Oxford Instruments PLC Half-year Report (1176H)

Share Name	Share Symbol	Market	Type	Share ISIN	Share Description
Oxford Instruments Plc	LSE:OXIG	London	Ordinary Share	GB0006650450	ORD 5P

	Price Change	% Change	Share Price	Bid Price	Offer Price	High Price	Low Price	Open Price	Shares Traded	Last Trade
	20.00	0.90%	2,245.00	2,245.00	2,255.00	2,270.00	2,225.00	2,235.00	10,908	10:26:58

Industry Sector	Turnover	Profit	EPS - Basic	PE Ratio	Market Cap
Lab Analytical Instruments	444.7M	58.6M	1.0126	22.37	1.31B

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RNS Number : 1176H

Oxford Instruments PLC

13 November 2018

Release Date: 7am Tuesday 13 November 2018

Oxford Instruments plc

Announcement of Half Year Results for the six months to 30 September 2018

Oxford Instruments plc, a leading provider of high technology products and systems for industry and research, today announces its Half Year Results for the six months to 30 September 2018.

 
                                          Half year to    Half year to     % change 
                                           30 September    30 September 
                                           2018            2017 
                                          GBPm            GBPm 
 Revenue(1)                               147.0           132.1           +11.3% 
 Adjusted* operating profit(1)            21.0            18.8            +11.7% 
 Adjusted* profit before tax(1)           19.8            16.3            +21.5% 
 Profit before tax(1)                     11.6            12.7             (8.7%) 
 Adjusted* basic earnings per share(1)    27.3p           22.3p           +22.4% 
 Dividend per share (interim)             3.8p            3.7p            +2.7% 
 Cash generated from operations(1)        21.4            3.7 
 Net debt                                 12.5            19.7

(1) Continuing operations

Financial Highlights:

   --      Orders up 10.3% to GBP162.9m (2017: GBP147.7m), an increase of 12.0% at constant currency

-- Order book of GBP177.9m (31 March 2018: GBP153.0m, restated for IFRS 15) up 16.3% (12.5% at constant currency)

-- The Group has adopted IFRS 15 'Revenue from Contracts with Customers' and IFRS 16 'Leases'. The impact is to increase revenue by GBP5.1m

   --      Reported revenue increased by 11.3% to GBP147.0m (12.6% at constant currency)

-- Adjusted operating profit from continuing operations up 11.7% to GBP21.0m (16.0% at constant currency) with margin rising to 14.3%

   --      Adjusted profit before tax from continuing operations up 21.5% to GBP19.8m

-- Reported profit before tax down 8.7% to GBP11.6m due to mark-to-market movement on currency derivatives

   --      Strong cash conversion of 91.0% contributes to reduction in net debt to GBP12.5m 
   --      Interim dividend increased by 2.7% to 3.8p

Operational Highlights:

   --       Continued progress with the implementation of our Horizon strategy 
   -     Good underlying order and revenue growth 
   -     Continued focus on innovation and R&D

- Further investment in sales, service and operational capabilities, with increased focus on strategic procurement, operational efficiencies and logistics

-- End markets and underlying drivers remain positive, with strong growth from commercial and industrial customers

-- Strong financial performance across Materials & Characterisation, driven by recently launched products, customer application focus and positive end markets

-- Good first half performance in Research & Discovery, driven by growth in Healthcare & Lifescience, and Quantum Technologies end markets

-- Good order and order book growth in Service & Healthcare, with growth in service contracts in OI Healthcare and increased demand for services related to our own products

Outlook:

-- Our expectations for the current financial year remain unchanged, supported by growth in constant currency orders and order book, along with our anticipated second half seasonal bias

Ian Barkshire, Chief Executive of Oxford Instruments plc, said: "We continue to make good progress with the implementation of our Horizon strategy whilst maintaining a focus on the near-term delivery of improved performance. The strategy is now well embedded across the Group and we are starting to see positive results with good underlying order and revenue growth."

"Our commitment to provide leading product performance and commercial solutions in markets with long-term growth drivers, coupled with our increased investment in operating efficiencies, will continue to drive progress."

Enquiries:

   Oxford Instruments plc                                                          Tel:  01865 393200

Ian Barkshire, Chief Executive

Gavin Hill, Group Finance Director

   MHP Communications                                                           Tel:  020 3128 8100

Rachel Hirst / Luke Briggs

Number of pages: 41

*NOTE: Throughout this half year announcement we make reference to adjusted numbers. A full definition of adjusted numbers can be found in note 2. Where we make reference to constant currency numbers these are prepared on a month by month basis using the translational and transactional exchange rates which prevailed in the previous year rather than the actual exchange rates which prevailed in the year. Transactional exchange rates include the effect of our hedging programme.

Chief Executive's Review

We were greatly saddened when Alan Thomson, our Chairman, passed away on 22 July 2018. Alan had led the Board of the Company since September 2016 and brought a wealth of experience and wisdom to the role. His commitment and passion in working with us to drive improvement, and his support, guidance and friendship have been greatly valued. The process to appoint Alan's successor is underway and, in the meantime, Steve Blair, our Senior Independent Director, is operating as Interim Chairman.

Overview

We continue to make good progress with the implementation of our Horizon strategy whilst maintaining a focus on the near-term delivery of improved performance. The strategy is now well embedded across the Group and we are starting to see positive results from our increased focus on end market applications, with good underlying order and revenue growth.

Our chosen end markets and their underlying growth drivers remain positive and robust, with reported orders for the Group up 10.3% (12.0% at constant currency) to GBP162.9m (2017: GBP147.7m). Each of our three sectors - Materials & Characterisation, Research & Discovery, and Service & Healthcare - reported order growth.

