Interim Report

RNS Number : 1990J

Gooch & Housego PLC

10 June 2014

 



For immediate release

10 June 2014

GOOCH & HOUSEGO PLC

INTERIM REPORT FOR THE SIX MONTHS ENDED 31 MARCH 2014

Gooch & Housego PLC (AIM:GHH), the specialist manufacturer of optical components and systems, today announces its interim results for the six months ended 31 March 2014.

Year ended 30 September	HY2014	HY2013	Change	FY2013
Revenue (£m)	34.4	29.0	18.6%	63.3
Adjusted profit before tax (£m)1	5.1	3.8	34.2%	9.7
Adjusted basic earnings per share (pence)1	15.9	12.7	25.2%	32.0
Interim dividend per share (pence)	2.6	2.3	13.0%	6.3
Net cash (£m)	2.3	0.7	228.6%	5.7
Statutory profit before tax (£m)	3.7	3.3	12.1%	8.3
Basic earnings per share (pence)	11.0	11.2	(1.8%)	27.7

¹ Adjusted for amortisation of acquired intangible assets, site closure costs, the impairment of goodwill and the gain on bargain purchase in relation to Spanoptic Limited.

Operational highlights

·      Strong performance from Aerospace & Defence and Industrial divisions

·      Acquisition of Spanoptic in October 2013 adds complementary precision optics business

·      Acquisition of Constelex in November 2013 strengthens Systems Technology Group

·      Systems Technology Group successful in securing contracts and funded projects

·      Rationalisation of manufacturing and R&D sites initiated

·      Investment in R&D up 19%; 4 patents granted and 6 filed so far this year

·      Solid order book of £29.7 milion at the end of the period

·      Net cash of £2.3 million at period end after investing £5.5 million (net) in acquisitions

Gareth Jones,Chief Executive of Gooch & Housego PLC, commented on the results:

"Gooch & Housego's markets continue to exhibit attractive, long-term structural growth drivers as photonic technology is adopted across an increasingly wide range of application areas.  We continue to invest in our business with confidence to position it for sustainable long-term growth."

For further information please contact:

Gooch & Housego PLC	Gareth Jones / Andrew Boteler	01460 256 440
Buchanan	Mark Court / Gabriella Clinkard	020 7466 5000
Investec Bank plc (Nomad & Broker)	Patrick Robb / David Anderson	020 7597 5169

Operating and Financial Review

Performance Overview

In the six months to 31 March 2014, the business has once again delivered profitable growth and improving margins in less than buoyant market conditions.  The trend towards a more evenly balanced business has continued, reflecting not only our strategy of diversification and our efforts to develop new opportunities in Aerospace & Defence and Life Sciences, but also our success in growing the business in our "new industrial" markets.

REVENUE
Six months ended 31 March	2014			2013
	£'000	% of total		£'000	% of total
Industrial	18,917	55%		16,404	56%
Aerospace and Defence	10,218	30%		7,437	26%
Life Sciences	3,608	10%		3,142	11%
Scientific Research	1,679	5%		2,006	7%
Group Revenue	34,422	100%		28,989	100%

Group revenue for the half year was a record £34.4 million, an increase of £5.4 million, or 19% over the comparative period last year. On a constant currency basis revenue was 22% higher.  Excluding the impact of acquisitions, Group revenue increased by 7% compared with the same period last year.

In our industrial market, revenues were 15% up on the corresponding period last year and up 5% excluding the impact of acquisitions.   A solid performance in our industrial laser market was supplemented by better demand from the telecommunications and semiconductor sectors.

Aerospace & Defence produced an excellent result with revenues up 37% on an absolute basis and 22% after excluding the impact of acquisitions.  This growth has been driven by strong sales of sub-assemblies for defence applications and continued buoyancy in the sales of navigation components for the civil aerospace market.  Budgetary constraints in the US continue to create headwinds, although these are having less of an impact on established programmes.

Life Sciences revenues were up 15% in absolute terms compared with the same period last year, but were flat excluding acquisitions.

In line with our expectations, constrained government spending continues to adversely affect our Scientific Research market (economically the smallest part of our business) with revenues down 16%. 

Order intake in the first half of the year has been solid.  The order book at 31 March 2014 was £29.7 million and the Company has booked £34.5 million in orders since 1 October 2013. 

RECONCILIATION OF ADJUSTED PERFORMANCE MEASURES

	Operating Profit		Net finance costs		Taxation		Earnings per share
Half Year to 31 March	2014 £000	2013 £000	2014 £000	2013 £000	2014 £000	2013 £000	2014 pence	2013 pence
Reported	3,956	3,643	(293)	(320)	(1,031)	(841)	11.0	11.2
Amortisation of acquired intangible assets	775	427	-	-	(221)	(113)	2.3	1.5
Gain on bargain purchase	(1,039)	-	-	-	-	-	(4.4)	-
Impairment of goodwill	1,538	-	-	-	-	-	6.5	-
Restructuring costs	172	-	-	-	(58)	-	0.5	-
Adjusted	5,402	4,070	(293)	(320)	(1,310)	(954)	15.9	12.7

Adjusted profit before tax was £5.1 million, 34% better than the £3.8 million reported last year. This reflects the overall increased volume in our Aerospace & Defence business, which has driven benefits in the operational gearing of this segment.  The two acquisitions that were made in the six months to 31 March 2014 have contributed £0.6 million to the profit before tax in this period.

