Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

This discussion should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's Annual Report on Form 10-K for the year ended October 31, 1998 as filed with the Securities and Exchange Commission and Note 7 to the Company's condensed consolidated financial statements included elsewhere in this report.

Results of operations

The following table sets forth certain information relating to the operations of the Company expressed as a percentage of net sales:

                                                    Three months ended          Nine months ended
                                                         July 31,                    July 31,
                                                 -----------------------     ------------------------
                                                    1999         1998           1999         1998
                                                 ----------   ----------      ----------   ----------
Gross profit:
  Analytical Instrumentation                       56.0   %      55.0   %        56.3   %     56.3  %
  Fluid Handling                                   49.6          46.0            47.9         45.1
  Industrial Controls                              49.6          47.9            49.2         49.3
                                                 ---------    ----------      ----------    ---------
                                                   52.1  %       49.6  %         51.4  %      50.2  %
                                                 =========    ==========      ==========    =========

Operating profit:
  Analytical Instrumentation                       21.1  %       14.8  %         17.8  %      16.1  %
  Fluid Handling                                   29.0          25.2            27.1         24.1
  Industrial Controls                              18.7          19.3            18.5         20.8
  Unallocated corporate expenses                   (1.9)         (1.0)           (1.7)        (1.5)
                                                 ---------    ----------      ----------    ---------
                                                   20.3          18.5            18.7         18.9
Interest expense                                   (1.7)         (2.2)           (1.8)        (2.0)
Other income                                        0.2           0.1             0.1          0.2
                                                 ---------    ----------      ----------    ---------
Earnings before income taxes                       18.8          16.4            17.0         17.1
Income taxes                                        6.5           5.6             5.9          5.8
                                                 ---------    ----------      ----------    ---------
Net earnings                                       12.3  %       10.8  %         11.1  %      11.3  %
                                                 =========    ==========      ==========    =========

Three months ended July 31, 1999 compared to 1998

On June 21, 1999, the Company acquired three related companies collectively referred to as Petroleum Analyzer Corporation. See Note 4 to the Company's condensed consolidated financial statements included elsewhere in this report.

Net sales increased $6.7 million, or 7%, during the three months ended July 31, 1999 compared to the three months ended July 31, 1998. On a pro forma basis assuming prior year results included Petroleum Analyzer Corporation for one month, sales increased 3%. The increase in sales was fueled by strength in the Company's digital imaging businesses (sales up 27%) and its centrifugal pump business (sales up 42%). Sales were adversely affected by continued weakness in oil & gas and semiconductor equipment end-user markets that caused sales declines in the companies selling primarily to these markets of 14% and 16%, respectively. The increase in Analytical Instrumentation sales (up 38% actual and up 24% pro forma) reflected the strength in the segment's digital imaging and leak-testing equipment businesses that overcame weakness in its oil refinery laboratory equipment business. The increase in Fluid Handling sales (up 2%) reflected the strength of the centrifugal pump business overcoming weakness in the segment's semiconductor equipment and emission testing businesses. The decrease in Industrial Controls sales (down 13%) reflected the weakness in oil & gas markets. Although energy prices have

recovered from lower levels earlier this year, capital spending appears slowed partly due to major consolidations within the industry.

The Company's gross profit percentage increased about 2.5 points as each of the Company's segments improved their margins compared to last year. All of the Company's businesses have aggressively kept costs under control and the margins for the centrifugal pump business increased significantly due to better leverage of production costs against increased sales and a sales mix favoring larger products with higher margins.

Selling, general and administrative ("SG&A") expenses increased $2.8 million, or 9%, during the three months ended July 31, 1999 compared to the three months ended July 31, 1998. As a percentage of sales for these three-month periods, SG&A expenses were 32% and 31% in fiscal 1999 and fiscal 1998, respectively. The increased percentage of sales was attributed to the growth in the Analytical Instrumentation segment whose percentage is typically higher than the Company's other segments due to higher research and development, other engineering and amortization costs. Analytical Instrumentation SG&A costs increased 19% compared to increased sales of 38%. Fluid Handling SG&A costs increased 1% compared to increased sales of 2%. Industrial Controls SG&A costs decreased 5% compared to decreased sales of 13%. The Industrial Controls segment has been adversely affected by poor market conditions in its oil & gas markets and the Company now pays certain transaction costs that used to be paid by Gazprom (a large Russian energy company). Unallocated corporate general and administrative expenses increased $1.0 million due to higher costs in fiscal 1999 related to an incentive compensation plan reflecting the increased market price of the Company's common stock and lower costs in fiscal 1998 related to the Company's broader-based incentive compensation plan based on operating results throughout the Company.

