ASRAC PumpsWorkingGroupEngineeringAnalysisUpdateBUILDINGTECHNOLOGIESPROGRAMMay27,20142Theupcomingslideswillcoverthefollowing:UpdatesmadetoEndSuctionandInlineanalysessincetheconclusionoftheApril30thmeetingResultsoftheVT‐SanalysisResultsoftheRS‐VanalysisUpdatetoMSP vs.EfficiencyRelationshipEngineeringAnalysisUpdates31.Percentofmodelseligibletobepolishedwasadjusted:-EndSuction:From6%to3.6%-Inline:From6.5%to3.9%•CommentsfromC.Cappellino (May4,2014)suggestedthatwewereover‐estimatingtheefficiencygainsavailablefrompolishingimpellers.-Availablegainsfrompolishingwereeffectivelycutinhalf,becausewewillnotbepolishingvolutes.EUstudyonpolishingwasusedasguidance.2.Additionalcapitalconversioncostrequiredtochangetoadvancedcastingreducedbyapproximatelyhalf•Correctsaninvalidassumptionintheoriginalmethod-Theoriginalmethodscaledupthetotalpatternandtoolingcosts,whenonlytheimpellerpatternandtoolingcostsshouldbescaledup.EndSuctionandInlineUpdates43.HydraulicRedesigncostdecreasedby15%•OriginalHIsurveyincluded“CostofCapital”category-20%ofthetotalcost-25%oftheRedesign,Tooling,Testing,andMarketingCost.•Definedas"Costofmoneytofinanceupgrades,andInventory(Cost,ReworkTransition,Inventoryforlegacysupport.)"•CostofmoneyiscoveredbytheWACC discountrate.-BecausethisiscoveredintheWACCalready,anyfinancingcostsmustbebackedout.-Weproposeleavingin25%oftheprovided“CostofCapital”dollarvalue,andattributingthistoInventorycosts,whichwouldlikelyimpactCGS.-Weproposedbacking‐out75%oftheprovided“CostofCapital”dollarvalue,whichworksoutto15%ofthetotalHydraulicRedesignCost–Thatputthecostoffinancingat18.75%oftheupfrontcosts.»Between3and4yearsworthoffinancingcostswithaWACC of11.8%EndSuctionandInlineUpdates54.UpdatednumberofEndSuctionandInlinepumpmodelsintheindustry,basedonHISurveydata•EndSuctionChangedfrom2050to2398•ILchangedfrom739to8085.Costofredesignper‐unitadjustedtodecreaselinearlyfromPER40toPER10•Previouslymodeledthemanufacturers’planstoredesigntoPER40foranystandardlessthanorequaltoPER40•ChangedtomodeltheactualcostofredesigningtoPER10or25inordertofairlyexamineeconomicjustificationforthoseefficiencylevelsEndSuctionandInlineUpdates66.UpdatedmodelcountsbasedonnewlyreleasedHIdata7.CostsateachELnowbasedontheexactpercentofmodelsfailingaswellastheaveragedesigncostfortheactualpopulationoffailingpumps.•ResultsarenowmorepreciseEndSuctionandInlineUpdates7SummaryofResults:TotalCostofRedesigntoIndustry(Aggregate)EndSuctionandInlineUpdatesESCC/ESFMEfficiencyLevelPER 10($MM)PER25($MM)PER40($MM)PER55($MM)PER70($MM)PER85($MM)April30,2014$24.4$65.1$110.7$213.1$348.8$423.6May14,2014$12.3 $49.0 $111.1 $213.9 $350.0 $425.0May27,2014$12.2 $48.6 $108.9 $207.3 $339.6 $403.2%Diff.(4/30to5/27)‐50%‐25%‐2%‐3%‐3%‐5%ILEfficiencyLevelPER 10($MM)PER25($MM)PER40($MM)PER55($MM)PER70($MM)PER85($MM)April30,2014$10.60$28.20$47.90$92.20$150.90$183.30May14,2014$5.0 $19.8 $45.0 $86.5 $141.6 $172.0May27,2014$5.0 $19.7 $44.6 $86.8 $141.7 $170.1%Diff.(4/30to5/27)‐53%‐30%‐7%‐6%‐6%‐7%Pleasenote:Theoriginalresults,releasedon5/2/14,andlistedinthepresentation“Final_Eng_Analysis_Slides_2014‐04‐30_w‐revisions.pptx”containedatypographicalerrorthatshiftedthecolumnsofsomeoftheresults.Theaboverow,titledApril30,2014presentstheproper,correctresultsforthatdate.8SummaryofResults:IndustryCostofRedesignas%ofRevenuesEndSuctionandInlineUpdatesESCC/ESFMEfficiencyLevelPER 10($MM)PER25($MM)PER40($MM)PER55($MM)PER70($MM)PER85($MM)April30,201418% 47% 80% 155% 253% 308%May14,20149% 36% 81% 155% 254% 309%May27,20149% 35% 79% 150% 247% 293%%Diff.