6th Jun 2006 07:01
Victrex PLC06 June 2006 6th June 2006 Victrex plc Results announcement for the six months ended 31st March 2006 • Volume up 13% to 1,113 tonnes (2005: 988 tonnes) • Revenue up 20% to £58.7m (2005: £49.0m) • Profit before taxation up 32% to £23.1m (2005: £17.5m) • Earnings per share up 32% to 19.3p (2005: 14.6p) • Interim dividend per share up 56% to 4.2p (2005: 2.7p) Chairman Peter Warry commented: "Victrex has continued to make excellent progress in the first half of 2006 withfurther strong growth resulting in record sales and profits. 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 and are detailed in note 7 to this interim report. The strong first half sales performance has continued in the second half.Accordingly, we expect second half sales to be broadly in line with the firsthalf. Looking further ahead, we believe that our ongoing global investment in productand market development for end users, together with our capital expenditureprogramme, will provide a sound basis for future growth." Enquiries Victrex plc David Hummel, Chief Executive 0207 357 9477 (6th June 2006)Michael Peacock, Finance Director 01253 897700 (thereafter) Hogarth Partnership Limited Nick Denton / Barnaby Fry 0207 357 9477 REPORT TO SHAREHOLDERSon the interim results for the six months ended 31 March 2006 Victrex has continued to make excellent progress in the first half of 2006 withfurther strong growth resulting in record sales and profits. 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 and are detailed in note 7 to this interim report. Results Revenue was £58.7m (H1 2005: £49.0m), an increase of 20% on the first six monthsof last year. At 1,113 tonnes, sales volume was 13% up on both the first half(988 tonnes) and the second half (984 tonnes) of last year. Gross profit was £36.8m (H1 2005: £27.3m), representing a gross margin of 62.7%(H1 2005: 55.8%). This significant gross margin improvement was mainly driven byreduced cost of sales arising from last year's acquisition of certain BDFoperations (the key raw material from which VICTREX PEEK is produced). Sales, marketing and administrative expenses increased by 36% to £14.2m comparedwith the first half of last year (£10.4m) and by 14% over the second half(£12.4m). We have continued to invest in product development and sales andmarketing resources for both the main VICTREX PEEK business and Invibio(R) (ourbiomaterials business). Profit before tax grew by 32% over the first half of 2005 (£17.5m) to a recordlevel of £23.1m and earnings per share were 19.3p (H1 2005: 14.6p), up 32%. Markets Electronics sales volume was 314 tonnes, up 18% on last year's second half of265 tonnes. This was due to a good recovery in both consumer electronics andsemiconductor sales. Transport sales volume was 314 tonnes, up 18% on last year's second half of 265tonnes. This was principally due to increased automotive sales in Europe andAsia-Pacific and a continued upturn in commercial aerospace volume. Industrial sales volume was 347 tonnes, up 3% on last year's strong second halfof 337 tonnes as oil and gas and chemical processing sales were maintained inline with the record levels achieved in the second half of last year. Regionally, European sales volume saw renewed growth at 556 tonnes, 18% up onthe previous second half (472 tonnes), due to increased sales in all segments,particularly automotive and industrial. United States volume continued to grow with sales of 348 tonnes. This was 6% upon the second half of last year (327 tonnes). At 209 tonnes, Asia-Pacific sales volume was up 13% on the previous second half(185 tonnes) and in line with last year's record first half of 210 tonnes. Thiswas largely due to electronics and automotive growth. Invibio generated record first half revenue of £7.6m, an increase of 33% overthe second half of last year (£5.7m) and 43% over the first half (£5.3m). Sincethe start of the new financial year we have entered into 14 additionalPEEK-OPTIMA(R) polymer long-term supply assurance agreements with implantablemedical device manufacturers. Development Pipeline During the first half we commercialised 240 new applications with an estimatedmature annualised volume ("MAV") of 210 tonnes compared with 176 commercialisedapplications with a MAV of 125 tonnes in the second half of 2005. Thedevelopment pipeline contained 1,472 developments (September 2005: 1,433) withan estimated MAV of 2,266 tonnes (September 2005: 2,344) if all of thedevelopments were successfully commercialised. Capital Expenditure Capital expenditure payments for the period amounted to £6.6m (2005: £2.6m). Themajority of these related to the ongoing construction of the second VICTREX PEEKpolymer powder manufacturing plant, which is scheduled to be completed in late2007, on our main UK site at Thornton Cleveleys, Lancashire. We expect totalcapital expenditure for the second half to be approximately £23m, againprincipally on the polymer plant, resulting in a total spend for the year ofaround £30m. This will be funded from the Group's cash resources and committedborrowing facilities. Detailed design and costing of the BDF supply chain uprate needed to supportthis additional polymer capacity is continuing. We expect to provide furtherdetails of the BDF uprate at our preliminary announcement in December. Other capital expenditure includes the new Asia Innovation and Technology Centerwhich is scheduled to open in Shanghai this month. The Center will providecustomers with expertise in material specification, testing, research andapplication development. Construction is also underway of a dedicated Invibio Global Technology Centre atThornton Cleveleys to support ongoing business growth, research and technologydevelopment. This global headquarters will house dedicated laboratories and aclean room processing capability and is expected to be completed in early 2007. Cash Flow Cash flow from operations increased to £23.4m (H1 2005: £14.8m) primarily as aresult of improved trading. Taxation paid was £6.5m (H1 2005: £4.8m) and the effective tax rate decreased to32.5% (H1 2005: 33.0%). At 31 March 2006, the Group remained ungeared with net cash of £19.1m comparedwith £15.7m as at 30 September 2005. The Group has a committed bank facility of£40m which expires in September 2008, all of which was undrawn at the end of thefirst half. Dividend Following the rebasing of last year's dividend through an increase in the finaldividend of 50% from the