Preliminary Results

RNS Number : 5476Y

Gooch & Housego PLC

02 December 2014

 



For immediate release

2 December 2014

Gooch & Housego PLC

PRELIMINARY RESULTS FOR THE YEAR ENDED 30 SEPTEMBER 2014

Gooch & Housego PLC ("Gooch & Housego", or "G&H", or the "Company", or the "Group"), the specialist manufacturer of optical components and systems, today announces its preliminary results for the year ended 30 September 2014.

Year ended 30 September	2014	2013	Change
Revenue (£m)	70.1	63.3	10.7%
Adjusted profit before tax (£m)*	11.5	9.7	18.6%
Adjusted basic earnings per share (pence)*	35.6	32.0	11.3%
Total dividend per share (pence)	7.2	6.3	14.3%
Net cash (£m)	8.7	5.7	£3.0m
Statutory profit before tax (£m)	7.9	8.3	(4.8%)
Basic earnings per share (pence)	22.5	27.7	(18.8%)

*adjusted figures are stated after excluding the amortisation of acquired intangible assets, gain on bargain purchase and exceptional items being acquisition costs, restructuring costs and impairment of goodwill.

Operating & Strategic Highlights

·      Profitable growth despite foreign exchange headwinds

·      Operational efficiencies & volume drive margin improvement from 15.3% to 16.4%

·      Commenced site rationalisation to reduce costs and duplication

·      Statutory profit includes one off costs associated with the site rationalisation

·      Implemented initiatives to drive operational excellence at all sites

·      Two acquisitions completed & successfully integrated

·      Systems Technology Group expanded to spearhead organic growth

·      Strong cash performance delivering record net cash at year end

·      Board succession plan successfully implemented

·      14.3% growth on full year dividend reflecting the strength of the balance sheet

Gareth Jones, CEO commented

"This has been another year of development and progress for the Company. Our initiatives to streamline the business and reduce costs are laying the building blocks for future growth to bear fruit in the coming years. With a solid order book and an encouraging pipeline of new products and opportunities, Gooch & Housego is well positioned to deliver further progress in FY15 and beyond."

For further information please contact:

Gooch & Housego PLC	Gareth Jones / Mark Webster / Andrew Boteler	01460 256 440
Buchanan	Mark Court / Gabriella Clinkard	020 7466 5000
Investec Bank plc  (Nomad & Broker)	Patrick Robb / David Anderson	020 7597 5970

Expected Financial Calendar

Annual General Meeting Final dividend for the year ended 30 September 2014 to shareholders on the register at close of business 18 December 2014. Subject to approval by shareholders at the Annual General Meeting Interim Results announced Financial Year End Preliminary announcement of results for the year ended 30 September 2015

26 February 2015 5 March 2015 June 2015 30 September 2015 December 2015

Chairman's Statement

2014 was a year in which the strategy defined by the Board resulted in continuing success for your company.  Growth was achieved in revenues and adjusted profit and, with a focus on cash generation, the company had a net cash balance of £8.7m at the year-end.

Important elements of the Board's strategy include: moving up the value chain by developing and supplying increasingly sophisticated products and systems in collaboration with our customers; increasing Gooch & Housego's diversification to ensure that any one market sector does not dominate; operating in an efficient manner with appropriate resources and using our cash generation, banking facilities and potentially the market to make suitable acquisitions to complement organic growth.

This defined strategy continued to be implemented in the year.  The Systems Technology Group, which was established in 2013 to enable the group to develop more complex and valuable products and sub-systems won further contracts particularly in the Space sector and has grown both through acquisition and recruitment.  Systems are being developed which in the medium term we expect to generate revenues and profit once the products reach the production stage.

The Board believed that the group had too many operating sites leading to inefficiencies. With the objective of improving the situation, one small site was closed during the year and by the calendar year end the Gooch & Housego site in Melbourne, Florida will have closed with its activities being moved partly to our Ilminster site in the UK with the remainder to Palo Alto in California.  Additionally, we continue to move production of some volume products to our lower cost manufacturing partner in the Czech Republic where we are comfortable that our traditional product quality is maintained.

As we enter our new financial year, the global economy remains supressed.  In the US a recovery is continuing although defence spending remains under pressure.  Nevertheless, given the increasing trend for photonic technologies to be deployed for target designation, range finding, navigation and countermeasures, the technology of Gooch & Housego is likely to be less affected by reduced budgets.  Our order book entering our new trading year was an encouraging 18% higher than at the previous year end.

During the year, major changes were announced regarding the senior management of the company.  In May Terry Scribbins, Chief Operating Officer retired from the company.  On behalf of the Board, I would like to thank him for his many years of excellent contribution.  His replacement, Alex Warnock joined the company in November and brings with him a wealth of relevant experience.  At the end of the calendar year, after almost nine years in the role, I will be stepping down as Chairman, to be replaced by Gareth Jones who will in turn retire from the CEO role.  Mark Webster, who has been a non-executive director of the company for two years, will take over from Gareth as CEO.  I would like to welcome them both in their new roles and thank Gareth for his many years of leading Gooch & Housego into the success it is today.

