content_image/62335.jpg
## Management’s Discussion and Analysis 

Industrial Controls’ segment earnings, as adjusted to eliminate goodwill-related amortization, increased 39% in 2001 from 2000. In 2000, expenses of approximately $4.2 million that we associate with the decision to sell our turbine control retrofit business reduced segment earnings. These expenses primarily involved the relocation of certain ongoing business activities. Without these expenses, our segment earnings would have been $47.2 million in 2000, and our increase in 2001 over 2000 would have been 26%. This earnings increase was the result of higher sales and improved segment earnings margins. 

• Exclusive of the impact of the sale of our turbine control retrofit business, our selling, general, and administrative expenses are relatively independent of changes in sales volumes. 

• The sale of our turbine control retrofit business four months prior to our fiscal year-end in 2000 impacted our segment earnings margin by an undetermined amount. While the retrofit business generated higher gross margins than our remaining business, it also incurred more selling, general, and administrative expenses as a percent of sales. 

## Aircraft Engine Systems 

<img src='content_image/62335.jpg'>

## 2002 Compared to 2001 and Outlook 

External net sales of Aircraft Engine Systems decreased 8% in 2002 from 2001. The decrease in sales is attributed to the effects of reduced commercial airline traffic since September 2001 on both OEM and aftermarket sales, although demand for our aftermarket services has been better than we expected. Also, increased military sales have partially offset sales declines in our commercial markets. While most of our sales are to OEMs, we estimate that about 36% of our sales resulted from the aftermarket in 2002 compared to 39% in 2001. 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 2% in 2002 over 2001. This earnings increase was the result of improved segment earnings margins. 

• Aggressive productivity enhancements and cost- control measures were initiated in our first quarter in response to decreased sales volumes, benefiting both cost of goods sold and selling, general, and administrative expenses. 

• 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 predominantly in the first quarter. 

• Expenses for accounts receivable collection losses decreased in 2002. In 2001, we recognized additional expense due to increased uncertainty about receivable collections following the September 2001 terrorist attacks. While we are continuing to maintain allowances for losses higher than we would have immediately preceding those events, our allowances at September 30, 2002, are below those of September 30, 2001. 