previous year (which resulted in an overall increase of40% over the previous year), we have raised this year's interim dividend so thatwe maintain the interim dividend at an appropriate proportion of the totaldividend. Accordingly, and in recognition of the strong first half performance,an interim dividend of 4.2p per share, representing an increase of 56% over lastyear's interim dividend, will be paid on 31 July 2006 to all shareholders on theregister at the close of business on 30 June 2006. Board Changes Non-executive Director, Charles Irving-Swift, is retiring from the Board today.Charles joined the Board in 2002 and has made a significant contribution to thedevelopment of Victrex. We are most grateful for his contribution and wish himwell in the future. We expect to announce his replacement shortly. Outlook The strong first half sales performance has continued in the second half.Accordingly, we expect second half sales to be broadly in line with the firsthalf. Looking further ahead, we believe that our ongoing global investment in productand market development for end users, together with our capital expenditureprogramme, will provide a sound basis for future growth. Peter WarryChairman 5 June 2006 CONSOLIDATED INCOME STATEMENT Six months ended Six months ended Year ended 31 March 2006 31 March 2005 30 September 2005 Note £000 £000 £000 £000 £000 £000__________________________________________________________________________________________________________Revenue 2 58,730 48,965 100,913Cost of sales (21,935) (21,627) (43,614)__________________________________________________________________________________________________________Gross profit 36,795 27,338 57,299Sales, marketing and administrative expenses (14,170) (10,424) (22,847)__________________________________________________________________________________________________________Operating profit before financing costs 22,625 16,914 34,452Financial income 267 286 419Financial expenses (44) (80) (131) _______ _______ _______Net financing income 223 206 288Share of profit of Japanese joint venture 242 417 526__________________________________________________________________________________________________________Profit before tax 23,090 17,537 35,266Income tax expense 3 (7,510) (5,791) (11,365)__________________________________________________________________________________________________________Profit for the period attributable to equityshareholders of the parent 15,580 11,746 23,901__________________________________________________________________________________________________________ __________________________________________________________________________________________________________Earnings per shareBasic 4 19.3p 14.6p 29.9pDiluted 4 19.1p 14.5p 29.5p__________________________________________________________________________________________________________DividendsYear ended 30 September 2004 final dividend paid at 6.2p per share - 4,949 4,949Year ended 30 September 2005 interim dividend paid at 2.7p per share - - 2,170 final dividend paid at 9.3p per share 7,494 - -__________________________________________________________________________________________________________ 7,494 4,949 7,119__________________________________________________________________________________________________________ An interim dividend of 4.2p per share will be paid on 31 July 2006 toshareholders on the register at the close of business on 30 June 2006. Inaccordance with IFRS this dividend will be recognised in the period in which itis approved. CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE Six months ended Six months ended Year ended 31 March 2006 31 March 2005 30 September 2005 £000 £000 £000__________________________________________________________________________________________________________Cash flow hedges (904) 416 (314)Exchange differences on net investmenttranslation of foreign operations 127 (76) 50Actuarial (losses)/gains on defined benefit plans (1,323) 791 812Tax on items taken directly to or transferredfrom equity 768 (237) (247)__________________________________________________________________________________________________________Net (expense)/income recognised directly in equity (1,332) 894 301Profit for the period 15,580 11,746 23,901__________________________________________________________________________________________________________Total recognised income and expense forthe period attributable to equity shareholdersof the parent 14,248 12,640 24,202__________________________________________________________________________________________________________ CONSOLIDATED BALANCE SHEET 31 March 2006 31 March 2005 30 September 2005 Note £000 £000 £000____________________________________________________________________________________________AssetsNon-current assetsProperty, plant and equipment 68,369 49,505 63,813Intangible assets 9,710 6,372 10,015Investment in Japanese joint venture 132 131 80Deferred tax assets 6,010 3,402 4,166____________________________________________________________________________________________ 84,221 59,410 78,074____________________________________________________________________________________________Current assetsInventories 21,637 18,494 19,939Trade and other receivables 13,892 14,085 12,813Derivative financial instruments 654 1,839 1,437Cash and cash equivalents 19,121 20,116 15,747____________________________________________________________________________________________ 55,304 54,534 49,936____________________________________________________________________________________________Total assets 139,525 113,944 128,010____________________________________________________________________________________________LiabilitiesNon-current liabilitiesDeferred tax liabilities (10,673) (8,806) (9,593)Retirement benefit obligations (9,322) (7,554) (7,812)____________________________________________________________________________________________ (19,995) (16,360) (17,405)____________________________________________________________________________________________Current liabilitiesDerivative financial instruments (1,449) (260) (1,010)Trade and other payables (18,499) (16,174) (17,348)____________________________________________________________________________________________ (19,948) (16,434) (18,358)____________________________________________________________________________________________Total liabilities (39,943) (32,794) (35,763)____________________________________________________________________________________________Net assets 99,582 81,150 92,247____________________________________________________________________________________________EquityShare capital 816 807 812Share premium account 16,076 13,876 15,243Translation reserve 177 (76) 50Hedging reserve (676) 1,058 228Retained earnings 83,189 65,485 75,914____________________________________________________________________________________________Total equity 6 99,582 81,150 92,247____________________________________________________________________________________________ CONSOLIDATED CASH FLOW STATEMENT Six months ended Six months ended Year ended 30 31 March 2006 31 March 2005 September 2005 £000 £000 £000______________________________________________________________________________________________________Cash flows from operating activitiesProfit for the period 15,580 11,746 23,901Adjustments for:Depreciation 2,365 1,817 4,061Amortisation 305 305 609Changes in working capital and provisions (2,934) (4,865) (3,658)Equity-settled transactions 511 277 694Japanese joint venture profit in stock adjustment 64 272 435Share of profit of Japanese joint venture (242) (417) (526)Net financing income (223) (206) (288)Income tax expense 7,510 5,791 11,365Fair value gains on derivative financial instruments 318 (46) 376Increase in retirement benefit obligations 187 161 440______________________________________________________________________________________________________Cash generated from operations 23,441 14,835 37,409Interest paid (4) (41) (49)Interest received 267 286 419Tax paid (6,511) (4,806) (9,892)______________________________________________________________________________________________________Net cash flow from operating activities 17,193 10,274 27,887______________________________________________________________________________________________________Cash flows from investing activitiesAcquisition of property, plant and equipment (6,635) (2,564) (6,043)Purchase of business including acquisition costs - - (17,747)Dividends received 113 123 123______________________________________________________________________________________________________Net cash flow from investing activities (6,522) (2,441) (23,667)______________________________________________________________________________________________________Cash flows from financing activitiesIssue of ordinary shares exercised under option 4 2 7Premium on issue of ordinary shares exercised under option 833 493 1,860Purchase of own shares held (767) - (84)Dividends paid (7,494) (4,949) (7,119)______________________________________________________________________________________________________Net cash flow from financing activities (7,424) (4,454) (5,336)______________________________________________________________________________________________________Net increase/(decrease) in cash and cash equivalents 3,247 3,379 (1,116)Effects of foreign exchange rates changes 127 (76) 50Cash and cash equivalents at beginning of period 15,747 16,813 16,813______________________________________________________________________________________________________Cash and cash equivalents at end of period 19,121 20,116 15,747______________________________________________________________________________________________________ NOTES TO THE INTERIM REPORT 1 Basis of preparation The Group is reporting its results in accordance with International FinancialReporting Standards ("IFRS") as adopted by the EU. In the Annual Report andAccounts 2006 all of the Group's financial information will be presented underIFRS. Previous accounts were prepared under UK Generally Accepted AccountingPrinciples ("UK GAAP") and reconciliations converting the Group's results fromUK GAAP to IFRS for the six months ended 31 March 2005 are given in note 7. Information in respect of the year ended 30 September 2005 is derived from theunaudited IFRS information published in the Annual Report and Accounts 2005,which also provided reconciliations converting the Group's results from UK GAAPto IFRS for the year ended 30 September 2005. The comparative figures for the financial year ended 30 September 2005 are notthe Group's statutory accounts for the financial year. Those accounts have beenreported on by the Group's auditors and delivered to the Registrar of Companies.The report of the auditors was unqualified. The Interim Report was approved by the Board of Directors on 5 June 2006 and isunaudited, but has been reviewed by the auditors. It does not constitutestatutory accounts, but has been prepared on a basis consistent with the Group'santicipated IFRS accounting policies which it expects to follow in its AnnualReport and Accounts for the year ending 30 September 2006. These accountingpolicies are set out at the back of this document. 2 Segment reporting _______________________________________________________________________________Analysis of revenue Six months ended Six months ended Year ended 31 March 2006 31 March 2005 30 September 2005 £000 £000 £000_______________________________________________________________________________Europe 31,281 26,373 52,485United States 19,001 13,957 32,188Asia-Pacific 8,448 8,635 16,240_______________________________________________________________________________ 58,730 48,965 100,913_______________________________________________________________________________ 3 Taxation Taxation of profit before tax in respect of the half year ended 31 March 2006has been provided at the estimated effective rates chargeable for the full yearin the respective jurisdiction. _______________________________________________________________________________ Six months ended Six months ended Year ended 31 March 2006 31 March 2005 30 September 2005 £000 £000 £000_______________________________________________________________________________UK corporation taxation 6,507 4,572 9,066Overseas taxation 999 684 1,780Deferred taxation 4 535 519_______________________________________________________________________________ 7,510 5,791 11,365_______________________________________________________________________________ 4 Earnings per share ____________________________________________________________________________________ Six months Six months Year ended ended ended 30 September 31 March 2006 31 March 2005 2005____________________________________________________________________________________ Earnings per share - Basic 19.3p 14.6p 29.9p - Diluted 