(4/30to5/27)‐50%‐25%‐2%‐3%‐3%‐5%ILEfficiencyLevelPER 10($MM)PER25($MM)PER40($MM)PER55($MM)PER70($MM)PER85($MM)April30,201422% 58% 98% 189% 309% 375%May14,201410% 41% 92% 177% 290% 352%May27,201410% 40% 91% 178% 290% 348%%Diff.(4/30to5/27)‐53%‐30%‐6%‐6%‐6%‐6%Pleasenote:Theoriginalresults,releasedon5/2/14,andlistedinthepresentation“Final_Eng_Analysis_Slides_2014‐04‐30_w‐revisions.pptx”containedatypographicalerrorthatshiftedthecolumnsofsomeoftheresults.Theaboverow,titledApril30,2014presentstheproper,correctresultsforthatdate.9Additionalconsiderationsfortheworkinggroup:Simplifythecostofredesignmodel:•Removepolishingasadesignoption-<2%ofpopulationiscurrentlypolishedinthemodel•Ignoretheeffectsofchangingtoadvancedcasting-Thiswouldreducetotalcostbyapproximately0.3%EndSuctionandInlineUpdates10VT‐SandRS‐VResults11KeyAssumptionsOnly2‐PolemodelsanalyzedNomodelsdroppedAllfailingmodelshydraulicallyredesigned40%oftotalMSP attributedtomotorprice70%shipmentssoldwithmotorCosttoredesignamodelreducedlinearlybelowPER40EndSuction/InlinePrice‐EfficiencyrelationshipappliedtoVT‐SResults:VT‐SResultsVT‐SEfficiencyLevelPER 10($MM)PER25($MM)PER40($MM)PER55($MM)PER70($MM)PER85($MM)IndustryCostofRedesign2.5 9.3 19.2 37.8 61.3 75.2PercentofRevenues8% 28% 57% 113% 184% 226%12KeyAssumptionsAllavailable2‐Polemodelsareavailableas4‐PoleLimitedadditionalcostnecessarytoconverta4‐PoleModel•10%ofthealreadyredesigned2‐Pole(basicmodel)model-25%ofmarketingandtestingcost.NomodelsdroppedAllfailingmodelshydraulicallyredesigned40%oftotalMSP attributedtomotorprice70%shipmentssoldwithmotorCosttoredesignamodelreducedlinearlybelowPER40MarketplacebaselinesetatPER40whichisequivalenttoEUMEI40•Nopriceefficiencyrelationapplied,becausePER40isintheflatportionofthecurve.Results:RS‐VResultsRS‐VEfficiencyLevelPER 10($MM)PER25($MM)PER40($MM)PER55($MM)PER70($MM)PER85($MM)IndustryCostofRedesign0.7 2.6 5.5 10.6 17.3 21.0PercentofRevenues1% 4% 9% 18% 30% 36%13SummaryofAllEquipmentClassesTotal CostofRedesignEfficiencyLevelPER 10($MM)PER25($MM)PER40($MM)PER55($MM)PER70($MM)PER85($MM)ESCC/ESFM$12.2 $48.6 $108.9 $207.3 $339.6 $403.2Inline$5.0 $19.7 $44.6 $86.8 $141.7 $170.1VT‐S$2.5 $9.3 $19.2 $37.8 $61.3 $75.2RS‐V$0.7 $2.6 $5.5 $10.6 $17.3 $21.0Total$19.7 $77.6 $178.2 $342.5 $560.0 $669.6CostofRedesignasPercentofRevenuesEfficiencyLevelPER 10 PER25 PER40 PER55 PER70 PER85ESCC/ESFM9% 35% 79% 150% 247% 293%Inline10% 40% 91% 178% 290% 348%VT‐S8% 28% 57% 113% 184% 226%RS‐V1% 4% 9% 18% 30% 36%Total7% 28% 64% 123% 202% 241%14Updates:MSP vsEfficiencyRelationship15Basicmethodologyhasnotchanged.Thefollowingchangehasbeenimplementedtoimproveprecision.TheMSP premiumrelationship(andultimatelymarkups)nowreliesapump’srelativemarketscore(PER%),ratherthanabsoluteC‐Value•Relativemarketscore(PER%)ismoreeasilyandaccuratelycomparableacrossequipment'sclasses-InlineMSP vs.Efficiency(PER%)relationshipisnowmappedtootherequipmentclassesmoreconsistently•Allowsformoreaccurateanalysisofthecombined2‐and4‐PoleInlinedataset-EachpumpisnowassigneditsspecificPER%,whichisdependentonspeed.-PreviouslyallC‐Valueswerelumpedtogether.Updates:MSP vsEfficiencyRelationship16MSP vsEfficiency(PER%)RelationshipUpdates:MSP vsEfficiencyRelationship