Oxford Instruments PLC Half-year Report (0394T)

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
	55.00	2.59%	2,180.00	2,175.00	2,185.00	2,180.00	2,120.00	2,120.00	94,704	16:35:18

Industry Sector	Turnover	Profit	EPS - Basic	PE Ratio	Market Cap
Lab Analytical Instruments	444.7M	58.6M	1.0126	21.48	1.26B

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RNS Number : 0394T

Oxford Instruments PLC

12 November 2019

Release Date: 7am Tuesday 12 November 2019

Oxford Instruments plc

Announcement of Half Year Results for the six months to 30 September 2019

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 2019.

 
                                      Half year to    Half year       % change    % change constant 
                                       30 September    to              reported    currency 
                                       2019            30 September 
                                                       2018 
                                      GBPm            GBPm 
 Revenue(1)                           166.3           147.0           +13.1%      +9.1% 
 Adjusted* operating profit(1)        25.8            21.0            +22.9%      +12.4% 
 Adjusted* profit before 
  tax(1)                              25.4            19.8            +28.3% 
 Profit before tax(1)                 18.0            11.6            +55.2% 
 Adjusted* basic earnings 
  per share(1)                        35.5p           27.3p           +30.0% 
 Dividend per share (interim)         4.1p            3.8p            +7.9% 
 Cash generated from operations(1)    16.4            21.4            (23.4)% 
 Net cash/(debt)                      14.2            (12.5)

(1) Continuing operations

Financial Highlights:

-- Orders up 6.4% to GBP173.3 million (2018: GBP162.9 million), an increase of 2.8% at constant currency; book-to-bill ratio of 1.04

-- Order book of GBP186.8 million (31 March 2019: GBP171.6 million), up 8.9% (+6.0% at constant currency)

   --      Reported revenue increased by 13.1% to GBP166.3 million (+9.1% at constant currency)

-- Adjusted operating profit from continuing operations up 22.9% at GBP25.8 million (+12.4% at constant currency)

   --      Adjusted operating margin of 15.5% (2018: 14.3%), 14.7% at constant currency

-- Reported profit before tax up 55.2% to GBP18.0 million after mark-to-mark movement on currency derivatives and other adjusting items

-- Net cash of GBP14.2 million following cash conversion of 65% and one-off US pension termination payment

   --      Interim dividend increased by 7.9% to 4.10 pence

Operational Highlights:

   --       Good progress with Horizon, delivering continued growth and improved operating margin

-- Market intimacy enabled new growth opportunities from academic and commercial customers, which more than offset softening in silicon semiconductor, electronics and automotive production markets

-- Materials & Characterisation delivered a strong performance underpinned by increased sales across Semiconductor & Communications, Advanced Materials and Energy & Environment segments

-- Research & Discovery saw growth across Healthcare & Lifescience, Quantum Technology and Fundamental Research segments

-- Increased focus on customer support services related to our own products delivered an improved performance in Service & Healthcare

-- Improved commercial practices and gains from our operational excellence programme contributed to increased profitability in the period

-- Focus on customer applications driving success of recently launched products and the development of richer future product roadmaps and IP portfolio; total cash spend on R&D equivalent to 7.8% of sales

   --       Underlying order growth impacted by some softer end markets and the phasing of OEM orders

-- Our access to all phases of the technology cycle - from academic research through to commercial production - provided resilience against uncertain macroeconomic backdrop

Summary and Outlook:

Ian Barkshire, Chief Executive of Oxford Instruments plc, said:

The Group has delivered a strong first half performance, with revenue, profit and order growth against a backdrop of uncertain macroeconomic conditions. Our customer centric approach has delivered growth within existing markets and expansion into new adjacent markets.

The breadth of our product portfolio and the diversity of our end-markets, together with our focus on understanding customer needs and responding to market changes, underpin our ability to deliver further growth and margin improvement. We expect the second half of the financial year to benefit from the normal seasonal bias, with expectations for the current financial year remaining unchanged on a constant currency basis.

Enquiries:

   Oxford Instruments plc                                                          Tel:  01865 393200

Ian Barkshire, Chief Executive

Gavin Hill, Group Finance Director

   MHP Communications                                                           Tel:  020 3128 8100

Rachel Hirst / Alice McLaren

Number of pages: 34

*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.

NOTE: Oxford Instruments plc compiled analyst forecast range for adjusted operating profit (year to 31 March 2020): GBP51.5 million to GBP53.0 million, with an average consensus of GBP52.4 million.

Chief Executive's Review

Introduction

Oxford Instruments provides high technology products and services to the world's leading industrial companies and scientific research communities, exploiting our world-class ability to image, analyse and manipulate materials down to the atomic and molecular level. Our core purpose is to support our customers in addressing some of the world's most pressing challenges, enabling a greener economy, increased connectivity, improved health, and leaps in scientific understanding.

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. Our customer-centric approach provides valuable market insights that deliver growth within existing markets and allow us to identify opportunities in new adjacent markets. These insights are driving increased success for recently launched products and the development of a richer future product roadmap. The implementation of improved commercial practices, combined with gains from our operational excellence programme, contributed to improved profitability in the period, and provide the foundation for further growth. We remain focused on addressing a broad and diverse range of attractive end markets with long-term growth drivers. By addressing the academic, applied R&D and high technology manufacturing segments, we are engaged throughout the technology cycle and are well positioned to benefit from each wave of commercialisation and market disruption.

