Invensys Interim Results For The Six Months Ended September 30, 2001.

Business Editors

LONDON--(BUSINESS WIRE)--Nov. 15, 2001

Invensys plc, the global automation and controls Group, today issued interim results for the six months ended September 30, 2001.

Key Features

- Ongoing sales down 3% (down 9% organically) at (pound)3,330m

- Ongoing operating profit of (pound)281m in line with guidance

- Debt at (pound)3,283m; interest cover for rolling 12 months of

3.3x

- Free cash flow improves to (pound)68m inflow from (pound)(194)m

outflow

- Dividend of 1.0p (H1 2000: 2.5p)

- Outlook for H2 assumes no improvement in trading: focus on

performance improvement to mitigate downside

- Leadership team strengthened

- Immediate actions to focus on customers and operational

improvements

- Completion of strategy review on schedule for fiscal Q4

Chief Executive Rick Haythornthwaite commented:

" Our early findings from the strategy review confirm a good core of assets on which to build - in our brands, product portfolio, people and customer relations. The problems which the Group must overcome stem as much from its sheer complexity and failure to address operational basics as from the need for an effective strategy.

"While these problems are not trivial, they can be solved. To do so will take strong leadership and a disciplined approach, but the resulting improvement in execution is as necessary for delivery of our long-term future as it is for short-term performance."

      Financial Summary
                                        H1 2001           H1 2000

Sales

-   Ongoing operations                  (pound)3,330m     (pound)3,450m
-   Total Group                         (pound)3,567m     (pound)3,816m

Operating profit(a)

-   Ongoing operations                  (pound)281m       (pound)467m
-   Total group                         (pound)276m       (pound)474m

Total exceptionals & goodwill
 amortization                           (pound)(240)m     (pound)(258)m

Interest                                (pound)(101)m     (pound)(102)m

EPS
-   Basic                                      (1.9)p             1.1p
-   Continuing                                  3.5p              7.1p

      (a) Before operating and corporate exceptional items, goodwill
amortization and share of associated company profits/losses

Ongoing sales were (pound)3,330m, down 9% organically over the first half of last year. The most significant decline was in Power Systems, down 19% due to the sharp reduction of investment in telecommunications and IT infrastructure. Automation Systems was down 4% as industrial demand slowed, particularly in the US. Control Systems showed a 5% decline driven by falls in consumer and heavy automotive markets. Software Systems' decline of 7% reflected the general reduction in capital spending and the lack of recovery in its prime process sectors.

Operating profits of (pound)281m for ongoing operations were in line with guidance given on July 24 and reaffirmed on September 20 and October 8. This equates to an organic decrease of 40%, exacerbated by reduced sales in many of our highest-margin businesses. Margins fell in all four divisions, with Power Systems the worst affected. The speed and size of volume decline in the latter's main markets, combined with competitive pricing pressure, caused its operating profit to fall by (pound)95m or 75%. Profits at Control Systems were (pound)70m lower, due to the pronounced drop in volumes of high-margin products. The performance of Software Systems, which failed to meet our expectations, was the result of lack of effective project management and cost control, coupled with a decreased percentage of higher value-added sales of systems and solutions. Automation Systems was most successful in limiting margin erosion, through action on cost reduction and pricing improvement and backed by strong profit performances in its Flow Control and Rail businesses.

During the period the Group continued to work to drive costs down in line with demand, resulting in the removal of 6,300 jobs in ongoing operations.

Operational Review

Software Systems

Sales (pound)677m (H1 2000:(pound)631m), operating profit(pound)3m (H1 2000:(pound)13m)

The division had a disappointing first half, despite the inclusion of six months' trading from Baan in comparison with two months for the same period last year. A global decline in capital spending across discrete and process manufacturing, as well as high technology sectors, resulted in weak demand for industrial automation, controls and enterprise software. The process sector has produced few greenfield refinery projects and low hardware sales. Nonetheless, significant recent contract wins include Pemex ((pound)22m) and Dalton Utilities ((pound)5m). Food and beverage remained depressed by consolidation in the sector and lower capital spending.

