Oxford Instruments Regulatory News (OXIG)

Release Date: 7am Tuesday 12 June 2018

Oxford Instruments plc

Announcement of Preliminary Results for the year to 31 March 2018

Oxford Instruments plc, a leading provider of high technology products and systems for industry and research, today announces its Preliminary Results for the year to 31 March 2018.

Financial Highlights:

· Reported orders up 5.0% to £313.0 million (2017: £298.0 million), an increase of 5.8% at constant currency.

· Reported order book of £134.0 million as at 31 March 2018, up 5.0% (10.4% at constant currency). Excluding US Healthcare, order book up 18.4% on a constant currency basis.

· Reported revenue in line with previous year at constant currency.

· Adjusted operating profit from continuing operations up 22.4% to £46.5 million (2017: £38.0 million), with a currency benefit of £10.6 million - margin increase of 300 basis points to 15.7%.

· Adjusted profit before tax from continuing operations up 34.3% to £42.3 million (2017: £31.5 million), an increase of 0.6% at constant currency.

· Profit before tax from continuing operations of £34.2 million (2017: loss of £26.2 million).

· Net debt down significantly to £19.7 million following good operating cash flow and disposals. Profit after tax from sale of Industrial Analysis of £45.9 million and net proceeds of £71.2 million.

· Full year dividend increased by 2.3% to 13.3 pence.

Operational Highlights:

· Good progress in the early implementation of our Horizon Strategy, in particular:

- Strong growth in orders and order book demonstrate early success from our market application focus;

- Increased management and leadership capability across the Group;

- Transitioned to a more commercially focused, market-driven Group to address a broad range of industrial and academic markets; and

- Continued investment in R&D with increased focus on customer solutions.

· Strong financial performance across Materials & Characterisation driven by leading product portfolio and customer applications focus in growing markets.

· Good second half performance in Research & Discovery was offset by a weaker first half. Constant currency order book up 15.3%.

· Profit and margin growth in Service & Healthcare driven by services relating to our own products. Reduction in revenue from the anticipated decline in the sale of refurbished imaging systems.

Outlook:

· Our chosen end markets remain attractive, supported by commercial and government investment. Our growing order book, customer application focus and drive for operational efficiencies provide confidence for the year ahead.

· We expect to see an improvement in performance on a reported basis2 after allowing for the impact of an anticipated currency headwind, based on current exchange rates.

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

"We have made good progress in the year with the early implementation of the Horizon strategy, which was introduced in May 2017.

We have positioned the Group to become a leading provider of high technology products and services to the world's leading industrial companies and scientific research communities to image, analyse and manipulate materials down to the atomic and molecular level. Our chosen end markets remain robust and, combined with our customer applications focus and improved core capabilities, provide strong long-term drivers for future growth and margin improvement."

1Continuing operations

2Before the adoption of IFRS 15 'Revenue for Contracts with Customers' and IFRS 16 'Leases'

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: 43

*NOTE: Throughout this preliminary announcement we make reference to adjusted numbers. A full definition of adjusted numbers can be found in note 1. 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.

Chairman's Statement

It has been a positive year with the Group delivering a performance in line with our expectations and making good progress with the Horizon strategy. Management has continued to steer our business towards a greater focus on market segments and applications, designed to help our customers advance their businesses through enhanced R&D and productivity improvement. As a result, we are already starting to see improved trading in some of our businesses and we expect progress to continue as the Horizon strategy gains momentum.

The Group has continued to focus on the core capabilities of its Horizon strategy: market intimacy, innovation and product development, customer support, and operational excellence as we embed best practice across the Group. We have also strengthened our management with new senior leaders joining the business during the year and created new leadership roles to sharpen our commercial focus. We also successfully completed the sale of Industrial Analysis early in the second quarter of the financial year, marking a significant change to our portfolio.

Against this backdrop of activity and repositioning for long-term sustainable growth, the team maintained their focus on near-term performance. Adjusted profit before tax was up 34.3% at £42.3 million (2017: £31.5 million) driven by a strong performance from our Materials & Characterisation sector and supported by favourable currency effects. Adjusted profit before tax increased by 0.6% at constant currency. Profit before tax was £34.2 million (2017: loss of £26.2 million) and adjusted basic earnings per share on a continuing basis was up 35.7% to 56.3 pence (2017: 41.5 pence). Good operating cash flow and the proceeds from the sale of Industrial Analysis led to a significant reduction in net debt to £19.7 million (2017: £109.3 million). Given the improvement in net debt and our confidence that the Horizon strategy is beginning to deliver tangible benefits, the Board has proposed to raise the final dividend to 9.6 pence (2017: 9.3 pence), giving a full year dividend of 13.3 pence (2017: 13.0 pence), an increase of 2.3%.

As Ian Barkshire sets out in his Chief Executive's Review, the management team is energised in changing the way we operate, implementing the key tenets of the Horizon strategy. This will help position the Group as a leading provider of high technology products and services to the world's leading industrial companies and scientific research communities.

I would like to thank the Board and all employees for their dedication and hard work during this time of change to reposition Oxford Instruments to deliver long-term profitable growth and sustainable value that benefits all our stakeholders.

Alan Thomson

Chairman

12 June 2018

Chief Executive's Review

Horizon Progress

We made good progress in the year with the early stages of the implementation of the Horizon strategy, launched in May 2017, and we are starting to see tangible benefits. I am encouraged by how firmly embedded the understanding of our strategy is and how positive engagement has been across the Group.

Through Horizon, we have progressed a number of areas in support of our new strategy. We have transitioned to a more commercially focused, market driven Group through significant portfolio management and have implemented a new sector structure to align our businesses with our chosen customer segments and applications. Our three new reporting sectors are Materials & Characterisation, Research & Discovery, and Service & Healthcare.

We are now positioned to address a broad range of markets and industrial sectors, with our key enabling technologies underpinning the shift to a greener economy, increased digital connectivity, and advances in materials, life science and healthcare. We do this by helping our customers to accelerate their applied R&D, increase their manufacturing productivity and make new scientific discoveries. Today, nearly half of our customer base comprises commercial organisations.

We have made good progress in migrating to a market and customer centric approach, offering solutions rather than tools. This allows us to provide more value to our existing customers, as well as creating growth opportunities in new market segments through application specific solutions with improved workflows, bespoke analytics, data interpretation and associated support services. For example, customers developing higher efficiency, power and longer life batteries need to understand and control the detailed chemical and electrical interactions at the nano and even atomic scale. Because battery materials are very reactive and operate within an active solution this has been extremely difficult to achieve. To solve this problem, we developed a sealed sample and imaging cell for our CypherES atomic force microscope that enables the direct measurement of these electrochemistry processes at the nano scale for battery materials operating under their real-life conditions. Within the automotive industry, incoming parts are inspected to control and maintain suitable levels of cleanliness and when contamination is present, stopping its re-occurrence at source is critical to maintain production. Here we developed a bespoke workflow and data interpretation package for our customer to measure the cleanliness of parts and importantly identify the source within the supply chain of any contaminating particles. This solution was built as an upgrade to our generic particle analysis solution. Importantly, these examples of a hardware and a software upgrade for existing product platforms can be delivered on short time frames relative to new instrument platforms to both expand our addressable markets and increase the value to our existing customers.