Operational and Strategy Review

Products and Markets - Industrial

Gooch & Housego's principal industrial markets are industrial lasers, telecommunications, metrology, sensing and semiconductor manufacturing. Industrial lasers are used in a diverse range of precision material processing applications ranging from microelectronics to automotive.

Business in our industrial laser market was solid in the first six months of the year, underpinned by good business in our acousto-optic components for fibre lasers and in our semiconductor businesses.  Sales of precision optics and acousto-optics into the semiconductor market were excellent in the six months to 31 March 2014, being 22% higher compared with the equivalent period last year.

The industrial laser market is continuing to evolve and grow, driven by the success of the fibre laser. Gooch & Housego anticipated these changes with the development of a family of products for fibre laser applications, including the Fibre-Q, with the result that the Company today is benefitting from these market trends. Recent innovations have enabled Gooch & Housego to keep up with the demanding requirements of this cost sensitive application, paving the way for greater market penetration. In other applications, most notably fibre-optic sensing, the Fibre-Q is proving to be a key enabling technology that is now being deployed by a number of our key customers.

While sales of products for fibre laser applications have been growing steadily, demand for the traditional acousto-optic Q-switch products has remained solid, sales of which represented only 10% of our total business during the period under review. A consequence of these market dynamics is a consolidation in the variety of acousto-optic products required to meet customer needs. In response to these changes, and as a result of the steady improvements in productivity that the Company has made to the production of these products, Gooch & Housego no longer needs to maintain three separate acousto-optic manufacturing facilities.  The decision has, therefore, been made to close the Melbourne, Florida, operation and to transfer the business to the Company's facilities in Ilminster, UK, and Palo Alto, California.  It is expected that this process will be largely complete by the end of the current financial year.  The closure of the Melbourne site is expected to entail a cash cost of $1.2 million and deliver annual cash savings of $1.0 million.

In telecommunications, sales of lithium niobate wafers for modulation applications exceeded our forecast and completely offset weaker demand for high-reliability products for undersea cable infrastructure projects that were again delayed due to uncertainties over funding. Indications are that this market is poised to recover as funding is released for new projects.

Products and Markets - Aerospace and Defence

The Aerospace & Defence market for Gooch & Housego is characterised by high-value, long-term programmes involving the main US and European defence contractors.  During the first six months of 2014, the Company has seen a healthy increase in its Aerospace & Defence business, with a significant proportion of revenues coming from sub-assemblies.  Gooch & Housego's precision optics and acousto-optic technologies have contributed most to the Aerospace & Defence markets in the last six months, with navigation, range finding and target designation being the principal applications.

Gooch & Housego continues to regard Aerospace & Defence as a growth market and we are investing accordingly.   During the past twelve months, Space Photonics has emerged as a significant new application area in which Gooch & Housego has the opportunity to develop a market leading position by leveraging its unique expertise in fibre optics, semiconductor lasers and precision optics. These skills are particularly sought after in the rapidly evolving field of satellite laser communications, guidance and control systems. With support and encouragement from UK, European and US space agencies, Gooch & Housego has successfully bid on several development programmes, and has more in the pipeline. Our recently established Systems Technology Group (STG) has been instrumental in realising these opportunities, which are focussed on the application of our core component technologies in complex sub-systems as we seek to move up the value chain. This is consistent with our strategy of delivering growth by migrating from component supplier to solutions provider at the systems level. We expect Space Photonics to become an increasingly important sub-set of the Aerospace & Defence market.

Products and Markets - Life Sciences

Gooch & Housego's three principal Life Sciences revenue streams are derived from diagnostics (fibre-optic modules for optical coherence tomography (OCT) applications), surgery (Q-switches for surgical lasers) and biomedical research (acousto-optics for microscopy applications). In each application area the Company is making steady progress in moving up the value chain and is currently selling sub-systems as well as components to several of our larger customers.

Whilst in absolute terms this market sector grew by 15% in the six months to 31 March 2014, compared with the equivalent period last year, when the impact of acquisitions is taken into account, Life Sciences revenue was flat.  The principal commercial application of OCT systems is retinal imaging, and Gooch & Housego continues to be the leading provider of fibre optic solutions (products and design services) to this industry.

Following inconclusive discussions with potential commercial partners earlier this year, it was decided to mothball the Group's work on cancer diagnostics using hyperspectral imaging and to close its research facility in New Jersey.   The cost of closing this facility was £0.8 million, of which £0.7 million related to non-cash costs (£0.6 million of goodwill impairment).  It is expected that the closure of this facility will result in a cash saving of £0.3 million per annum. Gooch & Housego will continue to develop and manufacture hyperspectral imaging products from its Orlando facility.