Reported revenue rose to GBP147.0m (2017: GBP132.1m), an increase of 11.3% (12.6% at constant currency), with strong growth in both the Materials & Characterisation and Research & Discovery sectors. Revenue was slightly down in Service & Healthcare due primarily to lower orders from our US Healthcare business. Reported adjusted operating profit increased 11.7% to GBP21.0m (2017: GBP18.8m), an increase of 16.0% at constant currency, with strong growth across both the Materials & Characterisation and Research & Discovery sectors partially offset by a lower contribution from Service & Healthcare.

The order book, representing orders for future delivery, as at 30 September 2018 increased 16.3% on a reported basis (12.5% at constant currency) since 31 March 2018.

Continuing adjusted basic earnings per share increased by 22.4% to 27.3 pence (2017: 22.3 pence).

Good cash collection in the period further reduced net debt to GBP12.5m, down from GBP19.7m at the year end.

Revenue from commercial and industrial customers increased in the period driven by our enhanced customer application and market focus. The proportion of revenue in the period from commercial customers increased to 52.7%

(2017: 45.3%), with revenue associated with academic or government funded customers remaining broadly in line with the same period last year.

From an end-market perspective, we have seen strong order and revenue growth in Advanced Materials and Healthcare & Lifescience. Quantum Technologies revenue was up in the period, with orders slightly down due to the phasing of order intake, but with a strong future-looking pipeline. Semiconductor & Communications revenue was broadly in line with last year, with good order growth in the period and a healthy pipeline for both our measurement and semiconductor processing solutions. Advanced Materials represented 24% of sales, Quantum Technologies 10%, and Healthcare & Lifescience and Semiconductor & Communications representing 28% and 21% respectively. Energy and Environment each represented 5%, with Research & Fundamental Science at 7%.

From a geographical perspective, we had strong constant currency revenue growth across Asia and Europe of 18.9% and 10.8% respectively, with growth of 5.3% in North America. Within Asia, we had strong growth across the region, with China, Japan and the Rest of Asia each achieving double digit growth relative to the comparative period. Asia represented 41% of Group revenue, Europe 25%, North America 32% and Rest of World 2%. China represented 21% of revenue, up from 17% in the previous half year.

This encouraging first half result has been achieved against a backdrop of increasing global political tensions that have impacted the overall international trading environment. We have seen a slight tightening of the grant of export licences to certain customers. In addition, the imposition of US sanctions and China tariffs has had a modest impact on orders and revenues in the period. We are monitoring this situation closely to mitigate, where possible, any future impact.

Horizon Strategy Progress

We have maintained a sharp focus on our Horizon strategy to deliver sustainable revenue growth and improved margins. In the period we have continued to embed an increased commercial focus and build capabilities across the Group, including extensive training for all our customer facing teams. With our cohort of internal operational champions now in place, we have increased our investment and focus on the Operational Excellence aspect of Horizon, with a specific focus on strategic procurement, operational efficiencies and logistics. This will support our future growth ambitions and contribute to margin improvement.

Sector Performance

Turning to the performance of our individual sectors:

Materials & Characterisation focuses on applied R&D and commercial customers, enabling the fabrication and characterisation of materials and devices down to the atomic scale. This sector delivered a strong first half, with positive contributions from all the constituent businesses, namely NanoAnalysis, Asylum Research and Plasma Technology. Reported revenue increased by 20.0% to GBP60.1m (2017: GBP50.1m), with reported adjusted operating profit increasing to GBP9.7m (2017: GBP7.2m). Reported order growth of 13.7% to GBP69.5m (2017: GBP61.1m) contributed to a positive order book growth for future deliveries. The enhanced results were driven by strong demand for recently launched higher margin products, an increased focus on end customer applications and operational efficiencies. These elements contributed to an improved reported operational margin of 170 basis points to 16.1% for the sector (2017: 14.4%).

Research & Discovery provides advanced solutions that create unique environments and enable measurements down to the molecular and atomic level, used predominantly in fundamental and applied research. Reported revenue increased by 13.4% to GBP54.3m (2017: GBP47.9m), with reported adjusted operating profit increasing to GBP4.8m (2017: GBP4.2m). This was driven by increased demand for our scientific cameras and optical microscopy systems, as well as increased revenues from our cryogenic systems and superconducting magnets. Improved performance from Andor Technology and NanoScience was partially offset by a softer first half performance from Magnetic Resonance, X-ray Technology and Scienta Omicron in the period. Reported order growth of 3.8% to GBP60.0m (2017: GBP57.8m), contributed to order book growth of 5.0%. Operational margin for the sector remained flat at 8.8% on a reported basis. The Group has adopted IFRS 15 'Revenue from Contracts with Customers'. The primary impact is the recognition of revenue on our complex cryogenic and magnet systems on installation, rather than shipment. The financial impact in the half year is to increase revenue by GBP5.1m; we expect this difference to partially unwind in the second half. The improvement plan within our NanoScience business is progressing well under a new leadership team, with greater commercial discipline and investment in sales and service resources. Consquently we have seen an anticipated reduction in the backlog of uninstalled complex systems.

Service & Healthcare provides customer service and support for our own products and the service, sale and rental of third-party healthcare imaging systems. Reported revenue for the sector fell by 4.4% to GBP32.6m (2017: GBP34.1m) due to lower volumes from our US Healthcare business, with a decline in reported adjusted operating profit of 12.2% to GBP6.5m (2017: GBP7.4m). The sector saw an increase in reported orders to GBP33.4m (2017: GBP29.1m), up 14.8%. The sector's performance was impacted by the ongoing strategic movement of our US Healthcare business towards a higher proportion of service revenue and a change in mix of upgrades and contract revenues associated with our own products.

