Final Results

Victrex PLC 05 December 2006 5th December 2006 VICTREX plc Results announcement for the year ended 30th September 2006 â€¢ Volume up 19% to 2,339 tonnes (2005: 1,972 tonnes) â€¢ Revenue up 21% to Â£122.5m (2005: Â£100.9m) â€¢ Profit before taxation up 31% to Â£46.1m (2005: Â£35.3m) â€¢ Earnings per share up 32% to 39.4p (2005: 29.9p) â€¢ 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 again delivered record sales and profits, further strong organic growth and continued success in developing new product applications in increasingly diverse industries. 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 the strengthening 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, markets and industries we serve through investments in market development, product and application technology and supply chain infrastructure. We believe that this leaves us well placed to further realise the underlying growth potential of the business and provides a sound basis for sustainable earnings 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 again delivered record sales and profits, further strong organic growth and continued success in developing new product applications in increasingly diverse industries. FINANCIAL RESULTS These results are the first to be published under International Financial Reporting Standards ('IFRS'). The main effects of the transition from UK Generally Accepted Accounting Principles ('UK GAAP') to IFRS were set out in our 2005 Annual Report. Revenue for the year grew by 21.4% to Â£122.5m (2005: Â£100.9m). Gross profit increased by 32.3% to Â£75.8m (2005: Â£57.3m), representing 61.9% of revenue (2005: 56.8%). This significant gross margin improvement was driven by reduced cost 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 Â£3.8m (2005: Â£2.2m) relating to third party sales by a small, low margin, fluorides business acquired as part of the BDF acquisition. As this does not represent a strategic business for Victrex, we have implemented a closure programme which will be completed in the first half of 2007. Accordingly, we have provided for associated redundancy and infrastructure costs of Â£0.8m in the second half of 2006. Group gross profit excluding this business amounted to Â£76.1m (2005: Â£56.9m), representing 64.1% of revenue (2005: 57.7%). Sales, marketing and administrative expenses increased by 34.6% to Â£30.7m (2005: Â£22.8m) as we have continued to invest in product development and sales and marketing resources for both the main VICTREX PEEK business and Invibio(R), the Group's biomaterials business. Profit before tax increased by 30.8% to Â£46.1m (2005: Â£35.3m) and basic earnings per share were up 31.8% at 39.4p (2005: 29.9p). Compared with the previous year, exchange rates have had an adverse impact of Â£0.4m on profit, principally due to a 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 a final dividend of 10.2p per ordinary share (2005: 9.3p), making a total of 14.4p per ordinary share for the year (2005: 12.0p). This represents an increase of 20% over last year and dividend cover of 2.7 times. Cash flow Cash flow generated from operations increased to Â£54.8m (2005: Â£37.4m) primarily as a result of improved trading. Capital expenditure cash payments amounted to Â£21.5m (2005: Â£6.0m) principally reflecting the ongoing investment in additional capacity. Taxation paid was Â£12.4m (2005: Â£9.9m) as a result of increased profits. At the year end, the Group had net cash of Â£26.9m (2005: Â£15.7m). The Group has a committed bank facility of Â£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) with second half volume of 1,226 tonnes (2005: 984 tonnes) up 10.2% on first half volume of 1,113 tonnes (2005: 988 tonnes). Of our three principal market segments, industrial sales volume was up 21.6% at 761 tonnes (2005: 626 tonnes), largely due to increasing demand from US oil and gas and chemical processing customers and European demand for industrial machinery applications. Second half sales of 414 tonnes were up 19.3% on the first half of 347 tonnes. Electronics sales volume increased by 18.1% to 658 tonnes (2005: 557 tonnes) as a result of increased semiconductor and consumer electronics sales. Second half sales 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 a result of increased automotive sales in Europe and commercial aerospace volume in 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 all market segments with sales volume at 1,196 tonnes for the year, up 23.4% on 2005 (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 sales to European processors for use in Asia-Pacific applications. At 724 tonnes, United States volume was 19.1% up on 2005 (608 tonnes) due to increased demand in the oil and gas, chemical processing, aerospace and semiconductor segments. Second half sales volume of 376 tonnes was up 8.0% on the 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 strong growth. 