I would like to thank all employees for their support and efforts both this year and during my tenure as Chairman.  Our success would not have been possible without their dedication.  I have enjoyed my time with the company and believe, along with the Board, that with its technology, its employees and the new management team, the business is well placed to continue its growth into the future.

Dr Julian Blogh

Chairman

Chief Executive Officer's Statement

Overview of 2014

Gooch & Housego made good progress in delivering its long-term objectives of sustainable growth and adjusted margin improvement in 2014. By combining organic and acquisitive revenue growth with initiatives to streamline operations, enhance operational efficiency and drive continuous improvement, the Company was able to meet its expectations notwithstanding a lacklustre trading environment and significant foreign exchange headwinds. Despite two acquisitions and increased investment in R&D net cash increased during the year.

The two acquisitions completed during the first quarter have been successfully integrated. They have made a positive contribution to revenue and profit and brought valuable additional products, capabilities and customers. Spanoptic Limited ("Spanoptic"), based in Glenrothes, Scotland, was acquired in October 2013. Spanoptic's advanced lens manufacturing and infrared optics capabilities have substantially broadenedGooch & Housego's precision optics product offering and opened up a number of new opportunities, particularly in the Aerospace & Defence sector. Constelex Technology Enablers Limited ("Constelex"), acquired in November 2013, is a small photonic systems business with expertise in fibre optic amplifiers for satellite communications. Constelex, which brought strong relationships with space agencies and satellite manufacturers, has been absorbed into Gooch & Housego's Torquay-based Systems Technology Group (STG).

Gooch & Housego's long term strategic themes of diversification and moving up the value chain have resulted in further progress towards a more balanced and vertically integrated business with reduced exposure to risk and cyclicality. Developing and maintaining close relationships with key customers has helped the Company to anticipate and respond to market trends. Such market intelligence has informed Gooch & Housego's near term new product development initiatives and guided the Company's longer term organic and acquisitive growth strategies. A targeted approach to acquisitions has been developed in the past year with the aim of accelerating delivery of the strategic objectives of the business.

While still at an early stage, initiatives commenced during 2014 to enhance operational efficiency and drive continuous improvement throughout the organisation are already delivering results in the form of reduced costs and improving margins. Rationalising operations and simplifying the management and organisational structure are key aspects of this process.

R&D expenditure increased as expected in 2014. Investments in the STG and a small number of significant new product development opportunities have accounted for the majority of this increase. The STG has met its ambitious growth targets in what was its first full year of operations.

The trend towards a more balanced spread of business across the Company's principal market sectors has continued.

In order to facilitate both organic and acquisitive investments, the business refinanced its banking facilities in November 2014. Further detail is given in the Financial & Operating Review.

Markets and applications - Industrial

Gooch & Housego has addressed an increasingly diverse range of industrial applications for photonics during 2014, including semiconductor manufacturing and test, microelectronics, remote sensing, metrology and telecommunications. The Industrial market has demonstrated significant growth in 2014, driven by both organic growth in our telecommunications and fibre laser business, and acquisitive growth that has come from Spanoptic. In addition, technology trends in the Company's traditional industrial laser market have enabled rationalisation of the product range and provided the opportunity to consolidate operations.

Shifts in technology represent both a threat and an opportunity. As the world leader in acousto-optics for industrial lasers, Gooch & Housego has been able to anticipate and prepare for the growing use of fibre lasers in materials processing applications. While sales of conventional water-cooled Q-switches declined during 2014 as expected, this trend was more than compensated for by a growing demand for acousto-optic modulators for fibre laser applications. Sales of this comparatively new product eclipsed those of the conventional Q-switch in 2014 in both volume and revenue terms. Although highly cost-sensitive, efforts to scale production volumes while controlling costs have enabled Gooch & Housego to retain its dominant position in this sector. With further initiatives in the pipeline the Company is well-positioned to maintain its market leading position.

At the opposite end of the scale, the semiconductor manufacturing and test market demands high levels of complexity and exceptional performance in modest volumes. New products launched during 2014 have been well received, and with the combination of acousto-optic and laser technology providing the key to enhancing miniaturisation and speed in this rapidly advancing field, the signs are that this sector will grow in importance in the coming years.

Lasers are increasingly being used in sensing applications, both free-space and in-fibre, and Gooch & Housego has strengthened its position in this growing market during the past year. Key new products include narrow line width laser sources and acousto-optic and fibre optic components. Gooch & Housego has been able to leverage its world-class photonic component technologies to meet customer pull for integrated sensor sub-systems, and in doing so has been successful in moving up the value chain in the sensor market.

The telecommunications sector in 2014 was mixed. Products for modulation systems performed extremely well while sales of high-reliability fibre optics for sub-sea applications were flat as a result of delays to long-haul cable infrastructure projects. With the first of these projects receiving the go ahead towards the end of the financial year it is anticipated that there will be more activity in this sector in 2015.