R&D

Innovation remains core to our Horizon strategy and we continue to invest in products, solutions and technology that help our customers improve their productivity and develop new capabilities. We have maintained our focus on strategic investments in line with our short, medium and longer-term roadmaps to expand our market shares and provide growth into new market areas. Investment in R&D initiatives was slightly lower in the period at GBP12.3m (2017: GBP13.0m) due to the phasing of specific projects, timing of associated spend and the receipt of additional external grant funding.

People

As we continue with the implementation of Horizon, it is our people that make the real difference. Our thanks go to all our employees for their ongoing support of our strategy and for their willingness to help us deliver an exceptional experience for our customers.

Dividends

The Board has declared an interim dividend increase of 2.7% to 3.8 pence (2017: 3.7 pence), reflecting improvement in underlying earnings per share.

Current Trading and Outlook

Our commitment to provide leading product performance and commercial solutions in markets with long-term growth drivers coupled with our increased investment in operating efficiencies will continue to drive progress

Our expectations for the current financial year remain unchanged, supported by growth in constant currency orders and order book along with our anticipated second half seasonal bias.

Ian Barkshire

Chief Executive

13 November 2018

Operations Review

Our Group reports in the following three sectors: Materials & Characterisation, Research & Discovery, and Service & Healthcare.

Materials & Characterisation

 
                                 2018    2017    Growth   Constant 
                                  GBPm    GBPm             Currency 
                                                           Growth(1) 
------------------------------  ------  ------  -------  ----------- 
 Revenue                         60.1    50.1    +20.0%   +21.2% 
------------------------------  ------  ------  -------  ----------- 
 Adjusted(2) operating profit    9.7     7.2 
------------------------------  ------  ------ 
 Adjusted(2) operating margin    16.1%   14.4% 
------------------------------  ------  ------ 
 Profit before tax after 
  adjusting items                8.6     5.8 
------------------------------  ------  ------

(1) For definition refer to note on page 2 of highlights

(2) Details of adjusting items can be found in Note 2 of the condensed Financial Statements

The Materials & Characterisation sector comprises NanoAnalysis, Asylum Research and Plasma Technology. This sector has a broad customer base across a wide range of applications for the imaging and analysis of materials down to the atomic level, as well as the fabrication of semiconductor devices and structures through our range of advanced semiconductor etch and deposition processes and systems. Our market leading product performance, combined with customer focused solutions, continues to drive strong growth by providing increased value to existing customers and the identification and reach into new markets and applications. The sector has a strong focus on supporting and accelerating our customers' applied R&D, enabling the development of new devices, next generation higher performance materials and enhancing productivity in advanced manufacturing, quality assurance (QA) and quality control (QC).

Materials & Characterisation delivered strong growth in orders, revenue and profitability driven by our continued focus on tailoring our product offering to specific end customer applications that increase both the product value and the addressable market. The success of recently launched higher margin products and solutions strongly contributed to the sector's performance in the period, which saw margins increase by 170 basis points to 16.1%. Growth from industrial and commercial customers increased their proportion of sales in the period to 58% of revenue (2017: 48%), with the balance from academic and government funded customers.

Looking at end-market segments, we saw strong growth in Advanced Materials, which accounted for 39% of sales in the sector. Semiconductor & Communications also represented 39% of sales with Energy, Environment and Healthcare & Lifescience each broadly similar at 8%, 7% and 6% of revenue, respectively. From a geographic perspective, revenue grew in each of Europe, North America and Asia.

Growth in the Advanced Materials market segment was strongly supported by the continued success of our recently launched, Symmetry(TM), super-fast material structure analyser and the Ultim(TM) large area X-ray detectors as well as our portfolio of atomic force microscopes. These products enable customers to undertake significantly more accurate and much faster analysis, driving both capability and productivity for customers in the automotive and aerospace industries, as well as those analysing metals, ceramics, composites and polymers. We also saw good growth from customers engaged in energy generation, storage and batteries.

We have continued to achieve success through our application specific solutions, in particular new solutions for QA and QC in the high-end additive manufacturing and 3D printing markets. Our Symmetry(TM) material analyser enables the critical qualification of the material properties, performance and quality of the additive manufactured metal components and optimisation of the manufacturing processes. This is of increasing interest within the automotive and aerospace industries, which use additive manufacturing to produce much lighter materials and more complex components than would be possible using traditional methods. In addition, we have exploited our expertise in particle analysis to develop a tailored solution to provide quality control for the raw material feedstock used in additive manufacturing, helping to avoid contamination that can significantly impact the performance and properties of the manufactured component or device.

Semiconductors remains a core market for the sector, where in addition to our imaging and analysis products we provide etch and deposition process solutions used across a range of advanced compound semiconductor and silicon device applications. We are entering what some call the 'decade of materials' - whereby performance materials will enable applications and device performance that silicon cannot. We are focusing on the global trends in optoelectronics, discrete devices, nanomaterials and research systems. Specifically, we are continuing to build on our core research market by targeting growth applications within the compound semiconductor device market with an overarching strategy of tailoring our market leading research and applied R&D products for production customers. As an example, we have developed leading capabilities in several key process steps required for the manufacture of power devices, MEMs sensors and vertical-cavity surface-emitting lasers (VCSELs). VCSELs are increasingly being used across a range of applications such as facial recognition on smart phones, and for higher-speed communications within data centres. We also see compound semiconductors providing growth in discrete semiconductor devices, where the properties of compound semiconductors allow faster, more energy efficient and higher voltage power electronics. This enables enhanced wireless charging capabilities and increased energy storage, providing longer range electric vehicles and higher data communication rates and capacity required for 5G networks.