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 European processors for use in Asia-Pacific applications and we continue to believe that this region offers excellent growth potential in the medium term. Invibio Invibio has had another excellent year with revenue of Â£15.4m, showing an increase of 40.5% over 2005 (Â£11.0m). This reflects continued sales growth of the PEEK-OPTIMA(R) family of implantable polymers and sales of recently launched products such as ENDOLIGN(R) composites and PEEK-CLASSIX(R) polymer. During the year we entered into 35 additional PEEK-OPTIMA polymer long-term supply assurance agreements with implantable medical device manufacturers. We have 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 Award for polymeric materials in the medical implant market. This award recognised Invibio for the introduction of new biomaterials, valuable regulatory approval expertise and for collaborating with key market players for medical device innovation. We have continued to invest in our business with the construction of a new Invibio Global Technology Centre in the UK due for completion in Spring 2007 and the establishment of a presence in Asia-Pacific with a new sales office and dedicated personnel. Long-term implantable devices utilising PEEK-OPTIMA polymer have now been approved in China, Taiwan, Korea, India, Australia and Japan. Business development Victrex market development efforts continued to accelerate in 2006, as our global teams developed new applications for Victrex products in an increasingly diverse 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 coatings for durability and long-life', which will allow us to continue to broaden our application and industry exposure. In addition to launching the product range, we commercialised a number of applications ranging from consumer cookware to industrial belting, in industries which were not served by our traditional products. We commenced sales of high performance films (based on VICTREX PEEK) directly to end users and fabricators. This has begun to develop the market ahead of a wider initiative for 2007 driven by strong industry interest and supported by Victrex's investment in our own film manufacturing facility currently under construction on our main UK site at Thornton Cleveleys, Lancashire. This facility is due for completion in Spring 2007 at an estimated capital cost of Â£5.3m. We are developing a number of applications based on VICTREX PEEK film in areas such as aerospace insulation and flexible printed circuits, and have commercialised applications in high performance speakers and electronic substrates. To further extend the potential uses for our materials, we launched the VICTREX T-Series of polymers, the first product family introduced by Victrex not entirely based on VICTREX PEEK polymer. This product, a blend of VICTREX PEEK and Celazole(R) PBI, extends the performance range of our materials into even more demanding temperature and wear applications such as high speed compressors and components for semiconductor wafer handling systems. While new product innovation continues to open up new markets, other investments globally underline our commitment to emerging market areas. We opened our first dedicated technical centre outside the UK, the Asia Innovation and Technology Center ('AITC'), based in Shanghai. The AITC is focused on delivering application solutions rapidly to regional and global customers, to keep pace with their increasing demands. Since opening in June 2006, the Center has already become very active, with many customer seminars, technical programmes and visits already completed. In addition, our AITC based technical team are helping to drive new semiconductor application developments. In our more traditional industries and geographies, we are seeing expansion of both our applications and our customer base. Reduced systems cost, improved safety and reduced warranty claims continue to drive interest in VICTREX PEEK in the automotive segment, with exciting new applications in areas such as ball joints, gears and mechanical friction and wear components. In the electronics market, we are penetrating new board level components such as connectors, capacitors and battery systems where lead-free solder processes demand robust materials at higher temperatures. The need for weight savings in the aerospace market, especially with the launch of a new generation of fuel efficient aircraft, requires the use of materials which are lighter than traditional metals yet still offer outstanding strength and toughness in a variety of demanding environments. Our success in new application development is best characterised by the continued strength of our development pipeline and new applications commercialised. At the year end, our pipeline of potential target opportunities contained 1,764 developments (2005: 1,433) with an estimated mature annualised volume ('MAV') of 2,754 tonnes (2005: 2,344 tonnes) which represents the total additional volume achievable if all of the developments were successfully commercialised. 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 PEEK sales. To allow us to meet our growth expectations and demonstrate further security of supply to our customers, we are currently constructing a second VICTREX PEEK polymer powder plant on our main UK site. With an estimated capital cost of Â£29m, the new plant will have the capacity to support an additional 1,450 tonnes per annum of VICTREX PEEK sales and is on schedule to be completed in Autumn 2007. Detailed design and costing of the BDF supply chain uprate to support this additional polymer capacity has now been completed. The estimated capital cost of the BDF uprate will be around Â£23m with completion expected in Autumn 2008. Total tangible fixed asset additions amounted to Â£25.0m for the year (2005: Â£18.5m - including the acquisition of the BDF operations) compared with total forecast expenditure of around Â£30m. The additions principally related to the ongoing construction of the polymer powder plant. Other items include the