Markets and applications  - Aerospace & Defence

During 2014 revenue from the Aerospace & Defence sector accounted for 27% of revenue, and in absolute terms was £1.5m higher than the previous year. Established customer relationships have been reinforced, and new ones forged, as a result of business development activities initiated in the past 12 months. Guidance and navigation, laser target designation and laser range finding continue to be the principal applications.

The Aerospace & Defence sector has always been exceptionally demanding in terms of product quality, reliability and performance, but in recent years it has also become intensely cost focused. In order to maintain competitiveness and keep pace with customer expectations, Gooch & Housego has invested considerable effort in the past year to reduce costs while continuing to improve quality and delivery performance. Areas of focus have included supply-chain, management, sub-contract partners and internal manufacturing equipment and processes. These initiatives are ongoing and are an essential aspect of doing business in this sector, which presents significant opportunities for future growth.

Markets and applications - Life Sciences

Whilst demand from the Life Sciences sector for sub-system products was solid during 2014, sales of some acousto-optic products in this sector were weaker than in previous years, resulting in an overall flat performance year on year. Principal applications were optical coherence tomography (OCT), ophthalmology, microscopy, laser surgery and aesthetic laser treatments. We continue to believe the increasingly widespread use of photonics in biomedical research, diagnostics and surgery represents a significant growth opportunity for Gooch & Housego. Companies in this market frequently prefer suppliers that are capable of providing more than just components, and during the past year Gooch & Housego has worked closely with several key customers to support the design and development of their next generation systems. Through the acquisition of Spanoptic Gooch & Housego gained a manufacturing partner in China capable of producing high-quality, competitively priced sub-systems and has been working with them to establish procedures and controls appropriate for this demanding but exciting market.

Markets and applications - Scientific Research 

For Gooch & Housego, the Scientific Research market is dominated by a small number of "Big Science" projects in the fields of nuclear fusion research and synchrotron radiation sources. These large, long term projects are reliant on government funding and are frequently subject to delay when budgets are under pressure. Following delays in the previous year that extended into the early months of 2014, demand picked up later in the year but was not sufficient to prevent a small decline in overall revenues from this sector.

Growth

Good progress has been made in delivering growth via a combination of organic and acquisitive means. Initiatives to increase the rate of organic growth have included focussing on a smaller number of higher-value near-market opportunities, increasing investment in the STG and introducing new technology, capabilities and relationships via the acquisition of Constelex.

Several new product opportunities have necessitated working closely with customers to refine and qualify complex sub-system and instrumentation products for applications new to Gooch & Housego. With the potential to provide further diversification and balance in the business, these projects are on target for commercialisation in the coming year.

The acquisition of Constelex, the increase in headcount to eleven and the growth in the number of contracts and funded projects has made it necessary to provide dedicated facilities for the STG. Further investment in the Company's Torquay facility is planned, supported by £1.2 million of grant funding from the Regional Growth Fund, to make available dedicated R&D laboratories alongside additional space for expansion of fibre optic components and systems manufacturing in Torquay.

The STG has been successful in securing European Space Agency, UK Space Agency and European Union funding in 2014. By the end of the year the STG was leading or participating in a total of six space photonics projects, including the projects that came with the acquisition of Constelex. The first satellite communications project won by the STG was successfully completed in 2014 with the delivery of a technology demonstrator. A follow-on contract to produce a flight-capable system has since been awarded. While these projects are part of a medium to long term strategy to develop a leadership position in space photonics, the STG is also actively engaged in near-market developments in OCT, fibre lasers and fibre optic sensing as the Companyleverages its components expertise to move up the value chain into systems.

Complementing Gooch & Housego's already strong position in planar optics, the acquisition of Spanoptic has added high precision spherical and aspheric lens manufacturing capabilities, as well as infrared optics and coatings. The latter are particularly relevant for Aerospace & Defence applications.

Operational Excellence

Gooch & Housego embarked on a number of initiatives to improve margins and reduce working capital in 2014. Whilst the full anticipated benefits are not expected to be seen until later in 2015 and beyond, these are aimed at applying a uniform standard of operational excellence across all of the Company's operating facilities. These initiatives are addressing site rationalisation, product consolidation, manufacturing, quality and process controls, supply-chain management and inventory reduction. Although very much work-in-progress, the benefits of these initiatives are already beginning to be reflected in improving margins.

Recent trends in the industrial laser market have resulted in a more streamlined product range, which has made it possible to consolidate manufacturing operations. In April 2014 the closure of the Company's acousto-opticmanufacturing site in Melbourne, Florida, was announced.  Customers will continue to be fully supported from Gooch & Housego's other acousto-optic manufacturing operations in the UK and California. The business transfer process is well advanced and is on schedule to be completed by the end of the calendar year.

Board Succession

Succession planning to underpin the continued success of the business and support the smooth evolution of the board was a priority during 2014. At the end of May 2014 Terry Scribbins retired as Chief Operating Officer. I would like to reiterate my thanks to Terry for his enormous contribution to Gooch & Housego over the past decade. In August 2014, Mark Webster made the transition from a non-executive to an executive role and was appointed as Deputy Chief Executive Officer. He will succeed me as Chief Executive Officer in January 2015. I would like to welcome Mark to the executive team. In November 2014 Alex Warnock joined the board as Chief Operating Officer, and will be instrumental in delivering operational excellence across the organisation.

