Cash flow and indebtedness
Free cash flow before dividends of £266 million demonstrated improved discipline after the £241 million outflow of the previous year. Working capital held steady in comparison to a £462 million increase last year and restructuring cash costs almost halved at £212 million. This result, whilst not yet satisfactory, does credit to the work of our cash action teams across the Group. Overall, free cash flow was 4% of sales, a solid step on our way from the 3% outflow of last year toward our stated goal over time of 8 to 10%.

Reduction of the Group's indebtedness is and will remain a major focus. Debt has reduced to £3,016 million from £3,283 million in September 2001 and £3,218 million in March 2001. In addition, disposals since the year end have led to gross cash proceeds of approximately £400 million; this, together with further expected proceeds of at least £850 million from the four remaining businesses identified for disposal, will significantly reduce our debt.

In the meantime, the Group has arranged a £979 million ($1.39 billion) facility with an effective repayment date of July 2003, which will meet the Group's refinancing requirements in 2002. This facility reduces as proceeds are received on the disposal programme or if the Group refinances debt in the debt capital or bank markets during 2002/03. The Group had total borrowing facilities of £3.9 billion (excluding the £979 million ($1.39 billion) above) as at 31 March 2002. The Group's facilities are not dependent on credit ratings for their availability.

It remains our intention to diversify our sources of debt finance during 2002/03.

The only significant debt maturities during the year 2002/03 are the syndicated revolving credit facilities to be repaid in August 2002. These have already been refinanced by means of the £979 million ($1.39 billion) syndicated revolving credit facility described above. The new facility itself matures in July 2003 and will be refinanced in advance through a combination of disposal proceeds from the programme already announced and debt capital market issuance. Other facilities maturing in 2003 are minimal and will not require separate refinancing. Beyond 2003 the Company has facilities maturing in 2004 and 2005 that will be refinanced nearer the time.

Asset management
Trade working capital to sales improved to 18% from 22% last year in the continuing operations. Inventory turns also improved from 6.7 to 8.0 times.

Return on capital employed (operating profit as a percentage of total capital employed, including goodwill) was 6% for continuing operations (2001: 11%) reflecting the reduction in trading profits during the year.

For the total Group gross capital expenditure in 2002 was £243 million (2001: £269 million). Certain fixed assets (primarily property) were sold during the year raising proceeds of £113 million, resulting in net capital expenditure of £130 million.

Acquisitions
Acquisitions completed during the year, at a total cost including acquired debt of £49 million, included FieldTech (£15 million) and Pacific Simulation (£5 million), as well as a number of small service-based businesses. FieldTech provides a complete package of high quality, cost-effective metering services to gas, water and electric utilities throughout the US. Pacific Simulation is a world leader in performance-based optimisation software and solutions for thermo-mechanical pulping and other pulp and paper industry applications.

Disposals
Total consideration from disposals in the year of £431 million included loan notes and other non-cash proceeds of £98 million and net cash divested of £5 million. After directly related restructuring costs and the settlement of certain liabilities in connection with the disposals, totalling £52 million and other costs, including fees, of £19 million, the net cash proceeds were £257 million. The largest of these disposals, Energy Storage, was completed in March 2002 for £287 million ($425 million), comprising $325 million cash and a $100 million loan note.

Other disposals and proceeds in the year included Hoffman (£32 million), Brook Crompton (£30 million) and Crompton Instruments (£17 million). In addition, since the year end, we have completed the disposals of Flow Control for £366 million ($535 million), Australian Transmissions for £33 million (A$88 million) and other smaller disposals for £6 million. We have also announced the conditional exchange of contracts for the sale of Alemite (£23 million) and CompAir (nominal consideration).

Altogether, disposals since September 2001 until the end of May 2002 have generated proceeds of approximately £750 million, including deferred consideration of £60 million. Approximately £650 million of these proceeds relates to the strategy disposal programme announced in February 2002. We remain confident that we can complete this programme by the end of the current financial year and realise a total of at least £1.5 billion to reduce our debt levels.

Treasury policy
The Group's treasury policy seeks to ensure that adequate financial resources are available for the development of the Group's businesses, whilst managing its currency, interest rate and counter party risks. Group treasury acts as a service centre operating within clearly defined guidelines that are approved by the Board.

The Group's policy is to not engage in speculative transactions. The Group's policy in respect of the major areas of treasury activity is set out below.

Interest rate risk
The Group's policy is to set the proportion of fixed and floating rate debt taking into account factors such as the interest rate, business cycles and the Group's level of financial leverage. This may result in significant levels of floating rate debt from time to time. Where appropriate, the Group will fix interest rates using fixed rate borrowings, forward rate agreements or interest rate swaps.

Currency risk
In common with other international companies the results of the Group's foreign subsidiaries are translated into sterling at the average exchange rates for the period concerned. This translation has no impact on the cash flow of the Group. The balance sheets of foreign subsidiaries are translated into sterling at the closing exchange rates. Any gains and losses resulting from the translation are recorded in reserves where they are matched with the gains and losses on borrowings, foreign exchange contracts or currency swaps taken out in the same currencies to hedge the net assets of subsidiaries. The Group aims to hedge a reasonable proportion of its non-sterling assets in this way. As a consequence, non-sterling borrowings are held primarily in US dollars, euros and yen. Major interest rate and currency hedging programmes require the approval of the Board.

Currency transaction exposure arises where actual sales and purchases are made by a business unit in a currency other than its own functional currency. However, the majority of the Group's businesses source raw materials and sell their products within their local markets in their functional currencies and therefore have limited transaction exposure. Where this is not the case, the Group's business units are required to cover forward a percentage of their forecast currency flows.

Transaction exposure also arises from the remittance from overseas of dividends or surplus disposal proceeds. The Group's policy is to cover such transactions as soon as they are committed and it uses forward currency contracts and, occasionally, currency options to do so.

Funding and deposits
The Group borrows using primarily short-to medium-term variable rate committed and uncommitted bank facilities. In this way it is able to optimise cost of borrowing, whilst maintaining the greatest flexibility to adjust currency mix and maturity in line with cash flows from operations as well as divestments and acquisitions. Uncommitted funding methods are supported by committed undrawn medium-and short-term facilities. The Group also borrows medium-term funds in the public and private debt markets.

Surplus funds are placed for short periods in investments in major currencies that carry low credit risk and which are readily realisable.

Counterparty risk
The Group monitors the distribution of its cash assets, borrowings and other financial instruments against pre-determined limits so as to control exposure to any territory or institution.

Committed facilities/use of derivatives
Disclosures on the Group's committed facilities and use of derivatives are included in notes 20 and 29 to the accounts.

US listing
Last year we announced that we would be seeking to list the Group on the New York Stock Exchange during 2002. Whilst listing remains our intention, we have decided to delay this in order to focus fully on the implementation of our new strategy and completion of our disposal programme.