AITC, Invibio Global Technology Centre and the film manufacturing facility. The lower than expected level of expenditure for the year simply reflects specific phasing of project expenditure. We expect capital expenditure for 2007 to amount to approximately Â£35m, again subject to phasing of projects. This will be funded from 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 the strengthening of Sterling against our key trading currencies (US Dollar, Euro and Yen) compared with 2006. Based on our budgeted sales volume, currency hedging already in place and recent spot exchange rates, we currently estimate the 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 Actual US Dollar 1.82 1.81 1.89 1.85 Euro 1.43 1.46 1.46 1.46 Yen 188 201 210 205 As can be seen from the above table, most of the impact will be felt in the second half. By way of illustration, if the estimated 2007 rates had applied in 2006, this would have had an adverse impact of Â£2.5m on profits. The future During the year we have made significant progress across our business. We have successfully launched new products, expanded our presence in emerging markets and broadened our application and customer base. Our capital expenditure programme is on schedule to ensure that we have the necessary infrastructure to support 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 and application technology and supply chain infrastructure. We believe that this leaves us well placed to further realise the underlying growth potential of the business and provides a sound basis for sustainable earnings growth. Peter Warry Chairman 4 December 2006 CONSOLIDATED INCOME STATEMENT For the year ended 30 September 2006 2006 2005 2005 Note Â£000 Â£000 Â£000 Â£000 Revenue 2 122,516 100,913 Cost of sales (46,708) (43,614) ------ ------ Gross profit 75,808 57,299 Sales, marketing and administrative expenses (30,743) (22,847) ------ ------ Operating profit 2 45,065 34,452 Financial income 688 419 Financial expenses (88) (131) ------ ------ Net financing income 600 288 Share of profit of Japanese joint venture 474 526 ------ ------ Profit before tax 46,139 35,266 Income tax expense (14,303) (11,365) ------ ------ Profit for the year attributable to equity shareholders of the parent 31,836 23,901 ------ ------ Earnings per share Basic 3 39.4p 29.9p Diluted 3 38.9p 29.5p Dividend per share Interim 4.2p 2.7p Final 5 10.2p 9.3p ------ ------ 14.4p 12.0p ------ ------ A final dividend in respect of 2006 of 10.2p per share has been recommended by the 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 Â£000 Â£000 Changes in fair value of cash flow hedges 299 (2,427) Net change in fair value of cash flow hedges transferred to income statement 1,366 2,113 Exchange differences on net investment translation of foreign operations (279) 50 Actuarial (losses)/gains on defined benefit plans (4,050) 812 Tax on items taken directly to or transferred from equity 1,262 (247) ------- ------ Net (expense)/income recognised directly in equity (1,402) 301 Profit for the year 31,836 23,901 ------- ------ Total recognised income and expense for the year attributable to equity shareholders of the parent 30,434 24,202 ------- ------ BALANCE SHEET As at 30 September 2006 2005 Â£000 Â£000 Assets Non-current assets Property, plant and equipment 84,009 63,813 Intangible assets 9,404 10,015 Investment in Japanese joint venture 370 80 Deferred tax assets 7,201 4,166 ------ ------ 100,984 78,074 ------ ------ Current assets Inventories 22,969 19,939 Current income tax assets 774 453 Trade and other receivables 12,139 12,813 Derivative financial instruments 2,776 1,437 Cash and cash equivalents 26,860 15,747 ------- ------ 65,518 50,389 ------- ------ ------- ------ Total assets 166,502 128,463 ------- ------ Liabilities Non-current liabilities Deferred tax liabilities (12,385) (9,593) Retirement benefit obligations (12,159) (7,812) ------- ------ (24,544) (17,405) ------- ------ Current liabilities Derivative 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 ------- ------ Equity Share capital 817 812 Share premium account 16,549 15,243 Translation reserve (229) 50 Hedging reserve 1,325 228 Retained earnings 94,989 75,914 ------- ------ Total equity 113,451 92,247 ------- ------ These financial statements were approved by the Board of Directors on 4 December 2006 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 Â£000 Â£000 Cash flows from operating activities Profit for the year 31,836 23,901 Adjustments for: Depreciation 4,836 4,061 Amortisation 611 609 Increase 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 1,122 694 Japanese joint venture profit in stock adjustment 59 435 Share of profit of Japanese joint venture (474) (526) Net financing income (600) (288) Income tax expense 14,303 11,365 Changes in fair value of derivative financial instruments (440) 376 Increase in retirement benefit obligations 298 440 ------ ------ Cash generated from the operations 54,791 37,409 Interest and similar charges paid (20) (49) Interest received 688 419 Tax paid (12,357) (9,892) ------ ------ Net cash flow from operating activities 43,102 27,887 ------ ------ Cash flows from investing activities Acquisition 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 activities Issue of ordinary shares exercised under option 5 7 Premium on issue of ordinary shares exercised under option 1,306 1,860 Purchase 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 of foreign operations (279) 50 Cash 