Overview

The Group has delivered a strong first half performance, with revenue, profit and order growth against a backdrop of uncertain macroeconomic conditions. Reported revenue increased 13.1% (9.1% at constant currency) to GBP166.3 million (2018: GBP147.0 million), with good growth across each of our sectors - Materials & Characterisation, Research & Discovery and Service & Healthcare. We had strong constant currency revenue growth from both academic and commercial customers, increasing by 8% and 10% respectively. The proportion of revenue from commercial customers remained broadly unchanged at 51%.

From an end market perspective, we saw constant currency growth across each of our target customer segments, with Healthcare & Lifescience up 6% (27% of Group revenue), Semiconductor & Communications up 8% (22% of revenue), Quantum Technology up 6% (8% of revenue), Energy & Environment up 16% (10% of revenue), Advanced Materials up 9% (23% of revenue) and Research & Fundamental Science up 14% (10% of revenue) resulting in a relatively unchanged end market distribution from 31 March 2019. While we saw further softening in specific markets such as silicon semiconductor, electronics and automotive production, our focus on customer outcomes has enabled us to find growth opportunities elsewhere.

From a geographical perspective, constant currency revenue grew in Europe, North America and Asia by 18%, 8% and 4% respectively. In Asia we continue to make good progress in China, with revenue up 14% relative to the comparative period. Asia represented 40% of Group revenue at constant currency, Europe 27%, North America 32% and Rest of World 1%. Within Asia, China represented an unchanged proportion of Group revenue at 21%.

Increased volumes and the benefit from our improved business processes and commercial practices, combined with gains from our operational excellence programme, drove reported adjusted operating profit up 22.9% to GBP25.8 million (2018: GBP21.0 million), an increase of 12.4% at constant currency. The Materials & Characterisation and Research & Discovery sectors both delivered double-digit constant currency growth. In our Service & Healthcare sector, strong profit growth from the increased demand for the services related to our own products was partially offset by reduced contribution from OI Healthcare in the period due to the phasing of system sales. Reported operating margin increased to 15.5% (2018: 14.3%) representing margin of 14.7% at constant currency.

Continuing adjusted basic earnings per share increased by 30.0% to 35.5 pence (2018: 27.3 pence).

Reported orders for the Group increased to GBP173.3 million (2018: GBP162.9 million) up 6.4% (2.8% at constant currency). We saw growth from academic and commercial customers being partially offset by reduced activity within the silicon semiconductor, electronics and automotive markets. The Materials & Characterisation and Service & Healthcare sectors increased orders on a constant currency basis, with Research & Discovery marginally down in the period due primarily to the phasing of larger customer orders within our X-ray Technology business. Continued order growth resulted in a book-to-bill ratio for the period of 1.04.

The order book, representing orders for future delivery, as at 30 September 2019 increased 8.9% on a reported basis (6.0% at constant currency) since the year end, driven predominately by growth in Materials & Characterisation and the servicing of our own products.

Good cash collection in the period resulted in an improved Group net cash position of GBP14.2 million, up from GBP6.7 million at the year end.

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 increase our commercial focus and build capabilities across the Group. We continue to see opportunities for further revenue and margin improvement delivered through the Horizon strategy. With good progress across our Market Intimacy, Innovation and Product Development, and Operational Excellence programmes, we have now started the transformation of our Customer Service approach, representing the fourth point of the Oxford Instruments operating model. As part of this programme we will be reviewing the way in which we provide support to our customers as well as expanding the breadth of service offerings and capabilities, including services to support performance enhancements and yield management packages.

Sector performance

Turning to the performance of our individual sectors:

Materials & Characterisation provides products and solutions that enable the fabrication and characterisation of materials down to the atomic scale, predominantly supporting customers across applied R&D as well as the production and manufacture of high technology products. The sector delivered a strong and enhanced first half performance underpinned by growth from both commercial and academic customers across the Semiconductor & Communications, Advanced Materials, and Energy & Environment customer segments. Revenue of GBP69.8 million (2018: GBP60.1 million) represented an increase of 12.3% at constant currency, with adjusted operating profit increasing to GBP12.2 million (2018: GBP9.7 million), growth of 16.5% at constant currency. Orders grew to GBP74.5 million (2018: GBP69.5 million), up 3.9% at constant currency, contributing to positive order book growth for future deliveries. Reported operational margin for the sector increased by 140 basis points (+60 basis points at constant currency) to 17.5% (2018: 16.1%).

Research & Discovery provides advanced solutions that create unique environments and enable imaging and analytical measurements down to the molecular and atomic level, used predominantly in scientific research and applied R&D. Revenue increased to GBP61.2 million, up 8.7% at constant currency (2018: GBP54.3 million) supported by growth from academic and commercial customers across the Healthcare & Lifescience, Quantum Technology, and Research & Fundamental Science segments. Adjusted operating profit increased to GBP6.4 million (2018: GBP4.8 million), up 16.7% at constant currency, supported by improved operational efficiencies within the sector and manufacturing yield improvements of our scientific X-ray tubes. Orders of GBP61.9 million (2018: GBP60.0 million) were broadly flat at constant currency, partially held back in the period by the phasing of large OEM customer orders in our X-ray Technology business. Operational margin for the sector grew 170 basis points (+70 basis points at constant currency) to 10.5% (2018: 8.8%) on a reported basis.

Service & Healthcare provides customer service and support for our own products and the service, sale and rental of third-party healthcare imaging systems. Revenue of GBP35.3 million (2018: GBP32.6 million) grew by 4.0% at constant currency, driven predominantly by increased sales of services and support related to our own products. Adjusted operating profit increased to GBP7.2 million (2018: GBP6.5 million), up 3.1% at constant currency. Strong growth in orders related to our own products were partially offset by the timing of system orders in our US OI Healthcare business resulting in reported orders of GBP36.9 million (2018: GBP33.4 million), an increase of 6.3% at constant currency. Operational margin for the sector grew 50 basis points (-10 basis points at constant currency) to 20.4% (2018: 19.9%) on a reported basis.