Research & Discovery

 
                            2018    2017    Growth   Constant 
                             GBPm    GBPm             Currency 
                                                      Growth(1) 
-------------------------  ------  ------  -------  ----------- 
 Revenue                    54.3    47.9    +13.4%   +14.6% 
-------------------------  ------  ------  -------  ----------- 
 Adjusted(2) operating 
  profit                    4.8     4.2 
-------------------------  ------  ------ 
 Adjusted(2) operating 
  margin                    8.8%    8.8% 
-------------------------  ------  ------ 
 Profit before tax after 
  adjusting items           1.9     0.1 
-------------------------  ------  ------

(1) For definition refer to note on page 2 of highlights

(2) Details of adjusting items can be found in Note 2 of the condensed Financial Statements

The Research & Discovery sector includes Andor Technology, NanoScience and Magnetic Resonance, X-ray Technology and our minority share in Scienta Omicron. This sector provides advanced solutions that create unique environments and enable imaging and analytical measurements down to the molecular and atomic level, used predominantly in fundamental and applied research. We can build on our relationships with customers working on breakthrough applications in research to gain insights and support future commercial applications.

The sector had an improved first half, with growth in orders, revenue and profitability driven by a strong performance from our optical microscopy systems, scientific cameras, cryogenic systems and superconducting research magnets, providing growth in the Healthcare & Lifescience and Quantum Technologies segments. This was partially offset by a reduction in revenues from our scientific X-ray tubes and benchtop magnetic resonance systems. The sector has a high proportion of academic and government funded customers, representing 65% of revenues. From a market perspective, the Healthcare & Lifescience and Quantum Technologies segments represented 40% and 25% of revenue respectively; Research & Fundamental Science 18%, Advanced Materials 10%, with the balance from Environment, Semiconductor & Communications, and Energy customers.

Growth in Healthcare & Lifescience is supported by increased research within neuroscience and customers involved in developmental biology to image and analyse cells, tissues and organs for the development of advanced medicines and the improved understanding of fundamental disease mechanisms. Within this segment, our Dragonfly(TM) optical microscopy portfolio continues to gain customer recognition and market share through the provision of improved image quality across larger and thicker samples.

We continue to see growth from customers involved in Quantum Technologies with increased investment by large corporates and the wider academic community across the EU, US and China in areas such as quantum computing, secure communications, sensors and imaging. We continue to work with leading companies and researchers worldwide to provide the fundamental tools for research and the development of solutions for commercial applications. The market remains attractive with strong global research funding due to the potential for significant market and technology disruption. However, the nature of the sector means orders and revenue remain irregular in value and frequency and are attracting an increased scrutiny for export licenses. As previously mentioned, revenue benefitted from the introduction of IFRS 15.

We have built on our market and technical leadership in scientific cameras with the launch of a new range of application specific cameras focusing on key market drivers including cell biology, personalised medicine, astronomy and physical science & quantum technology. Sona(TM) is tailored for the lifescience market offering exceptional sensitivity to improve long-term live cell analysis to help scientists gain a better understanding of cellular processes; and Marana(TM) has been optimised for high speed, high sensitivity imaging, supporting a broad range of physical sciences, including astronomy applications involving the search for near earth objects and space debris.

Research & Fundamental Science remains an attractive segment for this sector with our range of optical components, spectrographs, cryogenics and magnets providing customers with a broad range of platforms and solutions used predominately across the physical sciences. These included the BepiColumbo European Space Agency mission to Mercury, which has incorporated our X-ray detectors. The mission, launched in October, is seeking a deeper understanding of the planet's origin and its impact on the solar system.

Despite a softer first half, our benchtop magnetic resonance analysers continue to see positive pipeline and we are gaining further opportunities for our solutions across a range of food and industrial applications as well as within the oil exploration market. The market for our scientific X-ray tubes remains buoyant with order growth in the period, although delayed shipments and timing of orders has negatively impacted revenue and profitability in the first half of the year. We expect to see some improvement in the second half from both business units.

The Scienta Omicron joint venture created the largest player in the ultra-high vacuum surface science field. The Group has a 47% share in the joint venture. Following weak order intake last year, we recorded a loss of GBP0.6m for the half year. Assisted by the launch of new systems, orders are recovering, and we expect an improved trading performance in the second half.

Service & Healthcare Sector

 
                            2018    2017    Growth   Constant 
                             GBPm    GBPm             Currency 
                                                      Growth(1) 
-------------------------  ------  ------  -------  ----------- 
 Revenue                    32.6    34.1    (4.4)%   (2.9)% 
-------------------------  ------  ------  -------  ----------- 
 Adjusted(2) operating 
  profit                    6.5     7.4 
-------------------------  ------  ------ 
 Adjusted(2) operating 
  margin                    19.9%   21.7% 
-------------------------  ------  ------ 
 Profit before tax after 
  adjusting items           6.1     6.7 
-------------------------  ------  ------

(1) For definition refer to note on page 2 of highlights

(2) Details of adjusting items can be found in Note 2 of the condensed Financial Statements

The Service & Healthcare sector comprises the Group's maintenance service contracts, billable repairs, training and support services, and spare part sales related to Oxford Instruments' own products under the OiService brand; and the sale, service and rental of refurbished third-party MRI and CT machines under the OI Healthcare brand.

Reported orders grew 14.8% to GBP33.4m (2017: GBP29.1m) supported by increased demand for services related to our own products under OiService as well as services within OI Healthcare, with the order book for future deliveries up 15.0% to GBP46.9m (2017: GBP40.8m).

Within OI Healthcare we have seen good progress in the growth of service contracts to new customers as well as an improved utilisation of our leasing fleet. Sales in the refurbished imaging equipment market remained depressed compared to previous years with weaker demand for new and used equipment, competitive market limiting opportunities and depressing margins. In Japan, we have signed a service agreement to start servicing Hitachi Healthcare's Mitsubishi magnet-based MRI systems.

