (the 162 (m) plan) and use executive plan as SPX did
for 2012



Thresholds for Operating Margin and Operating Income should not be set below prior year actual results
Equity-based awards should be based (i) 50% on performance versus a rolling 3-year
business plan with multiple metrics (margin, operating profit, and ROIC) and (ii) 50% on TSR
over a rolling three year period
TSR should be measured against the S&P MidCap 400 Industrials Index
MidCap 400 Industrials
Composite 1500 Industrials
67
212
Mean Market Cap
$3.7B
$8.6B
SPX Market Cap
$3.5B
$3.5B
Number of companies



Threshold, target, and maximum payouts should be based on 3-year TSR percentile ranking
Payouts capped at 100% if absolute TSR is negative
Other benefits and perquisites








Eliminate relocation loans for NEOs
Eliminate “single-trigger” treatment following change-of-control
Eliminate 280G tax “gross-ups”
Eliminate incremental match ($30,000) of contribution for NEOs
Eliminate post-retirement key manager life insurance benefit
Eliminate executive retiree medical benefit
Eliminate car allowance, country club dues, financial planning, executive physical, and long-term executive
disability plan
Add supplemental executive choice plan to cover miscellaneous perks up to $100,000 for CEO and $75,000
for other NEOs
Employment Agreement
With Christopher Kearney
Effective Date - 11/20/2008
Two Year Evergreen

Cap base salary at $1 million (section 162 (m) deductible amount)

In 4(e), eliminate the second and third sentences restricting reductions in perquisites and
providing a special tax and financial planning reimbursement of up to $40,000 per year

Eliminate retiree medical benefits

Eliminate 5(e)(v) in definition of good reason regarding reduction of compensation plans and
programs
Change-of-Control Agreement
With Christopher Kearney
Commencement Date - 3/10/1999
Next Expiration
- 3/10/2014
Notice Date
- 9/10/2013

Eliminate 280G tax gross-up and cap payments at 280G amount

Eliminate forgiveness of relocation loan and related tax gross-up

Eliminate key manager life insurance program and related tax gross-up

Eliminate additional benefits

Revise definition of “Change-of-Control”

Eliminate 3(d)(v), (vi), and (ix) in definition of “good reason”. This includes single trigger on
change-of-control
Proposed Change-of-Control Agreement
Change in Control. For purposes of this agreement, “Change in Control” shall mean the
occurrence of a change in control of a nature that would be required to be reported in
response to Item 6(e) of Schedule 14A of Regulation 14A under the Securities Exchange Act
of 1934 (“1934 Act”) as in effect at the time of such change in control, provided that such a
change in control shall be deemed to have occurred at such time as (i) any “person” (as that
term is used in Sections 13(d) and 14(d) (2) of the 1934 Act), is or becomes the “beneficial
owner,” directly or indirectly, of securities representing 50% or more of the combined voting
power for election of directors of the then outstanding securities of the Company or any
successor of the Company; (ii) during any period of two (2) consecutive years or less,
individuals who at the beginning of such period constituted the Board cease, for any reason,
to constitute at least a majority of the Board, unless the election or nomination for election of
each new director was approved by a vote of at least two-thirds of the directors then still in
office who were directors at the beginning of the period or whose election or nomination for
election was so approved; (iii) the consummation of any merger or consolidation, approved
by the stockholders of the Company, as a result of which the common stock of the Company
shall be changed, converted or exchanged (other than a merger with a wholly owned
subsidiary of the Company) or of any sale or other disposition in one or a series of related
transactions of 50% or more of the assets or earning power of the Company, or the approval
by stockholders of any liquidation of the Company; or (iv) the consummation of any merger or
consolidation, approved by the stockholders of the Company, to which the Company is a
party as a result of which the persons who were stockholders of the Company immediately
prior to the effective date of the merger or consolidation shall have beneficial ownership of
less than 50% of the combined voting power for election of directors of the surviving
corporation following the effective date of such merger or consolidation.
Source: Home Depot 8-K filed 3-6-2013
APPENDIX
Appendix A: SPX’s Margin
Targets Appear Conservative
Alfa Laval
FLS
GEA
SPX
% Aftermarket
28%
42%
20%
28%
End Markets
Energy
Food & Beverage
Chemical
General Industrial/Other
36%
21%
42%
--
55%
-19%
26%
4%
74%
8%
13%
33%
35%
6%
26%
Europe (% of Revenue)
31%
21%
34%
26%
Current Operating Metrics
EBIT Margin
Return on Assets
Asset Turns
17%
14%
1.2x
16%
12%
1.1x
13%
10%
0.9x
11%
6%
0.7x
2015 Targets*
18%
18%
13%
13%-15%
SPX’s margin targets are below peers even after accounting for variance in end market
exposures and revenues from aftermarket
Note: *2015 Targets are based on management guidance. If management targets are not available, 2015 targets reflect consensus estimates.
Appendix B: Repurchase Valuation Details
2012
Revenue
EBIT
Margin
Net Income
Shares
EPS
Free Cash Flow
Beginning Basic Shares Out
Repurchase
Share Price
Shares repurchased
Basic shares out - period end
2013
$5,218
$376
7.2%
$225
41.8
$5.39
2014
$5,529
$489
8.8%
$311
38.4
$8.10
2015
$5,861
$612
10.4%
$404
35.7
$11.33
2016
$6,215
$658
10.6%
$438
33.3
$13.13
$121
$316
$404
$431
47.0
($500)
$96
(5.2)
41.8
41.8
($500)
$147
(3.4)
38.4
38.4
($500)
$185
(2.7)
35.7
35.7
($500)
$213
(2.3)
33.3
Forward EPS
Multiple
Ending Price
Price for Repo (average over year)
$5.39
15.1x
$70
$8.10
15.1x
$123
$96
$11.33
15.1x
$171
$147
$13.13
15.1x
$199
$185
$15.06
15.1x
$228
$213
Net Debt to Forward EBITDA
Gross Debt to Forward EBITDA
1.3x
3.1x
2.0x
2.5x
2.0x
2.2x
2.0x
2.2x
2.1x
2.2x
SPX has the balance sheet capacity to repurchase $500m of shares per year
Note: Assumes P/E multiple remains constant and SPX hits mid-point of management long-term margin targets by 2015.