Income taxes were 34.7% of pretax earnings for the three months ended July 31, 1999 compared to 34.0% during the three months ended July 31, 1998. The increased effective income tax rate in fiscal 1999 reflected the Company's expectations that tax benefits related to sales exported from the U.S. may be reduced resulting from the difficulties faced by some of the Company's businesses selling to oil & gas markets.

Outstanding shares were less in fiscal 1999 than the prior year due to 1.2 million shares that were repurchased by the Company during the fourth quarter of fiscal 1998 through the second quarter of fiscal 1999 under a buy-back program that was terminated in May 1999.

Other components of comprehensive earnings represented the change in cumulative translation adjustments related to the net assets of non-U.S. subsidiaries whose functional currency was not the U.S. dollar. The net change during each of the three months ended July 31, 1999 and 1998 was mostly related to the Company's subsidiaries in France, England and Japan. The Company's exposure to foreign currency exchange rate fluctuations continues to be concentrated in Europe and Japan and the Company believes these exposures are not significant to its overall operations or net assets.

The following table summarizes bookings and backlog information (dollars in thousands):

                                       Bookings                    Backlog
                              --------------------------  --------------------------
                                  Three months ended
                                       July 31,                    July 31,
                              --------------------------  --------------------------
                               1999      1998    Change    1999      1998     Change
                              -------  --------  -------  -------  --------  -------
Analytical Instrumentation    $37,728  $ 32,719   +15.3%  $35,823  $ 32,135  +11.5%
Fluid Handling                 23,063    20,616   +11.9    16,223    14,130  +14.8
Industrial Controls            32,137    56,829   -43.4    38,340    57,222  -33.0
                              -------  --------  -------  -------  --------  -------

                              $92,928  $110,164   -15.6%  $90,386  $103,487  -12.7%
                              =======  ========  -======  =======  ========  =======

Bookings and backlog growth within the Analytical Instrumentation segment was mostly due to the acquisition of Petroleum Analyzer Corporation. Excluding this company's bookings and backlog from fiscal 1999, bookings were up 3% and backlog was down 2%. Increased bookings and backlog within Fluid Handling reflected improved semiconductor equipment business (compared to much worse industry conditions in the latter part of fiscal 1998 and early part of fiscal 1999) and the timing of orders for its medical equipment business in fiscal 1998. This business had relatively low orders in the third quarter last year offset by higher bookings in the fourth quarter. The decrease in bookings and backlog for Industrial Controls reflected weakness in the oil & gas markets and an unusually large bookings volume in the third quarter of last year due in part to the largest single order ever received by one of this segment's companies. Although energy prices have increased since the beginning of the year, industry conditions are such that the Company doesn't expect significant improvement in its related businesses until fiscal 2000.

Nine months ended July 31, 1999 compared to 1998

Net sales increased $10.1 million, or 4%, during the nine months ended July 31, 1999 compared to the nine months ended July 31, 1998. On a pro forma basis assuming prior year acquisitions occurred at the beginning of fiscal 1998 and Petroleum Analyzer Corporation was included in fiscal 1998 results for the month of July, sales decreased 3%. Actual sales increased mostly due to the prior year acquisitions of Flow Technology, Acton Research, Photometrics and PMC/Beta and the current year acquisition of Petroleum Analyzer Corporation. Pro forma sales declined related to companies selling primarily to oil & gas and semiconductor equipment markets of 9% and 47%, respectively. Increases in Analytical Instrumentation sales (up 28% actual) reflected the acquisitions of Acton Research, Photometrics and Petroleum Analyzer Corporation and (up 6% pro forma) strength in its digital imaging businesses. The decline in Fluid Handling sales (down 5% actual and down 6% pro forma) reflected a 47% decline in its semiconductor equipment business partially offset by a 26% increase in its centrifugal pump business. The decline in Industrial Controls sales (down 6% actual and down 8% pro forma) reflected the weakness in oil & gas markets caused by historically low prices for oil and natural gas earlier in the year. The Company expects weak capital spending by the energy industry to continue into fiscal 2000.

The Company's overall gross profit percentage increased 1.2 points due to a Fluid Handling improvement of 2.7 points (every company in the segment improved). Analytical Instrumentation and Industrial Controls were consistent with the prior year period. All of the Company's businesses have aggressively kept costs under control in the face of some difficult market conditions.