Within OiService we continue our drive to provide enhanced support services tailored to customers' needs whilst improving our efficiency and response time to customers through the utilisation of mobile technologies. We have increased the number of application specific seminars and completed a very successful second microscopy summer school in collaboration with the Chinese Academy of Sciences.

Reported revenue declined in the period due primarily to a lower number of refurbished system sales within OI Healthcare which, combined with a change in product mix from OiService, contributed to a lower profit and margin in the period.

Finance Review

The Group has adopted IFRS 15 'Revenue from Contracts with Customers' using the modified retrospective approach. Comparatives have not been restated. The main difference is within our NanoScience business, where the revenue recognition on complex customised magnetic and cryogenic systems is deferred from being primarily on transfer of rights and rewards of ownership to completion of installation. The Group has adopted IFRS 16 'Leases' in the 2018/19 financial year. The net impact of adopting IFRS 15 and IFRS 16 is to increase profit before tax by GBP2.2m. Further detail on the impact of these new accounting standards is set out in note 1.

Reported orders increased by 10.3% to GBP162.9m (2017: GBP147.7m), an increase of 12.0% at constant currency. At the end of the period the Group's order book for future deliveries stood at GBP177.9m (31 March 2018: GBP134.0m). The order book as at 31 March 2018 restated on an IFRS 15 basis is GBP153.0m, against GBP134.0m as previously reported. Against this IFRS 15 adjusted comparative the order book grew 16.3% on a reported basis and 12.5% at constant currency.

Reported revenue increased by 11.3% to GBP147.0m (2017: GBP132.1m). Revenue, excluding currency effects, increased by 12.6%, with the movement in average currency exchange rates over the half year reducing reported revenue by GBP1.7m.

Adjusted operating profit from continuing operations increased by 11.7% to GBP21.0m (2017: GBP18.8m). Adjusted operating profit from continuing operations, excluding currency effects, increased by 16.0%. Adjusted operating margin from continuing operations increased by 10 basis points to 14.3% (2017: 14.2%).

The effect of IFRS 15 is to increase revenue by GBP5.1m and adjusted operating profit by GBP2.3m for the half year. This difference between revenue recognition on product installation compared to product shipment is expected to partially unwind in the second half of the year. Against the previous half year, the Group was unable to satisfy additional customer orders to the value of GBP1.7m following the refusal of government export licences and compliance with US sanction legislation. In the half year we have engaged consultants to accelerate the operational excellence element of our Horizon strategy and incurred restructuring costs, primarily on the closure of a small facility in North America. These costs totalled GBP1.0m and have been included within adjusted operating profit.

Adjusted profit before tax from continuing operations grew by 21.5% to GBP19.8m (2017: GBP16.3m). Recorded within the comparative period under discontinued operations is a post-tax profit of GBP45.6m from the sale of Industrial Analysis, which was completed on 3 July 2017.

Adjusting items include amortisation of acquired intangibles of GBP4.7m and a net charge of GBP0.6m relating to loan note make-whole settlement payments and a net credit relating to our joint venture, Scienta Omicron. The movement in the mark-to-market valuation of currency hedges for future years gave rise to a charge of GBP2.9m.

Adjusted profit before tax from continuing operations of GBP19.8m (2017: GBP16.3m) represents a margin of 13.5% (2017: 12.3%). After adjusting items, the Group recorded a profit before tax of GBP11.6m (2017: GBP12.7m).

Continuing adjusted basic earnings per share grew by 22.4% to 27.3 pence (2017: 22.3 pence). Continuing basic earnings per share was 15.6 pence (2017: 17.5 pence).

Cash generated from operations of GBP21.4m (2017: GBP3.7m), represents 91.0% (2017: 12.8%) cash conversion. Net debt decreased from GBP19.7m on 31 March 2018 to GBP12.5m, representing a net debt to EBITDA ratio (for banking covenant purposes) of 0.2 times; our banking covenant is set at 3.0 times.

Adjusted operating profit is stated before impairment and amortisation of goodwill and acquired intangibles, business reorganisation items, the mark-to-market valuation of unexpired currency hedges, and other adjusting items, as set out in Note 2 to the condensed Financial Statements.

Income Statement

The Group's Income Statement is summarised below.

 
                                                      Half year     Half year 
                                                             to            to 
                                                   30 September  30 September 
                                                           2018          2017 
                                                           GBPm          GBPm   Change 
-------------------------------------------------  ------------  ------------  ------- 
Revenue                                                   147.0         132.1   +11.3% 
Gross profit                                               78.7          67.7   +16.2% 
Administrative overheads                                 (56.8)        (48.7) 
Share of (loss)/profit of associate                       (0.6)             - 
Foreign exchange                                          (0.3)         (0.2) 
-------------------------------------------------  ------------  ------------  ------- 
Adjusted operating profit                                  21.0          18.8   +11.7% 
Net finance costs                                         (1.2)         (2.5) 
-------------------------------------------------  ------------  ------------  ------- 
Adjusted profit before tax                                 19.8          16.3   +21.5% 
Amortisation of acquired intangibles                      (4.7)         (5.6) 
Non-recurring items                                       (0.6)         (0.6) 
Mark-to-market of currency hedges                         (2.9)           2.6 
-------------------------------------------------  ------------  ------------  ------- 
Profit before tax                                          11.6          12.7 
Tax from continuing operations                            (2.7)         (2.7) 
-------------------------------------------------  ------------  ------------  ------- 
Profit for the period from continuing operations            8.9          10.0 
-------------------------------------------------  ------------  ------------  ------- 
 
Adjusted effective tax rate(1)                            21.2%         22.1% 
 
Continuing adjusted earnings per share - 
 basic                                                    27.3p         22.3p   +22.4% 
Continuing earnings per share - basic                     15.6p         17.5p  (10.9%) 
 
Continuing adjusted earnings per share - 
 diluted                                                  27.0p         22.1p   +22.2% 
Continuing earnings per share - diluted                   15.4p         17.4p  (11.5%) 
 
Dividend per share                                        3.80p         3.70p    +2.7% 
-------------------------------------------------  ------------  ------------  -------

1. The adjusted effective tax rate is calculated by excluding the tax effects of impairment of non-current assets, amortisation on acquired intangibles, non-recurring items, the mark-to-market of financial derivatives, and other adjusting items.