19.1p 14.5p 29.5p Profit for the financial period £15,580,000 £11,746,000 £23,901,000 Weighted average number of shares used: - Basic 80,586,195 80,612,301 80,050,992 - Diluted 81,702,637 81,239,175 80,922,451____________________________________________________________________________________ 5 Exchange rates The most significant Sterling exchange rates used in the accounts under theGroup's accounting policies are: Six months ended Six months ended Year ended 31 March 2006 31 March 2005 30 September 2005 Average Closing Average Closing Average Closing_______________________________________________________________________________US Dollar 1.83 1.73 1.74 1.89 1.77 1.77Euro 1.42 1.43 1.44 1.45 1.44 1.47Yen 189 205 188 202 187 201_______________________________________________________________________________ 6 Changes in equity _________________________________________________________________________________________ Six months ended Six months ended Year ended 31 March 2006 31 March 2005 30 September 2005 £000 £000 £000_________________________________________________________________________________________Equity at beginning of period 92,247 72,687 72,687Total recognised income and expense 14,248 12,640 24,202Share options exercised 837 495 1,867Equity-settled transactions 511 277 694Purchase of shares for employee trusts (767) - (84)Dividends to shareholders (7,494) (4,949) (7,119)_________________________________________________________________________________________Equity at end of period 99,582 81,150 92,247_________________________________________________________________________________________ 7 Reconciliations from UK GAAP to IFRS RECONCILIATIONS OF THE CONSOLIDATED INCOME STATEMENTS Six months ended 31 March 2005 Year ended 30 September 2005 Previous Effect of IFRS Previous Effect of IFRS UK GAAP transition UK GAAP transition to IFRS to IFRS £000 £000 £000 £000 £000 £000________________________________________________________________________________________________________Revenue 49,305 (340) 48,965 101,615 (702) 100,913Cost of sales (21,718) 91 (21,627) (43,628) 14 (43,614)________________________________________________________________________________________________________Gross profit 27,587 (249) 27,338 57,987 (688) 57,299Sales, marketing andadministrative expenses (10,807) 383 (10,424) (23,733) 886 (22,847)________________________________________________________________________________________________________Operating profit before financingcosts 16,780 134 16,914 34,254 198 34,452Financial income 286 - 286 419 - 419Financial expenses (86) 6 (80) (143) 12 (131)Share of profit of Japanesejoint venture 417 - 417 549 (23) 526________________________________________________________________________________________________________Profit before tax 17,397 140 17,537 35,079 187 35,266Income tax expense (5,654) (137) (5,791) (11,401) 36 (11,365)________________________________________________________________________________________________________Profit for the period attributable toequity shareholders of the parent 11,743 3 11,746 23,678 223 23,901________________________________________________________________________________________________________Earnings per shareBasic 14.6p 14.6p 29.3p 29.9pDiluted 14.5p 14.5p 29.0p 29.5p________________________________________________________________________________________________________ RECONCILIATIONS OF CASH FLOW STATEMENTS There are no material differences between the cash flow statements presentedunder UK GAAP and that under IFRS. RECONCILIATIONS OF THE CONSOLIDATED BALANCE SHEETS 31 March 2005 30 September 2005 Previous Effect of IFRS Previous Effect of IFRS UK GAAP transition UK GAAP transition to IFRS to IFRS £000 £000 £000 £000 £000 £000________________________________________________________________________________________________AssetsNon-current assetsProperty, plant and equipment 49,507 (2) 49,505 63,812 1 63,813Goodwill 3,144 331 3,475 6,562 860 7,422Other intangible assets 2,897 - 2,897 2,593 - 2,593Investment in Japanese joint venture share of gross assets 2,700 (136) 2,564 2,291 (80) 2,211 share of gross liabilities (2,619) 186 (2,433) (2,266) 135 (2,131)Deferred tax assets 181 3,221 3,402 243 3,923 4,166________________________________________________________________________________________________ 55,810 3,600 59,410 73,235 4,839 78,074________________________________________________________________________________________________Current assetsInventories 18,494 - 18,494 19,936 3 19,939Trade and other receivables 14,669 (584) 14,085 13,049 (236) 12,813Derivative financial instruments - 1,839 1,839 - 1,437 1,437Cash and cash equivalents 20,312 (196) 20,116 15,821 (74) 15,747________________________________________________________________________________________________ 53,475 1,059 54,534 48,806 1,130 49,936________________________________________________________________________________________________ Total assets 109,285 4,659 113,944 122,041 5,969 128,010________________________________________________________________________________________________LiabilitiesNon-current liabilitiesDeferred tax liabilities (6,601) (2,205) (8,806) (7,013) (2,580) (9,593)Retirement benefit obligations - (7,554) (7,554) - (7,812) (7,812)________________________________________________________________________________________________ (6,601) (9,759) (16,360) (7,013) (10,392) (17,405)________________________________________________________________________________________________Current liabilitiesDerivative financial instruments - (260) (260) - (1,010) (1,010)Trade and other payables (18,485) 2,311 (16,174) (24,854) 7,506 (17,348)________________________________________________________________________________________________ (18,485) 2,051 (16,434) (24,854) 6,496 (18,358)________________________________________________________________________________________________Total liabilities (25,086) (7,708) (32,794) (31,867) (3,896) (35,763)________________________________________________________________________________________________Net assets 84,199 (3,049) 81,150 90,174 2,073 92,247________________________________________________________________________________________________EquityShare capital 807 - 807 812 - 812Share premium account 13,876 - 13,876 15,243 - 15,243Translation reserve - (76) (76) - 50 50Hedging reserve - 1,058 1,058 - 228 228Retained earnings 69,516 (4,031) 65,485 74,119 1,795 