Products and Markets - Scientific Research

The key application in Scientific Research is laser inertial confinement fusion ("laser fusion"), where lasers are used to create the conditions found in the core of a star. In addition to pure research in high energy and plasma physics, these vast laser systems are being used to investigate whether this technology could provide clean, carbon-free energy to reduce dependency on fossil fuels. The first of these facilities is now complete, although progress in demonstrating the potential of the technology as an energy source has been slow. Gooch & Housego is continuing to supply crystals for the second facility and expects ongoing business to service replacement and maintenance requirements.

Strategy

Gooch & Housego has developed, and measures itself, on a set of strategies to deliver long term, sustainable growth for its shareholders.  These can be categorised into two broad pillars: "Diversification" and, "Moving up the Value Chain".  In seeking to achieve its strategic goals Gooch & Housego uses a variety of tools, including investment in R&D to deliver organic growth, acquisitions, market focused business development and strategic partnerships.

In the first six months of the current financial year, Gooch & Housego invested £2.9 million in R&D.  This represents 8.4% of revenue and is 19% higher than the same period last year (2013: £2.4m).

As the Company moves up the value chain, know-how and trade secrets no longer provide adequate protection. As a result, protecting intellectual property by means of patents is becoming increasingly important. Gooch & Housego has an Intellectual Property Committee, comprising senior R&D and management personnel and chaired by the Chief Technology Officer, that meets on a quarterly basis and whose remit is to identify and protect commercially relevant intellectual property.  So far this year four patents have been granted and a further six inventions have patents that are in the process of being filed.

Diversification:  Gooch & Housego seeks to develop, through R&D and acquisition, a presence in new markets that offer the potential for significant growth as a result of their adoption of photonic technology, whilst also reducing exposure to cyclicality in any particular sector.  In the current period Gooch & Housego has grown its business in its core Industrial, Aerospace & Defence and Life Sciences markets.  Moreover, the business has continued to invest in its quality systems and business development in order to strengthen its position in these markets in the future.

Moving up the Value Chain: Gooch & Housego seeks to move up the value chain to more complex sub-assemblies and systems through leveraging its excellence in materials and components, and by providing photonic design and engineering solutions for our customers. Gooch & Housego is progressively making the transition from components supplier to solutions provider.   A significant proportion of our business in the Aerospace & Defence market now comes from the sale of sub-systems rather than discrete components.

Fifteen months ago the Company introduced a new initiative to accelerate this process with the formation of the STG, which provides design and engineering services and leads Gooch & Housego's participation in a number of funded research programmes.  Its initial focus has been on opportunities to take Gooch & Housego up the value-chain in the fields of Space Photonics and optical coherence tomography for biomedical imaging applications. During the period under review, Gooch & Housego has made significant investments in the STG in the form of a dedicated new facility at the Company's Torquay site, the acquisition of Constelex and an increase in headcount to eleven with a broad range of skills in project management, design and modelling of complex optical and electronic systems.

Vertical integration: Vertical integration is a key strategic objective, not merely a by-product of moving up the value chain. In the field of photonics, certain materials (e.g. optical crystals), and materials processing operations (polishing, thin-film coating, fused-fibre processes etc.) have a critical bearing on the performance, cost and reliability of the final product, whether it is a component such as the Q-switch or a complex satellite communications system. Gooch & Housego has established a portfolio of world-class photonic products and capabilities that enable it to provide uniquely integrated solutions for the most demanding applications.

Gooch & Housego will continue to evaluate acquisition opportunities that have the potential to accelerate delivery of the Company's strategic objectives. Having established a presence in its target markets, Gooch & Housego is now focussing on moving up the value chain in each of those markets. Acquisition opportunities that enhance the Company's ability to wrap electronics and software around core photonic products to yield system-level solutions are of greater relevance today than those that merely broaden Gooch & Housego's range of component capabilities. The acquisition of Constelex is a good example of this strategy in action, paving the way to translate Gooch & Housego's leadership in space qualified fibre optic components (unit values typically in the $100 to $1,000 range) into a family of erbium-doped fibre amplifier systems for satellite communications with unit values up to $100,000.

Cash Flow and Financing

In the six months to 31 March 2014 Gooch & Housego generated cash from operations of £4.9 million, compared with £2.8 million in the same period of 2013. 

The Company's strategies of diversifying into industries such as Aerospace & Defence and Life Sciences and moving up the value chain inherently put demands on working capital.  Our customers in Aerospace & Defence require safety stocks to be held and the move to systems and sub-systems lead to Gooch & Housego managing longer supply chains and carrying higher levels of inventory. In recognising these upward pressures on working capital, Gooch & Housego has introduced a number of initiatives to help reduce this impact.  Excluding the impact of acquisitions, inventories have remained stable and trade debtors have reduced by £0.9 million. Capital expenditure on property, plant and equipment was £0.9 million in the period (2013: £1.0 million). The main fixed asset additions were in relation to expanding our Torquay facilities and equipment to accommodate the STG.