Orders and Revenue

Total reported orders grew by 10.3% (12.0% at constant currency) to GBP162.9m. Orders, at constant currency, increased by 15.2% for Materials & Characterisation, 5.5% for Research & Discovery and 16.8% for Service & Healthcare.

Reported revenue of GBP147.0m (2017: GBP132.1m) increased by 11.3% (12.6% at constant currency). Reported revenue increased by 20.0% for Materials & Characterisation, 13.4% for Research & Discovery and declined by 4.4% for Service & Healthcare.

The book-to-bill ratio (orders received to goods and services billed in the period) for the half year was 1.11.

Revenue, at constant currency, increased by 21.2% for Materials & Characterisation with good growth across all constituent businesses. Growth of 14.6% in Research & Discovery was driven by a high level of installations in NanoScience and good growth within Andor Technology. A decline of 2.9% for Service & Healthcare is a result of selling fewer refurbished imaging systems.

On a geographical basis, at constant currency, revenue grew by 10.8% in Europe, 5.3% in North America, 18.9% in Asia and 66.7% for the Rest of World.

After adjusting the comparative period for IFRS 15, total reported order book grew by 16.3% (12.5% at constant currency). The order book, at constant currency, compared to 31 March 2018, increased by 33.3% for Materials & Characterisation, 5.0% for Research & Discovery, and 9.4% for Service & Healthcare.

 
                                       Materials      Research    Service & 
GBPm                          & Characterisation   & Discovery   Healthcare  Total* 
---------------------------  -------------------  ------------  -----------  ------ 
 
Revenue: Half year 2017/18                  50.1          47.9         34.1   132.1 
---------------------------  -------------------  ------------  -----------  ------ 
Underlying movement                         10.6           7.0        (1.0)    16.6 
Foreign exchange                           (0.6)         (0.6)        (0.5)   (1.7) 
---------------------------  -------------------  ------------  -----------  ------ 
Revenue: Half year 2018/19                  60.1          54.3         32.6   147.0 
---------------------------  -------------------  ------------  -----------  ------ 
 
Revenue growth: reported                  +20.0%        +13.4%       (4.4%)  +11.3% 
Revenue growth: constant 
 currency                                 +21.2%        +14.6%       (2.9%)  +12.6%

* Excluding inter-sector revenue

Gross profit

Gross profit increased by 16.2% to GBP78.7m (2017: GBP67.7m), representing a gross profit margin of 53.5%, an increase of 230 basis points over last year.

Operating profit

Adjusted operating profit from continuing operations increased by 11.7% to GBP21.0m (2017: GBP18.8m), representing an adjusted operating profit margin of 14.3%, an increase of 10 basis points against last year. Materials & Characterisation margin rose by 170 basis points to 16.1% (2017: 14.4%). Research & Discovery's adjusted operating margin was flat at 8.8% (2017: 8.8%). Service & Healthcare margin declined by 180 basis points to 19.9% (2017: 21.7%).

An increase in administrative overheads of 16.6% from GBP48.7m to GBP56.8m primarily reflects an investment in sales and service resources and training, operations, a reduction in capitalised R&D and an increase in IT costs. In addition, the end of the transition agreement with Hitatchi High-Technologies following the sale of Industrial Analysis and the sale of two freehold properties last year has led to a rise in annual net administrative overheads of GBP1.6m. Commissions and logistics costs are included within administrative overheads.

Our share of the Scienta Omicron joint venture showed an adjusted loss of GBP0.6m for the year, against a break-even position for the comparative period. After adjusting items, our share of the Scienta Omicron joint venture was a loss of GBP0.3m.

Currency effects (including the impact of transactional currency hedging) have reduced reported adjusted operating profit by GBP0.8m when compared to blended hedged exchange rates for the comparative period.

At constant currency, the adjusted operating profit margin was 14.7%, an increase of 50 basis points.

 
                                       Materials      Research    Service & 
GBPm                          & Characterisation   & Discovery   Healthcare  Total 
---------------------------  -------------------  ------------  -----------  ----- 
 
Adjusted operating profit: 
 Half year 2017/18                           7.2           4.2          7.4   18.8 
---------------------------  -------------------  ------------  -----------  ----- 
 
Underlying movement                          2.8           1.0        (0.8)    3.0 
Foreign exchange                           (0.3)         (0.4)        (0.1)  (0.8) 
---------------------------  -------------------  ------------  -----------  ----- 
Adjusted operating profit: 
 Half year 2018/19                           9.7           4.8          6.5   21.0 
---------------------------  -------------------  ------------  -----------  ----- 
 
Margin: Half year 2017/18                  14.4%          8.8%        21.7%  14.2% 
Margin: Half year 2018/19                  16.1%          8.8%        19.9%  14.3%

Adjusting items

Amortisation of acquired intangibles of GBP4.7m relates to intangible assets recognised on acquisitions, being the value of technology, customer relationships and brands.

Non-recurring items were a net charge of GBP0.6m. During the period we repaid GBP11.6m of the principal outstanding on loan notes as a condition of the sale of Industrial Analysis. The make-whole settlement cost due at the time of the repayment was GBP0.9m. In addition, we recognised a net gain of GBP0.3m on adjustments relating to our Scienta Omicron joint venture.

