Interim Results

Victrex PLC 06 June 2006 6th June 2006 Victrex plc Results announcement for the six months ended 31st March 2006 â€¢ Volume up 13% to 1,113 tonnes (2005: 988 tonnes) â€¢ Revenue up 20% to Â£58.7m (2005: Â£49.0m) â€¢ Profit before taxation up 32% to Â£23.1m (2005: Â£17.5m) â€¢ Earnings per share up 32% to 19.3p (2005: 14.6p) â€¢ 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 with further strong growth resulting in record sales and profits. 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 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 first half. Looking further ahead, we believe that our ongoing global investment in product and market development for end users, together with our capital expenditure programme, 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 SHAREHOLDERS on the interim results for the six months ended 31 March 2006 Victrex has continued to make excellent progress in the first half of 2006 with further strong growth resulting in record sales and profits. 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 and are detailed in note 7 to this interim report. Results Revenue was Â£58.7m (H1 2005: Â£49.0m), an increase of 20% on the first six months of 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 Â£36.8m (H1 2005: Â£27.3m), representing a gross margin of 62.7% (H1 2005: 55.8%). This significant gross margin improvement was mainly driven by reduced cost of sales arising from last year's acquisition of certain BDF operations (the key raw material from which VICTREX PEEK is produced). Sales, marketing and administrative expenses increased by 36% to Â£14.2m compared with the first half of last year (Â£10.4m) and by 14% over the second half (Â£12.4m). We have continued to invest in product development and sales and marketing resources for both the main VICTREX PEEK business and Invibio(R) (our biomaterials business). Profit before tax grew by 32% over the first half of 2005 (Â£17.5m) to a record level of Â£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 of 265 tonnes. This was due to a good recovery in both consumer electronics and semiconductor sales. Transport sales volume was 314 tonnes, up 18% on last year's second half of 265 tonnes. This was principally due to increased automotive sales in Europe and Asia-Pacific and a continued upturn in commercial aerospace volume. Industrial sales volume was 347 tonnes, up 3% on last year's strong second half of 337 tonnes as oil and gas and chemical processing sales were maintained in line with the record levels achieved in the second half of last year. Regionally, European sales volume saw renewed growth at 556 tonnes, 18% up on the 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% up on 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. This was largely due to electronics and automotive growth. Invibio generated record first half revenue of Â£7.6m, an increase of 33% over the second half of last year (Â£5.7m) and 43% over the first half (Â£5.3m). Since the start of the new financial year we have entered into 14 additional PEEK-OPTIMA(R) polymer long-term supply assurance agreements with implantable medical device manufacturers. Development Pipeline During the first half we commercialised 240 new applications with an estimated mature annualised volume ('MAV') of 210 tonnes compared with 176 commercialised applications with a MAV of 125 tonnes in the second half of 2005. The development pipeline contained 1,472 developments (September 2005: 1,433) with an estimated MAV of 2,266 tonnes (September 2005: 2,344) if all of the developments were successfully commercialised. Capital Expenditure Capital expenditure payments for the period amounted to Â£6.6m (2005: Â£2.6m). The majority of these related to the ongoing construction of the second VICTREX PEEK polymer powder manufacturing plant, which is scheduled to be completed in late 2007, on our main UK site at Thornton Cleveleys, Lancashire. We expect total capital expenditure for the second half to be approximately Â£23m, again principally on the polymer plant, resulting in a total spend for the year of around Â£30m. This will be funded from the Group's cash resources and committed borrowing facilities. Detailed design and costing of the BDF supply chain uprate needed to support this additional polymer capacity is continuing. We expect to provide further details of the BDF uprate at our preliminary announcement in December. Other capital expenditure includes the new Asia Innovation and Technology Center which is scheduled to open in Shanghai this month. The Center will provide customers with expertise in material specification, testing, research and application development. Construction is also underway of a dedicated Invibio Global Technology Centre at Thornton Cleveleys to support ongoing business growth, research and technology development. This global headquarters will house dedicated laboratories and a clean room processing capability and is expected to be completed in early 2007. Cash Flow Cash flow from operations increased to Â£23.4m (H1 2005: Â£14.8m) primarily as a result of improved trading. Taxation paid was Â£6.5m (H1 2005: Â£4.8m) and the effective tax rate decreased to 32.5% (H1 2005: 33.0%). At 31 March 2006, the Group remained ungeared with net cash of Â£19.1m compared with