Profit for the division was hit by lower sales of high-margin systems and solutions and by operational issues, primarily at its APV business.

In September the division announced the launch of ArchestrA, its new software framework that will give process, batch, discrete and hybrid manufacturing customers improved systems management. A Wonderware/Baan real-time system linking factory floor to ERP has been developed for shipment in Q2 2002. In October, the division also announced a strategic alliance with IBM for joint sales and marketing initiatives and product development.

In October, Leo Quinn was appointed Division Chief Executive, having joined the Group from Tridium. His experience in the software industry includes 17 years at Honeywell. Under his leadership, the division will focus on improving operational execution, project management and solutions-based selling. Further restructuring and cost reduction is underway to realign the cost base to current revenue levels and working capital management will continue to be a priority.

Automation Systems

Sales (pound)810m (H1 2000:(pound)825m), operating profit(pound)108m (H1 2000:(pound)119m)

Sales in the division were down organically by 4% on the prior year, caused by the global industrial downturn which was especially pronounced in the US. Whilst cost reductions included a 4% reduction in headcount, the continued pressure on margins resulted in an operating profit decrease of 9%.

The performance of the individual businesses was mixed. Rexnord benefited from favorable markets in oil exploration, mining and aerospace, while activity in construction, chemical processing, heavy-duty trucks and forest products all experienced a slowdown. Destocking by industrial distributors also affected sales at Rexnord Bearings. Continuing growth in the renewable energy sector led to significant expansion for Rexnord Hansen, a world leader in gear manufacturing for the wind turbine industry.

Elsewhere, Flow Control drove up sales by 9% and orders by 13%. Rail Systems maintained sales and grew profits by offsetting delays from UK railways and the London Underground with an increase in engineering projects.

Management action to mitigate the effect of the economic slowdown has focused on cost reductions and implementation of strategic pricing initiatives. Inventories have been reduced by 11% in the period. The division continues to focus on development of products targeted at growth markets such as rail, food processing and confectionery and on business opportunities with a high service and systems content.

Control Systems

Sales (pound)1,134m (H1 2000:(pound)1,134m), operating profit(pound)139m (H1 2000:(pound)209m)

The division's sales were down 5% organically with a continuing slowdown in its markets, particularly the US. Appliance Controls experienced tough trading with a further fall in demand for white goods, while Sensors and Motor Systems were impacted by the drop-off in heavy truck/off-road vehicle production.

On the other hand, there was growth in non-component activities. Sales and profits at the recently-created Energy Solutions business improved, driven by utilities' continued outsourcing of metering and data collection/management services provided by IMServ. The requirement by customers to reduce or optimize energy costs is also fueling growth in remote monitoring and diagnostics. Building Systems made inroads in Asia and improved its operational performance in Europe.

However, the sharp volume declines and pricing pressures in the division's high-margin products led to further erosion in profitability. In response, management heightened focus on improving input costs and output pricing, as well as reducing headcount by a further 7%.

In addition to the cost reduction program, the division continues to target improvement in working capital management and lean manufacturing. Cash generation was doubled over the same period last year, driven by an 18% reduction in inventories.

Power Systems

Sales (pound)709m (H1 2000:(pound)860m), operating profit(pound)31m (H1 2000:(pound)126m)

The unprecedented slowdown in the deployment of infrastructure by telecom and internet service providers gave the division a tough first half, with orders down 40% as a number of major telecoms companies cancelled or postponed equipment orders.

Although market conditions were harsh, the division maintained its rollout of new products for strategic market segments, including new ranges of medium-sized uninterruptible power supplies and DC-DC converters. An exclusive distribution agreement was signed with Active Power for its second-generation battery-less storage system, which is consistent with the divisional objective of becoming more focused on systems.

Despite the inevitable pressure on pricing and margins brought on by market conditions and surplus capacity, the division remained profitable thanks to stringent cost reduction, including an 18% decrease in headcount in the period. Improving control of working capital resulted in a positive cash flow. Continued introduction of new products and the long-term need for clean, reliable power leave the division with competitive strength for recovery in its key markets.

