5th Dec 2006 07:00
Victrex PLC05 December 2006 5th December 2006 VICTREX plc Results announcement for the year ended 30th September 2006 • Volume up 19% to 2,339 tonnes (2005: 1,972 tonnes) • Revenue up 21% to £122.5m (2005: £100.9m) • Profit before taxation up 31% to £46.1m (2005: £35.3m) • Earnings per share up 32% to 39.4p (2005: 29.9p) • Final dividend of 10.2p making a total of 14.4p for the year, an increase of 20% Chairman Peter Warry commented: "I am pleased to report another year of excellent progress as Victrex has againdelivered record sales and profits, further strong organic growth and continuedsuccess in developing new product applications in increasingly diverseindustries. Sales volume has shown further growth since the year end which, if sustained,will result in higher first half volume than the second half of 2006. However,as previously reported, trading results for 2007 will be impacted by thestrengthening of Sterling against our key trading currencies (US Dollar, Euro &Yen) compared with 2006. As we look to the future, we will continue to expand the applications, marketsand industries we serve through investments in market development, product andapplication technology and supply chain infrastructure. We believe that this leaves us well placed to further realise the underlyinggrowth potential of the business and provides a sound basis for sustainableearnings growth." Enquiries VICTREX plc David Hummel, Chief Executive 0207 357 9477 (5th December 2006) Michael Peacock, Finance Director 01253 897700 (thereafter) Hogarth Partnership Limited Nick Denton / Barnaby Fry 0207 357 9477 VICTREX plc Preliminary results statement for the year ended 30th September 2006 I am pleased to report another year of excellent progress as Victrex has againdelivered record sales and profits, further strong organic growth and continuedsuccess in developing new product applications in increasingly diverseindustries. FINANCIAL RESULTS These results are the first to be published under International FinancialReporting Standards ("IFRS"). The main effects of the transition from UKGenerally Accepted Accounting Principles ("UK GAAP") to IFRS were set out in our2005 Annual Report. Revenue for the year grew by 21.4% to £122.5m (2005: £100.9m). Gross profitincreased by 32.3% to £75.8m (2005: £57.3m), representing 61.9% of revenue(2005: 56.8%). This significant gross margin improvement was driven by reducedcost of sales arising from last year's acquisition of certain BDF operations(the key raw material from which VICTREX(R) PEEKTM polymer is produced). These numbers include revenue of £3.8m (2005: £2.2m) relating to third partysales by a small, low margin, fluorides business acquired as part of the BDFacquisition. As this does not represent a strategic business for Victrex, wehave implemented a closure programme which will be completed in the first halfof 2007. Accordingly, we have provided for associated redundancy andinfrastructure costs of £0.8m in the second half of 2006. Group gross profitexcluding this business amounted to £76.1m (2005: £56.9m), representing 64.1% ofrevenue (2005: 57.7%). Sales, marketing and administrative expenses increased by 34.6% to £30.7m (2005:£22.8m) as we have continued to invest in product development and sales andmarketing resources for both the main VICTREX PEEK business and Invibio(R), theGroup's biomaterials business. Profit before tax increased by 30.8% to £46.1m (2005: £35.3m) and basic earningsper share were up 31.8% at 39.4p (2005: 29.9p). Compared with the previous year,exchange rates have had an adverse impact of £0.4m on profit, principally due toa weaker US Dollar partially offset by a stronger Euro. The overall effective tax rate is 31.0% (2005: 32.2%). Dividend In recognition of this strong performance, the Directors are recommending afinal dividend of 10.2p per ordinary share (2005: 9.3p), making a total of 14.4pper ordinary share for the year (2005: 12.0p). This represents an increase of20% over last year and dividend cover of 2.7 times. Cash flow Cash flow generated from operations increased to £54.8m (2005: £37.4m) primarilyas a result of improved trading. Capital expenditure cash payments amounted to£21.5m (2005: £6.0m) principally reflecting the ongoing investment in additionalcapacity. Taxation paid was £12.4m (2005: £9.9m) as a result of increasedprofits. At the year end, the Group had net cash of £26.9m (2005: £15.7m). The Group hasa committed bank facility of £40m, all of which was undrawn at the year end.This facility expires in September 2008. OPERATIONAL REVIEW Markets Total sales volume increased by 18.6% to 2,339 tonnes (2005: 1,972 tonnes) withsecond half volume of 1,226 tonnes (2005: 984 tonnes) up 10.2% on first halfvolume of 1,113 tonnes (2005: 988 tonnes). Of our three principal market segments, industrial sales volume was up 21.6% at761 tonnes (2005: 626 tonnes), largely due to increasing demand from US oil andgas and chemical processing customers and European demand for industrial machinery applications. Second half sales of 414 tonnes were up 19.3% on thefirst half of 347 tonnes. Electronics sales volume increased by 18.1% to 658 tonnes (2005: 557 tonnes) asa result of increased semiconductor and consumer electronics sales. Second halfsales volume of 344 tonnes was 9.6% above the first half of 314 tonnes. Transport sales volume grew by 12.1% to 619 tonnes (2005: 552 tonnes) as aresult of increased automotive sales in Europe and