Â£15.7m as at 30 September 2005. The Group has a committed bank facility of Â£40m which expires in September 2008, all of which was undrawn at the end of the first half. Dividend Following the rebasing of last year's dividend through an increase in the final dividend of 50% from the previous year (which resulted in an overall increase of 40% over the previous year), we have raised this year's interim dividend so that we maintain the interim dividend at an appropriate proportion of the total dividend. Accordingly, and in recognition of the strong first half performance, an interim dividend of 4.2p per share, representing an increase of 56% over last year's interim dividend, will be paid on 31 July 2006 to all shareholders on the register 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 the development of Victrex. We are most grateful for his contribution and wish him well 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 first half. Looking further ahead, we believe that our ongoing global investment in product and market development for end users, together with our capital expenditure programme, will provide a sound basis for future growth. Peter Warry Chairman 5 June 2006 CONSOLIDATED INCOME STATEMENT Six months ended Six months ended Year ended 31 March 2006 31 March 2005 30 September 2005 Note Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 __________________________________________________________________________________________________________ Revenue 2 58,730 48,965 100,913 Cost of sales (21,935) (21,627) (43,614) __________________________________________________________________________________________________________ Gross profit 36,795 27,338 57,299 Sales, marketing and administrative expenses (14,170) (10,424) (22,847) __________________________________________________________________________________________________________ Operating profit before financing costs 22,625 16,914 34,452 Financial income 267 286 419 Financial expenses (44) (80) (131) _______ _______ _______ Net financing income 223 206 288 Share of profit of Japanese joint venture 242 417 526 __________________________________________________________________________________________________________ Profit before tax 23,090 17,537 35,266 Income tax expense 3 (7,510) (5,791) (11,365) __________________________________________________________________________________________________________ Profit for the period attributable to equity shareholders of the parent 15,580 11,746 23,901 __________________________________________________________________________________________________________ __________________________________________________________________________________________________________ Earnings per share Basic 4 19.3p 14.6p 29.9p Diluted 4 19.1p 14.5p 29.5p __________________________________________________________________________________________________________ Dividends Year ended 30 September 2004 final dividend paid at 6.2p per share - 4,949 4,949 Year 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 to shareholders on the register at the close of business on 30 June 2006. In accordance with IFRS this dividend will be recognised in the period in which it is 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 Â£000 Â£000 Â£000 __________________________________________________________________________________________________________ Cash flow hedges (904) 416 (314) Exchange differences on net investment translation of foreign operations 127 (76) 50 Actuarial (losses)/gains on defined benefit plans (1,323) 791 812 Tax on items taken directly to or transferred from equity 768 (237) (247) __________________________________________________________________________________________________________ Net (expense)/income recognised directly in equity (1,332) 894 301 Profit for the period 15,580 11,746 23,901 __________________________________________________________________________________________________________ Total recognised income and expense for the period attributable to equity shareholders of the parent 14,248 12,640 24,202 __________________________________________________________________________________________________________ CONSOLIDATED BALANCE SHEET 31 March 2006 31 March 2005 30 September 2005 Note Â£000 Â£000 Â£000 ____________________________________________________________________________________________ Assets Non-current assets Property, plant and equipment 68,369 49,505 63,813 Intangible assets 9,710 6,372 10,015 Investment in Japanese joint venture 132 131 80 Deferred tax assets 6,010 3,402 4,166 ____________________________________________________________________________________________ 84,221 59,410 78,074 ____________________________________________________________________________________________ Current assets Inventories 21,637 18,494 19,939 Trade and other receivables 13,892 14,085 12,813 Derivative financial instruments 654 1,839 1,437 Cash and cash equivalents 19,121 20,116 15,747 ____________________________________________________________________________________________ 55,304 54,534 49,936 ____________________________________________________________________________________________ Total assets 139,525 113,944 128,010 ____________________________________________________________________________________________ Liabilities Non-current