We have transformed the leadership team at an operational level, targeting individuals who have the specific capabilities and experience needed to accelerate our progress with Horizon, largely through external recruitment. Around 50% of our senior managers are new in their roles within the last two years; successful placements in the year include new leaders for our NanoScience and X-ray Technology businesses and a new senior role, Group Commercial Director, to lead a sharper commercial focus across our sales teams and global territories.

Through Horizon we are changing the way we operate and we are embedding clearly defined core capabilities across our businesses in market intimacy, innovation and product development, customer support, and operational excellence.

In market intimacy we are changing the way we reach and communicate with our customers, more effectively bringing to life the innovative and value adding solutions that we can provide for their specific applications. As part of our move from product to solution-selling, all our sales teams have undertaken bespoke training. We have also invested in developing our digital marketing capabilities and new Group and e-commerce websites.

Innovation and product development remain core to our growth strategy and as part of Horizon we have established cross-sector roadmaps, which are providing a broader range of high quality investment opportunities better aligned with our chosen markets.

In customer support we have increased our breadth and range of products and services to support our customers more effectively. We are investing in a range of technologies to improve customer productivity including remote diagnostics and predictive monitoring.

Operational excellence is delivering improved customer satisfaction and operational and logistical efficiencies. We are implementing a lean approach to our operations and are in the process of training 50 'green belt' lean leaders in different roles and functions. We have added a Head of Strategic Sourcing to drive our Group procurement programme to improve efficiencies and exploit synergies across our supply chain.

As part of our change programme we have been breaking down silos, establishing cross business and functional working groups to extract best practice and better leverage our scale and deliver synergies. In the year we made £1.5 million of central and regional cost savings through back office and central overhead efficiencies, this partially offsetting the previous contribution from and therefore stranded costs associated with the divested Industrial Analysis business.

In the year we have positioned the Group to become a leading provider of high technology products and services to the world's leading industrial companies and scientific research communities to image, analyse and manipulate materials down to the atomic and molecular level. Our chosen end markets remain robust and, combined with our customer applications focus and improved core capabilities, provide strong long-term drivers for future growth and margin improvement.

Results

The following results exclude discontinued operations.

The Group delivered a performance in line with expectations, supported by a currency tailwind and strong second half trading. This was underpinned by significant growth in the Materials & Characterisation sector and improved performance from Service & Healthcare, offset by weaker trading in the Research & Discovery sector despite a positive uplift in the second half of the year.

Reported orders for the Group were up 5.0% (5.8% at constant currency) to £313.0 million (2017: £298.0 million). Excluding orders from our US Healthcare business, constant currency orders were up 8.9% against the previous period. We continue to see increased demand from commercial and academic customers engaged in applied R&D as well as production and manufacturing of high technology products and devices. This has driven a strong performance within Materials & Characterisation, with double-digit growth across the US, Europe and Asia, as well as increased demand for services relating to our own products. Research & Discovery orders were broadly in line with the previous year, maintaining a similar geographical split.

Reported revenue was broadly in line with the previous year at £296.9 million (2017: £300.2 million), and level at constant currency supported by a strong second half performance, with good growth in Materials & Characterisation and services related to our own products. This was offset by reduced volumes in Research & Discovery in line with the phasing of orders, the delivery of longer lead time items and lower revenues associated with the sale of third party systems in OI Healthcare. On a geographical basis, underlying revenue growth in Europe and Asia was offset by reduced sales in North America, with Materials & Characterisation having strong growth across all territories. 

The order book, representing orders for future delivery, increased by 5.0% to £134.0 million (2017: £127.6 million), growth of 10.4% at constant currency. Excluding our US Healthcare business, constant currency order book is up 18.4%, with strong growth across Materials & Characterisation, Research & Discovery, and the service of our own products.

Currency effects drove adjusted operating profit up 22.4% to £46.5 million (2017: £38.0 million), a decline of 5.5% at constant currency. Adjusted operating margin rose to 15.7% for the Group (2017: 12.7%), supported by the currency tailwind.

Adjusted profit before tax increased by 34.3% to £42.3 million (2017: £31.5 million), with an increased contribution from Materials & Characterisation and Service & Healthcare and a lower contribution from Research & Discovery. Adjusted profit before tax was up 0.6% at constant currency. Profit before tax of £34.2 million compared favourably to a loss of £26.2 million last year.

Continuing adjusted basic earnings per share grew strongly by 35.7% to 56.3 pence (2017: 41.5 pence).

We delivered a significant reduction in net debt in the period to £19.7 million (2017: £109.3 million) due to ongoing strengthening of the balance sheet throughout the year, resulting from good operating cash flow, proceeds from the sale of the Industrial Analysis business and the sale of two properties.

Sector Performance

Turning to the individual sector performance:

Materials & Characterisation products and solutions enable the fabrication and characterisation of materials and devices down to the atomic scale, predominantly supporting customers across applied R&D as well as the production and manufacture of high technology products and devices. Building on a positive first half year, the sector delivered strong growth and overall performance with positive contributions from NanoAnalysis, Asylum Research and Plasma Technology. Reported orders grew in the period by 22.7% to £129.5 million (2017: £105.8 million). Reported revenue grew by 11.7% to £118.1 million (2017: £105.7 million), with reported adjusted operating profit increasing to £20.1 million (2017: £12.2 million) and reported adjusted margin up to 17.0%. The order book for future deliveries increased by 36.8% to £34.2 million (2017: £25.0 million), providing positive momentum. The sector is already benefitting from a number of key initiatives within the Horizon strategy, particularly the focus on customer-orientated solutions that are tailored to provide application-specific workflows and process recipes, information and analytics.

Research & Discovery provides advanced solutions that create unique environments and enable imaging and analytical measurements down to the molecular and sub-atomic level, predominantly used in scientific research and applied R&D. Reported orders of £118.2 million (2017: £120.1 million) were broadly in line with the previous year, with continued growth in quantum solutions, an increased demand for our benchtop NMR products and an increase in order intake in the second half for our optical microscopy products, offset by lower orders for scientific X-ray tubes. Reported revenue of £112.1 million was down 10.5% on the previous year (2017: £125.3 million), due to the softer first half performance of our optical microscopy products and the higher proportion of longer lead time customised cryogenic and magnet system orders. The stronger second half orders resulted in an increase in order book of 11.7% to £59.0 million, (2017: £52.8 million). Reported adjusted operating profit was in line with previous year at £13.8 million (2017: £13.8 million) with an improved reported adjusted margin of 12.3% (2017: 11.0%).