commercial aerospace volumein the United States. The second half sales of 305 tonnes were in line with the first half (314 tonnes). Europe, our most established region, continued to show strong growth across allmarket segments with sales volume at 1,196 tonnes for the year, up 23.4% on2005 (969 tonnes). Second half volume (640 tonnes) was 15.1% up on the first half performance (556 tonnes) partly as a result of increased electronics salesto European processors for use in Asia-Pacific applications. At 724 tonnes, United States volume was 19.1% up on 2005 (608 tonnes) due toincreased demand in the oil and gas, chemical processing, aerospace andsemiconductor segments. Second half sales volume of 376 tonnes was up 8.0% onthe first half (348 tonnes). Asia-Pacific sales volume increased to 419 tonnes, up 6.1% on 2005 (395 tonnes)as we consolidated our position in this region after three years of very stronggrowth. Second half sales volume (210 tonnes) was in line with the first half (209 tonnes). As noted above, these volumes do not reflect sales to Europeanprocessors for use in Asia-Pacific applications and we continue to believe thatthis region offers excellent growth potential in the medium term. Invibio Invibio has had another excellent year with revenue of £15.4m, showing anincrease of 40.5% over 2005 (£11.0m). This reflects continued sales growth ofthe PEEK-OPTIMA(R) family of implantable polymers and sales of recently launchedproducts such as ENDOLIGN(R) composites and PEEK-CLASSIX(R) polymer. During the year we entered into 35 additional PEEK-OPTIMA polymer long-termsupply assurance agreements with implantable medical device manufacturers. Wehave achieved further penetration of strategic end use markets including spine,arthroscopy, dental, orthopaedic, trauma, urology and neurostimulation. Invibio received Frost & Sullivan's 2005 Product Innovation of the Year Awardfor polymeric materials in the medical implant market. This award recognisedInvibio for the introduction of new biomaterials, valuable regulatory approvalexpertise and for collaborating with key market players for medical deviceinnovation. We have continued to invest in our business with the construction of a newInvibio Global Technology Centre in the UK due for completion in Spring 2007 andthe establishment of a presence in Asia-Pacific with a new sales office anddedicated personnel. Long-term implantable devices utilising PEEK-OPTIMA polymerhave now been approved in China, Taiwan, Korea, India, Australia and Japan. Business development Victrex market development efforts continued to accelerate in 2006, as ourglobal teams developed new applications for Victrex products in an increasinglydiverse set of industries. We introduced a new range of coating products under the VICOTETM brand,characterised by the theme "VICOTE Coatings...the next generation of coatingsfor durability and long-life", which will allow us to continue to broaden ourapplication and industry exposure. In addition to launching the product range,we commercialised a number of applications ranging from consumer cookware toindustrial belting, in industries which were not served by our traditionalproducts. We commenced sales of high performance films (based on VICTREX PEEK) directly toend users and fabricators. This has begun to develop the market ahead of a widerinitiative for 2007 driven by strong industry interest and supported byVictrex's investment in our own film manufacturing facility currently underconstruction on our main UK site at Thornton Cleveleys, Lancashire. Thisfacility is due for completion in Spring 2007 at an estimated capital cost of£5.3m. We are developing a number of applications based on VICTREX PEEK film inareas such as aerospace insulation and flexible printed circuits, and havecommercialised applications in high performance speakers and electronicsubstrates. To further extend the potential uses for our materials, we launched the VICTREXT-Series of polymers, the first product family introduced by Victrex notentirely based on VICTREX PEEK polymer. This product, a blend of VICTREX PEEKand Celazole(R) PBI, extends the performance range of our materials into evenmore demanding temperature and wear applications such as high speed compressorsand components for semiconductor wafer handling systems. While new product innovation continues to open up new markets, other investmentsglobally underline our commitment to emerging market areas. We opened our firstdedicated technical centre outside the UK, the Asia Innovation and TechnologyCenter ("AITC"), based in Shanghai. The AITC is focused on deliveringapplication solutions rapidly to regional and global customers, to keep pacewith their increasing demands. Since opening in June 2006, the Center hasalready become very active, with many customer seminars, technical programmesand visits already completed. In addition, our AITC based technical team arehelping to drive new semiconductor application developments. In our more traditional industries and geographies, we are seeing expansion ofboth our applications and our customer base. Reduced systems cost, improvedsafety and reduced warranty claims continue to drive interest in VICTREX PEEK inthe automotive segment, with exciting new applications in areas such as balljoints, gears and mechanical friction and wear components. In the electronicsmarket, we are penetrating new board level components such as connectors,capacitors and battery systems where lead-free