75,914________________________________________________________________________________________________Total equity 84,199 (3,049) 81,150 90,174 2,073 92,247________________________________________________________________________________________________ RECONCILIATION OF THE CONSOLIDATED BALANCE SHEET 1 October 2004 Previous Effect of IFRS UK GAAP transition to IFRS £000 £000 £000_________________________________________________________________________________AssetsNon-current assetsProperty, plant and equipment 49,347 (2) 49,345Goodwill 3,475 - 3,475Other intangible assets 3,202 - 3,202Investment in Japanese joint venture share of gross assets 2,089 (179) 1,910 share of gross liabilities (1,800) 211 (1,589)Deferred tax assets 197 3,166 3,363_________________________________________________________________________________ 56,510 3,196 59,706_________________________________________________________________________________Current assetsInventories 18,833 - 18,833Trade and other receivables 10,578 (562) 10,016Derivative financial instruments - 1,543 1,543Cash and cash equivalents 17,004 (191) 16,813_________________________________________________________________________________ 46,415 790 47,205_________________________________________________________________________________Total assets 102,925 3,986 106,911_________________________________________________________________________________LiabilitiesNon-current liabilitiesDeferred tax liabilities (6,267) (1,760) (8,027)Retirement benefit obligations - (8,184) (8,184)_________________________________________________________________________________ (6,267) (9,944) (16,211)_________________________________________________________________________________Current liabilitiesDerivative financial instruments - (426) (426)Trade and other payables (22,704) 5,117 (17,587)_________________________________________________________________________________ (22,704) 4,691 (18,013)_________________________________________________________________________________Total liabilities (28,971) (5,253) (34,224)_________________________________________________________________________________Net assets 73,954 (1,267) 72,687_________________________________________________________________________________EquityShare capital 805 - 805Share premium account 13,383 - 13,383Translation reserve - - -Hedging reserve - 542 542Retained earnings 59,766 (1,809) 57,957_________________________________________________________________________________Total equity 73,954 (1,267) 72,687_________________________________________________________________________________ PRINCIPAL DIFFERENCES BETWEEN UK GAAP AND IFRS Accounting for foreign currency transactions & financial instruments Victrex has a policy of taking out forward foreign currency contracts to coverforecast foreign currency income streams providing medium term predictability inits results. Under UK GAAP, Victrex used the effective exchange rates from the forwardcontracts for translation of its foreign currency transactions and, whereappropriate, the consolidation of its overseas entities. Under IFRS, Victrex continues to hedge account (as defined by IAS 39 - FinancialInstruments: Recognition and Measurement) resulting in largely unchanged profitand loss recognition. However, IAS did require changes to the mechanics of howthis is achieved: • Under IAS 21 - Effects of Changes in Foreign Exchange Rates, all transactions and consolidations are recognised using spot rates;• Under IAS 39 the fair value of forward foreign currency contracts are recognised on the balance sheet. Victrex has adopted hedge accounting and therefore the movement in fair value is deferred in a hedging reserve until the associated transaction occurs at which point the cumulative movement is released to the income statement. Whilst the above did not materially affect overall profitability, there wereminor changes in categorisation within the detail with a reduction in revenue of£702,000 offset by a reduction in cost of sales £235,000 and indirect overheadsof £384,000 in the year ended 30 September 2005 and a reduction in revenue of£340,000 offset by a reduction in cost of sales £91,000 and indirect overheadsof £207,000 in the half year ended 31 March 2005. The opening balance sheet as at 1 October 2004 recognises a financial asset of£1,543,000 and a financial liability of £426,000, which account for the fairvalue of derivative financial instruments (forward contracts). The correspondinghedging reserve is £542,000, which reflects the fair value of forward contractsrelating to future transactions at the balance sheet date. These are offset bythe effects of revaluing all balance sheet categories to closing spot rate. The balance sheet at 31 March 2005 recognises a financial asset of £1,839,000, afinancial liability of £260,000 and a corresponding hedging reserve of£1,058,000. The balance sheet at 30 September 2005 recognises a financial asset of£1,437,000, a financial liability of £1,010,000 and a corresponding hedgingreserve of £228,000. As a first time adopter, Victrex has taken advantage of the IFRS 1 - First-timeAdoption of International Financial Reporting Standards exemption to deem aszero at the date of transition to IFRS the cumulative translation differencesfor all foreign operations. Goodwill amortisation Under UK GAAP, goodwill is amortised by equal instalments over its estimateduseful economic life. However, under IFRS 3 - Business Combinations,amortisation of goodwill is prohibited but is replaced by a requirement forannual impairment testing. Victrex has decided to take advantage of the IFRS 1exemption whereby IFRS 3 can be applied prospectively from the date oftransition, hence removing the need to restate previous business combinations. The carrying value of goodwill on the opening IFRS balance sheet has thereforebeen restricted to that £3,475,000 net carrying amount previously reported underUK GAAP. The profit impact on this adjustment in the six months ended 31 March 2005 andthe year ended 30 September 2005 is a credit of £331,000 and £662,000respectively, being the reversal of amortisation previously charged under UKGAAP on the goodwill which arose on the acquisition of the DFDPM business fromLaporte in 1999 (note that there is no change in the treatment of the knowhowarising from that transaction). On 1 April 2005 Victrex purchased certain operations from Degussa AG. Thisincluded the purchase of goodwill which, in accordance with