Outlook

Gooch & Housego has made good progress in executing its strategy during 2014, and in doing so has met expectations for growth and profitability. Strategic acquisitions have been used to accelerate organic growth and add new capabilities and customers, resulting in a more diversified and better balanced business that is well-positioned to deliver sustained growth. The initiatives to embed a culture of continuous improvement and deliver operational excellence that commenced in 2014 provide a sound basis for further margin improvement in 2015 and beyond under the direction of the new executive team and with a solid order book the Board are confident of the Group's prospects.

Gareth Jones

Performance Overview

The business has delivered profitable growth and improving margins whilst experiencing considerable foreign exchange headwinds. During the year the business has acquired and successfully integrated two companies, which have both contributed positively to adjusted profits in their first year of ownership under Gooch & Housego.

The Company has delivered an excellent cash performance in the year, increasing its net cash position from £5.7m at 30 September 2013 to £8.7m at 30 September 2014.  During this period, Gooch & Housego has also invested £5.5m in acquisitions and £2.8m in property, plant and equipment and intangible assets.

REVENUE
	2014			2013
Year ended 30 September	£'000	%		£'000	%
Industrial	39,813	57%		34,345	54%
Aerospace & Defence	18,786	27%		17,273	27%
Life Sciences	7,318	10%		7,353	12%
Scientific Research	4,139	6%		4,281	7%
Group Revenue	70,056	100%		63,252	100%

In the financial year under review, margins benefited from the greater operating leverage gained from increased volumes and efficiency gains made by the business this year.  As a result, adjusted operating margins have increased to 17.1% (2013: 16.2%).

Group revenue for the year was a record £70.1m, an increase of £6.8m, or 11% over the previous year of £63.3m.  On a consistent currency basis revenue was 16% higher than the previous year, with 10% of this growth coming from acquisitions.

In our Industrial segment, revenue grew by 15.9% from £34.3m last year to £39.8m this year.  Similarly, revenue in our Aerospace & Defence business grew by 8.8%, from £17.3m to £18.8m. Sales into our Life Sciences market were flat, whilst our smallest segment of Scientific Research fell by 3.3%.

A more detailed analysis of revenues by market is shown in the Market Analysis section, earlier in this report.

GROUP EARNINGS PERFORMANCE
All amounts in £'000	Adjusted			Reported
Year ended 30 September	2014	2013		2014	2013
Operating profit	11,974	10,268		8,395	8,951
Net finance costs	(514)	(608)		(514)	(608)
Profit before taxation	11,460	9,660		7,881	8,343
Taxation	(2,951)	(2,490)		(2,482)	(2,151)
Profit for the year	8,509	7,170		5,399	6,192
Basic earnings per share (p)	35.6p	32.0p		22.5p	27.7p

The Group adjusted profit before tax amounted to £11.5m (2013: £9.7m) and represented a return on revenue of 16.4% compared with 15.3% in the previous year.  Statutory profit before tax was £7.9m compared with £8.3m last year, reflecting the one off costs associated with the closure of our New Jersey R&D facility, the closure of our Melbourne facility and the write off of goodwill associated with our 2011 EM4 acquisition. Against this, the company had a one off benefit associated with the gain on acquisition of Spanoptic.

The adjusted effective rate of tax was 25.8% (2013: 25.8%). The effective rate of tax of 31.5% (2013: 25.8%) was higher due to the impairment of goodwill and write off of deferred tax assets due to the closure of the Melbourne site.  The rate also reflects a combination of the varying tax rates applicable throughout the countries in which the Group operates, principally the UK and the USA.  The effect of the reduction of the UK corporation tax rate was largely offset by a greater proportion of the Group's profit being taxed in the US.

The introduction of the patent box tax regime from April 2013 has not contributed to a lower tax rate in 2014 and will not in 2015 due to the Group historically filing patents in the USA rather than in the UK or Europe. Current policy is to file patents in the UK when possible. The effective rate of tax should benefit in the future from further reductions in the UK tax rate, although the increased percentage of profit generated in the USA, where tax rates are higher, will also have an impact.

Adjusted earnings per share (EPS) increased from 32.0p to 35.6p.  Basic EPS was 22.5p compared with 27.7p last year.