R&D

The development and delivery of highly innovative and market-leading technology that delivers ongoing, sustainable value for our customers remains a central theme within our Horizon strategy. Our enhanced customer-centric, market-focused approach is identifying increasingly attractive development opportunities, enriching our IP portfolio and driving our investment decisions across the Group. Through Horizon we are exploiting our technical capabilities and synergiesboth within the Group and with external partners to deliver key products faster. R&D spend in the period rose to GBP13.0 million (2018: GBP12.0 million), representing 7.8% of sales, reflecting both the increased opportunities available and our commitment to delivering sustainable growth.

People

Our employees are fundamental to our business progress and I remain delighted by their continued engagement with our Horizon strategy. We continue to invest in the development of our teams and the processes and tools to help them be successful. I would like to thank all our employees for their continued commitment to offering our customers a world-class experience and their part in helping to address some of the world's most pressing challenges.

Dividends

The Board has declared an interim dividend increase of 7.9% to 4.1 pence (2018: 3.8 pence), reflecting improvement in underlying earnings per share.

Current trading and outlook

The Group has delivered a strong first half performance, with revenue, profit and order growth against a backdrop of uncertain macroeconomic conditions. Our customer-centric approach has delivered growth within existing markets and expansion into new adjacent markets.

The breadth of our product portfolio and the diversity of our end markets, together with our focus on understanding customer needs and responding to market changes, underpin our ability to deliver further growth and margin improvement. We expect the second half of the financial year to benefit from the normal seasonal bias, with expectations for the current financial year remaining unchanged on a constant currency basis.

Ian Barkshire

Chief Executive

12 November 2019

Operations Review

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

Materials & Characterisation

 
                                 2019    2018    Growth   Constant 
                                  GBPm    GBPm             Currency 
                                                           Growth(1) 
------------------------------  ------  ------  -------  ----------- 
 Revenue                         69.8    60.1    +16.1%   +12.3% 
------------------------------  ------  ------  -------  ----------- 
 Adjusted(2) operating profit    12.2    9.7     +25.8%   +16.5% 
------------------------------  ------  ------  -------  ----------- 
 Adjusted(2) operating margin    17.5%   16.1% 
------------------------------  ------  ------ 
 Profit before tax after 
  adjusting items                11.0    8.6 
------------------------------  ------  ------

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

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

The Materials & Characterisation sector comprises Asylum Research, NanoAnalysis 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 process systems. Our portfolio of imaging systems include our range of market-leading X-ray and electron analysis systems used in conjunction with electron and ion microscopes as well as our performance-leading atomic force microscopes. The sector has a strong focus on supporting and accelerating our customers' applied R&D, enabling the development of new devices and next generation higher performance materials as well as enhanced productivity in advanced manufacturing, quality assurance ("QA") and quality control ("QC"). Our products provide market-leading performance, ease of use and data analytics.

Materials & Characterisation delivered strong growth in both revenue and operating profit with good order growth. A core strength of the sector is the market diversification and reach across academic and corporate R&D, and commercial production customers. Improved performance in the period was supported by the success of new and recently launched products, and our increased focus on tailoring our product offerings to specific end-customer applications, raising the product value and expanding our addressable markets. This led to strong revenue growth from both academic and commercial customers in the period, with the latter accounting for 55% of revenue. Increased volumes, application-tailored products and operational efficiencies all contributed to reported adjusted operating margin increasing 140 basis points to 17.5% (2018: 16.1%).

Looking at end markets, increased revenue was driven by growth in each of the three main application segments of Advanced Materials, Semiconductor & Communications, and Energy & Environment. Advanced Materials represented 38% of sales in the sector, Semiconductor & Communications 40%, with Energy & Environment 15%, and Healthcare & Lifescience 6%. Geographically, we saw strong growth in Europe and good growth in North America and Asia.

We had double-digit revenue growth in Advanced Materials due to positive end markets, despite the ongoing weakness in orders from automotive manufacturing customers. This growth was driven by the continued demand for lighter, stronger and higher functioning materials, combined with our leading market performance. Our measurement solutions are used to aid the development of next generation products and components as well as in the quality control and quality assurance of current manufactured products. Applications include the development of safer cars and planes with improved fuel consumption, and advanced new materials for wind turbine blades and medical implants. We continue to see growth in more routine applications including the optimisation of razor blade coatings, the quality control of ceramics used in mobile phone applications and increasing the strength of thinner aluminium drink cans to reduce their raw material consumption. These applications have led to strong growth across our range of Symmetry(TM) material structural analysers, X-ray detectors and atomic force microscopes ("AFM").

We continue to develop new products and tailored applications to target specific end-customer applications and grow our addressable market. In the period we launched Jupiter(TM), our first large sample AFM which can accept objects the size of a semiconductor wafer or tablet computer. This builds on our market-leading AFM product performance and reputation in the research market. Jupiter(TM) provides high resolution, faster results and simpler user experience to multi-user sites and industrial manufacturers, significantly expanding our addressable customer base. This has already driven significant growth to customers needing to characterise thin films and coatings. We have seen continued growth in sales into additive manufacturing through the launch of AZtecAM(TM), a dedicated analysis package for this market segment.

