Sales:

£1,251 million (2001: £1,343 million)

Operating profit*:

£170 million (2001: £212 million)

Overview
Sales were down 7% (organically down 8%), affected by lower demand for factory automation through most of the year, particularly in the US. Revenues in the product-based businesses — Rexnord, Drive Systems and Eurotherm — were down 7% overall, particularly through the traditionally high-margin distribution channel. The systems businesses declined 10%, as key contracts were delayed at APV Baker and Rail Systems. Strong management action to streamline costs limited some of the effect of volume reductions on operating profits. With signs of slight improvement now visible in the US industrial market, these businesses are well positioned to benefit from the recovery.

Key developments
Soft market conditions created an opportunity to build a strong foundation for growth by driving a series of improvements. Substantial cost savings were realised through a programme of measures that included a reduction of some 1,000 employees.

A strategic pricing policy was introduced and we restructured our sales force, streamlined back-office operations and reduced the number of owned and leased properties. Inventories were reduced by £35 million and debtor collections improved by over four days during tough market conditions. These activities contributed to a greater than 100% improvement in cash flow during the year.

Despite the slow industrial markets, certain businesses showed strong sales growth. While overall Rexnord sales declined, its aerospace bearings business saw sales rise by 28%. Hansen Transmissions' wind energy business also increased sales by 15% as demand for its gear drives for wind turbines continued to grow.

However, these successes were offset by declining sales in other businesses. Despite winning an important contract for the New York Transit Authority and encouragingly strong sales in Spain and Portugal, Rail Systems was affected by difficulties in the UK and by reduced freight business at Burco in the US market. Eurotherm, which manufactures industrial controls, saw sales fall by 14%, while consolidation in the food sector limited market growth and affected sales at APV Baker.

At Drive Systems, strong positive market reaction to several series of new drives was mitigated by an overall decline in demand for larger systems as well as for servo motors supplied to the semiconductor industry in Europe.

In line with the Group's disposal programme, Flow Control was sold to Flowserve Corporation for gross proceeds of £366 million ($535 million) subsequent to the year end.

From 1 May 2002, the businesses of Rexnord and Drive Systems were transferred to the Industrial Components and Systems division and marketed for disposal. At the same time, Eurotherm and APV Baker were transferred to our new Production Management division, and Wind Power and Rail Systems to the new Development division.