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 and domiciled in the United Kingdom. The address of its registered office is Victrex Technology Centre, Hillhouse International, Thornton Cleveleys, Lancashire, FY5 4QD, United Kingdom. The consolidated financial statements of the Company for the year ended 30 September 2006 comprise the Company and its subsidiaries (together referred to as 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 the Board of Directors on 4 December 2006. Basis of preparation These results are the first to be published under International Financial Reporting Standards ('IFRS'). The main effects of the transition from UK Generally Accepted Accounting Principles ('UK GAAP') to IFRS were set out in our 2005 Annual Report. The restated financial statements for the year ended 30 September 2005 and the opening balance sheet at 1 October 2004 have been prepared in accordance with IFRS as adopted by the EU. The consolidated financial statements have been prepared on the historical cost basis except that derivative financial instruments are measured at their fair value. The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements and in preparing an opening IFRS balance sheet at 1 October 2004 for the purposes of the transition to IFRS. The accounting policies have been consistently applied by Group entities. Victrex has decided to take advantage of the IFRS 1 - First-time Adoption of International Financial Reporting Standards exemption whereby IFRS 3 - Business Combinations can be applied prospectively from the date of transition, hence removing the need to restate previous business combinations. In addition, Victrex has also taken advantage of the IFRS 1 exemption to deem as zero at the date of transition to IFRS the cumulative translation differences for all foreign operations. Share option arrangements granted before 7 November 2002 exist. The recognition and measurement principles in IFRS 2 - Share-based Payment have not been applied to these grants in accordance with the transitional provisions in IFRS 1. A number of standards, amendments and interpretations have been issued during the period which are not yet effective, and accordingly the Group has not yet adopted. The cumulative impact of the adoption of these standards is not deemed to be significant. Investments In the Company's accounts, investments in the subsidiary undertakings and Victrex-MC, Inc are stated at cost less any impairment in the value of the investment. Basis of consolidation 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 the potential voting rights that are currently exercisable or convertible are considered in assessing control. Subsidiaries are consolidated from the date that control commences until the date that control ceases. 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. 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 an impairment of the asset transferred. Segment reporting A geographical segment is engaged in providing products or services within a particular 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 to the business segments. The Group has determined the primary reporting segment to be geographic as the Group is engaged in providing products or services within particular geographic environments 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 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 presentation currency. Transactions 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 transactions and from the retranslation to 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. 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 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 foreign exchange risks. In accordance with its treasury policy, the Group does not hold or issue derivative financial instruments for trading purposes. Derivatives are recognised at fair value. The method of recognising any gain or loss on remeasurement of fair value depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. At the inception of the transaction, the Group documents the relationship between hedging instruments and hedged items. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are effective in offsetting changes in fair values or cash flows of hedged items. For derivatives not used in hedging transactions, the gain or loss on remeasurement of fair value is recognised immediately in the income statement. Cash flow hedges Where a derivative financial instrument is designated as a hedge of the variability in cash flows of a recognised asset or liability, or a highly probable forecast transaction, the effective portion of changes in fair value is recognised in equity. The gain or loss relating to the ineffective portion is recognised immediately in the income statement. Amounts accumulated in equity are recycled in the income statement in the periods when the hedged item affects the profit or loss. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time is recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income statement. Fair value estimation The fair value of forward foreign exchange contracts is determined using forward exchange 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 cost less accumulated depreciation and provision for impairment. The cost of self constructed assets includes the cost of materials, direct labour and an appropriate proportion of overheads. Subsequent costs are included in the asset's carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the 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 straight line basis over the life of the lease. Depreciation Depreciation is charged to the income statement on a straight line basis over the 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 for continued appropriateness and indications of impairment, and adjusted if appropriate. Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in the income statement. Intangible assets Goodwill Goodwill is stated at cost less any accumulated impairment losses. Goodwill is not amortised but is tested annually for impairment. In respect of acquisitions prior to 1 October 2004, goodwill is included on the basis of its deemed cost, which represents the amount recorded previously under UK GAAP. In respect of acquisitions that have occurred since 1 October 2004, goodwill represents the difference between the cost of the acquisition and the fair value of the assets, liabilities and contingent liabilities acquired. Expenditure on internally generated goodwill is recognised in the income statement as an expense as incurred. Research and development Expenditure on research activities, undertaken with the prospect of gaining new scientific or technical knowledge and understanding, is recognised in the income statement as an expense as incurred. Development expenditure is recognised in the income statement as an expense as incurred 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 less any accumulated amortisation. Other intangible assets are tested annually for impairment. Amortisation Amortisation is charged to the income statement on a straight line basis in order 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 for continued appropriateness and impairment, and adjusted if appropriate. Inventories Inventories are measured at the lower of cost and net realisable value. The cost of inventories is based on the first-in, first-out principle and includes expenditure incurred in acquiring the inventories and bringing them to their existing location and condition. The cost of finished goods and work in progress comprises raw materials, direct labour, other direct costs and related production overheads (allocated based on normal operating capacity). Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. Cash and cash equivalents Cash and cash equivalents comprises cash balances, call deposits and other short-term highly liquid investments with original maturities of three months or less. Bank overdrafts that are repayable on demand and form an integral part of the Group's cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows. Income tax Income tax on the profit for the year comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to 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, and any adjustment to 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 liabilities for financial reporting purposes and the amounts used for tax purposes. The following temporary differences are not provided for: goodwill not deductible for tax purposes; the initial recognition of assets or liabilities that affects neither accounting nor taxable profit; and differences relating to investments in subsidiaries except to the extent that they will probably reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Dividend distribution Dividend distribution to the Company's shareholders is recognised as a liability in the Group's financial statements in the period in which the dividends are approved. Revenue recognition Revenue comprises the amounts receivable for the sale of goods and services, net of value added tax, rebates and discounts and after eliminating sales within the Group. Revenue from the sale of goods is recognised when the significant risks and rewards of ownership have been transferred to the buyer. Revenue from contractual payments is recognised by reference to completion of a specific milestone in accordance with the substance of the relevant agreements. Royalty income is recognised when the amount payable is known. No revenue is recognised if there is significant uncertainty regarding recovery of 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 are recognised as an expense in the income statement as incurred. Defined benefit pension plans The Group's net obligation in respect of defined benefit pension plans recognised in the balance sheet is the present value of the future benefits that employees have earned in return for their service in the current and prior periods less the fair value of plan assets, together with adjustments for past service costs. The defined benefit obligation is calculated by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high quality corporate bonds that are denominated in the currency in which the benefits will be paid and have terms to maturity approximating to the terms of the related pension liability. Victrex has decided to take advantage of the option under IAS 19 - Employee Benefits to recognise actuarial gains and losses through the statement of recognised income and expense as opposed to the income statement. Ongoing actuarial gains and losses are being immediately recognised in full through the statement of recognised income and expense. Share-based payment transactions The fair value of the employee services received in exchange for the grant of the options is recognised as an expense. The total amount to be expensed over the vesting period is determined by reference to the fair value of the options granted, excluding the impact of any non-market