Semiconductor & Communications delivered strong revenue growth and remains a significant market segment. Here we provide imaging and analysis products, as well as etch and deposition process solutions used across a range of advanced compound semiconductor and silicon device applications. Whilst we have seen continued weakness and associated reduced sales of our imaging and analysis solutions into silicon semiconductor and electronics customers, we have had continued strong growth and demand across our portfolio of etch and deposition solutions underpinned by our leading performance and expertise in compound semiconductors.

The compound semiconductor market remains buoyant with strong, long-term market drivers, due to the ability of compound semiconductor devices to dramatically transform the performance of power electronics, connectivity and communications. In the period we have seen growth in a number of key areas; our gallium arsenide and indium phosphide solutions support the increased speed and infrastructure capacity required to deliver the desired transformation and connectivity, for example telecommunication data centres and the rise in the data economy. Silicon carbide and gallium nitride solutions are being used to develop more efficient and faster power devices, enabling greater electric vehicle range and faster charging times. Demand for increased communications is driving growth across sensors and optoelectronic devices such as 3D sensors for facial recognition and heads up displays.

Our growth has been further supported by our ability to tailor our product offerings to specifically meet the needs of academic, corporate R&D and production customers. For example, we are now offering dedicated production-ready systems with key enabling processes, market-leading wafer throughput and reduced time to service.

We have seen growth in the Energy & Environment segment driven by the increased activities related to battery research and quality control, and in the development of improved efficiency and performance photovoltaic materials. This has included increased sales of our AFM products, and our advanced high resolution ultra-sensitive Extreme(TM) X-ray analyser remains the market leader in imaging the internal chemistry and active interfaces of batteries at the nanoscale. In the period we launched AZtecMineral(TM), a tailored solution building on the benefits of our existing products to optimise mining and ore processing. In combination with the high sensitivity provided by Extreme(TM), this is supporting the more efficient mining and recovery of lithium-based materials.

Research & Discovery

 
                            2019    2018    Growth   Constant 
                             GBPm    GBPm             Currency 
                                                      Growth(1) 
-------------------------  ------  ------  -------  ----------- 
 Revenue                    61.2    54.3    +12.7%   +8.7% 
-------------------------  ------  ------  -------  ----------- 
 Adjusted(2) operating 
  profit                    6.4     4.8     +33.3%   +16.7% 
-------------------------  ------  ------  -------  ----------- 
 Adjusted(2) operating 
  margin                    10.5%   8.8% 
-------------------------  ------  ------ 
 Profit before tax after 
  adjusting items           3.2     1.9 
-------------------------  ------  ------

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

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

The Research & Discovery sector includes Andor Technology, Magnetic Resonance, NanoScience, 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 build on our relationships with customers working on breakthrough applications in research to gain insights and support future commercial applications. We have strong brand recognition and leading product performance in our chosen market segments. Our increased applications focus has supported strong growth to commercial customers in addition to good growth from academic and Government-funded research. Revenue from industrial and commercial customers increased to 35%, with 65% of sales from the academic and Government-funded research community.

Strong revenue and double-digit profit growth were driven from across our product portfolio with continued growth from the main target application segments of Healthcare & Lifescience (representing 41% of revenue), Quantum Technology (19% of revenue), and Research & Fundamental Science (24% of revenue). Revenue growth was supported by an increased demand and improved operational performance in NanoScience, with profit growth supported by manufacturing yield improvements of our scientific X-ray tubes and an improved contribution from the Scienta Omicron joint venture. Order growth was offset by the phasing of framework OEM orders for our X-ray Technology business and of higher value rock core analysis systems.

Within Healthcare & Lifescience, demand continued to be driven by researchers seeking to uncover more about the pathology of disease states, helping to reveal more accurate cellular details at better resolution and higher speeds. This has driven increased revenue across our portfolio of microscopy systems, analysis and visualisation software and scientific research cameras. A significant proportion of sales are being used to understand the origins and progression of cancers and neurological disorders, such as Alzheimer's and Parkinson's, and to contribute to the development of new treatment approaches. The attractive advanced microscopy market has led to increased competitor activity which has moderated order growth in the period. We continue to focus on adding value to our products, building on our market-leading capabilities. For instance, the latest release of Imaris(TM) utilises sophisticated management of large data sets to enable the practical and efficient analysis and interpretation over multiple length scales from the big picture down to the molecular detail. Improved rendering and machine learning algorithms lead to automation and statistically meaningful analysis of biological structures and systems.

Our high sensitivity cameras, which offer enhanced performance at low light levels, are being used to measure and observe the interaction with individual biomolecules in real time. This continues to drive growth with our strategic OEM partners for a range of applications including gene sequencing and clinical screening solutions, which are used for drug feasibility studies and in the development of personalised medicines.

Quantum Technology continues to attract funding from both Governments and private industry, with increased long-term investment being announced within Europe, China and Japan, targeting quantum computing, cryptography and sensors. We continue to see increased demand for our cryogenic platforms, which are used for both fundamental research into quantum effects and in the development towards practical quantum computers. We have had increased sales of our Teslatron(TM) system, which provides low temperatures and high magnetic fields for the development and characterisation of quantum materials and sensors. We are also seeing increased demand for our high sensitivity and high-speed cameras in the growing area of quantum optics for applications across fundamental science through to secure communications and quantum computing.

Within Research & Fundamental Science, we continued to see growth in sales of our high field magnets and research instruments. In addition, astronomy remains an attractive market for us, with demand for higher performance cameras in order to meet the increasing requirements of modern astronomy. Through the successful collaboration with end customers within the astronomy market, we have launched Balor(TM), our new large area camera, whose unique features, including large field of view, enable it to capture a much larger area of the sky with improved resolution and stability. This enables the practical tracking of significantly smaller space junk, easier tracking of near-earth asteroids and enhanced solar studies, which are important due to the dramatic impact these can have on satellite and earth-based communications.