Service & Healthcare provides customer service and support for our own products and the service, sale and rental of third party healthcare imaging systems. Reported orders for the period of £65.6 million (2017: £72.2 million) were down 9.1% as reported (7.8% at constant currency) due to reduced orders within our US Healthcare business. Reported orders for services related to our own products grew 3.7% to £39.0 million (2017: £37.6 million). Reported revenue of £66.8 million (2017: £69.3 million), down 3.6% on the previous year, was due to lower shipments of refurbished third-party medical imaging systems. This more than offset reported revenue growth of 6.9% for services related to our own products to £38.8 million (2017: £36.3 million). Reported adjusted operating profit rose to £12.6 million (2017: £12.0 million), an increase of 5.0%, while reported adjusted operating margin increased to 18.9% (2017: 17.3%).

R&D

One of the core elements of our Horizon strategy is innovation and product development. We invested £24.8 million (2017: £25.8 million), with an increased emphasis on the solutions and technology that will increase value for our customers through new capabilities, ease of use, enhanced productivity and application-specific information. We monitor the proportion of our revenue which originates from products launched in the last three years (our vitality index). Our vitality index for the reported period increased to 37% (2017; 30%), reflecting the successful uptake of recently launched products.

People

Our staff are fundamental to our business success and I have been encouraged by how they have engaged with the Horizon strategy to improve our business. We continue with our focus to enhance the capabilities of our teams through the development of existing employees and investment in new talent.

I would like to thank all our employees for their commitment to Oxford Instruments, and for their ongoing enthusiasm to help our customers.

Summary

We have made good progress in the year with the early implementation of the Horizon strategy, which was introduced in May 2017. We have positioned the Group to become a leading provider of high technology products and services to the world's leading industrial companies and scientific research communities to image, analyse and manipulate materials down to the atomic and molecular level.

Materials & Characterisation performed strongly in attractive markets. We continue to invest in new product development within the sector to improve and expand our range of products and solutions.

Research & Discovery had an improved second half performance, with recovery in optical microscopy systems and like for like order growth in Andor. An under performance in NanoScience and X-ray Technology depressed the sector's result, however we are addressing the challenges through structural change and business simplification. These self-help actions, combined with positive end markets, support improved financial performance.

In Service & Healthcare, OiService continues to focus on increasing after-market revenue by providing a broader range of support services, while OI Healthcare is making a strategic shift towards a higher proportion of service revenue, which is driving greater visibility of revenue and improved returns.

Outlook

Our chosen end markets remain attractive, supported by commercial and government investment. Our growing order book, customer application focus and drive for operational efficiencies provide confidence for the year ahead.

We expect to see an improvement in performance on a reported basis after allowing for the impact of an anticipated currency headwind, based on current exchange rates.

Ian Barkshire

Chief Executive

12 June 2018

Operations Review

The Group reports in the following three sectors: Materials & Characterisation, Research & Discovery, and Service & Healthcare. The numbers detailed in the Operations Review refer to continuing operations. 

Materials & Characterisation

1For definition refer to note on page 2 of highlights2Details of adjusting items can be found in Note 1 of these Financial Statements

The Materials & Characterisation sector is comprised of 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 and the fabrication of semiconductor devices and structures through our range of advanced etch and deposition processes and systems. Our market leading product performance combined with customer focused solutions is driving strong growth by providing increased value to existing customers and the identification of and reach into new markets and applications. We are providing new capabilities, ease of use and enhanced productivity through application-specific workflows, processes, analytics and information. Revenue in Materials & Characterisation comes from a broad range of end applications with about three quarters from the Semiconductor & Communications and the Advanced Materials related customer segments. Industrial and commercial customers represent 49% of revenue, with the balance either academic or government funded.

Materials & Characterisation delivered strong order, revenue and profit growth supported by the successful launch of new products, our increased customer application focus, the tailoring of products to provide dedicated solutions and general growth within our end markets. From a geographic perspective, strong growth was seen across Europe, US and Asia.

Sales of our imaging and analysis products and solutions used in electron microscopy had strong growth, with placements in the world's leading academic, semiconductor and advanced manufacturing facilities, as well as top forensic laboratories, where customers seek rapid, automated solutions to their analysis challenges. The launch of Symmetry, our super-fast material structure analyser, was a key driver in both the advanced materials and environmental markets, enabling productivity improvements for our customers in terms of the speed, high-resolution and accuracy of analysis.

The introduction of our UltimTM range of large area X-ray detectors has driven strong sales within the semiconductor market by providing unprecedented resolution and analysis of semiconductor structures and devices. A range of applications are benefiting from the enhanced capabilities we offer, including fault finding and failure analysis within devices for the leading semiconductor manufacturers and cleanliness control in precision manufacturing. Other applications that are utilising our UltimTM product range include solar cells and batteries, where researchers are working to improve performance and storage density by better understanding their structure at a nanoscale. The sensitivity of the UltimTM Extreme is providing new market opportunities within the life science and pharmaceutical markets where it is providing further insight and understanding of disease processes and can aid the identification of counterfeit prescription drugs.

We saw strong order, revenue and profit growth for our scanning probe microscopy products. This has been largely supported by the strong uptake we have had for our market leading Cypher portfolio and increased orders for our updated entry level platform, with advanced ease of use providing marketing leading performance at a value price point. CypherVRS™, the first and only full-featured video-rate atomic force microscope (AFM), is generating strong interest across a diverse range of biological and physical science applications, where the visualisation of dynamic processes at a molecular or atomic level provides new insights and information for research and applied R&D. Examples include the imaging of viruses, molecular and cellular dynamics, and semiconductor etch processes.

Our electrochemistry sample cell upgrade for our CypherES™ AFM provides high-resolution imaging in real device operating conditions. The advanced environmental control enables those researching the development of lithium-ion batteries and emerging solid-state energy storage systems to better understand and characterise performance in real life conditions.

We have strengthened our customer application focus with the release of a photovoltaics package for our MFP™ AFM. This offers a convenient, high-performance turnkey solution for materials scientists that are seeking to improve the efficiency, reduce manufacturing costs and lengthen solar cell lifetimes.

In addition to the many varied research applications for our advanced AFM systems, our entry level portfolio is ideally positioned to provide the simpler, routine measurements such as thin film roughness and uniformity at nanometre and even sub-nanometre length scales that are inaccessible to other metrology tools. Our updated MFP Origin+™ has seen good growth across a broad range of application areas due to its high level of performance, ease of use and appropriate price point.

We had good growth from our semiconductor processing systems that provide etch and deposition process solutions used across a range of semiconductor, device and materials applications. We have leading expertise in the processing of compound semiconductors, which are critical for enabling more compact devices, higher speeds, larger capacity and higher energy efficiencies required to deliver the functionality and demands for big data, IoT, AI, high speed communications and autonomous vehicles.