solder processes demand robustmaterials at higher temperatures. The need for weight savings in the aerospacemarket, especially with the launch of a new generation of fuel efficientaircraft, requires the use of materials which are lighter than traditionalmetals yet still offer outstanding strength and toughness in a variety ofdemanding environments. Our success in new application development is best characterised by thecontinued strength of our development pipeline and new applicationscommercialised. At the year end, our pipeline of potential target opportunitiescontained 1,764 developments (2005: 1,433) with an estimated mature annualisedvolume ("MAV") of 2,754 tonnes (2005: 2,344 tonnes) which represents the totaladditional volume achievable if all of the developments were successfullycommercialised. During the year we commercialised 517 new applications (2005:475) with an estimated MAV of 345 tonnes (2005: 351 tonnes). Supply chain and capital expenditure The supply chain can currently support 2,800 tonnes per annum of VICTREX PEEKsales. To allow us to meet our growth expectations and demonstrate furthersecurity of supply to our customers, we are currently constructing a secondVICTREX PEEK polymer powder plant on our main UK site. With an estimated capitalcost of £29m, the new plant will have the capacity to support an additional1,450 tonnes per annum of VICTREX PEEK sales and is on schedule to be completedin Autumn 2007. Detailed design and costing of the BDF supply chain uprate to support thisadditional polymer capacity has now been completed. The estimated capital costof the BDF uprate will be around £23m with completion expected in Autumn 2008. Total tangible fixed asset additions amounted to £25.0m for the year (2005:£18.5m - including the acquisition of the BDF operations) compared with totalforecast expenditure of around £30m. The additions principally related to theongoing construction of the polymer powder plant. Other items include the AITC,Invibio Global Technology Centre and the film manufacturing facility. The lowerthan expected level of expenditure for the year simply reflects specific phasingof project expenditure. We expect capital expenditure for 2007 to amount toapproximately £35m, again subject to phasing of projects. This will be fundedfrom the Group's cash resources and committed borrowing facilities. OUTLOOK Sales volume Sales volume has shown further growth since the year end which, if sustained,will result in higher first half volume than the second half of 2006. Currency impact As previously reported, trading results for 2007 will be impacted by thestrengthening of Sterling against our key trading currencies (US Dollar, Euroand Yen) compared with 2006. Based on our budgeted sales volume, currencyhedging already in place and recent spot exchange rates, we currently estimatethe following average exchange rates will apply: Year to Six months to Six months to Year to 30 September 31 March 30 September 30 September 2006 2007 2007 2007 ActualUS Dollar 1.82 1.81 1.89 1.85Euro 1.43 1.46 1.46 1.46Yen 188 201 210 205 As can be seen from the above table, most of the impact will be felt in thesecond half. By way of illustration, if the estimated 2007 rates had applied in2006, this would have had an adverse impact of £2.5m on profits. The future During the year we have made significant progress across our business. We havesuccessfully launched new products, expanded our presence in emerging marketsand broadened our application and customer base. Our capital expenditureprogramme is on schedule to ensure that we have the necessary infrastructure tosupport the continuing development of the business. As we look to the future, we will continue to expand the applications, markets,and industries we serve through investments in market development, product andapplication technology and supply chain infrastructure. We believe that this leaves us well placed to further realise the underlyinggrowth potential of the business and provides a sound basis for sustainableearnings growth. Peter WarryChairman4 December 2006 CONSOLIDATED INCOME STATEMENT For the year ended 30 September 2006 2006 2005 2005 Note £000 £000 £000 £000Revenue 2 122,516 100,913Cost of sales (46,708) (43,614) ------ ------Gross profit 75,808 57,299Sales, marketing and administrativeexpenses (30,743) (22,847) ------ ------Operating profit 2 45,065 34,452Financial income 688 419Financial expenses (88) (131) ------ ------Net financing income 600 288Share of profit of Japanese joint venture 474 526 ------ ------Profit before tax 46,139 35,266Income tax expense (14,303) (11,365) ------ ------Profit for the year attributable toequity shareholders of the parent 31,836 23,901 ------ ------ Earnings per shareBasic 3 39.4p 29.9pDiluted 3 38.9p 29.5p Dividend per shareInterim 4.2p 2.7pFinal 5 10.2p 9.3p ------ ------ 14.4p 12.0p ------ ------ A final dividend in respect of 2006 of 10.2p per share has been recommended bythe Directors for approval at the Annual General Meeting in February 2007. STATEMENT OF RECOGNISED INCOME AND EXPENSE For the year ended 30 September 2006 2005 £000 £000Changes in fair value of cash flow hedges 299 (2,427)Net change in fair value of cash flow hedges transferred toincome statement 1,366 2,113Exchange differences on net investment translation offoreign operations (279) 50Actuarial (losses)/gains on defined benefit plans (4,050) 812Tax on items taken directly to or transferred from equity 1,262 (247) ------- ------Net (expense)/income recognised directly in equity (1,402) 301Profit for the year 31,836 23,901 ------- ------Total recognised income and expense for the yearattributable to equity shareholders of the parent 30,434 24,202 ------- ------ BALANCE SHEET As at 30 September 2006 2005 £000 £000Assets Non-current assetsProperty, plant and equipment 84,009 63,813Intangible assets 9,404 10,015Investment in Japanese joint venture 370 80Deferred tax assets 7,201 4,166 ------ ------ 100,984 78,074 ------ ------Current assetsInventories 22,969 19,939Current income tax assets 774 453Trade and other receivables 12,139 12,813Derivative financial instruments 2,776 1,437Cash and cash equivalents 26,860 15,747 ------- ------ 65,518 50,389 ------- ------ ------- ------Total assets 166,502 128,463 ------- ------ Liabilities Non-current liabilitiesDeferred tax liabilities (12,385) (9,593)Retirement benefit obligations (12,159) (7,812) ------- ------ (24,544) (17,405) ------- ------ Current liabilitiesDerivative financial instruments (244) (1,010)Current income tax liabilities (7,549) (6,312)Trade and other payables (20,714) (11,489) ------- ------ (28,507) (18,811) ------- ------ ------- ------Total liabilities (53,051) (36,216) ------- ------ ------- ------Net assets 113,451 92,247 ------- ------ EquityShare capital 817 812Share premium account 16,549 15,243Translation reserve (229) 50Hedging reserve 1,325 228Retained earnings 94,989 75,914 ------- ------Total equity 113,451 92,247 ------- ------ These financial statements were approved by the Board of Directors on 4 December2006 and were signed on its behalf by: D R Hummel Chief Executive M W Peacock Finance Director CASH FLOW STATEMENT For the year ended 30 September 2006 2005 £000 £000Cash flows from operating activitiesProfit for the year 31,836 23,901Adjustments for:Depreciation 4,836 4,061Amortisation 611 609Increase in inventories (3,030) (206)Decrease/(increase) in trade and other receivables 675 (2,795)Increase/(decrease) in trade and other payables 5,595 (657)Equity-settled share-based payment transactions 1,122 694Japanese joint venture profit in stock adjustment 59 435Share of profit of Japanese joint venture (474) (526)Net financing income (600) (288)Income tax expense 14,303 11,365Changes in fair value of derivative financial instruments (440) 376Increase in retirement benefit obligations 298 440 ------ ------Cash generated from the operations 54,791 37,409Interest and similar charges paid (20) (49)Interest received 688 419Tax paid (12,357) (9,892) ------ ------Net cash flow from operating activities 43,102 27,887 ------ ------ Cash flows from investing activitiesAcquisition of property, plant and equipment (21,470) (6,043)Purchase of business including acquisition costs - (17,747)Dividends received 112 123 ------ ------Net cash flow from investing activities (21,358) (23,667) ------ ------ Cash flows from financing activitiesIssue of ordinary shares exercised under option 5 7Premium on issue of ordinary shares exercised under option 1,306 1,860Purchase of own shares held (767) (84)Dividends paid (10,896) (7,119) ------ ------Net cash flow from financing activities (10,352) (5,336) ------ ------ Net increase/(decrease) in cash and cash equivalents 11,392 (1,116)Exchange differences on net investment translation offoreign operations (279) 50Cash and cash equivalents at beginning of year 15,747 16,813 ------ ------Cash and cash equivalents at end of year 26,860 15,747 ------ ------ NOTES TO THE FINANCIAL STATEMENTS 1 Significant accounting policies General information VICTREX plc (the 'Company') is a limited liability company incorporated anddomiciled in the United Kingdom. The address of its registered office is VictrexTechnology Centre, Hillhouse International, Thornton Cleveleys, Lancashire, FY54QD, United Kingdom. The consolidated financial statements of the Company for the year ended 30September 2006 comprise the Company and its subsidiaries (together referred toas the 'Group') and the Group's interest in the Japanese joint venture. The Company is listed on the London Stock Exchange. These consolidated financial statements have been approved for issue by theBoard of Directors on 4 December 2006. Basis of preparation These results are the first to be published under International FinancialReporting Standards ("IFRS"). The main effects of the transition from UKGenerally Accepted Accounting Principles ("UK GAAP") to IFRS were set out in our2005 Annual Report. The restated financial statements for the year ended 30 September 2005 and theopening balance sheet at 1 October 2004 have been prepared in accordance withIFRS as adopted by the EU. The consolidated financial statements have been prepared on the historical costbasis except that derivative financial instruments are measured at their fairvalue. The preparation of financial statements in conformity with IFRS requiresmanagement to make judgements, estimates and assumptions that affect theapplication of policies and reported amounts of assets and liabilities, incomeand expenses. The estimates and associated assumptions are based on historicalexperience and various other factors that are believed to be reasonable underthe circumstances, the results of which form the basis of making the judgementsabout carrying values of assets and liabilities that are not readily apparentfrom other sources. Actual results may differ from these estimates. Theestimates and underlying assumptions