Service & Healthcare Sector

 
                            2019    2018    Growth   Constant 
                             GBPm    GBPm             Currency 
                                                      Growth(1) 
-------------------------  ------  ------  -------  ----------- 
 Revenue                    35.3    32.6    +8.3%    +4.0% 
-------------------------  ------  ------  -------  ----------- 
 Adjusted(2) operating 
  profit                    7.2     6.5     +10.8%   +3.1% 
-------------------------  ------  ------  -------  ----------- 
 Adjusted(2) operating 
  margin                    20.4%   19.9% 
-------------------------  ------  ------ 
 Profit before tax after 
  adjusting items           6.8     6.1 
-------------------------  ------  ------

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

(2) Details of adjusting items can be found in Note 2 to 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.

Good order, revenue and profit growth at constant currency in the period through the increased demand for services and support related to our own products was partially offset by the timing of system orders within our US OI Healthcare business.

Revenue from our OI Healthcare businesses was broadly flat with adjusted operating profit slightly down on last year owing to the phasing of system orders. Utilisation of our mobile MRI fleet remains strong and we continue our focus on building a healthy service orderbook.

The Service & Healthcare sector is now a focal point within the evolution of our Horizon strategy. We have initiated the transformation of our customer service approach by reviewing the way in which we provide support to our customers as well as expanding the breadth of service product offerings and capabilities. This includes the tailoring of service products to end market applications and customer segments. For example, for industrial customers, we are introducing services to support performance enhancements and yield management packages. Our launch of Plasmaview(TM) process control software supports this transition for our semiconductor customers, allowing us to provide a broader range of diagnostic and process optimisation services both online and remotely. Whilst still at the early stages, we have already built a pipeline of opportunities and have seen an uplift in service-related revenue and profitability.

Finance Review

Reported orders increased by 6.4% to GBP173.3 million (2018: GBP162.9 million), an increase of 2.8% at constant currency. At the end of the period the Group's order book for future deliveries stood at GBP186.8 million (31 March 2019: GBP171.6 million). The order book grew 8.9% on a reported basis and 6.0% at constant currency.

Reported revenue increased by 13.1% to GBP166.3 million (2018: GBP147.0 million). Revenue, excluding currency effects, increased by 9.1%, with the movement in average currency exchange rates against the comparative period increasing reported revenue by GBP5.9 million.

Adjusted operating profit increased by 22.9% to GBP25.8 million (2018: GBP21.0 million) with the movement in exchange rates against the comparative period increasing adjusted operating profit by GBP2.2 million. Adjusted operating profit, excluding currency effects, increased by 12.4%. Adjusted operating margin increased by 120 basis points to 15.5% (2018: 14.3%), supported by a currency tailwind. Excluding currency effects, adjusted operating margin increased by 40 basis points to 14.7%.

Adjusted profit before tax grew by 28.3% to GBP25.4 million (2018: GBP19.8 million), representing a margin of 15.3% (2018: 13.5%).

Adjusting items consist of amortisation of acquired intangibles of GBP4.8 million and a charge of GBP2.6 million relating to the movement in the mark-to-market valuation of uncrystallised currency hedges for future years.

After adjusting items, the Group recorded an operating profit of GBP18.4 million (2018: GBP13.7 million) and profit before tax of GBP18.0 million (2018: GBP11.6 million).

Adjusted basic earnings per share grew by 30.0% to 35.5 pence (2018: 27.3 pence). Basic earnings per share grew by 59.0% to 24.8 pence (2018: 15.6 pence).

Cash generated from operations of GBP16.4 million (2018: GBP21.4 million), represents 65% (2018: 91%) cash conversion. Net cash increased from GBP6.7 million on 31 March 2019 to GBP14.2 million.

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

Under the rules for audit tendering and rotation implemented in 2016, the Group is required to replace our current auditors, KPMG LLP, no later than 31 March 2021, effective for the 31 March 2022 year end. The Audit Committee has decided to undertake a comprehensive and thorough competitive tender process for the audit in the first quarter of 2020. The Committee expects to invite at least one challenger firm to participate in this process. Depending on the outcome of the tender, we expect to make an appointment prior to our 31 March 2020 year end, effective for the 31 March 2021 year end. This appointment will be subject to Shareholder approval at the next AGM to be held in September 2020.

Income Statement

The Group's Income Statement is summarised below.

 
                                                     Half year    Half year    Change 
                                                      to 30        to 30 
                                                      September    September 
                                                      2019         2018 
                                                      GBPm         GBPm 
--------------------------------------------------  -----------  -----------  ------- 
 Revenue                                             166.3        147.0        13.1% 
 Gross profit                                        82.2         73.9         11.2% 
 Administrative expenses                             (55.3)       (52.0) 
 Share of profit of associate                        -            (0.6) 
 Foreign exchange                                    (1.1)        (0.3) 
--------------------------------------------------  -----------  -----------  ------- 
 Adjusted operating profit                           25.8         21.0         22.9% 
 Net finance costs                                   (0.4)        (1.2) 
--------------------------------------------------  -----------  -----------  ------- 
 Adjusted profit before tax                          25.4         19.8         28.3% 
 Amortisation of acquired intangibles                (4.8)        (4.7) 
 Non-recurring items                                 -            (0.6) 
 Mark-to-market of currency hedges                   (2.6)        (2.9) 
--------------------------------------------------  -----------  -----------  ------- 
 Profit before tax                                   18.0         11.6         55.2% 
 Tax from continuing operations                      (3.8)        (2.7) 
--------------------------------------------------  -----------  -----------  ------- 
 Profit for the period from continuing operations    14.2         8.9 
--------------------------------------------------  -----------  -----------  ------- 
 Adjusted effective tax rate(1)                      20.1%        21.2% 
 