liabilities Deferred tax liabilities (10,673) (8,806) (9,593) Retirement benefit obligations (9,322) (7,554) (7,812) ____________________________________________________________________________________________ (19,995) (16,360) (17,405) ____________________________________________________________________________________________ Current liabilities Derivative 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 ____________________________________________________________________________________________ Equity Share capital 816 807 812 Share premium account 16,076 13,876 15,243 Translation reserve 177 (76) 50 Hedging reserve (676) 1,058 228 Retained 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 Â£000 Â£000 Â£000 ______________________________________________________________________________________________________ Cash flows from operating activities Profit for the period 15,580 11,746 23,901 Adjustments for: Depreciation 2,365 1,817 4,061 Amortisation 305 305 609 Changes in working capital and provisions (2,934) (4,865) (3,658) Equity-settled transactions 511 277 694 Japanese joint venture profit in stock adjustment 64 272 435 Share of profit of Japanese joint venture (242) (417) (526) Net financing income (223) (206) (288) Income tax expense 7,510 5,791 11,365 Fair value gains on derivative financial instruments 318 (46) 376 Increase in retirement benefit obligations 187 161 440 ______________________________________________________________________________________________________ Cash generated from operations 23,441 14,835 37,409 Interest paid (4) (41) (49) Interest received 267 286 419 Tax paid (6,511) (4,806) (9,892) ______________________________________________________________________________________________________ Net cash flow from operating activities 17,193 10,274 27,887 ______________________________________________________________________________________________________ Cash flows from investing activities Acquisition 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 activities Issue of ordinary shares exercised under option 4 2 7 Premium on issue of ordinary shares exercised under option 833 493 1,860 Purchase 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) 50 Cash 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 Financial Reporting Standards ('IFRS') as adopted by the EU. In the Annual Report and Accounts 2006 all of the Group's financial information will be presented under IFRS. Previous accounts were prepared under UK Generally Accepted Accounting Principles ('UK GAAP') and reconciliations converting the Group's results from UK 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 the unaudited IFRS information published in the Annual Report and Accounts 2005, which also provided reconciliations converting the Group's results from UK GAAP to IFRS for the year ended 30 September 2005. The comparative figures for the financial year ended 30 September 2005 are not the Group's statutory accounts for the financial year. Those accounts have been reported 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 is unaudited, but has been reviewed by the auditors. It does not constitute statutory accounts, but has been prepared on a basis consistent with the Group's anticipated IFRS accounting policies which it expects to follow in its Annual Report and Accounts for the year ending 30 September 2006. These accounting policies 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 Â£000 Â£000 Â£000 _______________________________________________________________________________ Europe 31,281 26,373 52,485 United States 19,001 13,957 32,188 Asia-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 2006 has been provided at the estimated effective rates chargeable for the full year in the respective jurisdiction. _______________________________________________________________________________ Six months ended Six months ended Year ended 31 March 2006 31 March 2005 30 September 2005 Â£000 Â£000 Â£000 _______________________________________________________________________________ UK corporation taxation 6,507 4,572 9,066 Overseas taxation 999 684 1,780 Deferred 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 Â£15,580,000 Â£11,746,000 Â£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 the Group'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 1.77 Euro 1.42 1.43 1.44 1.45 1.44 1.47 Yen 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 Â£000 Â£000 Â£000 _________________________________________________________________________________________ Equity at beginning of period 92,247 72,687 72,687 Total recognised income and expense 14,248 12,640 24,202 Share options exercised 837 495 1,867 Equity-settled transactions 511 277 694 Purchase 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 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 ________________________________________________________________________________________________________ Revenue 49,305 (340) 48,965 101,615 (702) 100,913 Cost of sales (21,718) 91 (21,627) (43,628) 14 (43,614) ________________________________________________________________________________________________________ Gross profit 27,587 (249) 27,338 57,987 (688) 57,299 Sales, marketing and administrative expenses (10,807) 383 (10,424) (23,733) 886 (22,847) ________________________________________________________________________________________________________ Operating profit before financing costs 16,780 134 16,914 34,254 198 34,452 Financial income 286 - 286 419 - 419 Financial expenses (86) 6 (80) (143) 12 (131) Share of profit of Japanese joint venture 417 - 417 549 (23) 526 ________________________________________________________________________________________________________ Profit before tax 17,397 140 17,537 35,079 187 35,266 Income tax expense (5,654) (137) (5,791) (11,401) 36 (11,365) ________________________________________________________________________________________________________ Profit for the period attributable to equity shareholders of the parent 11,743 3 11,746 23,678 223 23,901 ________________________________________________________________________________________________________ Earnings per share Basic 14.6p 14.6p 29.3p 29.9p Diluted 14.5p 14.5p 29.0p 29.5p ________________________________________________________________________________________________________ RECONCILIATIONS OF CASH FLOW STATEMENTS There are no material differences between the cash flow statements presented under 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 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 ________________________________________________________________________________________________ Assets Non-current assets Property, plant and equipment 49,507 (2) 49,505 63,812 1 63,813 Goodwill 3,144 331 3,475 6,562 860 7,422 Other intangible assets 2,897 - 2,897 2,593 - 2,593 Investment 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 assets Inventories 18,494 - 18,494 19,936 3 19,939 Trade and other receivables 14,669 (584) 14,085 13,049 (236) 12,813 Derivative financial instruments - 1,839 1,839 - 1,437 1,437 Cash 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 ________________________________________________________________________________________________ Liabilities Non-current liabilities Deferred 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 liabilities Derivative 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 ________________________________________________________________________________________________ Equity Share capital 807 - 807 812 - 812 Share premium account 13,876 - 13,876 15,243 - 15,243 Translation reserve - (76) (76) - 50 50 Hedging reserve - 1,058 1,058 - 228 228 Retained 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 Â£000 Â£000 Â£000 _________________________________________________________________________________ Assets Non-current assets Property, plant and equipment 49,347 (2) 49,345 Goodwill 3,475 - 3,475 Other intangible assets 3,202 - 3,202 Investment 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 assets Inventories 18,833 - 18,833 Trade and other receivables 10,578 (562) 10,016 Derivative financial instruments - 1,543 1,543 Cash and cash equivalents 17,004 (191) 16,813 _________________________________________________________________________________ 46,415 790 47,205 _________________________________________________________________________________ Total assets 102,925 3,986 106,911 _________________________________________________________________________________ Liabilities Non-current liabilities Deferred tax liabilities (6,267) (1,760) (8,027) Retirement benefit obligations - (8,184) (8,184) _________________________________________________________________________________ (6,267) (9,944) (16,211) _________________________________________________________________________________ Current liabilities Derivative 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 _________________________________________________________________________________ Equity Share capital 805 - 805 Share premium account 13,383 - 13,383 Translation reserve - - - Hedging reserve - 542 542 Retained 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 cover forecast foreign currency income streams providing medium term predictability in its results. Under UK GAAP, Victrex used the effective exchange rates from the forward contracts for translation of its foreign currency transactions and, where appropriate, the consolidation of its overseas entities. Under IFRS, Victrex continues to hedge account (as defined by IAS 39 - Financial Instruments: Recognition and Measurement) resulting in largely unchanged profit and loss recognition. However, IAS did require changes to the mechanics of how this is achieved: â€¢ Under IAS 21 - Effects of Changes in Foreign Exchange Rates, all transactions and consolidations are recognised using spot rates; â€¢ 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 were minor changes in categorisation within the detail with a reduction in revenue of Â£702,000 offset by a reduction in cost of sales Â£235,000 and indirect overheads of Â£384,000 in the year ended 30 September 2005 and a reduction in revenue of Â£340,000 offset by a reduction in cost of sales Â£91,000 and indirect overheads of Â£207,000 in the half year ended 31 March 2005. The opening balance sheet as at 1 October 2004 recognises a financial asset of Â£1,543,000 and a financial liability of Â£426,000, which account for the fair value of derivative financial instruments (forward contracts). The corresponding hedging reserve is Â£542,000, which reflects the fair value of forward