During the period to 31 March 2014, £5.5 million, net of cash acquired, was invested in relation to the acquisitions of Spanoptic Limited and Constelex Limited.

Cash, cash equivalents and bank overdrafts as at 31 March 2014 amounted to a net positive cash position of £12.0 million, compared to £12.1 million at 30 September 2013.

Since 30 September 2013, the Company's net cash position has reduced from £5.7 million to £2.3 million, following the acquisition of Spanoptic Limited and Constelex Limited

At 31 March 2014, the Group's banking facilities with its bankers, the Royal Bank of Scotland, comprise an $18 million dollar denominated term loan (of which $4.5 million is drawn), a £3.1 million sterling denominated term loan (of which £1.8 million is drawn), an $8 million revolving credit facility (undrawn as at 31 March 2014) and a fully drawn $8 million capital expenditure facility.  All facilities are committed until April 2015, subject to certain covenant provisions.

Staff

The Company workforce increased from 581 at 30 September 2013 to 644 at the end of March 2014. This increase is was largely due to the acquisitions of Spanoptic Limited and Constelex Limited.   

Dividends

The Directors have declared an interim dividend of 2.6p per share (2013: 2.3p per share), a 13% increase on the prior period, which is reflective of the Directors' confidence in the Company's long term growth.  This will be payable on 21 July 2014 to shareholders on the register as at 27 June 2014.

Prospects

Whilst the strengthening of sterling in recent months represents a headwind to growth, Gooch & Housego's markets continue to exhibit attractive, long-term structural growth drivers as photonic technology is adopted across an increasingly wide range of application areas.  We continue to invest in our business with confidence to position it for sustainable long-term growth.

Julian Blogh Chairman 10 June 2014

Gareth Jones Chief Executive Officer 10 June 2014

Andrew Boteler Chief Financial Officer 10 June 2014

Unaudited interim results for the 6 months ended 31 March 2014

Group Income Statement	Note	Half Year to 31 Mar 2014 (Unaudited)	Half Year to 31 Mar 2013 (Unaudited)	Full Year to 30 Sep 2013 (Audited)
		£'000	£'000	£'000
Revenue	5	34,422	28,989	63,252
Cost of revenue		(20,960)	(17,674)	(37,635)
Gross profit		13,462	11,315	25,617
Research and Development		(2,577)	(2,423)	(4,913)
Sales and Marketing		(2,301)	(2,218)	(4,666)
Administration and other expenses		(5,179)	(4,078)	(8,814)
Other income		551	1,047	1,727
Operating profit	5	3,956	3,643	8,951
Net finance costs		(293)	(320)	(608)
Profit before income tax expense		3,663	3,323	8,343
Income tax expense	6	(1,031)	(841)	(2,151)
Profit for the period		2,632	2,482	6,192
Earnings per share	7	11.0p	11.2p	27.7p

Reconciliation of operating profit to adjusted operating profit:

		Half Year to 31 Mar 2014 (Unaudited)	Half Year to 31 Mar 2013 (Unaudited)	Full Year to       30 Sep 2013 (Audited)
		£'000	£'000	£'000
Operating profit		3,956	3,643	8,951
Amortisation of acquired intangible assets		775	427	875
Acquisition costs		-	-	164
Restructuring costs		172	-	278
Gain on bargain purchase: Spanoptic Limited		(1,039)	-	-
Impairment of goodwill (including CDI closure)		1,538	-	-
Adjusted operating profit		5,402	4,070	10,268

Group Statement of Comprehensive Income	Half Year to 31 Mar 2014 (Unaudited)	Half Year to 31 Mar 2013 (Unaudited)	Full Year to       30 Sep 2013 (Audited)
	£'000	£'000	£'000
Profit for the period	2,632	2,482	6,192
Other comprehensive income
Fair value adjustment of interest rate swap net of tax	5	41	90
Currency translation difference	(837)	1,841	(364)
Other comprehensive (expense)/income for the period	(832)	1,882	(274)
Total comprehensive income for the period	1,800	4,364	5,918

Unaudited interim results for the 6 months ended 31 March 2014

Group Balance Sheet		31 Mar 2014 (Unaudited)	31 Mar 2013 (Unaudited)	30 Sep 2013 (Audited)
		£'000	£'000	£'000
Non-current assets
Property, plant and equipment		24,339	21,523	21,456
Intangible assets		20,697	21,130	19,821
Deferred income tax assets		3,462	4,203	3,830
		48,498	46,856	45,107
Current assets
Inventories		13,976	14,188	13,390
Income tax assets		508	-	420
Trade and other receivables		14,106	13,515	12,706
Cash and cash equivalents		12,016	11,672	14,558
		40,606	39,375	41,074
Current liabilities
Trade and other payables		(9,929)	(10,569)	(10,461)
Borrowings		(7,972)	(6,082)	(5,726)
Income tax liabilities		(131)	(841)	(307)
Provision for other liabilities and charges		(272)	(324)	(271)
		(18,304)	(17,816)	(16,765)
Net current assets		22,302	21,559	24,309
Non-current liabilities
Borrowings		(1,698)	(4,879)	(3,113)
Deferred income tax liabilities		(2,536)	(618)	(1,330)
Derivative financial instruments		(32)	(83)	(34)
		(4,266)	(5,580)	(4,477)
Net assets		66,534	62,835	64,939
Shareholders' equity Capital and reserves attributable to equity shareholders
Called up share capital		4,760	4,491	4,620
Share premium account		15,420	14,757	15,213
Merger reserve		2,671	2,671	2,671
Hedging reserve		(74)	(128)	(79)
Cumulative translation reserve		(1,697)	1,347	(860)
Retained earnings		45,454	39,697	43,374
Equity Shareholders' Funds		66,534	62,835	64,939