are reviewed on an ongoing basis. The accounting policies set out below have been applied consistently to allperiods presented in these consolidated financial statements and in preparing anopening IFRS balance sheet at 1 October 2004 for the purposes of the transitionto IFRS. The accounting policies have been consistently applied by Group entities. Victrex has decided to take advantage of the IFRS 1 - First-time Adoption ofInternational Financial Reporting Standards exemption whereby IFRS 3 - BusinessCombinations can be applied prospectively from the date of transition, henceremoving the need to restate previous business combinations. In addition, Victrex has also taken advantage of the IFRS 1 exemption to deem aszero at the date of transition to IFRS the cumulative translation differencesfor all foreign operations. Share option arrangements granted before 7 November 2002 exist. The recognitionand measurement principles in IFRS 2 - Share-based Payment have not been appliedto these grants in accordance with the transitional provisions in IFRS 1. A number of standards, amendments and interpretations have been issued duringthe period which are not yet effective, and accordingly the Group has not yetadopted. The cumulative impact of the adoption of these standards is not deemedto be significant. Investments In the Company's accounts, investments in the subsidiary undertakings andVictrex-MC, Inc are stated at cost less any impairment in the value of theinvestment. Basis of consolidation Subsidiaries Subsidiaries are entities over which the Group has the power to govern thefinancial and operating policies generally accompanying a shareholding of morethan one half of the voting rights. The existence and effect of the potentialvoting rights that are currently exercisable or convertible are considered inassessing control. Subsidiaries are consolidated from the date that controlcommences until the date that control ceases. Joint venture The activities of the Japanese joint venture are governed by a joint ventureagreement between the Company and Mitsui Chemicals Inc. Certain key managementdecisions require the co-operation of both parties. The Group's share of profitsless losses of the Japanese joint venture is included in the consolidated incomestatement on the equity accounting basis. The holding value of the Japanesejoint venture in the Group balance sheet is calculated by reference to theGroup's equity in the gross assets and liabilities of the Japanese jointventure, adjusted for unrealised profit in stock. Transactions eliminated on consolidation Intragroup balances and any unrealised gains and losses or income and expensesarising from intragroup transactions are eliminated in preparing theconsolidated financial statements. Unrealised gains arising from transactionswith the joint venture are eliminated to the extent of the Group's interest inthe entity. Unrealised losses are also eliminated in the same way as unrealisedgains, unless the transaction provides evidence of an impairment of the assettransferred. Segment reporting A geographical segment is engaged in providing products or services within aparticular environment that are subject to risks and returns that are differentfrom those of segments operating in other economic environments. A businesssegment is defined as a group of assets and operations engaged in providingproducts or services that are subject to risks and returns that are differentfrom those of to the business segments. The Group has determined the primary reporting segment to be geographic as theGroup is engaged in providing products or services within particular geographicenvironments that are subject to varying risks and returns. Foreign currency translation Functional and presentation currency Items included in the financial statements of each of the Group's entities aremeasured using the currency of the primary economic environment in which theentity operated ('the functional currency'). The consolidated financialstatements are presented in Sterling, which is the Company's functional andpresentation currency. Transactions and balances Foreign currency transactions are translated into the functional currency usingthe exchange rate prevailing at the dates of the transactions. Foreign exchangegains and losses resulting from the settlement of such transactions and from theretranslation to balance sheet date exchange rates of monetary assets andliabilities denominated in foreign currencies are recognised in the incomestatement, except when deferred in equity as qualifying cash flow hedges. Group companies The results and financial position of all the Group entities (none of which hasthe currency of a hyperinflationary economy) that have a functional currencydifferent from the presentation currency are translated into the presentationcurrency as follows: a) Assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; b) Income and expenses for each income statement are translated at weighted average exchange rates and, c) All resulting exchange differences, from 1 October 2004, are recognised as a separate component of equity. Derivative financial instruments and hedging activities The Group uses derivative financial instruments to hedge its exposure to foreignexchange risks. In accordance with its treasury policy, the Group does not holdor issue derivative financial instruments for trading purposes. Derivatives are recognised at fair value. The method of recognising any