contracts relating to future transactions at the balance sheet date. These are offset by the effects of revaluing all balance sheet categories to closing spot rate. The balance sheet at 31 March 2005 recognises a financial asset of Â£1,839,000, a financial liability of Â£260,000 and a corresponding hedging reserve of Â£1,058,000. The balance sheet at 30 September 2005 recognises a financial asset of Â£1,437,000, a financial liability of Â£1,010,000 and a corresponding hedging reserve of Â£228,000. As a first time adopter, Victrex has taken advantage of the IFRS 1 - First-time Adoption of International Financial Reporting Standards exemption to deem as zero at the date of transition to IFRS the cumulative translation differences for all foreign operations. Goodwill amortisation Under UK GAAP, goodwill is amortised by equal instalments over its estimated useful economic life. However, under IFRS 3 - Business Combinations, amortisation of goodwill is prohibited but is replaced by a requirement for annual impairment testing. Victrex has decided to take advantage of the IFRS 1 exemption whereby IFRS 3 can be applied prospectively from the date of transition, hence removing the need to restate previous business combinations. The carrying value of goodwill on the opening IFRS balance sheet has therefore been restricted to that Â£3,475,000 net carrying amount previously reported under UK GAAP. The profit impact on this adjustment in the six months ended 31 March 2005 and the year ended 30 September 2005 is a credit of Â£331,000 and Â£662,000 respectively, being the reversal of amortisation previously charged under UK GAAP on the goodwill which arose on the acquisition of the DFDPM business from Laporte in 1999 (note that there is no change in the treatment of the knowhow arising from that transaction). On 1 April 2005 Victrex purchased certain operations from Degussa AG. This included the purchase of goodwill which, in accordance with IFRS, will not be amortised, but will be subject to annual impairment testing. The profit impact of this adjustment in 2005 is a credit of Â£198,000, being the reversal of amortisation previously charged under UK GAAP. Share based payments Under UK GAAP, there is no charge to the profit and loss account relating to options granted under the Victrex Employee share option scheme, Executive plan, Save as you earn scheme, Sharesave plan or Stock purchase plan. As regards the LTIP, under UK GAAP, the profit and loss account is charged over the performance period 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 such relevant instruments granted since 7 November 2002, which have not vested by 1 January 2005, be charged to the income statement over the relevant option vesting periods (adjusted for actual and expected levels). Fair values have been calculated using the recognised stochastic options valuation model. Victrex receives a tax credit, as appropriate, which relates to share options and awards when exercised, based on the gains the award holders make. A deferred tax asset representing an estimate of the future tax relief for this gain has to be recognised under IFRS and is based on the potential gains available to the option or award holders at the balance sheet date. The profit impact of this adjustment in the year ended 30 September 2005 is a net charge of Â£139,000, offset by a deferred tax credit of Â£636,000. A corresponding deferred tax asset of Â£636,000 has been recognised at 30 September 2005. Borrowing costs Under IAS 23 - Borrowing Costs, unamortised borrowing costs have been written off. Japanese joint venture The Japanese joint venture continues to be included in the income statement on the equity accounting basis, but as a single line item under IFRS, as opposed to the 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 was adopted by Victrex. However, under IAS 12 - Income Taxes, this discounted basis is not permitted and hence the deferred tax provision has to be stated at the gross amount. The effect on the opening balance sheet is an increase in the deferred tax provision of Â£1,760,000, the impact on the half year ended 31 March 2005 results is an increased deferred tax charge of Â£445,000 and the resulting adjustment to the closing balance sheet at 31 March 2005 is an increase in the deferred tax provision of Â£2,205,000. The impact on the year ended 30 September 2005 result is an increased deferred tax charge of Â£820,000 and the resulting adjustment to the closing balance sheet at 30 September 2005 is an increase in the deferred tax provision of Â£2,580,000. In addition, IAS 12 requires separate recognition of deferred tax assets and liabilities on the Group balance sheet. IAS 12 is also more prescriptive than UK GAAP and hence additional deferred tax assets of Â£711,000, Â£955,000 and Â£943,000 have been recognised in the opening, 31 March 2005 and 30 September 2005 balance sheets respectively. The impact on the half year ended 31 March 2005 and year ended 30 September 2005 results is a decreased deferred tax charge of Â£244,000 and Â£232,000 respectively. The specific deferred taxation impact of changes in accounting for share based payments 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 benefits section of Victrex's principal scheme over the employees' working lives within the Group. Victrex