Unaudited interim results for the 6 months ended 31 March 2014

Statement of Changes in Equity	Share capital account £000	Share premium account £000	Merger reserve £000	Hedging reserve £000	Retained earnings £000	Total equity £000
At 1 October 2012	4,382	14,311	2,671	(169)	37,371	58,566
Profit for the period	-	-	-	-	2,482	2,482
Other comprehensive income for the period	-	-	-	41	1,841	1,882
Total comprehensive income for the period	-	-	-	41	4,323	4,364
Dividends	-	-	-	-	(712)	(712)
Proceeds from shares issued	109	446	-	-	(33)	522
Fair value of employee services	-	-	-	-	235	235
Tax charge relating to share option schemes	-	-	-	-	(140)	(140)
	109	446	-	-	(650)	(95)
At 31 March 2013 (unaudited)	4,491	14,757	2,671	(128)	41,044	62,835
At 1 October 2013	4,620	15,213	2,671	(79)	42,514	64,939
Profit for the period	-	-	-	-	2,632	2,632
Other comprehensive income for the period	-	-	-	5	(837)	(832)
Total comprehensive income for the period	-	-	-	5	1,795	1,800
Dividends	-	-	-	-	(950)	(950)
Proceeds from shares issued	140	207	-	-	(120)	227
Fair value of employee services	-	-	-	-	122	122
Tax credit relating to share option schemes	-	-	-	-	396	396
	140	207	-	-	(549)	(202)
At 31 March 2014 (unaudited)	4,760	15,420	2,671	(74)	43,757	66,534

Unaudited interim results for the 6 months ended 31 March 2014

Group Cash Flow Statement		Half Year to 31 Mar 2014 (Unaudited)	Half Year to 31 Mar 2013 (Unaudited)	Full Year to 30 Sep 2013 (Audited)
		£'000	£'000	£'000
Cash flows from operating activities
Cash generated from operations		4,905	2,794	10,130
Income tax paid		(582)	(53)	(882)
Net cash generated from operating activities		4,323	2,741	9,248
Cash flows from investing activities
Acquisition of subsidiaries (net of cash acquired)		(5,532)	(20)	(22)
Purchase of property, plant and equipment		(853)	(896)	(2,032)
Sale of property, plant and equipment		88	-	67
Purchase of intangible assets		(74)	(56)	(202)
Interest received		3	6	15
Net cash used in investing activities		(6,368)	(966)	(2,174)
Cash flows from financing activities
Drawdown of acquisition borrowing facility		4,971	-	-
Repayment of borrowings		(1,704)	(1,694)	(3,394)
Proceeds from issues of share capital		123	522	1,044
Dividends paid to ordinary shareholders		(950)	(712)	(1,229)
Interest paid		(230)	(269)	(505)
Net cash generated by / (used in) financing activities		2,210	(2,153)	(4,084)
Net increase / (decrease) in cash, cash equivalents and revolving credit facility		165	(378)	2,990
Cash, cash equivalents and revolving credit facility at beginning of the period		12,088	9,235	9,235
Exchange (losses) / gains on cash and revolving credit facility		(237)	180	(137)
Cash, cash equivalents and revolving credit facility at the end of the period		12,016	9,037	12,088

Cash, cash equivalents and revolving credit facility at the end of the period are made up of:

		Half Year to 31 Mar 2014 (Unaudited)	Half Year to 31 Mar 2013 (Unaudited)	Full Year to 30 Sep 2013 (Audited)
		£'000	£'000	£'000
Cash and cash equivalents		12,016	11,672	14,558
Revolving credit facility		-	(2,635)	(2,470)
Cash, cash equivalents and revolving credit facility at the end of the period		12,016	9,037	12,088