SG&A expenses increased $7.2 million, or 8%, during the nine months ended July 31, 1999 compared to the nine months ended July 31, 1998. As a percentage of sales for these nine-month periods, SG&A expenses were 33% and 31% in fiscal 1999 and fiscal 1998, respectively. The increased percentage of sales was attributed to the growth in the Analytical Instrumentation segment whose SG&A costs as a percentage of sales is typically higher than the Company's other segments due to higher R&D, other engineering and amortization costs. Analytical Instrumentation SG&A costs increased 23% compared to increased sales of 28%. Fluid Handling SG&A costs decreased 7% compared to decreased sales of 5%. Industrial Controls SG&A costs increased 1% compared to decreased sales of 6%. The Industrial Controls segment has been adversely affected by poor market conditions in its oil & gas markets and the Company now pays certain transaction costs that used to be paid by Gazprom.

Income taxes were 34.5% of pretax earnings for the nine months ended July 31, 1999 compared to 34.1% during the nine months ended July 31, 1998. The increased effective income tax rate in fiscal 1999 reflected the Company's expectations that tax benefits related to sales exported from the U.S. may be reduced resulting from the difficulties faced by some of the Company's businesses selling to oil & gas markets.

Outstanding shares were less in fiscal 1999 than the prior year period due to the shares repurchased by the Company during the fourth quarter of fiscal 1998 through the second quarter of fiscal 1999 as previously discussed.

Other components of comprehensive earnings represented the change in cumulative translation adjustments related to the net assets of non-U.S. subsidiaries whose functional currency was not the U.S. dollar. The net change during each of the nine months ended July 31, 1999 and 1998 was mostly related to the Company's subsidiaries in France, England and Japan. The Company's exposure to foreign currency exchange rate fluctuations continues to be concentrated in Europe and Japan and the Company believes these exposures are not significant to its overall operations or net assets.

The following table summarizes bookings for the nine months ended July 31, 1999 and 1998 (dollars in thousands):

                                1999      1998     Change
                              --------  --------   ------
Analytical Instrumentation    $104,839  $ 82,445   +27.2%
Fluid Handling                  76,418    72,564    +5.3
Industrial Controls            119,114   144,337   -17.5
                              --------  --------   ------

                              $300,371  $299,346   + 0.3%
                              ========  ========   ======

Bookings growth within the Analytical Instrumentation segment reflected the acquisitions of Acton Research, Photometrics and Petroleum Analyzer Corporation. On a pro forma basis, bookings increased 6% reflecting strength in the segment's digital imaging businesses (pro forma bookings up 9%). Increased bookings within Fluid Handling reflected the strength in the centrifugal pump business (bookings up 34%) that offset a 26% decline in semiconductor equipment business. The decrease in bookings for Industrial Controls reflected poor business conditions in the oil & gas markets, which affects this segment much more than the Company's other segments. Although oil and gas prices have recovered somewhat from historical lows earlier in fiscal 1999, the reduced spending by many energy industry customers in response to low prices and consolidations within the industry is not expected to recover until fiscal 2000.

Financial Condition, Liquidity and Capital Resources

Working capital increased to $86.1 million at July 31,1999 compared to $82.3 million at October 31, 1998. Working capital acquired with the acquisition of Petroleum Analyzer Corporation was $4.8 million.

Total debt was $130.2 million at July 31, 1999 (37% of total capital) compared to $126.1 million (39% of total capital) at October 31, 1998. Excluding the effects of any future acquisitions, the Company expects debt levels to be reduced over the remainder of fiscal 1999 resulting in further strengthening of its capital structure. Despite the cash acquisition of Petroleum Analyzer Corporation, the Company's capital structure was less leveraged at July 31, 1999 compared to October 31, 1998 and total debt only increased slightly during this nine-month period. At July 31, 1999, the Company had $88.3 million of credit available under its primary debt agreement, which the Company considered sufficient for any reasonable short-term needs.

At July 31, 1999, the estimated fair value of the Company's interest rate swap agreements for a notional amount of $75 million was an unrecorded liability of $1.8 million compared to $2.6 million at October 31, 1998. Most of the decrease was due to an increase in LIBOR to 5.3% at July 31, 1999 compared to 5.2% at October 31, 1998. The interest rate swap agreements expire in 2003 and the other party to the agreements has an option to extend each of the agreements until 2008. The current value attributed to these agreements assumes the options will be exercised.

In May 1999, the Company's Board of Directors terminated an open-market stock buy-back program it authorized in August 1998 under which the Company was authorized to repurchase up to 5% of its outstanding common stock. Pursuant to the buy-back program the Company purchased 1.2 million shares of its common stock for $23.5 million. Total purchases were about 80% of the eligible number of shares.