Growth has been supported by the development of new process recipes aligned to these growing markets, including the fabrication of sensors and MEMS, which are used across a broad range of optical devices and communications systems to provide higher speeds; and the development of advanced lasers used across a broad range of photonics markets including Vertical Cavity Surface Emitting lasers (VCSELs) for facial recognition applications.

Customers working in these markets value our expertise and development capabilities, large portfolio of processing recipes and our applications support to help them manufacture new devices repeatedly, with the required quality for new and demanding applications. We have seen growth in both applied R&D and the expanding specialist production markets for the manufacture of commercial systems, with specialist production now representing almost half the sales in this market.

Research & Discovery

1For definition refer to note on page 2 of highlights2Details of adjusting items can be found in Note 1 of these Financial Statements

The Research & Discovery sector includes Andor Technology, NanoScience & Magnetic Resonance, X-ray Technology and our minority share in ScientaOmicron. This sector provides advanced solutions that create unique environments and enable imaging and analytical measurements down to the molecular and sub-atomic level, used predominantly in fundamental and applied research. We are able to 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 with 73% of sales into research communities and 23% into industrial customers predominately for use in applied R&D.

In this sector, 40% of revenue comes from customers working within Healthcare & Life Science applications. Customers exploring new semiconductor materials and devices make a significant contribution, and an increasing share is coming from customers working in quantum technology applications and research. Quantum Technology is a strong growth area for the sector due to increased government and corporate funding for applications such as quantum information processing and quantum sensors. Research & Fundamental Science contributes 4% of revenue. 

Orders for the sector were broadly in line with the previous year, with like for like growth in Andor and Magnetic Resonance offset by lower orders from X-ray Technology, with NanoScience broadly in line with last year. From a geographic perspective, orders from Europe and US were broadly in line with previous year, with increases from Rest of the World offsetting slight declines in Asia.

Revenue and profitability in the sector were impacted by three particular product areas that more than offset growth across the broad range of the portfolio. As previously reported, there was a softer financial performance from our Andor optical microscopy systems in the first half of the year as we transitioned from third-party systems to our own portfolio; lower revenues from NanoScience as they work through a high volume of complex specialised systems at lower margins; and lower volumes of our scientific X-ray tubes in X-ray Technology.

Our NanoScience business is underperforming relative to its potential and is in transition as part of our Horizon programme. The quality and complexity of the order book negatively impacted performance in the year despite an improved second half performance. The current year is expected to be impacted by the remaining tail of complex systems within the orderbook. We have a new leadership team and self-help plan in place to increase the emphasis on margin, drive a stronger commercial focus and deliver organisational efficiencies.

We had order growth for our customised high magnetic systems for national science facilities, building on our strong reputation in this sector. We increased sales of our ultra-low temperature portfolio driven by the increasing demand for systems and solutions to support quantum research and quantum information processing. We are moving towards more standardised solutions designed specifically for this growing market. Our combined cryogenic and magnetic solutions grew in the year with the launch of a new range of measurement probes, providing more complete solutions for the measurement of 2D materials, such as graphene.

Andor had significantly higher order intake in the second half of the year, driven by new product launches and the broadening of our optical microscopy portfolio. Lower revenue in the period, partly due to phasing of orders, has resulted in a significant increase in the order book for future deliveries.

We continue to develop our range of market leading scientific research cameras and have seen growth from application areas requiring higher performance, faster collection and increased sensitivity. Our specialised deep cooled, large area, high sensitivity cameras have provided good growth in astronomy, as researchers look for more accurate and detailed information with better spectral performance to enable deep space imaging, solar astronomy and near-earth object observation. Our world's first super-resolution microscopy camera, iXon-SRFFTM allows customers to observe biological features at resolutions significantly smaller than the wavelength of light to reveal unprecedented details in living cells, helping to build an understanding of the complex intracellular mechanisms that underlie a wide range of disease states. This image enhancement, which is only available on Andor cameras, overcomes frustrations with the complexity of sample preparation and the added expense of current super-resolution microscopes enabling customers to achieve super-resolution capability with a more affordable microscope and standard sample preparation techniques.

We continue to benefit from our connections to many Quantum Imaging centres of excellence that have been established in support of this rapidly growing and well-funded market. Our single photon sensitive cameras saw growing demand from researchers investigating and developing quantum optics, which are required for communication systems and exotic imaging solutions, for example those that can look through smoke or around corners.

Our optical microscopy platform, DragonflyTM, saw strong growth in the second half of the year as we introduced a complimentary lower price point model to the portfolio, enabling the product range to address a much broader end market. DragonflyTM provides the capability to quickly image large samples and reveal detail previously not seen in applications such as neuroscience, cancer research and regenerative science. The product received an R&D Top 100 award, recognising the revolutionary technology and superior performance. We also saw good growth from our ImarisTM visualisation software due to its ability to capture, process and visualise the extremely large data sets captured by modern instrumentation, with data analysis and interpretation becoming an increasing part and value of the overall product solution. ImarisTM is sold for use on our own and other optical microscopy systems.

We saw increased demand for our benchtop Nuclear Magnetic Resonance solutions, which provide essential information about the identification and quantification of foods and chemicals for academic and industrial researchers and for quality assurance and control. Revenue and order growth has been driven by our enhanced PulsarTM and the recently launched MQC+TM systems. In the second half of the year we saw growth in the energy generation and storage sector following increasing oil prices, capitalising on developments made across our application specific Geospec range of products.

Our X-ray source business continued to grow in the medical and research market segments but experienced greater than expected head winds in the material characterisation and industrial applications leading to a drop in the year on year revenue. This was in part driven by the delayed introduction of new products for these markets and pricing pressures in China.

The ScientaOmicron joint venture created the largest player in the Ultra-High Vacuum surface science field. The Group has a 47% share in the joint venture. The business delivered an improved financial performance for the year, with our share of adjusted operating profit at £0.4 million against a loss of £0.8 million last year. After our year end, the business sold its UK based ultra-high vacuum products division. This is in line with the strategy to focus on providing core surface science products and solutions.

Service & Healthcare Sector

1For definition refer to note on page 2 of highlights2Details of adjusting items can be found in Note 1 of these 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.

The Service & Healthcare sector increased profitability and margin in the period, driven predominantly by increased demand for the services related to our own products. Revenue and order growth from our service offerings relating to our own products were more than offset by a decline from US OI Healthcare business. This was due to a combination of the timing of sales prospects and the previously reported structural changes in the market by OEM providers.

OI Healthcare made good progress, with increased orders in the second half of the year, in line with the implementation of our strategy to move to a higher proportion of service contracts relative to the sale of refurbished systems. Revenue was down in the year but through structural changes in line with our strategy, profitability was in line with last year, providing a solid platform for future growth.