 Continuing adjusted earnings per share 
  - basic                                            35.5p        27.3p        30.0% 
 Continuing earnings per share - basic               24.8p        15.6p        59.0% 
 
 Continuing adjusted earnings per share 
  - diluted                                          35.1p        27.0p        30.0% 
 Continuing earnings per share - diluted             24.6p        15.4p        59.7% 
 
 Dividend per share                                  4.10p        3.80p        7.9% 
--------------------------------------------------  -----------  -----------  -------

1. The adjusted effective tax rate is calculated excluding amortisation of acquired intangibles, the mark-to-market of financial derivatives, and other adjusting items.

Orders and revenue

Total reported orders grew by 6.4% (2.8% at constant currency) to GBP173.3 million. Orders, at constant currency, increased by 3.9% for Materials & Characterisation, declined by 0.5% for Research & Discovery and increased by 6.3% for Service & Healthcare. The decline in Research & Discovery was principally due to the phasing of OEM orders within X-Ray Technology.

Reported revenue of GBP166.3 million (2018: GBP147.0 million) increased by 13.1% (9.1% at constant currency). Reported revenue increased by 16.1% for Materials & Characterisation, 12.7% for Research & Discovery and 8.3% for Service & Healthcare.

The book-to-bill ratio (orders received to goods and services billed in the period) for the half year was 1.04.

Revenue, at constant currency, increased by 12.3% for Materials & Characterisation, with a particularly strong performance from all constituent businesses. Constant currency growth was 8.7% in Research & Discovery, with good progress from Andor Technology and an improvement in NanoScience and X-Ray Technology. Service & Healthcare constant currency revenue grew by 4.0%, with good growth from the service of our own products.

On a geographical basis, at constant currency, revenue grew by 18.4% in Europe, 7.8% in North America, 4.3% in Asia and 15.0% in Rest of World.

The total reported order book grew by 8.9% (6.0% at constant currency) to GBP186.8 million compared to 31 March 2019. The order book, at constant currency, increased by 10.4% for Materials & Characterisation, 0.7% for Research & Discovery and 13.6% in Service & Healthcare. All constituent businesses grew their order book over the half year, with the exception of X-Ray Technology as previously explained.

 
                                      Materials             Research       Service         Total 
   GBPm                                & Characterisation    & Discovery    & Healthcare 
-----------------------------------  --------------------  -------------  --------------  ------ 
 Revenue: Half year 2018/19           60.1                  54.3           32.6            147.0 
-----------------------------------  --------------------  -------------  --------------  ------ 
 Underlying movement                  7.4                   4.7            1.3             13.4 
 Foreign exchange                     2.3                   2.2            1.4             5.9 
-----------------------------------  --------------------  -------------  --------------  ------ 
 Revenue: Half year 2019/20           69.8                  61.2           35.3            166.3 
-----------------------------------  --------------------  -------------  --------------  ------ 
 
 Revenue growth: reported             16.1%                 12.7%          8.3%            13.1% 
 Revenue growth: constant currency    12.3%                 8.7%           4.0%            9.1% 
-----------------------------------  --------------------  -------------  --------------  ------

Reclassification of costs

During the year we have reviewed the classification of costs within the Income Statement, with a focus on whether items are reported within cost of sales or operating expenses. As a result, certain reclassifications were made, the most significant being that outward freight costs and sales commissions paid to employees and external agents are reported within cost of sales rather than within selling and marketing expenses. This is considered to be a better presentation since gross margin is now a clearer indicator of commercial performance and overheads a clearer indicator of cost control.

Gross profit

Gross profit increased by 11.2% to GBP82.2 million (2018: GBP73.9 million), representing a gross profit margin of 49.4%.

Adjusted operating profit

Adjusted operating profit increased by 22.9% to GBP25.8 million (2018: GBP21.0 million), representing an adjusted operating profit margin of 15.5%, an increase of 120 basis points against last year. At constant currency, the adjusted operating profit margin was 14.7%, an increase of 40 basis points.

Materials & Characterisation's margin increased by 140 basis points to 17.5% (2018: 16.1%). At constant currency, the margin was 16.7%, an increase of 60 basis points.

Research & Discovery's adjusted operating margin increased to 10.5% (2018: 8.8%), an increase of 170 basis points. At constant currency, the margin was 9.5%, an increase of 70 basis points.

Service & Healthcare's margin increased by 50 basis points to 20.4% (2018: 19.9%). At constant currency, the margin was 19.8%, a reduction of 10 basis points.

Our share of the Scienta Omicron joint venture showed an adjusted result after tax of zero for the period, against an adjusted loss of GBP0.6 million for the comparative period.