RECONCILIATION OF ADJUSTED PERFORMANCE MEASURES

	Operating Profit		Net finance costs		Taxation		Earnings per share
Year ended 30 September	2014 £000	2013 £000	2014 £000	2013 £000	2014 £000	2013 £000	2014 pence	2013 pence
Reported	8,395	8,951	(514)	(608)	(2,482)	(2,151)	22.5p	27.7p
Amortisation of acquired intangible assets	1,525	875	-	-	(381)	(225)	4.8p	2.9p
Gain on bargain purchase	(1,039)	-	-	-	-	-	(4.3p)	-
Impairment of goodwill	1,538	-	-	-	-	-	6.4p	-
Acquisition costs	-	164	-	-	-	(42)	-	0.5p
Restructuring costs	1,555	278	-	-	(88)	(72)	6.2p	0.9p
Adjusted	11,974	10,268	(514)	(608)	(2,951)	(2,490)	35.6p	32.0p

NON GAAP MEASURES

The Company uses a number of non GAAP measures which are shown in the table above and in the segmental analysis.  These measures are used to illustrate the impact of non-recurring and non-trading items on the Company's financial results.  These are the impact of the amortisation of acquired intangible assets, gain on bargain purchase of Spanoptic, impairment of goodwill, acquisition costs and costs associated with restructuring activities. In addition, the Company uses the term EBITDA (Earnings before interest, taxation, depreciation and amortisation).  This is a commonly used measure of operating performance and cash flow.

SEGMENTAL ANALYSIS

Industrial

Our Industrial business grew strongly during the year, with revenues of £39.8m, compared with £34.3m last year. Revenue from the Group's traditional Q-switch product fell during the year, as anticipated, and now represents 10.2% of total group revenue (2013: 12.2%). We believe this reflects the continuing shift towards the use of fibre lasers in materials processing applications.  Once again this appears to be supported by the significant increase in sales of fibre laser components experienced by Gooch & Housego in 2014.  Telecommunications revenues were up significantly in the year due to increased demand for our crystal products for modulation applications. The acquisition of Spanoptic Ltd also strengthened our offering in the Industrial space.

After adjusting for the Melbourne site restructuring costs and the revised corporate allocation basis, operating profit for the Industrial sector as a whole was 26.3% higher at £8.1m, compared with £6.4m last year. This reflects a combination of the Spanoptic acquisition and operational gearing resulting from additional volume flowing through our Palo Alto facility.

Aerospace & Defence (A&D)

A&D business revenue increased by 8.8% from £17.3m to £18.8m in 2014.  The business continues to provide both components and systems to the Company's UK and US A&D customers and this year this was supplemented by the additional contribution from the Spanoptic acquisition.  Despite continuing softness in engineering contracts as a result of US Government spending constraints, our engineering services business also performed better in 2014.  Operating margins in this sector improved largely as a result of the additional volume.  

Life Sciences

In 2014 the Life Science market was flat for Gooch & Housego.  Whilst the business benefited from the additional contribution that the Spanoptic acquisition brought, sales of acousto optic products into this market were down.  Operating margins in this sector were down, largely as a result of product mix. We continue to believe this market offers a significant growth opportunity.

Scientific Research

Our activities in the Scientific Research market are dominated by a small number of large, long-term programmes.   This market was weaker for Gooch & Housego in 2014 as a result of a slow-down in demand from the laser fusion programmes as a result of budgetary pressures. Once the construction of Laser Megajoule is complete we expect on-going business to be service replacement and maintenance requirements for these projects.

RESEARCH & DEVELOPMENT (R&D)

Gooch & Housego continues to invest in R&D in all areas of the business and regards this as fundamental to the continued growth of the company.  There were fourteen product releases in 2014, together with four new patents granted.

Expenditure on R&D in the year to 30 September 2014 increased by 16.3% from £4.9m to £5.7m.  A proportion of this increase was funded through UK and European grant funding.  R&D expenditure represented 8.1% of revenue (2013: 7.8%).  The Group capitalised £0.5m (2013: £0.03m) of development expenditure.

PERFORMANCE OF ACQUISITIONS AND SITE PERFORMANCE

The acquisitions of Spanoptic and Constelex continued our strategy, reinforcing Gooch & Housego's leadership in precision optics and high-end fibre optics for space applications, contributing to our diversification and strengthening our position in our core, and new target, markets.

The acquisition of Spanoptic has brought high precision spherical and aspherical optics, as well as infra-red optics and coatings to Gooch & Housego's existing stable of precision optic capabilities.  This acquisition was completed in October 2013 and has contributed £6.6 million in revenue and £1.4 million in profit before allocation of central costs in the year to 30 September 2014.  The acquisition also resulted in a gain on bargain purchase of £1.0 million.

The acquisition of Constelex, a small photonic systems business specialising in fibre amplifier technology for the space market, was completed in November 2013. As well as providing a great stimulus to the STG, the Constelex has contributed £36,000 in revenue and £16,000 in profit in the year to 30 September 2014.

As part of its bi-annual review of the carrying value of goodwill, the Board has taken the decision to impair the goodwill relating to the Boston cash generating unit. This goodwill arose on the acquisition of EM4, now referred to as Gooch & Housego Boston, in January 2011 for consideration of $11.6 million and, prior to the impairment, the carrying value of the associated goodwill was £5.8m.  Over the last three years this acquisition has played a vital role in Gooch & Housego's diversification strategy, by providing the systems and critical mass needed for the Company to become a credible player in the Aerospace & Defence market.  The duplication of Boston's technology in our Torquay facility has also been a key factor in allowing Gooch & Housego to address the European space market.  However, on a stand-alone basis, Boston has struggled to grow its engineering services business during the well documented cuts in US government spending on defence.  Recent trends in this market and a success in its products business, are encouraging signs for the future. These changes have yet to produce tangible results and as a result, the Board feels it is appropriate to make an impairment of £1.0m to the carrying value of Boston.