Within OiService we continue to drive our enhanced customer support offerings, adapting to our customers' needs, for example with remote diagnostics and online self-help. We are designing product platforms to enable service upgrades delivering either performance enhancements or application specific solutions. This increases value and builds versatility for our customers as well as growth in aftermarket revenue. Our new e-commerce website makes it easier for customers to find and purchase consumable items and accessories and we have seen a corresponding increase in associated revenue.

Growth in service contracts related to our optical imaging analysis software has been driven by the value customers place on having annual updates and access to our inhouse analysis experts. Across the OI Group we provide extensive customer training programmes designed to increase their capability and productivity. This year we also held many very successful global application seminars with research and application scientists, most notably a new microscopy summer school run in collaboration with the Chinese Academy of Sciences.

Finance Review

During the financial year the Group disposed of its Industrial Analysis business and this has been treated as a discontinued operation in the financial statements. Accordingly, the numbers detailed in the Finance Review refer to continuing operations and exclude the results of Industrial Analysis in both the current and prior periods.

Reported orders increased by 5.0% to £313.0 million (2017: £298.0 million), an increase of 5.8% at constant currency. At the end of the period the Group's order book for future deliveries stood at £134.0 million (2017: £127.6 million), growth of 5.0% on a reported basis and 10.4% at constant currency. 

Reported revenue declined by 1.1% to £296.9 million (2017: £300.2 million). Revenue, excluding currency effects, was broadly in line with last year, with the movement in average currency exchange rates over the last year reducing reported revenue by £3.1 million.

Adjusted operating profit from continuing operations increased by 22.4% to £46.5 million (2017: £38.0 million). Adjusted operating profit from continuing operations, excluding currency effects, declined by 5.5%. Adjusted operating margin from continuing operations increased by 300 basis points to 15.7% (2017: 12.7%).

Adjusted profit before tax from continuing operations grew by 34.3% to £42.3 million (2017: £31.5 million). A pre-tax adjusted profit of £0.5 million from the Industrial Analysis business for the three months of ownership, prior to its sale on 3 July 2017, is included in discontinued operations. For the twelve months to 31 March 2017 the Industrial Analysis and Superconducting Wire businesses delivered an adjusted profit before tax of £5.6 million. Including discontinued operations, the Group achieved reported adjusted profit before tax of £42.8 million (2017: £37.1 million).

Adjusting items include amortisation of acquired intangibles of £10.9 million and a net gain of £1.7 million for business reorganisation items. Our share of an impairment in our equity accounted associate was £2.0 million and the movement in the mark-to-market valuation of currency hedges for future years gave rise to a gain of £3.1 million.

Adjusted profit before tax from continuing operations of £42.3 million (2017: £31.5 million) represents a margin of 14.2% (2017: 10.5%). After adjusting items, the Group recorded a profit before tax of £34.2 million from continuing operations (2017: loss of £26.2 million).

Continuing adjusted basic earnings per share grew by 35.7% to 56.3 pence (2017: 41.5 pence). Continuing basic earnings per share was 34.3 pence (2017: loss of 44.7 pence).

Cash generated from operations fell by £1.1 million to £33.4 million (2017: £34.5 million), representing 68.8% (2017: 90.3%) cash conversion. Cash conversion is defined as: cash generated from operations before business reorganisation items and pension scheme payments, less, capitalised development expenditure and capital expenditure / adjusted operating profit. Net debt decreased from £109.3 million to £19.7 million, representing a net debt to EBITDA ratio (for banking covenant purposes) of 0.3 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 1 to the Financial Statements.

Income Statement

The Group's Income Statement is summarised below.

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

Revenue

Orders, at constant currency, increased by 22.8% for Materials & Characterisation with good growth across all business units and was broadly flat for Research & Discovery. A decline of 7.8% in Service & Healthcare as we reduce the level of sales of refurbished imaging systems in the US Healthcare business, offset order growth of 3.7% in service of our own products. Total reported orders grew by 5.0% (5.8% at constant currency). Excluding orders from US Healthcare, reported and constant currency orders grew by 8.3% and 8.9% respectively. 

Reported revenue of £296.9 million (2017: £300.2 million) decreased by 1.1%. Materials & Characterisation grew by 11.7%. Research & Discovery and Service & Healthcare declined by 10.5% and 3.6% respectively.

Excluding currency effects, revenue grew by 13.2% for Materials & Characterisation with growth across all constituent businesses. Lower optical microscopy sales and an increase in the proportion of customised magnetic and cryogenic systems with longer production lead times, resulted in a constant currency decline of 9.7% in Research & Discovery revenue. Growth in revenue from service of our own products was offset by an anticipated decline in Healthcare revenue from selling fewer refurbished imaging systems, leading to a constant currency revenue decline of 2.9% in Service & Healthcare.

On a geographical basis, at constant currency, revenue grew by 4.3% in Europe, 1.2% in Asia and 8.3% for the Rest of World. Constant currency revenue declined by 5.3% in North America but was in line with last year when excluding revenue from OI Healthcare. 

The order book, at constant currency, increased by 42.4% for Materials & Characterisation and 15.2% for Research & Discovery, with a decline of 10.8% in Service & Healthcare. Total reported order book grew by 5.0% (10.4% at constant currency). Excluding the order book from US Healthcare, reported and constant currency order book growth was 14.0% and 18.4% respectively.

* Excluding inter-sector revenue

Gross profit

Gross profit fell by 4.1% to £150.9 million (2017: £157.3 million), representing a gross profit margin of 50.8%, a decrease of 160 basis points over last year.

Operating profit

Adjusted operating profit increased by 22.4% to £46.5 million (2017: £38.0 million), representing an adjusted operating profit margin of 15.7%, an increase of 300 basis points against last year. Materials & Characterisation margin rose by 550 basis points to 17.0% (2017: 11.5%). Research & Discovery adjusted operating margin increased by 130 basis points to 12.3% (2017: 11.0%). Service & Healthcare margin increased by 160 basis points to 18.9% (2017: 17.3%).

Our share of the Scienta Omicron joint venture showed a profit of £0.5 million for the year, an improvement of £1.3 million against the comparative period. After restructuring costs and impairments, our share of the Scienta Omicron joint venture was a loss of £1.9 million.

Currency effects (including the impact of transactional currency hedging) have increased reported adjusted operating profit by £10.6 million when compared to blended hedged exchange rates for the comparative period. Blended hedged exchange rates for the US Dollar, Euro and Japanese Yen against Sterling are all at stronger rates than last year.

At constant currency, the adjusted operating profit margin was 12.0%, a decline of 70 basis points.

Adjusting items

Amortisation of acquired intangibles of £10.9 million relates to intangible assets recognised on acquisitions, being the value of technology, customer relationships and brands.

Business reorganisation items were a net gain of £1.7 million. This comprised three main items, the first being a net gain of £3.3 million from the sale of the Superconducting Wire facility that we initially retained in New Jersey, US, following the sale of the business, and the disposal of a freehold property in Germany. Second, costs of £0.5 million were incurred within our US Healthcare business to successfully defend a legal claim relating to a prior acquisition. Lastly, we incurred restructuring costs of £1.1 million primarily relating to US Healthcare and our Scienta Omicron joint venture.