 
                               Materials           Research     Service         Total 
   GBPm                         &                   &            & Healthcare 
                                Characterisation    Discovery 
----------------------------  ------------------  -----------  --------------  ------ 
 Adjusted operating profit: 
  Half year 2018/19            9.7                 4.8          6.5             21.0 
----------------------------  ------------------  -----------  --------------  ------ 
 Underlying movement           1.6                 0.8          0.2             2.6 
 Foreign exchange              0.9                 0.8          0.5             2.2 
----------------------------  ------------------  -----------  --------------  ------ 
 Adjusted operating profit: 
  Half year 2019/20            12.2                6.4          7.2             25.8 
----------------------------  ------------------  -----------  --------------  ------ 
 
 Margin: 2018/19               16.1%               8.8%         19.9%           14.3% 
 Margin: 2019/20               17.5%               10.5%        20.4%           15.5% 
----------------------------  ------------------  -----------  --------------  ------

Adjusting items

Amortisation of acquired intangibles of GBP4.8 million relates to intangible assets recognised on acquisitions, being the value of technology, customer relationships and brands.

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 approximately 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 GBP2.6 million (2018: GBP2.9 million loss). This reflects the movement on currency derivatives that are hedging future transactional currency exposures for the Group. The half-year position reflects an uncrystallised loss arising from a fall in the value of Sterling at the balance sheet date against a blended rate achieved on the US Dollar, Euro and Japanese Yen forward contracts that will mature over the next 18 months.

Net finance costs

The Group's adjusted net finance costs fell by GBP0.8 million to GBP0.4 million (2018: GBP1.2 million) with net finance charges falling by GBP0.6 million to GBP0.4 million, supported by a refund of overpaid interest for previous years of GBP0.2 million, and pension financing charges falling by GBP0.2 million to zero, reflecting the movement from a net pension deficit as at 31 March 2019 to a small net pension asset as at 30 September 2019.

Profit before tax

Adjusted profit before tax increased by 28.3% to GBP25.4 million (2018: GBP19.8 million). The adjusted profit before tax margin rose to 15.3% (2018: 13.5%).

Profit before tax of GBP18.0 million (2018: GBP11.6 million) is after the mark-to-market movement on derivative financial instruments and amortisation of acquired intangibles.

Tax

The adjusted tax charge of GBP5.1 million (2018: GBP4.2 million) represents an effective tax rate of 20.1% (2018: 21.2%). The reduction reflects a change in the geographical mix of profits.

Earnings per share

Adjusted basic earnings per share increased by 30.0% to 35.5 pence (2018: 27.3 pence); adjusted diluted earnings per share grew by 30.0% to 35.1 pence (2018: 27.0 pence). Basic earnings per share increased by 59.0% to 24.8 pence (2018: 15.6 pence); diluted earnings per share grew by 59.7% to 24.6 pence (2018: 15.4 pence).

The number of undiluted weighted average shares remained constant at 57.2 million.

Foreign exchange

The Group faces transactional and translational currency exposure, most notably against the US Dollar, Euro and Japanese Yen. For the year, approximately 13% of Group revenue was denominated in Sterling, 57% in US Dollars, 19% in Euros, 10% in Japanese Yen and 1% in other currencies. Our adjusted operating profit currency exposure for the half year in Sterling equivalent is short Sterling GBP35.2 million, long US Dollar GBP38.1 million, long Euro GBP19.3 million, long Japanese Yen GBP9.4 million, short Chinese Renminbi GBP4.5 million and short other currencies GBP1.3 million. 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 2019 the Group had currency hedges in place extending up to eighteen months forward.

Currency effects (including the impact of transactional currency hedging) have increased half year reported adjusted operating profit by GBP2.2 million, when compared to blended hedged exchange rates for the comparative period. We estimate that the full-year currency effect, based on currency rates prevailing at the end of October 2019, will be approximately a benefit of GBP3.0 million to adjusted operating profit.

For the full year 2020/21, our assessment of the currency impact is, based on hedges currently in place and spot rates prevailing as at 31 October 2019, a benefit to adjusted operating profit of GBP1.0 million. As an example sensitivity, if we assume a 5% appreciation of Sterling against our major trading currencies, then the impact is a reduction in adjusted operating profit of GBP2.7 million.

The actual currency impact will be dependent on currency rates at the time of shipments and customer acceptances, as well as the currency mix, and is thus subject to a high degree of uncertainty.

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 7.9% to 4.10 pence (2018: 3.80 pence). The interim dividend will be paid on 14 April 2020 to Shareholders on the register as at 6 March 2020.

Cash flow

The Group's cash flow is summarised below.

 
                                                         Half year    Half year 
                                                          to 30        to 30 
                                                          September    September 
                                                          2019         2018 
                                                         GBPm         GBPm 
------------------------------------------------------  -----------  ----------- 
 Adjusted operating profit                               25.8         21.0 
 Depreciation and amortisation                           5.2          5.4 
------------------------------------------------------  -----------  ----------- 
 Adjusted EBITDA                                         31.0         26.4 
 Working capital movement                                (10.4)       (1.2) 
 Purchase of rental assets held for subsequent 
  sale                                                   (0.1)        (0.6) 
 Equity settled share schemes                            2.0          0.4 
 Share of loss from associate                            -            0.6 
 Business reorganisation items                           -            (0.7) 
 Pension scheme payments above charge to operating 
  profit                                                 (6.1)        (3.5) 
------------------------------------------------------  -----------  ----------- 
 Cash generated from operations                          16.4         21.4 
 Interest                                                (1.1)        (2.3) 
 Tax                                                     (3.5)        (4.7) 
 Capitalised development expenditure                     (2.2)        (1.5) 
 Expenditure on tangible and intangible assets           (2.0)        (3.4) 
 Decrease in long-term receivables                       0.5          0.6 
 Dividends paid                                          (2.2)        (2.1) 
 Proceeds from issue of share capital and exercise       0.2          - 
  of share options 
 Payments made in respect of lease liabilities           (1.6)        (1.6) 
 Decrease in borrowings                                  -            (8.6) 
------------------------------------------------------  -----------  ----------- 
 Net increase/(decrease) in cash and cash equivalents 
  from continuing operations                             4.5          (2.2) 
------------------------------------------------------  -----------  -----------

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

Cash generated from operations

Cash generated from operations of GBP16.4 million (2018: GBP21.4 million), represents 65% (2018: 91%) cash conversion. Cash conversion is defined as cash generated from operations before pension scheme payments, less capitalised development expenditure, capital expenditure and payments made in respect of finance leases/adjusted operating profit. Payments made in respect of finance leases are now included within our definition of cash conversion to retain a like-for-like comparison following the introduction of IFRS 16.