IFRS, will not beamortised, but will be subject to annual impairment testing. The profit impactof this adjustment in 2005 is a credit of £198,000, being the reversal ofamortisation previously charged under UK GAAP. Share based payments Under UK GAAP, there is no charge to the profit and loss account relating tooptions granted under the Victrex Employee share option scheme, Executive plan,Save as you earn scheme, Sharesave plan or Stock purchase plan. As regards theLTIP, under UK GAAP, the profit and loss account is charged over the performanceperiod with an amount equal to the market price on the date of the award,subject to meeting performance targets. However, IFRS 2 - Share Based Payments, requires that the fair value of all suchrelevant instruments granted since 7 November 2002, which have not vested by 1January 2005, be charged to the income statement over the relevant optionvesting periods (adjusted for actual and expected levels). Fair values have beencalculated using the recognised stochastic options valuation model. Victrex receives a tax credit, as appropriate, which relates to share optionsand awards when exercised, based on the gains the award holders make. A deferredtax asset representing an estimate of the future tax relief for this gain has tobe recognised under IFRS and is based on the potential gains available to theoption or award holders at the balance sheet date. The profit impact of this adjustment in the year ended 30 September 2005 is anet charge of £139,000, offset by a deferred tax credit of £636,000. Acorresponding deferred tax asset of £636,000 has been recognised at 30 September2005. Borrowing costs Under IAS 23 - Borrowing Costs, unamortised borrowing costs have been writtenoff. Japanese joint venture The Japanese joint venture continues to be included in the income statement onthe equity accounting basis, but as a single line item under IFRS, as opposed tothe three lines of interest, profit and taxation under UK GAAP. Deferred taxation Under UK GAAP, the option to calculate deferred tax on a discounted basis wasadopted by Victrex. However, under IAS 12 - Income Taxes, this discounted basisis not permitted and hence the deferred tax provision has to be stated at thegross amount. The effect on the opening balance sheet is an increase in the deferred taxprovision of £1,760,000, the impact on the half year ended 31 March 2005 resultsis an increased deferred tax charge of £445,000 and the resulting adjustment tothe closing balance sheet at 31 March 2005 is an increase in the deferred taxprovision of £2,205,000. The impact on the year ended 30 September 2005 resultis an increased deferred tax charge of £820,000 and the resulting adjustment tothe closing balance sheet at 30 September 2005 is an increase in the deferredtax provision of £2,580,000. In addition, IAS 12 requires separate recognition of deferred tax assets andliabilities on the Group balance sheet. IAS 12 is also more prescriptive than UK GAAP and hence additional deferred taxassets of £711,000, £955,000 and £943,000 have been recognised in the opening,31 March 2005 and 30 September 2005 balance sheets respectively. The impact onthe half year ended 31 March 2005 and year ended 30 September 2005 results is adecreased deferred tax charge of £244,000 and £232,000 respectively. The specific deferred taxation impact of changes in accounting for share basedpayments and pensions are set out in the respective notes. Pensions Under UK GAAP, Victrex has accounted for pensions in accordance with SSAP 24 -Accounting for Pension Costs, which spreads the costs of the defined benefitssection of Victrex's principal scheme over the employees' working lives withinthe Group. Victrex has also made additional disclosures giving details of thepension fund deficit, liabilities and operating charges on the valuationmethodologies in accordance with FRS 17 - Retirement Benefits. IAS 19 - Employee Benefits requires the actuarial deficit arising under thedefined benefit pension scheme to be recognised on the balance sheet based onthe fair valuations of assets and liabilities at the balance sheet date. Themovement in deficit as a result of current service cost, contributions and otherfinance expenditure has to be recognised in the income statement and Victrex hastaken advantage of the option under IAS 19 to recognise actuarial gains andlosses through the statement of recognised income and expense as opposed to theincome statement. Note that similar adjustments would have been required underUK GAAP once FRS 17 becomes fully applicable. Consequently, a deficit of £8,184,000 and a corresponding deferred tax asset of£2,455,000 have been recognised on the balance sheet at the date of transition.A deficit of £7,554,000 and a corresponding deferred tax asset of £2,266,000have been recognised on the balance sheet at 31 March 2005. A deficit of£7,812,000 and a corresponding deferred tax asset of £2,344,000 have beenrecognised on the balance sheet at 30 September 2005. Dividend recognition Under UK GAAP, proposed dividends are recognised in the financial results forperiod in which they relate, but under IFRS, a dividend can only be recognisedif it has been formally declared during the accounting period being reported. Retained earnings The adjustments to retained earnings are as follows: 1 October 2004 31 March 2005 30 September 2005 £000 £000 £000____________________________________________________________________________________Adoption of IAS 39, 32 & 21 25 38 (115)Goodwill - 331 860Borrowing costs (48) (42) (36)Deferred taxation (1,049) (1,250) (1,001)Defined pension scheme (5,729) (5,288) (5,468)Dividend 4,992 2,180 7,555____________________________________________________________________________________ (1,809) (4,031) 1,795____________________________________________________________________________________ INDEPENDENT REVIEW REPORT BY KPMG AUDIT plc TO VICTREX plc Introduction We have been engaged by the Company to review the financial information set outon pages 4 to 14 and we have read the other information contained in the InterimReport and considered whether it contains any apparent misstatements or materialinconsistencies with the financial information. This report is made solely to the Company in accordance with the terms of ourengagement to assist the Company in meeting the requirements of the ListingRules of the Financial Services Authority. Our review has been undertaken sothat we might state