During the year our Scienta Omicron associate recognised an impairment relating to the sale of one of its subsidiaries. The Group's share of this impairment was £2.0 million.

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 IAS 39 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 gain in respect of derivative financial instruments was £3.1 million (2017: £1.2 million gain). This reflects a movement from a net fair value liability to a small net asset 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 asset is attributable to a rise 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 twelve months.

Net finance costs

The Group's adjusted net finance costs fell by £2.3 million to £4.2 million (2017: £6.5 million) with net finance charges falling by £1.8 million to £3.6 million and pension financing charges falling by £0.5 million to £0.6 million.

Profit before tax

Continuing adjusted profit before tax increased by 34.3% to £42.3 million (2017: £31.5 million), up 0.6% at constant currency. The continuing adjusted profit before tax margin increased by 370 basis points to 14.2% (2017: 10.5%).

Continuing profit before tax of £34.2 million (2017: loss of £26.2 million) 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 £10.1 million (2017: £7.8 million) represents an effective tax rate of 23.9% (2017: 24.8%). The current tax liability includes a provision of £2.9 million in respect of a historical financing structure, of which £2.0 million was provided in this financial year. The statutory effective tax rate from continuing operations is 42.7% owing to a reduction in deferred tax assets arising from a lowering of the US tax rate.

Earnings per share

Continuing adjusted basic earnings per share increased by 35.7% to 56.3 pence (2017: 41.5 pence); adjusted basic earnings per share increased by 13.5% to 55.6 pence (2017: 49.0 pence). Continuing adjusted diluted earnings per share were 56.1 pence (2017: 41.4 pence); adjusted diluted earnings per share were 55.4 pence (2017: 48.9 pence).

Undiluted weighted average shares have increased by 0.1 million to 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 full year, approximately 16% of Group revenue was denominated in Sterling, 52% in US Dollars, 19% in Euros, 11% in Japanese Yen and 2% 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 31 March 2018 the Group had currency hedges in place extending up to twelve months forward.

For the 2018/19 financial year, we expect a currency headwind to operating profit of approximately £3 million, based on current exchange rates.

Dividend

The Group's policy is to increase the dividend each year in line with the increase in underlying earnings. Given the strong reduction in net debt and the positive impact from the Horizon strategy, the Board has proposed to increase the final dividend to 9.6 pence (2017: 9.3 pence). This results in a total dividend of 13.3 pence (2017: 13.0 pence). The final dividend will be paid, subject to Shareholder approval, on 19 October 2018 to Shareholders on the register as at 14 September 2018.

Cash flow

The Group cash flow is summarised below.

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 fell by £1.1 million to £33.4 million (2017: £34.5 million), representing 68.8% (2017: 90.3%) cash conversion. Cash conversion is defined as: cash generated from operations before business reorganisation items and pension scheme payments, less, capitalised development expenditure and capital expenditure / adjusted operating profit.

The working capital outflow of £13.2 million reflects an increase in inventories of £4.5 million, an increase in receivables of £14.4 million, a decrease in payables of £2.8 million and an increase in customer deposits of £2.9 million. The increase in inventories reflects an increase in work in progress and components to support our planned production schedule in the first quarter of 2018/19 for our customised magnets and cryogenic systems, as well as an increase in demonstration stock to support new launches of imaging and analysis products used in electron microscopy. The movement in receivables consists of an increase of £8.6 million due to good sales growth across our Materials and Characterisation sector along with a higher proportion of sales made towards the end of the year compared to the previous period. In addition, we also shipped a higher proportion of customised magnets and cryogenic systems that were invoiced but not paid at the end of the year. Furthermore, an increase of £2.3 million relates to foreign currency forward contracts relating to the previous year but settled in this financial year, and £3.5 million relating to the settlement of foreign currency swaps that are hedging overseas cash balances.

Interest

Net interest paid was £2.1 million (2017: £5.0 million). The difference from last year is due to lower financing costs arising from a lower level of average net debt compared to the comparative period following the receipt of proceeds from the sale of Industrial Analysis part way through the period, and the settlement of £1.0 million of interest payments made just after the year end close.

Tax

Tax paid was £3.8 million (2017: £2.1 million), 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 year was £24.8 million, equivalent to 8.4% of sales, (2017: £25.8 million, 8.6% of sales). A reconciliation between the amounts charged to the Income Statement and the cash spent is given below:

During the year intangible assets of £1.8 million were impaired within our X-ray Technology Business on a development project discontinued as a result of the sale of Industrial Analysis. In addition, we impaired £1.4 million in respect of a development project which has experienced delays and cost overruns.

Investment in Associate

The shareholders of ScientaOmicron 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 £2.1 million and was paid in September 2017.

Disposals

The sale of Industrial Analysis was completed on 3 July 2017. A post-tax profit of £45.9 million has been recorded within discontinued operations.

New Accounting Standards

Transition to IFRS 9 'Financial Instruments' will take effect from 1 April 2018 with the half year results for September 2018 being IFRS 9 compliant and the first annual report published in accordance with IFRS 9 being for the year ended 31 March 2019. There is no requirement to restate comparatives. The main impact is likely to be in respect of mark-to-market valuation of currency derivatives that are hedging future cash flows. The gain or loss on unrealised forward foreign exchange contracts might qualify for hedge accounting and so be booked directly to reserves with the gain or loss recycled to the income statement on maturity. Currently, gains or losses are treated as adjusting items. Work is on-going to assess the extent to which the group's hedges will qualify for hedge accounting.

The Group will also be adopting IFRS 15 'Revenue from Contracts with Customers' using the modified retrospective approach, which means that the cumulative impact on adoption will be recognised in retained earnings on 1 April 2018 with the half year results for September 2018 being IFRS 15 compliant, and the first annual report published in accordance with IFRS 15 being for the year ended 31 March 2019. Comparatives will not be restated. We anticipate that the main differences will be within our NanoScience business where the revenue recognition on complex customised magnetic and cryogenic systems will be deferred from being primarily on transfer of legal title to completion of installation.

The Group will be adopting IFRS 16 'Leases' in the 2018/19 financial year. The main impact will be in respect of property and vehicle leases which are currently accounted for as operating leases. Further detail on the impact of these new accounting standards is set out in the accounting policies of the financial statements.

Net debt and funding

Net debt

Net debt decreased in the period from £109.3 million to £19.7 million. Cash generated from operations was £33.4 million. Disposal proceeds of £71.2 million relate to the sale of Industrial Analysis. The Group invested in capitalised development costs of £5.8 million and tangible and intangible assets of £4.8 million.

Funding

The Group has in place an unsecured multi-currency revolving facility agreement which is committed until February 2020. The facility has been entered into with a group of three banks and comprises a Sterling denominated multi-currency facility of £100.0 million and a US Dollar denominated multi-currency facility of $37.0 million.