Working capital rose by GBP10.4 million, reflecting an increase in inventories of GBP3.8 million, a decrease in receivables of GBP3.6 million and a reduction in payables and customer deposits of GBP10.2 million. The increase in inventories is primarily to support shipments in the second half of the year. Receivables fell by less than expected owing to a higher number of shipments occurring closer to the half year end compared to the previous year, with the effect that issued invoices are not due by the half year end and are thus not payable. The reduction in payables and customer deposits is primarily due to a reduction in deferred revenue due to a change in timing of invoicing of service contracts, a fall in customer deposits due to revenue recognised on acceptance close to the half year end, and the timing of payments made on the operational excellence consultancy support. We expect the cash conversion ratio to improve for the full year.

The increase in the cost of equity settled share schemes is due to a catch-up charge relating to a correction in the valuation of management share option incentive schemes.

Pension

Pension costs included a payment of $2.9 million (GBP2.3 million) to the US pension scheme as part settlement of termination liabilities. We expect a second and final payment of approximately $1.6 million will be made prior to the year end.

Interest

Net interest paid was GBP1.1 million (2018: GBP2.3 million). Cash interest is higher than the charge in the Income Statement due to timing differences on the payment of interest on private placement loan notes.

Tax

Tax paid was GBP3.5 million (2018: GBP4.7 million); the current period includes a cash settlement to HMRC of GBP4.0 million in April 2019, partially offset by a tax refund in the US following the closure of prior period submissions.

Investment in Research and Development ("R&D")

Total cash spend on R&D in the half year was GBP13.0 million, equivalent to 7.8% of sales (2018: GBP12.0 million, 8.2% of sales). During the half year we have invested in additional systems to support projects and sample production for new processes within our semiconductor solutions business. Development costs for a new analyser for electron microscopy have been capitalised in the first half of the year. A reconciliation between the amounts charged to the Income Statement and the cash spent is given below:

 
                                                     Half year    Half year 
                                                      to 30        to 30 
                                                      September    September 
                                                      2019         2018 
                                                     GBPm         GBPm 
--------------------------------------------------  -----------  ----------- 
 R&D expense charged to the Income Statement         11.9         12.0 
 Amounts capitalised as fixed assets                 0.1          - 
 Amortisation of R&D costs previously capitalised 
  as intangibles                                     (1.2)        (1.5) 
 Amounts capitalised as intangible assets            2.2          1.5 
--------------------------------------------------  -----------  ----------- 
 Total cash spent on R&D during the year             13.0         12.0 
--------------------------------------------------  -----------  -----------

Net cash and funding

Net cash

Cash generation in the half year increased the Group's net cash from GBP6.7 million at the start of the year to GBP14.2 million on 30 September 2019. Cash generated from operations was GBP16.4 million. The Group invested GBP2.2 million in capitalised development costs and GBP2.0 million in tangible and intangible assets.

 
 Movement in net cash                                     GBPm 
-------------------------------------------------------  ------ 
 Net cash as at 31 March 2019                             6.7 
-------------------------------------------------------  ------ 
 Cash generated from operations                           16.4 
 Interest                                                 (1.1) 
 Tax                                                      (3.5) 
 Capitalised development expenditure                      (2.2) 
 Capital expenditure on tangible and intangible assets    (2.0) 
 Dividends paid                                           (2.2) 
 Foreign exchange and other items                         2.1 
-------------------------------------------------------  ------ 
 Net cash as at 30 September 2019                         14.2 
-------------------------------------------------------  ------

Funding

On 2 July 2018 the Group entered into an 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 EUR50.0 million and a US Dollar denominated multi-currency facility of $80.0 million.

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 2019, the business had net cash.

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 2019, we recorded a net asset of GBP2.6 million from defined benefit scheme obligations (31 March 2019: net liability of GBP6.5 million). The movement of GBP9.1 million from a net liability to net asset position was primarily due to the contributions paid in the period. Total scheme assets at 30 September 2019 were GBP353.1 million (31 March 2019: GBP311.4 million) while liabilities were GBP350.5 million (31 March 2019: GBP317.9 million).

We are progressing with the process to terminate the US defined benefit pension scheme. This will extinguish all liabilities of the scheme. We expect to complete the project by the end of the financial year.

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 of the 2019 Annual Report. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the Finance 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 enquiries, 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

12 November 2019

Responsibility Statement of the Directors in respect of the Half-year Financial Statements

We confirm that to the best of our knowledge:

-- the condensed set of Financial Statements has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU; and

-- the interim management report includes a fair review of the information required by:

(a) DTR 4.2.7R of the Disclosure Guidance and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of Financial Statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

(b) DTR 4.2.8R of the Disclosure Guidance and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last Annual Report that could do so.

 
Ian Barkshire    Gavin Hill 
Chief Executive  Group Finance Director

12 November 2019

Condensed Consolidated Income Statement