Capital expenditures in fiscal 1999 are expected to be marginally higher than fiscal 1998.

The Company continues to expect fiscal 1999 to be its seventh consecutive year of record sales and earnings and increases are also expected in fiscal 2000. The Company's energy-related and, to a lesser extent, semiconductor markets continue to show poor fundamentals, although the semiconductor industry began showing some signs of strengthening, and achievement of expected results may be dependent on these markets showing some, or continuing to show, signs of recovery.

The Company expects to continue an active acquisition program and recently announced a signed letter of intent to acquire a company for its Analytical Instrumentation segment that is expected to close in the Company's fourth quarter of fiscal 1999. However, completion of this or any other future acquisitions will be dependent upon numerous factors and it is not feasible to reasonably estimate when any such acquisitions will actually occur, what the financing requirements will be or what the impact will be on the Company's operations, earnings, or other financial results or financial condition.

Year 2000 Issues

Many data processing applications identify a year using its last two digits and assume the first two digits are 19. After December 31, 1999 when the first two digits of a year become 20, there is uncertainty regarding how these applications will interpret the current date and the inability to interpret the date correctly might disrupt the effectiveness of the data processing applications. Such disruptions might adversely affect normal business operations. These issues are commonly known as "Y2K" issues.

The Company believes it has taken reasonable steps to instigate a process that should ensure that its operations are not going to be materially affected by Y2K issues that could impair the functionality of its products or processes. The Company has identified some products and processes that need to be modified and such changes are planned to be implemented well in advance of January 1, 2000. In general, the Company has very few products that are date sensitive and most of these products do not rely on the date for their performance.

Some of the Company's subsidiaries are or had been using data information systems that would not properly address Y2K issues. Some of the changes necessary to address these issues have already been made and remaining changes are planned to be implemented before January 1, 2000. Total prior and future implementation costs, including capital expenditures, are expected to be less than $3 million, most of which has already been incurred.

The Company does not utilize any material interdependent computer systems, either between its subsidiaries or between the Company and its suppliers or customers.

The Company believes that its most reasonably likely worst-case scenario with Y2K issues involves a disruption at a direct vendor or one of the vendor's vendors that reduces the availability of components to the Company's products. No individual product accounts for a significant amount of the Company's revenues and the Company believes it could find alternative sources for such components that might become unavailable from historical sources. Each of the Company's subsidiaries has been undergoing a process of contacting their vendors to assess their preparedness for Y2K issues. It's also possible that Y2K issues affecting the Company's customers could cause them to delay or cancel their orders for the Company's products. The Company is continuing to assess potential material disruption from Y2K issues that might disrupt our customers businesses. Due to the diversity of the Company's customer base, the Company does not believe that any disruption of its business by a single customer due to its problems with Y2K issues would materially affect its business as a whole.

The Company cautions that it's not possible to know the full impacts of what might happen when the events triggering Y2K issues actually occur and the impact on the Company could be significantly worse than the worst-case scenario the Company believes reasonably likely to occur.

Recently Issued Accounting Standards

The Financial Accounting Standards Board has issued, among others, Statement of Financial Accounting Standards ("SFAS") 131 - Disclosures about Segments of an Enterprise and Related Information, SFAS 132 - Employers' Disclosures about Pensions and Other Postretirement Benefits, and SFAS 133 - Accounting for Derivative Instruments and Hedging Activities that will be applicable to the Company by the end of fiscal 1999 (SFAS 131 and SFAS 132) or fiscal 2001 (SFAS 133, as amended by SFAS 137 to defer its effective date by one year). Once adopted, SFAS 133 will require that the Company's interest rate swap agreements be reflected in its financial statements. This change along with any other changes resulting from adopting these standards is not expected to significantly affect the Company's financial position, results of operations or other disclosures.

Forward-Looking Information

The information provided in this report, in other Company filings with the Securities and Exchange Commission, and in other press releases and public disclosures contains forward-looking statements about the Company's businesses and prospects as to which there are numerous risks and uncertainties which generally are beyond the Company's control. Some of these risks include, but are not limited to, completion of and the anticipated operating results of new acquisitions, the level and the timing of future business with Gazprom, the effects of Y2K issues on the Company, its customers or its suppliers, market conditions failing to improve or showing further deterioration in several of the Company's key end-user markets, changing interest rates and changing foreign currency exchange rates. There is no assurance that these and other risks and uncertainties will not have an adverse impact on the Company's future operations, earnings, or other financial results or financial condition.