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Outlook: With continued weakness in commercial markets due to reduced airline traffic, we believe Aircraft Engine Systems’ net sales will remain at volumes that are relatively consistent with the second half of 2002, resulting in a full-year decrease in 2003 as compared to 2002. Proportionately, Aircraft Engine Systems’ segment earnings are likely to decrease slightly more than sales due to a less favorable sales mix. However, we are continuing to pursue greater efficiencies and productivity improvements to minimize the impact on margins. 

## 2001 Compared to 2000 

External net sales of Aircraft Engine Systems increased 11% in 2001 over 2000. In addition to solid orders for products used in regional and narrow-body commercial jets, sales growth was driven by increased demand for some OEM products, aeroderivative engine nozzles and controls for power generation applications, military spare parts, and commercial aftermarket sales. While most of our sales are to OEMs, we estimate that about 39% of our sales resulted from the aftermarket in 2001 compared to 42% in 2000. The impact of changes in selling prices and changes in foreign currency exchange rates was insignificant. 

Aircraft Engine Systems’ segment earnings, as adjusted to eliminate goodwill-related amortization, increased 38% in 2001 over 2000. In 2000, segment earnings were impacted by expenses totaling $5.1 million associated with a workforce management program to align staffing levels with expected demand. Without these expenses, adjusted segment earnings would have been $45.8 million in 2000, and our increase in 2001 over 2000 would have been 23%. This earnings increase was the result of higher sales and improved segment earnings margins. 

• Cost of goods sold was relatively high in the first half of 2000. Near the end of the second quarter, we implemented our workforce management program to align staffing levels with expected demand. Our cost of goods sold in 2001, as a percent of sales, was relatively close to the comparable percent in the last half of 2000. 

• Selling, general, and administrative activities are relatively independent of changes in sales volumes and did not increase proportionally with sales. 

• Partially offsetting the items above, in 2001, we recognized additional expense due to increased uncertainty about receivable collections following the September 2001 terrorist attacks, and we had higher losses on disposals of equipment. In 2000, we reduced certain acquisition-related accruals and recognized insurance proceeds that settled certain matters from previous years as a reduction in expense. 

## Nonsegment Expenses and Gain 

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## 2002 Compared to 2001 

Interest expense decreased in 2002 from 2001 primarily because average interest rates were lower in 2002 as compared to 2001. Our average outstanding debt was also lower. 

Corporate expenses decreased in 2002 from 2001 primarily because of reductions in variable compensation expense, due to a decline in overall financial performance of the company. 

## 2001 Compared to 2000 

Interest expense decreased in 2001 from 2000 primarily because we had lower levels of average outstanding debt in 2001 as compared to 2000. Average interest rates were also lower. 

Corporate expenses were 3% of consolidated net sales in both 2001 and 2000. 

The gain on the sale of business in 2000 relates to a sale on May 31, 2000, of certain assets associated with our turbine control retrofit business for cash, with the buyer assuming certain liabilities. The resulting gain was reported separately in the statements of consolidated earnings. 

The net sales and earnings of the turbine control retrofit business were included as part of Industrial Controls and could not be separately identified. However, we believe annual sales of this business were approaching $50 million at the time of the sale. 