vesting conditions. Non-market vesting conditions are included in assumptions about the number of options that are expected to become exercisable and include employee service periods and performance targets which are not related to the parent's share price, such as earnings per share growth. The fair value of the options is measured by the Stochastic model, taking into account the terms and conditions upon which the instruments were granted. At each balance sheet date the entity revises its estimates of the number of options that are expected to become exercisable. It recognises the impact of the revision of original estimates, if any, in the income statement, and a corresponding adjustment to equity over the remaining vesting period. Any failure to meet market conditions, which includes performance targets such as share price or total shareholder return, would not result in a reversal of original estimates in the income statement. The proceeds received, net of any directly attributable transaction costs, are credited to share capital (nominal value) and share premium when the options are exercised. Provisions A provision is recognised in the balance sheet when the Group has a present legal or constructive obligation as a result of a past event, it is probable that an outflow of economic benefits will be required to settle the obligation and 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 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Total segment sales 65,076 70,452 17,789 153,316 52,423 55,063 16,401 123,887 Less 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 38,181 Unallocated central costs (4,112) (3,729) ------ ------ Operating profit 45,065 34,452 Net financing income 600 288 Share of profit of Japanese joint venture 474 526 ------ ------ Profit before tax 46,139 35,266 Income 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 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Â£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 - 18,529 Depreciation 4,772 30 34 4,836 4,056 5 - 4,061 Amortisation 611 - - 611 609 - - 609 Secondary business segments 2006 2005 Sales Â£000 Â£000 VICTREX PEEK 107,076 89,926 Invibio 15,440 10,987 ------ ------ 122,516 100,913 ------ ------ Total assets VICTREX PEEK 159,049 122,144 Invibio 7,453 6,319 ------ ------ 166,502 128,463 ------ ------ Capital expenditure VICTREX PEEK 23,581 18,519 Invibio 1,454 10 ------ ------ 25,035 18,529 ------ ------ Analysis of sales by category Product sales 118,670 98,060 Other 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 to ordinary shareholders and a weighted average number of ordinary shares outstanding during the year, excluding own shares held. 2006 2005 Earnings per share - basic 39.4p 29.9p - diluted 38.9p 29.5p Profit for the financial year Â£31,836,000 Â£23,901,000 Weighted average number of shares used: Issued ordinary shares at beginning of year 81,235,566 80,515,020 Effect 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 80,050,992 Effect 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 the Group's accounting policies are: Year ended Year ended 30 September 30 September 2006 2005 Average Closing Average Closing US Dollar 1.82 1.87 1.77 1.77 Euro 1.43 1.47 1.44 1.47 Yen 188 221 187 201 5 Dividend and Annual General Meeting The proposed final dividend will be paid on 1 March 2007, to all shareholders on the register on 2 February 2007. The Annual General Meeting of the Company will be held on 6 February 2007, at The Great Eastern Hyatt Hotel (formerly The Great Eastern Hotel), Liverpool Street, London, EC2M 7QN. 6 Financial statements The above financial information does not comprise full financial statements within the meaning of the Companies Act 1985. The results for the year ended 30 September 2006 have been extracted from the full accounts for that period. The auditors have given an unqualified report on the accounts for this year. The financial information for the year ended 30 September 2005 has been extracted from the full accounts for that year, except that this comparative information has been restated as a result of the adoption of IFRS. The accounts for the year ended 30 September 2005 were unqualified and have been delivered to the Registrar of Companies. The accounts for the year ended 30 September 2006 will be posted to shareholders on 15 December 2006 and will be available from the Company's registered office at Victrex Technology Centre, Hillhouse International, Thornton Cleveleys, Lancashire, FY5 4QD. 7 Forward-looking statements Sections of this preliminary results announcement contain forward-looking statements, including statements related to: future demand and markets for the Group's products and services; research and development relating to new products and services and liquidity and capital resources. These forward-looking statements involve risks and uncertainties, because they relate to events that may or may not occur in the future. Accordingly, actual results may differ materially from anticipated results because of a variety of risk factors, including: changes in global, political, economic, business, competitive and market forces; changes to legislation and tax rates; future business combinations or disposals; relations with customers and customer credit risk; events affecting 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 Exchange

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Victrex plc (VCT)

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