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 an annual cash saving of £0.3 million per annum. Gooch & Housego will continue to develop and manufacture hyperspectral imaging products from its Orlando facility.

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 closure of this facility is expected to be completed by the end of December 2014.  The cost of closing this site is expected to be £1.8m, of which £1.4m has been recognised in the year to 30 September 2014.

BALANCE SHEET

The Group's shareholders' funds at the end of the year were £69.9m, an increase of £5.0m over the prior year.  This increase comprised £0.2m due to the issue of share capital and £4.8m from retained earnings.

Additions to property, plant and equipment totalled £1.9m.  The main fixed asset additions related to investment in plant and machinery and the expansion of our Torquay facilities and equipment to accommodate the Systems Technology Group.

Working capital was 22.0% of revenue in the current year compared to 24.7% in 2013.  Inventories have increased by £1.3m from £13.4m in 2013 to £14.7m at this year-end, although if acquisitions are excluded the increase was £0.5m.  Trade and other receivables have increased by £0.3m from £12.7m in 2013 to £13.0m at this year-end. However, again after stripping out the trade and other receivables attributable to acquisitions of £1.4m, the balance has actually decreased by £1.1m compared to 2013.

Cash balances at 30 September 2014 were £17.1m, compared with £14.6m at 30 September 2013.  Net cash flows from operating activities generated £13.7m, compared with £9.2m last year. During the year the business moved from a net cash position of £5.7m as at 30 September 2013, to a net cash position of £8.7m.

MOVEMENT IN NET CASH

All amounts in £m	Gross Cash	Gross Debt	Net Cash
At 1 October 2013	14.6	(8.9)	5.7
Operating cash flows	13.6	-	13.6
Acquisitions	(5.5)	(0.3)	(5.8)
Debt repayment (net of drawdown)	(0.9)	0.9	-
Capital expenditure	(2.7)	-	(2.7)
Working capital	1.7	-	1.7
Proceeds from share issue	0.1	-	0.1
Interest, tax and dividends	(3.8)	-	(3.8)
Exchange movement	-	(0.1)	(0.1)
At 30 September 2014	17.1	(8.4)	8.7

ORDER BOOK

As at 30 September 2014, the Group order book stood at £32.8m, compared to £27.8m at the end of the 2013 financial year, an 18% increase.  On a like for like basis, excluding the impact of acquisitions, the order book was 7% higher.  Book to bill ratios for the business as a whole were 1.43 times (six month rolling average) as at 30 September 2014, compared to 1.01 times for the same period last year. 

STAFF

The Group workforce increased from 581 at 30 September 2013 to 664 at the end of September 2014, an increase of 83, of which 63 was due to acquisitions. This is a net position and therefore reflects both the reductions in staffing resulting from the work the business has done in integration and rationalisation of sites and processes and the additional investment that the business has made in engineering, business development and management.

POST BALANCE SHEET EVENTS

On 13 November 2014, the remaining €125,000 of deferred consideration in respect of the acquisition of Constelex Technology Enablers Limited was settled in the form of share capital.

On 14 November 2014, the Company refinanced its debt facilities with the Royal Bank of Scotland. The Group now has a committed revolving credit facility of $15m and an uncommitted flexible acquisition facility of $20m available until 30 April 2019.  Upon inception of the new facility, all existing RBS borrowings were repaid and $8m of the new revolving credit facility was drawn.  

DIVIDENDS

The Directors propose a final dividend of 4.6p per share making a total dividend for the year of 7.2p (2013: 6.3p).  The final dividend will be payable on 5 March 2015 to shareholders on the Company's share register as at close of business on 18 December 2014.

KEY PERFORMANCE INDICATORS (KPIs)

The Group objective is to deliver sustainable, long-term growth in revenue and profits.  This is to be achieved through the execution of the Board's strategies of market diversification, the continued investment in R&D to support organic growth, the acquisition of strategically complementary businesses and the on-going drive to move up the value chain.

In striving to achieve these strategic objectives, the main financial performance measures monitored by the Board are:

Total revenue growth	2014	2013	2012
At actual exchange rates	11%	4%	0%
At constant exchange rates	16%	3%	(1%)

The Board is focused on delivering revenue growth by investing both organically and through acquisitions.  The Group business has delivered underlying growth, whilst experiencing variable demand patterns within its core markets.

Target market revenue	2014	2013	2012
Aerospace & Defence  (£m)	18.8	17.3	15.4
Life Sciences (£m)	7.3	7.4	5.7

The Group target markets of Aerospace & Defence and Life Sciences provide a route to sustainable growth, and a more diversified revenue base. These markets also provide significant opportunities for Gooch & Housego to migrate up the value-chain from materials and components to higher value sub-assemblies, modules and systems in response to the trend for our larger customers to outsource increasingly complex parts of their business.  The business has made good progress in addressing its target markets of Aerospace & Defence and Life Sciences which, in aggregate, have increased by 5.7% in the 2014 financial year.