Other Matters

Currency Effects in the Period

Overseas sales and profits are translated into sterling at average rates for the period. The strengthening of the US dollar and the euro against the equivalent period last year produced a favorable translation effect, but this was offset in part by the weakening of the Japanese yen. The net year-on-year beneficial impact arising from the translation of operating profit in ongoing operations was (pound)13 million.

The translation benefit in reported performance was 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 UK and US markets.

Other Financial Items

Restructuring charges of (pound)165m within operating exceptional items relate to ongoing restructuring programs and reflect accelerated headcount reductions during the first half, but are in line with overall targets for the year. Restructuring includes a provision of (pound)20m for committed second half utilization.

Corporate exceptional items include (pound)21m of closure costs and (pound)16m profit on disposals, after (pound)2m goodwill written back. Goodwill amortization of (pound)61m (H1 2000: (pound)37m) was increased by the effect of a full six months' charge for the Baan acquisition, against two months for the same period last year.

Free cash flow after restructuring but before dividends improved to (pound)68m, or 2% of sales, from an outflow of (pound)194m in the first half of last year, as a detailed program to reduce working capital levels on a site-by-site basis began to take effect.

The interest charge for the period of (pound)101m (H1 2000: (pound)102m) reflected the increased level of net debt, offset by falling interest rates. At any given time, 80-85% of the Group's debt is at variable interest rates, enabling it to benefit rapidly from reductions in rates. Interest cover before exceptional items and goodwill amortization was 3.3x on a rolling twelve months to September 30, 2001, thereby exceeding the requirements of the Group's banking covenants. Gearing was 67% (H1 2000: 57%) including goodwill both capitalized and written off. Assuming interest rates remain unchanged, we estimate the interest charge for the second half will be around (pound)70m.

The tax charge for the period was(pound)nil (H1 2000:(pound)68m), net of a(pound)3m credit on corporate exceptional items. The underlying tax rate for continuing operations was 29.0% (H1 2000: 30.9%).

The Group has adopted Financial Reporting Standard No. 19: Deferred Tax (FRS19) for the first half with no impact on current period profit after tax. As required by the Standard, prior year results have been restated, resulting in an impact on profit after tax for H1 2000 of a decrease of (pound)3m and for the year to March 31, 2001, a decrease of (pound)8m. Shareholders' funds at September 30, 2000 have been reduced by (pound)158m and at March 31, 2001 by (pound)137m.

Impact of FRS17

Under the transitional requirements of Financial Reporting Standard No. 17: Retirement Benefits (FRS17), we will disclose our net pension assets as at March 31, 2002 in the year-end accounts based on financial conditions at that time. In respect of the UK, our largest pension arrangement, we believe the Invensys Pension Scheme remains in surplus. As less than 50% of this scheme is invested in equities - and has been for some time - we believe it would require a sustained significant fall in equity values for this to impact the Group's balance sheet negatively when FRS17 is fully implemented in the year ending March 2004.

Dividend

In light of the Group's current need to conserve cash and reduce its level of indebtedness, the Board has taken the decision to reduce the interim dividend to 1.0p per ordinary share (H1 2000: 2.5p). Future dividend policy will be determined upon completion of the strategy review later this year and in the context of performance in the second half.

The interim dividend will be payable on March 5, 2002 to shareholders on the register at close of business on December 7, 2001.

Strategy Review

Objectives

In August, new Chief Executive Rick Haythornthwaite launched a detailed strategy review of the Group.

Our key objectives for the review are to achieve a clear understanding of the current state and performance needs of Invensys and to develop a shared commitment to our future strategy among all managers and employees.

To provide us with the right framework for our future investment decisions, the strategy must encompass operating excellence, leadership in significant markets and material opportunity for profitable growth. It must be built on the strengths of our existing assets and capabilities, offer customers a clear proposition with defensible competitive advantage, and leverage the benefits of our structure as a Group.

The review is designed to challenge all aspects of the current business, with a view to creating a new direction for the Group from a starting point of our customers' expectations of value and service.

