ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2012 AND COMPARABLE PERIOD ENDED SEPTEMBER 30, 2011 OVERVIEW
The Company is a leading worldwide diversified manufacturer of motion and control technologies and systems, providing precision engineered solutions for a wide variety of mobile, industrial and aerospace markets.
The Company's order rates provide a near-term perspective of the Company's outlook particularly when viewed in the context of prior and future order rates. The Company publishes its order rates on a quarterly basis. The lead time between the time an order is received and revenue is realized generally ranges from one day to 12 weeks for mobile and industrial orders and from one day to 18 months for aerospace orders. The Company believes the leading economic indicators of these markets that have a strong correlation to the Company's future order rates are as follows:

• Purchasing Managers Index (PMI) on manufacturing activity specific to regions around the world with respect to most mobile and industrial markets;

• Global aircraft miles flown and global revenue passenger miles for commercial aerospace markets and Department of Defense spending for military aerospace markets; and

• Housing starts with respect to the North American residential air conditioning market and certain mobile construction markets.

A PMI above 50 indicates that the manufacturing activity specific to a region of the world in the mobile and industrial markets is expanding. A PMI below 50 indicates the opposite. The PMI at the end of September 2012 for the United States, the Eurozone countries and China was 51.5, 46.1 and 47.9, respectively. Since June 30, 2012, the PMI for China has decreased, while the PMI for the United States and the Eurozone countries have increased.
Global aircraft miles flown have increased approximately two percent from the comparable fiscal 2012 level and global revenue passenger miles have increased approximately four percent from the comparable fiscal 2012 level. The Company anticipates that U.S. Department of Defense spending with regards to appropriations and operations and maintenance for the U.S. Government's fiscal year 2013 will be slightly up from the comparable fiscal 2012 level. Housing starts in September 2012 were approximately 35 percent higher than housing starts in September 2011 and were approximately 15 percent higher than housing starts in June 2012.
The Company remains focused on maintaining its financial strength by adjusting its cost structure to reflect changing demand levels, maintaining a strong balance sheet and managing its cash. The Company has been able to borrow funds at affordable interest rates and had a debt to debt-shareholders' equity ratio of 25.7 percent at September 30, 2012 compared to 25.8 percent at September 30, 2011 and 26.1 percent at June 30, 2012.
The Company believes many opportunities for profitable growth are available. The Company intends to focus primarily on business opportunities in the areas of energy, water, agriculture, environment, defense, life sciences, infrastructure and transportation.

-15 -

---

The Company believes it can meet its strategic objectives by:

• Serving the customer;

• Empowering its employees to become successful in its lean enterprise and fostering an entrepreneurial culture;

• Successfully executing its Win Strategy initiatives relating to premier customer service, financial performance and profitable growth;

• Engineering innovative systems and products to provide superior customer value through improved service, efficiency and productivity;

• Delivering products, systems and services that have demonstrable savings to customers and are priced by the value they deliver;

• Maintaining its decentralized division and sales company structure;

• Acquiring strategic businesses;

• Organizing around targeted regions, technologies and markets; and

• Advancing business practices to achieve corporate sustainability goals.

During the first three months of fiscal 2013, the Company completed five acquisitions whose aggregate sales for their most recent fiscal year prior to acquisition were $243 million. Acquisitions will continue to be considered from time to time to the extent there is a strong strategic fit, while at the same time, maintaining the Company's strong financial position. In August 2012, the Company entered into an agreement to divest the automotive businesses of the Mobile Climate Systems (MCS) division. MCS is part of the Climate & Industrial Controls Segment. The divestiture was completed in the second quarter of fiscal 2013 and is expected to result in a pre-tax gain of approximately $30 million. The Company will continue to assess its existing businesses and initiate efforts to divest businesses that are not considered to be a good long-term strategic fit for the Company. Future business divestitures could have a negative effect on the Company's results of operations.
The discussion below is structured to separately discuss the Consolidated Statement of Income, Results by Business Segment, Consolidated Balance Sheet and Consolidated Statement of Cash Flows.