has also made additional disclosures giving details of the pension fund deficit, liabilities and operating charges on the valuation methodologies in accordance with FRS 17 - Retirement Benefits. IAS 19 - Employee Benefits requires the actuarial deficit arising under the defined benefit pension scheme to be recognised on the balance sheet based on the fair valuations of assets and liabilities at the balance sheet date. The movement in deficit as a result of current service cost, contributions and other finance expenditure has to be recognised in the income statement and Victrex has taken advantage of the option under IAS 19 to recognise actuarial gains and losses through the statement of recognised income and expense as opposed to the income statement. Note that similar adjustments would have been required under UK GAAP once FRS 17 becomes fully applicable. Consequently, a deficit of Â£8,184,000 and a corresponding deferred tax asset of Â£2,455,000 have been recognised on the balance sheet at the date of transition. A deficit of Â£7,554,000 and a corresponding deferred tax asset of Â£2,266,000 have been recognised on the balance sheet at 31 March 2005. A deficit of Â£7,812,000 and a corresponding deferred tax asset of Â£2,344,000 have been recognised on the balance sheet at 30 September 2005. Dividend recognition Under UK GAAP, proposed dividends are recognised in the financial results for period in which they relate, but under IFRS, a dividend can only be recognised if 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 Â£000 Â£000 Â£000 ____________________________________________________________________________________ Adoption of IAS 39, 32 & 21 25 38 (115) Goodwill - 331 860 Borrowing 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 out on pages 4 to 14 and we have read the other information contained in the Interim Report and considered whether it contains any apparent misstatements or material inconsistencies with the financial information. This report is made solely to the Company in accordance with the terms of our engagement to assist the Company in meeting the requirements of the Listing Rules of the Financial Services Authority. Our review has been undertaken so that we might state to the Company those matters we are required to state to it in 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 for our review work, for this report, or for the conclusions we have reached. Directors' responsibilities The Interim Report, including the financial information contained therein, is the responsibility of and has been approved by the Directors. The Directors are responsible for preparing the Interim Report in accordance with the Listing Rules which require that the accounting policies and presentation applied to the interim figures should be consistent with those applied in preparing the preceding annual financial statements except where any changes, and the reasons for them, are disclosed. As disclosed in note 1 to the financial information, the next annual financial statements of the Group will be prepared in accordance with IFRSs adopted for use in the European Union. The accounting policies that have been adopted in preparing the financial information are consistent with those that the Directors currently intend to use in the next annual financial statements. There is, however, a possibility that the Directors may determine that some changes to these policies are necessary when preparing the full annual financial statements for the first time in accordance with those IFRSs adopted for use by the European Union. Review work performed We conducted our review in accordance with the guidance contained in Bulletin 1999/4 Review of interim financial information issued by the Auditing Practices Board for use in the United Kingdom. A review consists principally of making enquiries of group management and applying analytical procedures to the financial information and underlying financial data and, based thereon, assessing whether the accounting policies and presentation have been consistently applied unless otherwise disclosed. A review is substantially less in scope than an audit performed in accordance with Auditing Standards and therefore provides a lower level of assurance than an audit. Accordingly, we do not express an audit opinion on the financial information. Review conclusion On the basis of our review we are not aware of any material modifications that should be made to the financial information as presented for the six months ended 31 March 2006. KPMG Audit Plc Chartered Accountants Manchester 5 June 2006 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 half year ended 31 March 2006 comprise the Company and its subsidiaries (together referred to as the 'Group') and the Group's interest in Victrex-MC, Inc (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 5 June 2006. Basis of preparation 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 International Financial Reporting Standards as adopted by the EU ('IFRS') issued by the International Accounting Standards Board ('IASB'). These are subject to ongoing review and possible amendment by interpretative guidance from the IASB. Victrex also continues to conduct an ongoing review of changes, interpretations and best practice and hence further restatement may occur up until the first IFRS financial statements are published. The consolidated financial statements have been prepared on the historical cost basis except that derivative financial instruments are stated 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 exemption whereby IFRS 3 can be applied prospectively from the date of transition, hence removing the need to restate previous business combinations. Victrex has decided to take advantage of the option under IAS 19 to recognise actuarial gains and losses through the statement of recognised income and expense as opposed to the income statement. 