gain orloss on remeasurement of fair value depends on whether the derivative isdesignated as a hedging instrument, and if so, the nature of the item beinghedged. At the inception of the transaction, the Group documents the relationshipbetween hedging instruments and hedged items. The Group also documents itsassessment, both at hedge inception and on an ongoing basis, of whether thederivatives that are used in hedging transactions are effective in offsettingchanges in fair values or cash flows of hedged items. For derivatives not used in hedging transactions, the gain or loss onremeasurement of fair value is recognised immediately in the income statement. Cash flow hedges Where a derivative financial instrument is designated as a hedge of thevariability in cash flows of a recognised asset or liability, or a highlyprobable forecast transaction, the effective portion of changes in fair value isrecognised in equity. The gain or loss relating to the ineffective portion isrecognised immediately in the income statement. Amounts accumulated in equity are recycled in the income statement in theperiods when the hedged item affects the profit or loss. When a hedging instrument expires or is sold, or when a hedge no longer meetsthe criteria for hedge accounting, any cumulative gain or loss existing inequity at that time is recognised in the income statement. When a forecasttransaction is no longer expected to occur, the cumulative gain or loss that wasreported in equity is immediately transferred to the income statement. Fair value estimation The fair value of forward foreign exchange contracts is determined using forwardexchange market rates at the balance sheet date. Property, plant and equipment Owned assets All owned items of property, plant and equipment are stated at historical costless accumulated depreciation and provision for impairment. The cost of selfconstructed assets includes the cost of materials, direct labour and anappropriate proportion of overheads. Subsequent costs are included in the asset's carrying amount or recognised as aseparate asset, as appropriate, only when it is probable that future economicbenefits associated with the item will flow to the Group and the cost of theitem can be measured reliably. All other repairs and maintenance are charged tothe income statement during the financial period in which they are incurred. Leased assets Operating lease rental charges are charged to the income statement on a straightline basis over the life of the lease. Depreciation Depreciation is charged to the income statement on a straight line basis overthe estimated useful economic lives as follows: Long leasehold buildings 30 years Freehold buildings 30 years Plant and machinery 10 - 20 years Fixtures, fittings, tools and equipment 5 years Computers and motor vehicles 3 - 5 years Freehold land is not depreciated. The residual values and useful lives of assets are reviewed annually forcontinued appropriateness and indications of impairment, and adjusted ifappropriate. Gains and losses on disposals are determined by comparing proceeds with carryingamount. These are included in the income statement. Intangible assets Goodwill Goodwill is stated at cost less any accumulated impairment losses. Goodwill isnot amortised but is tested annually for impairment. In respect of acquisitions prior to 1 October 2004, goodwill is included on thebasis of its deemed cost, which represents the amount recorded previously underUK GAAP. In respect of acquisitions that have occurred since 1 October 2004,goodwill represents the difference between the cost of the acquisition and thefair value of the assets, liabilities and contingent liabilities acquired. Expenditure on internally generated goodwill is recognised in the incomestatement as an expense as incurred. Research and development Expenditure on research activities, undertaken with the prospect of gaining newscientific or technical knowledge and understanding, is recognised in the incomestatement as an expense as incurred. Development expenditure is recognised in the income statement as an expense asincurred unless it meets all the criteria to be capitalised under IAS 38 -Intangible Assets. Other intangible assets Other intangible assets that are acquired by the Group are stated at cost lessany accumulated amortisation. Other intangible assets are tested annually forimpairment. Amortisation Amortisation is charged to the income statement on a straight line basis inorder to allocate the cost over the estimated useful economic lives as follows: Knowhow 10 years The residual values and useful lives of assets are reviewed annually forcontinued appropriateness and impairment, and adjusted if appropriate. Inventories Inventories are measured at the lower of cost and net realisable value. The costof inventories is based on the first-in, first-out principle and includesexpenditure incurred in acquiring the inventories and bringing them to theirexisting location and condition. The cost of finished goods and work in progresscomprises raw materials, direct labour, other direct costs and relatedproduction overheads (allocated based on normal operating capacity). Netrealisable value is the estimated selling price in the ordinary course ofbusiness, less the estimated costs of completion and selling expenses. Cash and cash equivalents Cash and cash equivalents comprises cash balances, call deposits and othershort-term highly liquid investments with original