Net cash analysis	2014	2013	2012
Net cash/(debt)  (£m)	8.7	5.7	(0.3)

In order to balance business risk with the investment needs of the Company, management closely monitor and manage net debt.  This year the business increased its net cash position of from £5.7m to £8.7m, putting the business in a strong position both in terms of headroom for further investment and from the perspective of managing its business risk.

Earnings per share (EPS)	2014	2013	2012
Adjusted diluted EPS (pence)	35.2p	30.5	26.4

As a result of a strong trading performance, the business has been able to deliver growth in adjusted diluted EPS of 15.4%, from 30.5p to 35.2p in 2014.

Group Income Statement

For the year ended 30 September 2014 (unaudited)

		2014	2013
	Note	£000	£000
Revenue	2	70,056	63,252
Cost of revenue		(41,706)	(37,635)
Gross profit		28,350	25,617
Research and Development		(5,160)	(4,913)
Sales and Marketing		(4,498)	(4,666)
Administration		(10,026)	(8,814)
Other income and expenses		(271)	1,727
Operating profit	2	8,395	8,951
Finance income		8	15
Finance costs		(522)	(623)
Profit before income tax expense		7,881	8,343
Income tax expense	3	(2,482)	(2,151)
Profit for the year		5,399	6,192
Basic earnings per share	4	22.5p	27.7p
Diluted earnings per share	4	22.3p	26.4p

Reconciliation of operating profit to adjusted operating profit:

		2014	2013
		£000	£000
Operating profit		8,395	8,951
Amortisation of acquired intangible assets		1,525	875
Acquisition costs		-	164
Restructuring costs		1,555	278
Gain on bargain purchase of Spanoptic Limited		(1,039)	-
Impairment of goodwill		1,538	-
Adjusted operating profit		11,974	10,268

Group Balance Sheet

For the year ended 30 September 2014 (unaudited)

		2014	2013
		£000	£000
Non-current assets
Property, plant and equipment		24,140	21,456
Intangible assets		20,668	19,821
Deferred income tax assets		3,114	3,830
		47,922	45,107
Current assets
Inventories		14,663	13,390
Income tax assets		487	420
Trade and other receivables		13,005	12,706
Cash and cash equivalents		17,094	14,558
		45,249	41,074
Current liabilities
Trade and other payables		(11,829)	(10,461)
Borrowings		(8,048)	(5,726)
Income tax liabilities		(244)	(307)
Provision for other liabilities and charges		(447)	(271)
		(20,568)	(16,765)
		24,014
Net current assets		24,681	24,309
Non-current liabilities
Borrowings		(360)	(3,113)
Deferred income tax liabilities		(2,306)	(1,330)
Derivative financial instruments		-	(34)
		(2,666)	(4,477)
Net assets		69,937	64,939
Shareholders' equity Capital and reserves attributable to equity shareholders
Called up share capital		4,774	4,620
Share premium account		15,420	15,213
Merger reserve		2,671	2,671
Hedging reserve		(21)	(79)
Cumulative translation reserve		(770)	(860)
Retained earnings		47,863	43,374
Total equity		69,937	64,939

Group Statement of Changes in Shareholders' Equity

For the year ended 30 September 2014 (unaudited)

	Note	Called up share capital £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 financial year		-	-	-	-	6,192	6,192
Other comprehensive income/(expense) for the year		-	-	-	90	(364)	(274)
Total comprehensive income for the year		-	-	-	90	5,828	5,918
Dividends	5	-	-	-	-	(1,229)	(1,229)
Proceeds from shares issued		238	902	-	-	(96)	1,044
Fair value of employee services		-	-	-	-	341	341
Tax credit relating to share option schemes		-	-	-	-	299	299
Total contributions by and distributions to owners of the parent recognised directly in equity		238	902	-	-	(685)	455
At 30 September 2013		4,620	15,213	2,671	(79)	42,514	64,939
At 1 October 2013		4,620	15,213	2,671	(79)	42,514	64,939
Profit for the financial year		-	-	-	-	5,399	5,399
Other comprehensive income for the year		-	-	-	58	90	148
Total comprehensive income for the year		-	-	-	58	5,489	5,547
Dividends	5	-	-	-	-	(1,569)	(1,569)
Proceeds from shares issued		154	207	-	-	(149)	212
Fair value of employee services		-	-	-	-	361	361
Tax credit relating to share option schemes		-	-	-	-	447	447
Total contributions by and distributions to owners of the parent recognised directly in equity		154	207	-	-	(910)	(549)
At 30 September 2014		4,774	15,420	2,671	(21)	47,093	69,937

Group Statement of Comprehensive Income

For the year ended 30 September 2014 (unaudited)

		2014	2013
	Note	£000	£000
Profit for the year		5,399	6,192
Other comprehensive income / (expense) - items that may be reclassified subsequently to profit or loss
Fair value adjustment of interest rate swap net of tax		58	90
Currency translation differences		90	(364)
Other comprehensive income / (expense) for the year net of tax		148	(274)
Total comprehensive income for the year attributable to the shareholders of Gooch & Housego PLC		5,547	5,918