Notes to the Group Cash Flow Statement		Half Year to 31 Mar 2014 (Unaudited)	Half Year to 31 Mar 2013 (Unaudited)	Full Year to 30 Sep 2013 (Audited)
		£'000	£'000	£'000
Profit before income tax		3,663	3,323	8,343
Adjustments for:
- Amortisation of acquired intangible assets		775	427	875
- Impairment of goodwill		1,538	-	-
- Gain on bargain purchase: Spanoptic Limited		(1,039)	-	-
- Amortisation of other intangible assets		79	84	168
- Depreciation		1,227	1,042	1,949
- Profit on disposal of property, plant    and equipment		25	-	91
- Share based payment obligations		122	235	341
- Finance income		(3)	(6)	(15)
- Finance costs		296	326	623
Total adjustments		3,020	2,108	4,032
Changes in working capital
- Inventories		(72)	(786)	(1,328)
- Trade and other receivables		877	(562)	(1,208)
- Trade and other payables		(1,507)	(1,189)	(538)
- Provisions for liabilities and charges		(1,076)	(100)	829
Total changes in working capital		(1,778)	(2,637)	(2,245)
Cash generated from operating activities		4,905	2,794	10,130

Reconciliation of net cash flow to movements in net debt

		Half Year to 31 Mar 2014 (Unaudited)	Half Year to 31 Mar 2013 (Unaudited)	Full Year to 30 Sep 2013 (Audited)
		£'000	£'000	£'000
Increase / (decrease) in cash in the period		165	(378)	2,990
Drawdown of acquisition facility		(4,971)	-	-
Repayment of borrowings		1,704	1,694	3,394
Changes in net debt resulting from cash flows		(3,102)	1,316	6,384
Finance leases acquired		(257)	-	-
Translation differences		(14)	(282)	(342)
Movement in net debt in the period / year		(3,373)	1,034	6,042
Net cash/(debt) at start of period		5,719	(323)	(323)
Net cash at end of period		2,346	711	5,719

Analysis of net debt

	At 1 Oct 2013	Cash flow	Exchange movement	Non-cash movement	At 31 Mar 2014
	£'000	£'000	£'000	£'000	£'000
Cash at bank and in hand	14,558	(2,305)	(237)	-	12,016
Revolving credit facility	(2,470)	2,470	-	-	-
	12,088	165	(237)	-	12,016
Debt due within 1 year	(3,256)	(4,971)	346	-	(7,881)
Debt due after 1 year	(3,113)	1,605	(123)	-	(1,631)
Finance leases	-	99	-	(257)	(158)
Net cash	5,719	(3,102)	(14)	(257)	2,346

Notes to the Interim Report

1.      Basis of Preparation

The unaudited Interim Report has been prepared under the historical cost convention and in accordance with International Financial Reporting Standards ("IFRS"), as adopted by the European Union.

The Interim Report was approved by the Board of Directors and the Audit Committee on 10 June 2014.  The Interim Report does not constitute statutory financial statements within the meaning of the Companies Act 2006 and has not been audited.  

Comparative figures in the Interim Report for the year ended 30 September 2013 have been taken from the Group's audited statutory financial statements on which the Group's auditors, PricewaterhouseCoopers LLP, expressed an unqualified opinion.  The comparative figures to 31 March 2013 are unaudited.

The Interim Report will be announced to all shareholders on the London Stock Exchange and published on the Group's website on 10 June 2014. Copies will be available to members of the public upon application to the Company Secretary at Dowlish Ford, Ilminster, Somerset, TA19 0PF.

The accounting policies adopted are consistent with those of the annual financial statements for the year ended 30 September 2013, as described in those financial statements.

2.      Application of IFRS

Adoption of new standards

During the current reporting period there were no new standards or amendments which had a material impact on the net assets of the Group. In addition, standards or amendments issued but not yet effective are not expected to have a material impact on the net assets of the Group.  However, the Group is closely monitoring the IASB projects on Contract Revenue recognition and the Lease accounting overhaul as they could potentially have a material impact on the Group's results.

3.      Estimates

The preparation of interim financial statements requires management to make estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense.  Actual results may differ from these estimates.

In preparing these condensed consolidated interim financial statements, the significant judgments made by management in applying the Company's accounting policies and the key sources of estimation uncertainty were the same as those that applied to the consolidated financial statements for the year ended 30 September 2013.

4.      Financial risk management

The Company's activities expose it to a variety of financial risks, market risk (including currency risk, cash flow interest rate risk and price risk), credit risk and liquidity risk.

The interim condensed consolidated financial statements do not include all financial risk management information and disclosures required in the annual financial statements and should be read in conjunction with the Company's annual financial statements as at 30 September 2013.

There have been no changes to the risk management policies since the year end.