In this year the Group repaid £5.0 million of its bilateral private placement note, leaving an outstanding note of £39.5 million, which matures in 2021. In September 2017, the Group repaid the balance of its amortising fixed rate loan from the European Investment Bank. The Group has uncommitted facilities of £20.6 million.

Debt covenants are net debt to EBITDA less than 3.0 times and EBITDA to interest greater than 4.0 times. As at 31 March 2018 net debt to EBITDA was at 0.3 times and EBITDA to interest was 14.3 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 31 March 2018, the net liability arising from our defined benefit scheme obligations was £15.3 million (31 March 2017: £25.1 million), a fall of £9.8 million. The reduction in the deficit was primarily due to the contributions paid in the period and the actuarial gains on the scheme's liabilities arising from a change in the accounting assumptions at 31 March 2018. Total scheme assets at 31 March 2018 were £289.5 million (31 March 2017: £287.9 million) while liabilities were £304.8 million (31 March 2017: £313.0 million).

Prior to the year end the Trustees of the UK defined benefit scheme, in consultation with the Company, reduced its exposure to on-risk assets (a portfolio of market focused asset classes, the majority being equities) with a corresponding increase in its liability driven investments, with the objective of steering a more stable journey to being fully funded. The pension fund's gross exposure to on-risk assets has fallen from 85% to 45%; the majority of transactions required to make this change were completed in February 2018. As a result, the level of risk inherent in the investment strategy is now significantly lower than previously, in addition to a substantial reduction in funding level volatility.

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

12 June 2018 

Consolidated Statement of Income

year ended 31 March 2018

* Adjusted numbers are stated to give a better understanding of the underlying business performance. Details of adjusting items can be found in Note 1 of this Preliminary Statement.

The attached notes form part of the Financial Statements.

Consolidated Statement of Income

year ended 31 March 2017

* Adjusted numbers are stated to give a better understanding of the underlying business performance. Details of adjusting items can be found in Note 1 of this Preliminary Statement.

During the current year, the Group amended the presentation in the Income Statement to include the change in fair value derivatives in operating expenses rather than financial income or expenditure. Prior year comparatives have been re-presented to be consistent with this change and, as a result, £1.2 million has now been included on the foreign exchange line. There is no impact on profit after tax in either period.

Consolidated Statement of Comprehensive Income

year ended 31 March 2018

Consolidated Statement of Financial Position

as at 31 March 2018

The Financial Statements were approved by the Board of Directors on 12 June 2018 and signed on its behalf by:

Ian Barkshire Gavin Hill

Director Director

Company Number: 775598

Consolidated Statement of Changes in Equity

year ended 31 March 2018

Consolidated Statement of Changes in Equity

year ended 31 March 2017

Other reserves comprise the capital redemption reserve, which represents the nominal value of shares repurchased and then cancelled during the year ended 31 March 1999, and the hedging reserve in respect of the effective portion of changes in value of commodity contracts.

The foreign exchange translation reserve comprises all foreign exchange differences arising since 1 April 2004 from the translation of the Group's net investments in foreign subsidiaries into Sterling.

The Group holds 183,145 (2017: 183,145) of its own shares in an employee benefit trust. The cost of these shares is included within retained earnings. There was no movement in the shares held by the trust during the year.

Consolidated Statement of Cash Flows year ended 31 March 2018

Reconciliation of changes in cash and cash equivalents to movement in net debt

Notes to the Financial Statements

year ended 31 March 2018

1 Non-GAAP measures

In the preparation of adjusted numbers the Directors exclude certain items in order to assist with comparability between peers and to give what they consider to be a better indication of the underlying performance of the business. These adjusting items are excluded in the calculation of adjusted operating profit, adjusted profit before income tax, adjusted profit for the year from continuing operations, adjusted EBITDA, adjusted EPS, adjusted cash conversion, and adjusted effective tax rate. Details of adjusting items are given below.

Adjusted EBITDA is calculated by adding back depreciation of property, plant and equipment and amortisation of intangible assets to adjusted operating profit and can be found in the Consolidated Statement of Cash Flows. Calculation of Adjusted EPS can be found in note 2. Adjusted effective tax rate is calculated by dividing the share of tax attributable to adjusted profit before tax by adjusted profit before tax.

Reconciliation between profit before income tax and adjusted profit from continuing operations

Acquisition related costs comprise professional fees incurred in relation to mergers and acquisitions activity and any consideration which, under IFRS 3 (revised), falls to be treated as a post-acquisition employment expense.

Restructuring costs of £1.2m primarily relate to our US Healthcare business and include £0.5m to successfully defend a legal claim relating to a prior acquisition.

During the prior year the Group settled various claims totalling £0.4m relating to the disposal of its Omicron business in 2016.

The Group recorded a net profit on disposal of £3.3m during the year, following the disposal of two buildings previously held under property, plant and equipment.

During the year the Group's equity accounted associate recognised an impairment relating to the disposal of its Vacgen subsidiary. The Group's share of this impairment was £2.0m.

Adjusted profit excludes the non-cash amortisation and impairment of acquired intangible assets and goodwill and the unwind of discounts in respect of contingent consideration relating to business combinations. Impairments in respect of capitalised development costs would not normally be treated as adjusting items although in certain circumstances they may be, for example, in the prior year a project was completely cancelled as part of a wider restructuring plan.

Adjusting items include the income tax on each of the items described above. In addition, during the year the tax rate in the United States reduced from 35% to 21%. As a result this has reduced the deferred tax asset by £5.4m. This has been excluded from the calculation of share of taxation attributable to adjusted profit before tax.

During the prior year the Group recognised the following impairments:

· £8.0m relating to its equity accounted associate investment. See note 5 for further details

· £0.7m concerning capitalised development costs that related to a specific internal systems project that was stopped as the Group focused and directed resources so as to accelerate key projects.

· £2.2m relating to capitalised software costs, following a reassessment of the future value expected to be derived from internally developed software.

The Group reports ineffectiveness of its hedging as an adjusting item. In the prior year this included losses on certain contracts relating to the hedging of the Japanese Yen which were not required for ordinary trading and which were re-allocated for use against the remittance of net income of the Group's Japan operations. Additionally, under IAS 39, all derivative financial instruments are recognised initially at fair value. Subsequent to initial recognition, they are also measured at fair value. In respect of instruments used to hedge foreign exchange risk and interest rate risk the Group does not take advantage of the hedge accounting rules provided for in IAS 39 since that standard requires certain stringent criteria to be met in order to hedge account, which, in the particular circumstances of the Group, are considered by the Board not to bring any significant economic benefit. Accordingly, the Group accounts for these derivative financial instruments at fair value through profit or loss. To the extent that instruments are hedges of future transactions, adjusted profit for the year is stated before changes in the valuation of these instruments so that the underlying performance of the Group can be more clearly seen.