The Group uses derivative products to hedge its short-term exposure to fluctuations in foreign exchange rates. It is Group policy to have in place at the beginning of the financial year hedging instruments to cover 80% of its forecast transactional exposure for that year. The Group has decided that the additional costs of meeting the extensive documentation requirements of IFRS 9 to apply hedge accounting to these foreign exchange hedges cannot be justified. Accordingly, the Group does not use hedge accounting for these derivatives.

Net movements on marking-to-market derivatives in respect of future periods are disclosed in the Income Statement as foreign exchange and excluded from our calculation of adjusted profit before tax.

The mark-to-market loss in respect of derivative financial instruments was GBP2.9m (2017: GBP2.6m gain). This reflects a movement from a net fair value asset to a small net liability position on currency derivatives that are hedging future transactional currency exposures for the Group compared to the previous year end. The un-crystallised balance sheet liability is attributable to a fall in the value of Sterling at the balance sheet date against a blended rate achieved on US Dollar, Euro and Japanese Yen forward contracts that will mature over the next eighteen months.

Net finance costs

The Group's adjusted net finance costs fell by GBP1.3m to GBP1.2m (2017: GBP2.5m) with net finance charges falling by GBP1.2m to GBP1.0m and pension financing charges falling by GBP0.1m to GBP0.2m.

Profit before tax

Continuing adjusted profit before tax increased by 21.5% to GBP19.8m (2017: GBP16.3m). The adjusted profit before tax margin increased by 120 basis points to 13.5% (2017: 12.3%).

Profit before tax of GBP11.6m (2017: GBP12.7m) is after the mark-to-market movement on derivative financial instruments, amortisation of acquired intangibles and other adjusting items.

Tax

The adjusted tax charge from continuing operations of GBP4.2m (2017: GBP3.6m) represents an effective tax rate of 21.2% (2017: 22.1%). The current tax liability includes a provision of GBP2.9m in respect of a historical financing structure. The statutory effective tax rate is 23.3%.

Earnings per share

Continuing adjusted basic earnings per share increased by 22.4% to 27.3 pence (2017: 22.3 pence); continuing adjusted diluted earnings per share were 27.0 pence (2017: 22.1 pence).

The number of undiluted weighted average shares have increased by 0.1m to 57.2m.

Foreign exchange

The Group faces transactional and translational currency exposure, most notably against the US Dollar, Euro and Japanese Yen. For the half year, approximately 16% of Group revenue was denominated in Sterling, 54% in US Dollars, 19% in Euros, 10% in Japanese Yen and 1% in other currencies. Translational exposures arise on the consolidation of overseas company results into Sterling. Transactional exposures arise where the currency of sale or purchase transactions differs from the functional currency in which each company prepares its local accounts.

The Group maintains a hedging programme against its net transactional exposure using internal projections of expected currency trading transactions expected to arise over a period extending from 12 to 24 months. As at 30 September 2018 the Group had currency hedges in place extending up to eighteen months forward.

Dividend

The Group's policy is to increase the dividend each year in line with the increase in underlying earnings, considering movements in currency. The Board has proposed to increase the interim dividend by 2.7% to 3.8 pence. The interim dividend will be paid on 8 April 2019 to Shareholders on the register as at 1 March 2019.

Cash flow

The Group cash flow is summarised below.

 
                                                               Half year     Half year 
                                                                      to            to 
                                                            30 September  30 September 
                                                                    2018          2017 
                                                                    GBPm          GBPm 
----------------------------------------------------------  ------------  ------------ 
Adjusted operating profit                                           21.0          18.8 
Depreciation and amortisation                                        5.4           4.0 
----------------------------------------------------------  ------------  ------------ 
Adjusted EBITDA                                                     26.4          22.8 
Working capital movement                                           (1.2)        (15.0) 
Purchase of rental assets held for subsequent sale                 (0.6)         (0.6) 
Loss on disposal of property, plant and equipment                      -           0.2 
Equity settled share schemes                                         0.4           0.5 
Share of loss/(profit) from associate                                0.6             - 
Business reorganisation items                                      (0.7)         (0.7) 
Pension scheme payments above charge to operating 
 profit                                                            (3.5)         (3.5) 
Cash generated from operations                                      21.4           3.7 
Interest                                                           (2.3)         (1.0) 
Tax                                                                (4.7)         (2.5) 
Capitalised development expenditure                                (1.5)         (3.1) 
Expenditure on tangible and intangible assets                      (3.4)         (2.4) 
Increase in investment in associate                                    -         (2.1) 
Proceeds from sale of subsidiary undertaking                           -          73.0 
Decrease in long-term receivables                                    0.6             - 
Dividends paid                                                     (2.1)         (2.1) 
Proceeds from issue of share capital                                   -           0.2 
Payments made in respect of lease liabilities                      (1.6)             - 
Decrease in borrowings                                             (8.6)        (77.6) 
----------------------------------------------------------  ------------  ------------ 
Net decrease in cash and cash equivalents from continuing 
 operations                                                        (2.2)        (13.9) 
----------------------------------------------------------  ------------  ------------

Note: Adjusted EBITDA is earnings before interest, tax, depreciation, intangible amortisation, mark-to-market of financial derivatives and other non-cash adjusting items.

Cash generated from operations

Cash generated from operations of GBP21.4m (2017: GBP3.7m), represents 91.0% (2017: 12.8%) cash conversion. The impact of IFRS 16 is to recognise a lease liability and corresponding asset for leases previously classified as operating leases. As a result, the depreciation charge for the half year includes an additional GBP1.7m reflecting the increase in asset base. Compared to the comparative period, cash generated from operations is also higher by GBP1.7m. Cash conversion is defined as cash generated from operations before non-recurring items and pension scheme payments, less, capitalised development expenditure, capital expenditure and payments made in respect of lease liabilities / adjusted operating profit. Payments made in respect of lease liabilities are now included within our definition of cash conversion to retain a like-for-like comparison following the introduction of IFRS 16.