5.      Segmental analysis

	Aerospace & Defence	Life Sciences	Industrial	Scientific Research	Corporate	Total
For half year to 31 March 2014	£'000	£'000	£'000	£'000	£'000	£'000
Revenue
Total revenue	10,218	3,608	20,935	1,679	-	36,440
Inter and intra-division	-	-	(2,018)	-	-	(2,018)
External revenue	10,218	3,608	18,917	1,679	-	34,422
Divisional expenses	(8,460)	(3,023)	(14,591)	(1,592)	(222)	(27,888)
EBITDA¹	1,758	585	4,326	87	(222)	6,534
EBITDA %	17.2%	16.2%	22.9%	5.2%	-	19.0%
Depreciation and Amortisation	(286)	(129)	(765)	(45)	(79)	(1,304)
Operating profit before amortisation of acquired intangible assets and impairment of goodwill	1,472	456	3,561	42	(301)	5,230
Amortisation of acquired intangible assets and impairment of goodwill	-	-	-	-	(1,274)	(1,274)
Operating profit	1,472	456	3,561	42	(1,575)	3,956
Operating profit margin %	14.4%	12.6%	18.8%	2.5%	-	11.5%
	Aerospace & Defence	Life Sciences	Industrial	Scientific Research	Corporate	Total
For half year to 31 March 2013	£'000	£'000	£'000	£'000	£'000	£'000
Revenue
Total revenue	7,437	3,142	18,430	2,006	-	31,015
Inter and intra-division	-	-	(2,026)	-	-	(2,026)
External revenue	7,437	3,142	16,404	2,006	-	28,989
Divisional expenses	(6,658)	(2,617)	(12,799)	(1,433)	(286)	(23,793)
EBITDA¹	779	525	3,605	573	(286)	5,196
EBITDA %	10.5%	16.7%	22.0%	28.6%	-	17.9%
Depreciation and Amortisation	(281)	(124)	(558)	(80)	(83)	(1,126)
Operating profit before amortisation of acquired intangible assets	498	401	3,047	493	(369)	4,070
Amortisation of acquired intangible assets	-	-	-	-	(427)	(427)
Operating profit	498	401	3,047	493	(796)	3,643
Operating profit margin %	6.7%	12.8%	18.6%	24.6%	-	12.6%

¹EBITDA = Earnings before interest, tax, depreciation and amortisation.

All of the amounts recorded are in respect of continuing operations.

5.      Segmental analysis continued

Analysis of revenue by destination

	Half year to 31 Mar 2014 (Unaudited)		Half year to 31 Mar 2013 (Unaudited)
	£'000		£'000
United Kingdom	6,807		4,093
America	14,604		12,940
Continental Europe	7,733		7,491
Asia-Pacific	5,278		4,465
	34,422		28,989

6.      Income tax expense

Analysis of tax charge in the period

		Half Year to 31 Mar 2014 (Unaudited)	Half Year to 31 Mar 2013 (Unaudited)	Full Year to 30 Sep 2013 (Audited)
		£'000	£'000	£'000
Current taxation
UK Corporation tax		526	740	1,263
Overseas tax		404	52	238
Adjustments in respect of prior year tax charge		-	86	(304)
Total current tax		930	878	1,197
Deferred tax
Origination and reversal of temporary differences		101	(1)	677
Adjustments in respect of prior year deferred tax		-	(36)	234
Impact of tax rate change in 2013 to 20%		-	-	43
Total deferred tax		101	(37)	954
Income tax expense per income statement		1,031	841	2,151

The tax charge for the six months ended 30 March 2014 is based on the estimated effective rate of the tax for the Group for the full year to 30 September 2014. The estimated rate is applied to the profit before tax.

7.      Earnings per share

The calculation of earnings per 20p Ordinary Share is based on the profit for the period using as a divisor the weighted average number of Ordinary Shares in issue during the period.  The weighted average number of shares is given below.

	Half Year to 31 Mar 2014 (Unaudited)	Half Year to 31 Mar 2013 (Unaudited)	Full Year to 30 Sep 2013 (Audited)
	No.	No.	No.
Number of shares used for basic earnings per share	23,864,426	22,123,658	22,376,650
Dilutive shares	125,595	1,652,880	1,097,927
Number of shares used for dilutive earnings per share	23,990,021	23,776,538	23,474,577

A reconciliation of the earnings used in the earnings per share calculation is set out below:

	Half Year to 31 Mar 2014 (Unaudited)		Half Year to 31 Mar 2013 (Unaudited)		Full Year to 30 Sep 2013 (Audited)
	£'000	p per share	£'000	p per share	£'000	p per share
Basic earnings per share	2,632	11.0p	2,482	11.2p	6,192	27.7p
Adjustments net of income tax expense:
Amortisation of acquired intangible assets	554	2.3p	329	1.5p	650	2.9p
Goodwill impairment	1,538	6.5p	-	-	-	-
Gain on bargain purchase: Spanoptic Limited	(1,039)	(4.4)p	-	-	-	-
Acquisition costs	-	-	-	-	122	0.5p
Restructuring costs	114	0.5p	-	-	206	0.9p
Total adjustments net of income tax expense	1,167	4.9p	329	1.5p	978	4.3p
Adjusted basic earnings per share	3,799	15.9p	2,811	12.7p	7,170	32.0p

Basic diluted earnings per share	2,632	11.0p	2,482	10.4p	6,192	26.4p
Adjusted diluted earnings per share	3,799	15.8p	2,811	11.8p	7,170	30.5p

Adjusted earnings per share before amortisation and adjustments has been shown because, in the opinion of the Directors, it more accurately reflects the trading performance of the Group.  