maturities of three months orless. Bank overdrafts that are repayable on demand and form an integral part ofthe Group's cash management are included as a component of cash and cashequivalents for the purpose of the statement of cash flows. Income tax Income tax on the profit for the year comprises current and deferred tax. Incometax is recognised in the income statement except to the extent that it relatesto items recognised directly in equity. Current tax is the expected tax payable on the taxable income for the year,using tax rates enacted or substantively enacted at the balance sheet date, andany adjustment to tax payable in respect of previous years. Deferred income tax is provided in full, using the liability method, ontemporary differences arising between the carrying amounts of assets andliabilities for financial reporting purposes and the amounts used for taxpurposes. The following temporary differences are not provided for: goodwill notdeductible for tax purposes; the initial recognition of assets or liabilitiesthat affects neither accounting nor taxable profit; and differences relating toinvestments in subsidiaries except to the extent that they will probably reversein the foreseeable future. The amount of deferred tax provided is based on theexpected manner of realisation or settlement of the carrying amount of assetsand liabilities, using tax rates enacted or substantively enacted at the balancesheet date. A deferred tax asset is recognised only to the extent that it is probable thatfuture taxable profits will be available against which the asset can beutilised. Deferred tax assets are reduced to the extent that it is no longerprobable that the related tax benefit will be realised. Dividend distribution Dividend distribution to the Company's shareholders is recognised as a liabilityin the Group's financial statements in the period in which the dividends areapproved. Revenue recognition Revenue comprises the amounts receivable for the sale of goods and services, netof value added tax, rebates and discounts and after eliminating sales within theGroup. Revenue from the sale of goods is recognised when the significant risksand rewards of ownership have been transferred to the buyer. Revenue fromcontractual payments is recognised by reference to completion of a specificmilestone in accordance with the substance of the relevant agreements. Royaltyincome is recognised when the amount payable is known. No revenue is recognised if there is significant uncertainty regarding recoveryof the consideration due, associated costs or the possible return of goods. Employee benefits Defined contribution pension plans Obligations for contributions to defined contribution pension plans arerecognised as an expense in the income statement as incurred. Defined benefit pension plans The Group's net obligation in respect of defined benefit pension plansrecognised in the balance sheet is the present value of the future benefits thatemployees have earned in return for their service in the current and priorperiods less the fair value of plan assets, together with adjustments for pastservice costs. The defined benefit obligation is calculated by independentactuaries using the projected unit credit method. The present value of thedefined benefit obligation is determined by discounting the estimated futurecash outflows using interest rates of high quality corporate bonds that aredenominated in the currency in which the benefits will be paid and have terms tomaturity approximating to the terms of the related pension liability. Victrex has decided to take advantage of the option under IAS 19 - EmployeeBenefits to recognise actuarial gains and losses through the statement ofrecognised income and expense as opposed to the income statement. Ongoing actuarial gains and losses are being immediately recognised in fullthrough the statement of recognised income and expense. Share-based payment transactions The fair value of the employee services received in exchange for the grant ofthe options is recognised as an expense. The total amount to be expensed over the vesting period is determined byreference to the fair value of the options granted, excluding the impact of anynon-market vesting conditions. Non-market vesting conditions are included inassumptions about the number of options that are expected to become exercisableand include employee service periods and performance targets which are notrelated to the parent's share price, such as earnings per share growth. The fairvalue of the options is measured by the Stochastic model, taking into accountthe terms and conditions upon which the instruments were granted. At eachbalance sheet date the entity revises its estimates of the number of optionsthat are expected to become exercisable. It recognises the impact of therevision of original estimates, if any, in the income statement, and acorresponding adjustment to equity over the remaining vesting period. Any failure to meet market conditions, which includes performance targets suchas share price or total shareholder return, would not result in a reversal oforiginal estimates in the income statement. The proceeds received, net of any directly attributable transaction costs, arecredited to share capital (nominal value) and share premium when the options areexercised. Provisions A provision is recognised in the balance sheet when the Group has a presentlegal or constructive obligation as a result of a past event, it is probablethat an outflow of economic benefits will be required to settle the obligationand it has been reliably estimated. Net financing income and expense Net financing income and expense comprises interest payable on borrowings,interest received on funds invested and charges on bank loans and overdrafts. 