Industrial Controls’ segment earnings, as adjusted to eliminate goodwill-related amortization, decreased 44% in 2002 from 2001. This earnings decrease was the result of reduced segment earnings margins, which more than offset the effect of higher sales. 

• Changes in our sales mix reduced our average gross margins (which we measure as net sales less cost of goods sold as a percent of net sales) in 2002 as compared to 2001. Reduced sales of our core manufactured products, the series of shipments that included lower-profit purchased components, and the lower average margins from the businesses we acquired in 2002 and 2001 all contributed to this decline. 

• Reductions in our workforce in 2002, resulting in total expense of $4.0 million, were made to align staffing levels with expected demand. These reductions occurred throughout the year, but slightly more than half of them occurred toward the end of the fourth quarter. 

• Product development activities increased in 2002 over 2001. We continued to actively pursue opportunities to gain market share, often working in conjunction with our customers’ own development programs. 

• A charge of $3.0 million was recognized in the fourth quarter of 2002 to reduce the carrying value of certain manufacturing equipment to its estimated fair value. This equipment is no longer in service and is to be disposed of. 

• Amortization expense, as adjusted to eliminate goodwill-related amortization from 2001, increased from $1.0 million to $2.2 million. This increase is directly related to the business acquisitions that were completed in 2001 and 2002. Among the assets acquired were intangible assets other than goodwill that are being amortized over periods ranging from five to eight years. 

Outlook: While it remains difficult to project the timing of economic recovery, we believe Industrial Controls’ net sales will decrease in 2003 as compared to 2002, with growing volume in the second half of the year. Despite this decrease, we believe the actions we have taken to reduce our costs and increase productivity, along with a more favorable sales mix, should result in improved Industrial Controls segment earnings in 2003. 

## 2001 Compared to 2000 

External net sales of Industrial Controls increased 16% in 2001 over 2000. Increases in sales volumes more than offset the impact of the sale of our turbine control retrofit business and negative foreign currency translation effects. 

• Strong demand for turbine and engine control products throughout the world, as well as new product introductions and market share gains, accounted for most of our volume increase. We benefited from continued strength in key end- markets, particularly power generation. Prices averaged about 1% higher. 

• Businesses acquired in November 2000 and June 2001 accounted for approximately $9 million of our volume increase. 

• The sale of our turbine control retrofit business four months prior to our fiscal year-end in 2000 reduced our sales by an undetermined amount. We believe this business had annual sales approaching $50 million. 

• The strengthening of the dollar against most foreign currencies reduced our sales by 3%. 

Several key actions in 2001 broadened the functionality and scope of our integrated energy control systems. 

• We acquired the Bryce diesel fuel injection business of Delphi Automotive Systems, which extended and complemented our existing products for the important medium-speed diesel market. 

• We acquired Hoeflich Controls, Inc. and entered into a licensing agreement with Adrenaline Research to add to our ignition systems technology for gas engines. 

• We formed an alliance with Leonhard-Reglerbau for networked system solutions targeting distributed power and centrally generated power applications, ranging from a few kilowatts to 300 megawatts. 

• We formed an alliance with Edward King AG of Switzerland, to design, develop, supply, and service integrated fuel skids for gas turbines. 