to the Company those matters we are required to state to itin this report and for no other purpose. To the fullest extent permitted by law,we do not accept or assume responsibility to anyone other than the Company forour review work, for this report, or for the conclusions we have reached. Directors' responsibilities The Interim Report, including the financial information contained therein, isthe responsibility of and has been approved by the Directors. The Directors areresponsible for preparing the Interim Report in accordance with the ListingRules which require that the accounting policies and presentation applied to theinterim figures should be consistent with those applied in preparing thepreceding annual financial statements except where any changes, and the reasonsfor them, are disclosed. As disclosed in note 1 to the financial information, the next annual financialstatements of the Group will be prepared in accordance with IFRSs adopted foruse in the European Union. The accounting policies that have been adopted in preparing the financialinformation are consistent with those that the Directors currently intend to usein the next annual financial statements. There is, however, a possibility thatthe Directors may determine that some changes to these policies are necessarywhen preparing the full annual financial statements for the first time inaccordance with those IFRSs adopted for use by the European Union. Review work performed We conducted our review in accordance with the guidance contained in Bulletin1999/4 Review of interim financial information issued by the Auditing PracticesBoard for use in the United Kingdom. A review consists principally of makingenquiries of group management and applying analytical procedures to thefinancial information and underlying financial data and, based thereon,assessing whether the accounting policies and presentation have beenconsistently applied unless otherwise disclosed. A review is substantially lessin scope than an audit performed in accordance with Auditing Standards andtherefore provides a lower level of assurance than an audit. Accordingly, we donot express an audit opinion on the financial information. Review conclusion On the basis of our review we are not aware of any material modifications thatshould be made to the financial information as presented for the six monthsended 31 March 2006. KPMG Audit PlcChartered AccountantsManchester5 June 2006 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 half year ended 31March 2006 comprise the Company and its subsidiaries (together referred to asthe "Group") and the Group's interest in Victrex-MC, Inc (the "Japanese jointventure"). The Company is listed on the London Stock Exchange. These consolidated financial statements have been approved for issue by theBoard of Directors on 5 June 2006. Basis of preparation The restated financial statements for the year ended 30 September 2005 and theopening balance sheet at 1 October 2004 have been prepared in accordance withInternational Financial Reporting Standards as adopted by the EU ("IFRS") issuedby the International Accounting Standards Board ("IASB"). These are subject toongoing review and possible amendment by interpretative guidance from the IASB.Victrex also continues to conduct an ongoing review of changes, interpretationsand best practice and hence further restatement may occur up until the firstIFRS financial statements are published. The consolidated financial statements have been prepared on the historical costbasis except that derivative financial instruments are stated 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 exemption whereby IFRS 3 canbe applied prospectively from the date of transition, hence removing the need torestate previous business combinations. Victrex has decided to take advantage of the option under IAS 19 to recogniseactuarial gains and losses through the statement of recognised income andexpense as opposed to the income statement. 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 difference forall foreign operations. Basis of consolidation (i) Subsidiaries Subsidiaries are entities over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered in assessing control. Subsidiaries are fully consolidated from the date that control commences until the date that control ceases. (ii) Joint venture The activities of the Japanese joint venture are governed by a joint venture agreement between the Company and Mitsui Chemicals Inc. Certain key management decisions require the co-operation of both parties. The Group's share of profits less losses of the Japanese joint venture is included in the consolidated income statement on the equity accounting basis. The holding value of the Japanese joint venture in the Group balance sheet is calculated by reference to the Group's equity in the gross assets and liabilities of the Japanese joint venture, adjusted for unrealised profit in stock. (iii) Transactions eliminated on consolidation Intragroup balances and any unrealised gains and losses or income and expenses arising from intragroup transactions, are eliminated in preparing the consolidated financial statements. Unrealised gains arising from transactions with the joint venture are eliminated to the extent of the Group's interest in the entity. Unrealised losses are also eliminated in the same way as unrealised gains, unless the transaction provides evidence of impairment of the asset transferred. Segment reporting A geographical segment is engaged in providing products or services within a particular economic environment that are subject to risks and returns that are different from those of segments operating in other economic environments. A business segment is defined as a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different from those of other business segments. Foreign currency translation (i) Functional and presentation currency Items included in the financial statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operated ("the functional currency"). The consolidated financial statements are presented in Sterling, which is the Company's functional and presentational currency. (ii) Translation and balances Foreign currency transactions are translated into the functional currency using the exchange rate prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transaction and from the translation at balance sheet date exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except when deferred in equity as qualifying cash flow hedges. (iii) Group companies The results and financial position of all the Group entities (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency 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 average exchange rates; and c) All resulting exchange differences are recognised as a separate component of equity. Derivative financial instruments and hedging activities The Group uses derivative instruments to hedge its exposure to foreign exchangerisks. In accordance with its treasury policy, the Group does not hold or issuederivative financial instruments for trading purposes. Derivatives are recognised initially at fair value. Subsequent to initialrecognition, derivative financial instruments are stated at fair value. Themethod of recognising the resulting gain or loss depends on whether thederivative is designated as a hedging instrument, and if so, the nature of theitem being hedged. 