Accounting standards
The 2002 accounts of the Group have been prepared in accordance with all applicable accounting standards. Three new accounting standards have been adopted by Invensys during the year.

Financial Reporting Standard No 18: Accounting Policies (FRS 18) has been adopted in full during the year. The adoption of this standard did not have a material impact on the financial statements.

All the requirements of the Financial Reporting Standard No 17: Retirement Benefits (FRS 17) must be adopted in full for the Invensys accounting period ending on 31 March 2004. The transitional disclosure requirements of FRS 17 have been adopted in these accounts, but they have no effect on the primary financial statements. The Group has followed the transitional arrangements under which information on financial assumptions to calculate the projected benefit obligations of the Group schemes and details of scheme assets, expected rates of return and liabilities are disclosed by way of a note to the accounts (see note 6). The actual effect on the schemes' assets and the Group's balance sheet will be determined by the values existing as at 31 March 2004 when the standard becomes fully mandatory.

Financial Reporting Standard No 19: Deferred Tax (FRS 19) was issued in December 2000 for adoption in accounting periods ending after 23 January 2002 to replace an existing accounting standard. Prior to the adoption of FRS 19, the Group provided for deferred tax using the liability method to the extent that it was probable that liabilities would crystallise in the foreseeable future. Under FRS 19, full provision is required, whether or not an actual liability will crystallise. Deferred tax unprovided for at 31 March 2001, and which is now required to be provided for under FRS 19, has been provided for and shown as a prior year adjustment in these accounts. The amount included as a prior year adjustment is £137 million and reduces shareholders' funds. The impact to the Group's 2001/02 earnings from the adoption of FRS 19 is not material.

Currency effects in the period
Overseas sales and profits are translated into sterling at average rates for the period. The net effect of currency translation added £62 million to sales and £8 million to profits. However, this translation benefit in reported performance was more than offset by the transactional effects of exporting from a strong US dollar and sterling base into countries with weaker currencies, particularly the euro, and also competing against imports from these countries into our US and UK markets.

Operating results
Our operating results include the performance of ongoing operations, the Disposal group and discontinued operations. Ongoing operations encompass our four main divisions in existence during the year ended 31 March 2002: Software Systems, Automation Systems, Control Systems and Power Systems. The Disposal group primarily represents the CompAir business. Discontinued operations are those businesses which were sold before the date of this report. The principal businesses sold were Flow Control, Energy Storage, Hoffman, Brook Crompton and Crompton Instruments.

Total sales for the year of £6,972 million (2001: £7,863 million) were down 11%, reflecting an organic decline of 12%. This was driven principally by the US industrial recession and the severe downturn in telecoms demand. The speed and size of revenue declines in our Power Systems division — by one third — caused operating profit in the division to fall 99%.

Operating profit was £549 million overall, in line with our expectations announced at the half year. The £471 million generated by our ongoing businesses showed a 42% fall, illustrating the sensitivity of our product-based businesses to volume declines and our need to build service-based revenues. It also highlights the problems in Software Systems, where legacy internal issues — exacerbated by some localised market weakness — continued to reduce profits.

Significantly, the Group's overall performance held steady between the first and second halves, as some recovery in US industrial and consumer demand balanced further weakness in the technology sectors.

Details regarding the performance of these businesses are included in the operational review section of this annual report and accounts. During 2002, further restructuring and cost reduction programmes were implemented across all divisions.

Operating and corporate exceptional items
During 2002 the Group carried out three major programmes:

1. The operational restructuring programme, which was primarily the final aspects of the merger related restructuring programmes, and further restructuring initiatives caused by the deepening recession. These programmes included a reduction of full-time staff across the Group by 7,600 employees, or 8%.
   
   
2. The strategy review, which led to balance sheet asset write downs.
   
   
3. The disposal programme, covering both asset and business disposals.

The financial implications of these programmes are shown in operating and corporate exceptional items, depending on the nature of the transaction, and are detailed below. Total exceptional items amounted to a charge of £1,115 million, representing operational restructuring/strategy write downs of £516 million and £599 million relating to disposals.

Operational restructuring programme and strategy write downs
The restructuring programme charges are £231 million, asset write downs £240 million and closure costs £45 million, totalling £516 million. As announced in February 2002, the asset write downs relate to the Group's strategic review and the exceptional market downturn in Power Systems. The requirements of Financial Reporting Standard No 3: Reporting Financial Performance (FRS 3) mean that each component of the £516 million is reported in the accounts as follows:

	Restructuring programme £m	Asset write downs £m	Closures £m	Total £m
Operating exceptional items
Restructuring costs	186	37	-	223
Market related write downs	-	76	-	76
Corporate exceptional items
Fundamental reorganisation costs	45	127	-	172
Cost of closure	-	-	45	45
	231	240	45	516

Disposal programme
The sale of non-core businesses and fixed assets generated a loss on net assets of £120 million and a write off of associated goodwill of £479 million. The write off of goodwill does not materially affect shareholders' funds as £447 million had already been eliminated against reserves on acquisition.

Goodwill amortisation
In accordance with Financial Reporting Standard No 10: Goodwill and Intangible Assets (FRS 10), goodwill arising on acquisitions since April 1998 has been capitalised in the balance sheet and an amortisation charge of £124 million (2001: £98 million) has been reflected in these accounts. The increase over the last year relates primarily to the inclusion of a full year amortisation charge relating to the acquisition of Baan in August 2000.

Finance costs
Interest for the year of £170 million (2001: £227 million) was consistent with forecasts made during the year, with payments decreasing steadily through the second half in line with interest rates, due to our large proportion of floating rate and US dollar denominated debt. Interest cover for the year was 3.2 times, with cover in the second half rising to 4.0 times from 2.7 times in the first half. This compares with the covenant requirement in our debt facilities of 3.0 times on a twelve month rolling basis.

Taxation
The tax charge for the period was £9 million (2001: £74 million), net of a £15 million credit on corporate exceptional items, reflecting an underlying rate of 29%.

Earnings
The Group has recorded a loss of £869 million compared with earnings of £70 million last year, reflecting primarily the impact of disposals, goodwill and balance sheet write downs in the current year. The basic loss per share was 24.8p (2001: earnings per share of 2.0p). Earnings per share in respect of total Group operations before exceptional items and goodwill amortisation were 7.7p, down 44% from 2001.

Dividend
In the context of the Group's performance for the year and the need to conserve cash and reduce its level of indebtedness, the Board is recommending a final dividend of 1.0p (2001: 5.2p). This will be payable on 11 September 2002 to shareholders on the register at close of business on 19 July 2002. Together with the interim dividend of 1.0p (2001: 2.5p), this represents a total dividend of 2.0p (2001: 7.7p) and establishes the base from which to grow the dividend with reference to future performance.

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