2 Segment reporting Primary geographical segments Results Europe USA Asia-Pacific Group Europe USA Asia-Pacific Group 2006 2006 2006 2006 2005 2005 2005 2005 £000 £000 £000 £000 £000 £000 £000 £000 Total segment sales 65,076 70,452 17,789 153,316 52,423 55,063 16,401 123,887Less inter-segment sales (158) (29,974) (669) (30,800) - (22,974) - (22,974) ------ ------ ------ ------ ------ ------ ------ ------Revenue from external sales 64,918 40,478 17,120 122,516 52,423 32,089 16,401 100,913 ------ ------ ------ ------ ------ ------ ------ ------ Segment operating profit 29,753 14,670 4,754 49,177 22,303 11,214 4,664 38,181Unallocated central costs (4,112) (3,729) ------ ------Operating profit 45,065 34,452Net financing income 600 288Share of profit of Japanese jointventure 474 526 ------ ------Profit before tax 46,139 35,266Income tax expense (14,303) (11,365) ------ ------Profit for the year attributable to equity shareholders of the parent 31,836 23,901 ------ ------ Other information Europe USA Asia-Pacific Group Europe USA Asia-Pacific Group 2006 2006 2006 2006 2005 2005 2005 2005 £000 £000 £000 £000 £000 £000 £000 £000 Segment assets 152,341 8,788 5,373 166,502 116,170 9,299 2,994 128,463 Segment liabilities 43,418 9,482 151 53,051 28,945 7,271 - 36,216 Capital expenditure 23,637 33 1,365 25,035 18,502 27 - 18,529Depreciation 4,772 30 34 4,836 4,056 5 - 4,061Amortisation 611 - - 611 609 - - 609 Secondary business segments 2006 2005Sales £000 £000VICTREX PEEK 107,076 89,926Invibio 15,440 10,987 ------ ------ 122,516 100,913 ------ ------ Total assetsVICTREX PEEK 159,049 122,144Invibio 7,453 6,319 ------ ------ 166,502 128,463 ------ ------ Capital expenditureVICTREX PEEK 23,581 18,519Invibio 1,454 10 ------ ------ 25,035 18,529 ------ ------ Analysis of sales by category Product sales 118,670 98,060Other income 3,846 2,853 ------ ------ 122,516 100,913 ------ ------ 3 Earnings per share Diluted earnings per share is based on the Group's profit attributable toordinary shareholders and a weighted average number of ordinary sharesoutstanding during the year, excluding own shares held. 2006 2005Earnings per share - basic 39.4p 29.9p - diluted 38.9p 29.5p Profit for the financial year £31,836,000 £23,901,000 Weighted average number of shares used:Issued ordinary shares at beginning of year 81,235,566 80,515,020Effect of own shares held (720,157) (770,498)Effect of shares issued during the year 258,054 306,470 -------- --------Basic weighted average number of shares 80,773,463 80,050,992Effect of share options 1,064,721 871,459 -------- --------Diluted weighted average number of shares 81,838,184 80,922,451 -------- -------- 4 Exchange rates The most significant Sterling exchange rates used in the accounts under theGroup's accounting policies are: Year ended Year ended 30 September 30 September 2006 2005 Average Closing Average ClosingUS Dollar 1.82 1.87 1.77 1.77Euro 1.43 1.47 1.44 1.47Yen 188 221 187 201 5 Dividend and Annual General Meeting The proposed final dividend will be paid on 1 March 2007, to all shareholders onthe register on 2 February 2007. The Annual General Meeting of the Company willbe held on 6 February 2007, at The Great Eastern Hyatt Hotel (formerly The GreatEastern Hotel), Liverpool Street, London, EC2M 7QN. 6 Financial statements The above financial information does not comprise full financial statementswithin the meaning of the Companies Act 1985. The results for the year ended 30September 2006 have been extracted from the full accounts for that period. Theauditors have given an unqualified report on the accounts for this year. Thefinancial information for the year ended 30 September 2005 has been extractedfrom the full accounts for that year, except that this comparative informationhas been restated as a result of the adoption of IFRS. The accounts for the yearended 30 September 2005 were unqualified and have been delivered to theRegistrar of Companies. The accounts for the year ended 30 September 2006 will be posted to shareholderson 15 December 2006 and will be available from the Company's registered officeat Victrex Technology Centre, Hillhouse International, Thornton Cleveleys,Lancashire, FY5 4QD. 7 Forward-looking statements Sections of this preliminary results announcement contain forward-lookingstatements, including statements related to: future demand and markets for theGroup's products and services; research and development relating to new productsand services and liquidity and capital resources. These forward-lookingstatements involve risks and uncertainties, because they relate to events thatmay or may not occur in the future. Accordingly, actual results may differ materially from anticipated resultsbecause of a variety of risk factors, including: changes in global, political,economic, business, competitive and market forces; changes to legislation andtax rates; future business combinations or disposals; relations with customersand customer credit risk; events affecting international security, includingglobal health issues and terrorism; changes in regulatory environment and theoutcome of litigation. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Victrex