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 is recognisedimmediately in the income statement using spot rates. 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 forecasted transaction, the effective portion of changes in fair valueis recognised 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 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. The cost of self constructed assets includes thecost of materials, direct labour and an appropriate 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 Leases are operating leases, whose rental charges are charged to the incomestatement on a straight line 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 assets' residual values and useful lives are reviewed annually for continuedappropriateness and indications of impairment, and adjusted if appropriate. 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 isno longer 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 under previous UKGAAP. 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 net identifiable assets 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 lessaccumulated 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 assets' residual values and useful lives are reviewed annually for continuedappropriateness and impairment, and adjusted if appropriate. Inventories Inventories are stated 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 comprise 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 substantially enacted at the balance sheet date, andany adjustment to the tax payable in respect of previous years. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the carrying amounts of assets and liabilitiesfor financial reporting purposes and the amounts used for taxation purposes. Thefollowing temporary differences are not provided for: goodwill not deductiblefor tax purposes; the initial recognition of assets or liabilities that affectsneither accounting nor taxable profit; and differences relating to investmentsin subsidiaries to the extent that they will probably not reverse in theforeseeable future. The amount of deferred tax provided is based on the expectedmanner of realisation or settlement of the carrying amount of assets andliabilities, using tax rates enacted or substantially 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 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 are significant uncertainties regardingrecovery of the consideration due, associated costs or the possible return ofgoods. 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 at the balance sheet date less the fair value of the plan assets,together with adjustments for unrecognised actuarial gains or losses and 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. Ongoing actuarial gains and losses are immediately recognised in full at thebalance sheet date through the statement of recognised income and expense, anoption in accordance with IAS 19. Share based payment transactions The Victrex 1995 Executive Share Option Scheme, the Victrex 2005 Executive ShareOption Plan, the Victrex 1995 Sharesave Scheme, the Victrex 2005 UK SharesavePlan, the Victrex 2005 Employee Stock Purchase Plan and the Victrex Long TermIncentive Plan (executive Directors only) allow Group employees to acquireshares in the Company. The fair value of the employee services received inexchange for the grant of the 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 targets, would not result in areversal of original 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 costs Net financing costs comprise interest payable on borrowings, interest receivedon funds invested and charges on bank loans and overdrafts. SHAREHOLDER INFORMATION Copies of this Interim Report will be sent to all shareholders and will beavailable from the Registered Office detailed below. Financial Calendar________________________________________________________________Ex-dividend date for interim dividend 28 June 2006Record date for interim dividend 30 June 2006Payment of interim dividend 31 July 20062006 year end 30 September 2006Announcement of 2006 full year results December 2006Annual General Meeting February 2007Payment of final dividend March 2007________________________________________________________________ Company SecretaryM W Peacock Registered OfficeVictrex plcVictrex Technology CentreHillhouse InternationalThornton CleveleysLancashire FY5 4QDUnited Kingdom Forward-looking Statements Sections of this Interim Report contain forward-looking statements, includingstatements relating to: future demand and markets for the Group's products andservices; research and development relating to new products and services; andliquidity and capital resources. These forward-looking statements involve risksand uncertainties because they relate to events and depend on circumstances thatwill or may occur in the future. Accordingly, actual results may differmaterially from those set out in the forward-looking statements as a result of avariety of factors, including: changes in interest and exchange rates; changesin global, political, economic, business, competitive and market forces; changesin tax rates and future business combinations or dispositions; negotiations withcustomers relating to renewal of contracts and future volumes and prices; eventsaffecting international security, including global health issues and terrorism;changes in regulatory environment; and the outcome of litigation. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Victrex