The working capital outflow of GBP1.2m reflects an increase in inventories of GBP7.9m, a decrease in receivables of GBP12.6m, a decrease in payables of GBP7.7m and an increase in customer deposits of GBP1.8m. The increase in inventories primarily reflects an increase in work in progress and components to support our planned production schedule in the second half of the year, particularly for our deposition and etch process solutions and optical imaging systems.

Interest

Net interest paid was GBP2.3m (2017: GBP1.0m). This includes loan note make-whole payments of GBP0.9m as a consequence of repaying loan note principal following the sale of Industrial Analysis. Net interest paid in the comparative period was low due to payment timing differences.

Tax

Tax paid was GBP4.7m (2017: GBP2.5m), the comparative period benefiting from tax deductions on allowable adjusting items and utilisation of brought forward tax losses.

Investment in research and development ('R&D')

Total cash spend on R&D in the half year was GBP12.3m, equivalent to 8.4% of sales, (2017: GBP13.0m, 9.8% of sales). The small decrease reflects lower material costs incurred this year and a change in timing of receipt of government grants. A reconciliation between the amounts charged to the Income Statement and the cash spent is given below:

 
                                                          Half year     Half year 
                                                                 to            to 
                                                       30 September  30 September 
                                                               2018          2017 
                                                               GBPm          GBPm 
-----------------------------------------------------  ------------  ------------ 
R&D expense charged to the Income Statement                    12.3          11.4 
Amounts capitalised as fixed assets                               -           0.1 
Amortisation and impairment of R&D costs capitalised 
 as intangibles                                               (1.5)         (1.6) 
Amounts capitalised as intangible assets                        1.5           3.1 
-----------------------------------------------------  ------------  ------------ 
Total cash spent on R&D during the year                        12.3          13.0 
-----------------------------------------------------  ------------  ------------

Investment in Associate

In the comparative period, the shareholders of Scienta Omicron agreed to a capital injection to strengthen the balance sheet of the joint venture and ensure future liquidity in support of the business strategy. Our share was GBP2.1m and was paid in September 2017.

Disposals

The sale of Industrial Analysis was completed on 3 July 2017. A post-tax profit of GBP45.6m is recorded within discontinued operations for the comparative period.

Net debt and funding

Net debt

Net debt decreased in the period from GBP19.7m to GBP12.5m. Cash generated from operations was GBP21.4m. The Group invested in capitalised development costs of GBP1.5m and tangible and intangible assets of GBP3.4m.

 
Movement in net debt                                      GBPm 
------------------------------------------------------  ------ 
Net debt as at 31 March 2018                              19.7 
------------------------------------------------------  ------ 
Cash generated from operations                          (21.4) 
Interest                                                   2.3 
Tax                                                        4.7 
Capitalised development expenditure                        1.5 
Capital expenditure on tangible and intangible assets      3.4 
Dividends paid                                             2.1 
Other items                                                0.2 
------------------------------------------------------  ------ 
Net debt as at 30 September 2018                          12.5 
------------------------------------------------------  ------

Funding

On 2 July 2018 the Group entered into a new unsecured multi-currency revolving facility agreement which is committed until June 2023 with one-year extension options at the end of the first and second years. The facility has been entered into with two banks and comprises a Euro denominated multi-currency facility of EUR50.0m and a US Dollar denominated multi-currency facility of $80.0m.

In this half year the Group repaid, as a pre-condition relating to the sale of Industrial Analysis, GBP11.6m of its bilateral private placement note, leaving an outstanding note of GBP27.9m, which matures in March 2021. Associated make-whole settlement costs of GBP0.9m have been included within non-recurring items.

Debt covenants are net debt to EBITDA less than 3.0 times and EBITDA to interest greater than 4.0 times. As at 30 September 2018 net debt to EBITDA was at 0.2 times and EBITDA to interest was 21.3 times.

Pensions

The Group has defined benefit pension schemes in the UK and USA. Both have been closed to new entrants since 2001 and closed to future accrual from 2010.

At 30 September 2018, the net liability arising from our defined benefit scheme obligations was GBP9.9m (31 March 2018: GBP15.3m), a fall of GBP5.4m. The reduction in the deficit was primarily due to the contributions paid in the period and a rise in the discount rate. Total scheme assets at 30 September 2018 were GBP285.7m (31 March 2018: GBP289.5m) while liabilities were GBP295.6m (31 March 2018: GBP304.8m).

Going concern

The Group's business activities, together with the factors likely to affect its future development, performance and position, are set out in the Performance, Strategy and Operations sections. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the Financial Review.

The diverse nature of the Group, combined with its financial strength, provides a solid foundation for a sustainable business. The Directors have reviewed the Group's forecasts and flexed them to incorporate a number of potential scenarios relating to changes in trading performance. The Directors believe that the Group will be able to operate within its existing debt facilities. This review also considered hedging arrangements in place. The Directors believe that the Group is well placed to manage its business risks successfully.

The Financial Statements have been prepared on a going concern basis, based on the Directors' opinion, after making reasonable enquires, that the Group has adequate resources to continue in operational existence for the foreseeable future.

Forward-looking statements

This document contains certain forward-looking statements. The forward-looking statements reflect the knowledge and information available to the Company during the preparation and up to the publication of this document. By their very nature, these statements depend upon circumstances and relate to events that may occur in the future thereby involving a degree of uncertainty. Therefore, nothing in this document should be construed as a profit forecast by the Company.

Gavin Hill

Group Finance Director

13 November 2018

Condensed Consolidated Statement of Income