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 difference for all 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 exchange risks. In accordance with its treasury policy, the Group does not hold or issue derivative financial instruments for trading purposes. Derivatives are recognised initially at fair value. Subsequent to initial recognition, derivative financial instruments are stated at fair value. The method of recognising the resulting gain or loss 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 is recognised immediately in the income statement using spot rates. 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 forecasted 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 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. 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 Leases are operating leases, whose 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 assets' residual values and useful lives 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 no longer 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 under previous 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 net identifiable assets 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 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 assets' residual values and useful lives are reviewed annually for continued appropriateness and impairment, and adjusted if appropriate. Inventories Inventories are stated 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 comprise 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 substantially enacted at the balance sheet date, and any adjustment to the tax payable in respect of previous years. Deferred income tax is provided in full, using the liability method, on temp orary differences arising between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation 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 to the extent that they will probably not 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 substantially 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 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 are significant uncertainties 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 at the balance sheet date less the fair value of the plan assets, together with adjustments for unrecognised actuarial gains or losses and 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. Ongoing actuarial gains and losses are immediately recognised in full at the balance sheet date through the statement of recognised income and expense, an option in accordance with IAS 19. Share based payment transactions The Victrex 1995 Executive Share Option Scheme, the Victrex 2005 Executive Share Option Plan, the Victrex 1995 Sharesave Scheme, the Victrex 2005 UK Sharesave Plan, the Victrex 2005 Employee Stock Purchase Plan and the Victrex Long Term Incentive Plan (executive Directors only) allow Group employees to acquire shares in the Company. 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 targets, 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 costs Net financing costs comprise interest payable on borrowings, interest received on funds invested and charges on bank loans and overdrafts. SHAREHOLDER INFORMATION Copies of this Interim Report will be sent to all shareholders and will be available from the Registered Office detailed below. Financial Calendar ________________________________________________________________ Ex-dividend date for interim dividend 28 June 2006 Record date for interim dividend 30 June 2006 Payment of interim dividend 31 July 2006 2006 year end 30 September 2006 Announcement of 2006 full year results December 2006 Annual General Meeting February 2007 Payment of final dividend March 2007 ________________________________________________________________ Company Secretary M W Peacock Registered Office Victrex plc Victrex Technology Centre Hillhouse International Thornton Cleveleys Lancashire FY5 4QD United Kingdom Forward-looking Statements Sections of this Interim Report contain forward-looking statements, including statements relating 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 and depend on circumstances that will or may occur in the future. Accordingly, actual results may differ materially from those set out in the forward-looking statements as a result of a variety of factors, including: changes in interest and exchange rates; changes in global, political, economic, business, competitive and market forces; changes in tax rates and future business combinations or dispositions; negotiations with customers relating to renewal of contracts and future volumes and prices; 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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