8.      Dividend

The Directors have declared an interim dividend of 2.6 pence per share for the half year ending 31 March 2014.  This dividend has not been accounted for within the period to 31 March 2014 as it is yet to be paid.

	Half Year to 31 Mar 2014 (Unaudited)	Half Year to 31 Mar 2013 (Unaudited)	Full Year to 30 Sep 2013 (Audited)
	£'000	£'000	£'000
Final 2013 dividend paid : 4.0p per share	950	712	-
2013 Interim dividend paid : 2.3p per share	-	-	517
Final 2012 dividend paid in 2013 : 3.2p per share	-	-	712
	950	712	1,229

9.      Borrowings

The group's banking facilities with the Royal Bank of Scotland comprise an $18 million dollar denominated term loan (fully drawn down), a £3.1 million sterling denominated term loan (fully drawn down).  The term loan balances at 31 March 2014 were $4.5 million and £1.8 million sterling respectively.

In addition, the Company has an undrawn revolving credit facility of $8.0 million and a fully drawn capital expenditure facility of $8.0 million.

All facilities are committed until April 2015 and attract an interest rate of between 2.25% and 3.00% above LIBOR dependent upon the Company's leverage ratio.

10.     Called up share capital

	2014 No.	2013 No.	2014 £'000	2013 £'000
Allotted, issued and fully paid Ordinary share of 20p each	23,797,999	22,456,965	4,760	4,491

11.     Derivative financial instruments

		Half Year to 31 Mar 2014  (Unaudited)	Half Year to 31 Mar 2013  (Unaudited)	Full Year to 30 Sep 2013 (Audited)
		£'000	£'000	£'000
Interest rate swap		96	166	103
Current liability portion		64	83	69
Non-current liability portion		32	83	34
		96	166	103

The notional principal amount of the outstanding interest swap contract at 31 March 2014 was $6.75 million (2013: $11.25 million).  The end date for the interest rate swap is 1 April 2015.  At 31 March 2014, the fixed rate of the interest rate swap was 2.14% and the floating rate was US dollar LIBOR. The fair value of the swap is a mark to market calculation based on future interest rate expectations over the life of the swap.  This is a level 2 method of determining fair value as defined by IFRS 7.

12.    Acquisition of Spanoptic Limited

On 15 October 2013, the Group completed the acquisition of the entire issued share capital of Spanoptic Limited, a Glenrothes, Scotland based manufacturer of precision optical components.

The consideration for the acquisition was £6.6m, paid in cash on completion.

The fair value of the assets acquired is summarised as follows:

		Provisional fair value
		£'000
Property, plant and equipment		3,575
Intangible assets		2,631
Cash		1,006
Trade and other receivables		1,768
Inventory		923
Trade and other payables		(866)
Current and deferred tax liabilities		(1,141)
Hire purchase and finance lease liabilities		(257)
Net assets acquired		7,639
Consideration paid:
Cash		6,600
Gain on bargain purchase		(1,039)

The fair value of the net assets acquired are provisional pending finalisation of the fair value exercise in relation to those assets.

The fair value of the intangible assets represents the estimated fair value of Spanoptic's customer relationships and its brand.  These have been valued using a discounted cash flow model.

The gain on bargain purchase of £1.0 million has been credited to the income statement.

Post-acquisition, the acquired business contributed £3.4 million of revenue and £0.5 million of profit after tax to the consolidated income statement.

13.     Acquisition of Constelex Technology Enablers Limited

On 26 November 2013, the Group completed the acquisition of the entire issued share capital of Constelex Technology Enablers Limited, designer and manufacturer of advanced photonic systems based in Athens, Greece.

The consideration for the acquisition was €650,000 (£539,000), comprising €400,000 (£333,000) in cash, followed by €250,000 (£207,000) in Gooch & Housego shares when the activities are relocated to the UK.  

The fair value of the assets acquired is summarised as follows:

		Provisional fair value
		£'000
Property, plant and equipment		18
Intangible assets		327
Cash		401
Trade and other receivables		813
Trade and other payables		(1,202)
Current and deferred tax liabilities		(65)
Net assets acquired		292
Consideration paid:
Cash		333
Deferred share consideration		207
Total consideration		540
Goodwill		248

The deferred share consideration is payable to the vendors when they relocate to the UK.  €125,000 of the deferred consideration was issued on 24 February 2014.  

The fair value of the net assets acquired are provisional pending finalisation of the fair value exercise in relation to those assets.

The fair value of the intangible assets represents the estimated fair value of future secured grant funding based on a discounted cash flow valuation.  

Goodwill reflects items not separately recognised.  

Post-acquisition, the acquired business contributed £96,000 of revenue and £21,000 of profit after tax to the consolidated income statement.

14.     Post balance sheet events

On 16 April 2014, management announced the proposed closure of the Group's Melbourne, Florida facility in connection with the consolidation of acousto-optic development and manufacturing into two of the Group's existing sites.

The costs of the proposed closure will be recorded in the results for the second half of 2014.

On 31 May 2014 Terry Scribbins retired as Chief Operating Officer.

 

END

 

 

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