2 Earnings per share

Basic and diluted EPS from continuing operations are based on the result for the year from continuing operations, as reported in the Group Income Statement. Basic and diluted EPS from total operations are based on the result for the year attributable to equity shareholders of the parent. Adjusted and diluted adjusted EPS are based on adjusted profit for the year from continuing operations. The profit measures noted above are divided by the weighted average number of ordinary shares outstanding during the year, excluding shares held by the Employee Share Ownership Trust. The table below reconciles these different profit measures.

The weighted average number of shares used in the calculation excludes shares held by the Employee Share Ownership Trust, as follows:

The following table shows the effect of share options on the calculation of diluted earnings per share:

For the purposes of calculating diluted and diluted adjusted EPS, the weighted average number of ordinary shares is adjusted to include the weighted average number of ordinary shares that would be issued on the conversion of all potentially dilutive ordinary shares expected to vest, relating to the Company's share-based payment plans. Potential ordinary shares are only treated as dilutive when their conversion to ordinary shares would decrease EPS, or increase loss per share.

3 Segment information

The Group has ten operating segments. These operating segments have been combined into three aggregated operating segments to the extent that they have similar economic characteristics, with relevance to products and services, type and class of customer, methods of sale and distribution and the regulatory environment in which they operate. Each of these three aggregated operating segments is a reportable segment.

Following the disposal of the Industrial Analysis business and the introduction of the Horizon Strategy in 2017, the Group now reports under a revised segment structure. The aggregated operating segments are as follows:

· the Materials and Characterisation segment comprises a group of businesses focusing on applied R&D and commercial customers, enabling the fabrication and characterisation of materials and devices down to the atomic scale;

· the Research and Discovery segment comprises a group of businesses providing advanced solutions that create unique environments and enable measurements down to the molecular and atomic level which are used in fundamental research; and

· the Service and Healthcare segment provides customer service and support for the Group's products and the service, sale and rental of third party healthcare imaging systems.

The Group's internal management structure and financial reporting systems have been amended to differentiate the three aggregated operating segments on the basis of the economic characteristics discussed above. Prior year comparatives have been re-presented due to the change in the Group's segment structure.

Reportable segment results include items directly attributable to a segment as well as those which can be allocated on a reasonable basis. Inter‑segment pricing is determined on an arm's length basis. The operating results of each are regularly reviewed by the Chief Operating Decision Maker, which is deemed to be the Board of Directors. Discrete financial information is available for each segment and used by the Board of Directors for decisions on resource allocation and to assess performance. No asset information is presented below as this information is not presented in reporting to the Group's Board of Directors.

a) Analysis by business

The adjusted profit after tax of £0.5m (2017: £0.8m) from the Group's associate is reported within the Research & Discovery segment.

Revenue in the Materials & Characterisation and Research & Discovery segments represents the sale of products. Revenue in the Service & Healthcare segment relates to service income, with the exception of leasing of mobile MRIs of £6.1m (2017: £9.0m) and equipment sales of £3.3m (2017: £5.6m).

Reconciliation of reportable segment profit

Depreciation, capital expenditure, amortisation and impairment of intangibles and capitalised development costs arise in the following segments:

b) Geographical analysis

The Group's reportable segments are located across a number of geographical locations and make sales to customers in countries across the world.

The analysis below shows revenue and non-current assets (excluding deferred tax) for individual countries or regions that represent more than 5% of revenue.

Revenue from continuing operations from external customers by destination

Non-current assets (excluding deferred tax)

4 Research and Development ("R&D")

The total R&D spend by the Group as part of continuing operations is as follows:

5 Investment in associate

During the 2015/16 financial year the Group entered into a strategic alliance with GD Intressenter AB of Sweden ("GDI") to create the world's largest company in the highly specialised ultra high vacuum surface science field. The alliance comprised Oxford Instruments' Omicron Nanotechnology GmbH ("Omicron") and associated subsidiaries and GDI's Scienta Scientific AB ("Scienta") and associated subsidiaries. Scienta Scientific AB is registered and has its principal place of business in Sweden.

In consideration for new shares in Scienta, Oxford Instruments transferred all of its shares in the capital of Omicron to Scienta. Oxford Instruments holds a 47% interest in the ordinary share capital of Scienta and GDI holds 53%. The investment has been accounted for as an associate taking into account the following factors:

· the Group holds substantial, but minority, voting rights (47%). All other rights are controlled by a single shareholder;

· the Group has a minority number of Non-Executive Board seats (two of five), with the remaining seats held by representatives of GDI; and

· whilst the Group has certain veto rights in respect of certain decisions, it cannot unilaterally direct the activities of the Scienta Group.

During the current year the Group invested a further £2.1m in its equity accounted associate. During the prior year the Group recognised an impairment charge of £8.0m in respect of its investment in Scienta and settled various claims totalling £0.4m relating to the disposal of its Omicron business in 2015/16.

The Group's share of loss in its equity accounted associate for the year was £1.9m (2017: £1.2m). The Group did not receive any dividends from the associate in either period.

During the prior year the Group recognised an impairment charge of £8.0m relating to its investment in ScientaOmicron due to the associate's financial performance for the year ended 31 December 2016 and lower projected cash flows. This resulted in a reassessment of ScientaOmicron's expected future business performance and the actions and time required to improve profitability and operational efficiency.

The £8.0m impairment was reported in the results of the Research & Discovery segment. As at 31 March 2017, the estimate of the recoverable amount of the Group's investment in ScientaOmicron, being its value in use, was calculated as £3.9m. The pre-tax discount rate used to arrive at this estimate was 15.5%. No further impairment is considered to be required as at 31 March 2018.

Summary financial information for the equity accounted associate is as follows:

According to the terms of the transaction, no dividend could be paid by the associate until 27 May 2017. Following that date, any dividend paid must be agreed by both Oxford Instruments plc and GD Intressenter AB, up to a maximum of 50% of the previous year's profit after tax. At the date of signing these Financial Statements no dividend has been declared or paid.

6 Disposal of subsidiary and discontinued operations

On 3 July 2017 the Group disposed of its Industrial Analysis business for a final consideration of £82.8m. On 17 November 2016 the Group disposed of its Superconducting Wire business for a final consideration of £14.0m.

Effect of disposal on the financial position of the Group

The recognition of provisions on disposal primarily relate to onerous lease contracts. These have been recognised in the Income Statement under discontinued operations.

Discontinued operations

In the year to 31 March 2018 the Group's Industrial Analysis business was classified as a discontinued operation; and in the year to 31 March 2017 the Group's Superconducting Wire business was classified as a discontinued operation. They were considered major classes of business on the basis that they were previously operating segments and referred to in the Group Strategic Report.

The 2017 Financial Statements have been re-presented to reflect the classification of the Group's Industrial Analysis business as a discontinued operation.

Results of discontinued operations - year to 31 March 2018