Early findings

Two months of intensive data collection from the business units have been followed by detailed interviews with the Group's top 75 customers and a comprehensive market survey of 2,000 companies in the US and Europe. Early findings from this analysis phase include:

- A broad base of loyal customers and strong brands

- Most businesses sound but currently under-performing

- Execution weakness in project management

- Essential skills gap in solution-based sales and marketing

- Lack of defined purpose for growth businesses versus

cash-generating businesses

- Excessive restructuring with resulting dilution of customer

focus

- Overly complex structure; little exploitation of Group

opportunities in selling or purchasing

- No remaining accounting issues; limited expected write-downs(b)

- No requirement to restate profits: prior utilization of

provisions appropriate; but failure to tackle underlying issues

- Present rates of growth and profitability are wholly inadequate

- Strong employee commitment but need for clarity and direction

In summary, the Group's failure to match peer performance seems largely due to a lack of focus on customers and operational basics and the need for a revised strategy.

(b) Our review of the strategic development of our businesses

may impact our view of the future value of certain assets in

some areas of our business, including fixed assets, contract

valuations and inventory. At this early stage, we believe that

addressing these issues would result in an exceptional charge of

less than 5% of our operating assets (before debt and tax).

Subject to completion of the strategy review, the Board believes

that there is no current impairment to the balance sheet

carrying values.

Next steps

Having completed our analysis, the Executive has agreed a number of market opportunities that warrant further investigation and has appointed Groupwide teams to subject these over the next two months to rigorous testing, including financial and market modeling. This will enable a final selection and strategic formulation to take place in our fourth quarter, for communication to all our employees, investors and business partners prior to our year-end.

At this early stage, what is already obvious is that any successful strategy will require a radically changed shape and approach for the Group, since the current structure has proved incompatible with effective customer service and creation of shareholder value.

Current priorities

Both the short- and long-term future of the Group dictate several clear requirements for immediate action.

We must drive cash generation hard, through continued implementation of our localized cash action teams on a site-by-site basis, and through selective disposals of non-strategic assets. We currently have several businesses mandated for sale. We will drive growth by limiting restructuring activity in order to allow renewed outward focus on our customers and their needs. Our growth businesses will receive targeted investment and we are taking urgent action to increase our capabilities in solution-based selling.

We will inject more discipline into our pricing policies with structured rollout of our agreed action plans. Loss-making businesses as well as production and project "blackspots" have been identified and are being systematically addressed.

We are beginning at once to drive for Group benefits in cross-selling to our existing customer base to increase our share of their overall investment spend. We have appointed a Senior Vice President of Supply Chain Management to lead improvements in Group purchasing. We have redefined the scope of our IT program, Project Unity, to ensure that execution of our future strategy is supported by common systems and will begin implementation early in our next fiscal year.

Finally, we will continue to drive up the quality of our management, the creation of a leadership culture that embraces accountability and delivery, and a passion for success among all our people.

Outlook

In the current fragile economic environment, trading in the second half is more likely to decline than improve on the first half. However, barring extreme events, our strong focus on performance improvement should mitigate any further downside risk and enable the Group to exceed the requirement of its banking covenant at year-end.

Invensys plc is one of the global leaders in automation and controls. Headquartered in London, England, Invensys operates in all regions of the world through four divisions - Software Systems, Automation Systems, Control Systems and Power Systems. With over 75,000 employees, the Group supplies products and services ranging from advanced control systems, remote diagnostics and energy management for process plants, factories and commercial environments to electronic devices and networks for residential buildings, as well as complete power systems for the industrial, telecommunications and information technology sectors.

(For tabular information contact Taylor Rafferty)

A presentation and webcast of the Group's preliminary results will take place at 10.00 am (UK time) today at Vinopolis, No1 Bank End, SE1.

All details of the announcement, presentation and webcast are available on www.invensys.com, together with a video interview with Chief Executive, Rick Haythornthwaite.

Safe Harbor

The information communicated in this documentation with respect to the Invensys financial outlook is forward looking and subject to risks and uncertainties. For this statement Invensys claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.