Group Cash Flow Statement

For the year ended 30 September 2014 (unaudited)

		2014	2013
	Note	£000	£000
Cash flows from operating activities
Cash generated from operations	6	15,298	10,130
Income tax paid		(1,625)	(882)
Net cash generated from operating activities		13,673	9,248
Cash flows from investing activities
Acquisition of subsidiaries, net of cash acquired		(5,532)	(22)
Purchase of property, plant and equipment		(1,909)	(2,032)
Sale of property, plant and equipment		26	67
Purchase of intangible assets		(852)	(202)
Interest received		8	15
Net cash used in investing activities		(8,259)	(2,174)
Cash flows from financing activities
Drawdown of borrowings		4,832	-
Repayment of borrowings		(3,196)	(3,394)
Proceeds from issues of share capital		105	1,044
Dividends paid to ordinary shareholders		(1,569)	(1,229)
Interest paid		(569)	(505)
Net cash used in financing activities		(397)	(4,084)
Net increase in cash, cash equivalents, revolving credit facility and bank overdraft		5,017	2,990
Cash, cash equivalents, revolving credit facility and bank overdraft at beginning of the year		12,088	9,235
Exchange losses on cash and bank overdrafts		(11)	(137)
Cash, cash equivalents, revolving credit facility and bank overdraft at the end of the year		17,094	12,088

 Cash, cash equivalents, revolving credit facility and bank overdrafts at the end of the year comprise:

		2014	2013
		£000	£000
Cash and cash equivalents		17,094	14,558
Revolving credit facility and overdraft		-	(2,470)
Cash, cash equivalents, revolving credit facility and bank overdraft at the end of the year		17,094	12,088

Notes to the preliminary report

1.         Basis of preparation

The unaudited Preliminary Report has been prepared under the historical cost convention and in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union and interpretations in issue at 30 September 2014.  

The Preliminary Report does not constitute statutory financial statements within the meaning of section 434 of the Companies Act 2006 and has not been audited.  

Comparative figures in the Preliminary 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 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. New standards or interpretations which came into effect for the current reporting period did not have a material impact on the net assets or results of the Group.

The Preliminary Report will be announced to all shareholders on the London Stock Exchange and published on the Group's website on 2 December 2014. Copies will be available to members of the public upon application to the Company Secretary at Dowlish Ford, Ilminster, Somerset, TA19 0PF.

2.             Segmental analysis

The Company's segmental reporting reflects the information that management uses within the business.  The business is divided into four market sectors, being Aerospace & Defence, Life Sciences, Industrial and Scientific Research, together with the Corporate cost centre.

The industrial business segment primarily comprises the industrial laser market for use in the semiconductor and microelectronic industries, but also includes other industrial applications such as metrology and telecommunications.  Scientific Research covers academic and government funded research including major multi-national projects.

	Aerospace & Defence	Life Sciences	Industrial	Scientific Research	Corporate	Total
	£000	£000	£000	£000	£000	£000
For year ended 30 September 2014
Revenue
Total revenue	18,786	7,318	44,248	4,139	-	74,491
Inter and intra-division	-	-	(4,435)	-	-	(4,435)
External revenue	18,786	7,318	39,813	4,139	-	70,056
Divisional expenses	(15,612)	(6,083)	(31,207)	(3,713)	(214)	(56,829)
EBITDA¹	3,174	1,235	8,606	426	(214)	13,227
EBITDA %	16.9%	16.9%	21.6%	10.3%	-	18.9%
Depreciation and amortisation	(522)	(270)	(1,702)	(152)	(162)	(2,808)
Operating profit before amortisation of acquired intangible assets	2,652	965	6,904	274	(376)	10,419
Amortisation of acquired intangible assets	-	-	-	-	(2,024)	(2,024)
Operating profit	2,652	965	6,904	274	(2,400)	8,395
Operating profit margin %	14.1%	13.2%	17.3%	6.6%	-	12.0%
Add back Melbourne closure costs	79	59	1,155	91	-	1,384
Operating profit excluding Melbourne closure costs	2,731	1,024	8,059	365	(2,400)	9,779
Adjusted profit margin %	14.5%	14.0%	20.2%	8.8%	-	14.0%

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

Management have added back the cost of the Melbourne site closure in the above analysis. This has been shown because the Directors consider the analysis to be more meaningful excluding the impact of this non-recurring expense.

2.         Segmental analysis (continued)

As restated	Aerospace & Defence	Life Sciences	Industrial	Scientific Research	Corporate	Total
	£000	£000	£000	£000	£000	£000
For year ended 30 September 2013
Revenue
Total revenue	17,273	7,353	38,179	4,281	-	67,086
Inter and intra-division	-	-	(3,834)	-	-	(3,834)
External revenue	17,273	7,353	34,345	4,281	-	63,252
Divisional expenses	(14,652)	(5,799)	(27,055)	(3,679)	(127)	(51,312)
EBITDA¹	2,621	1,554	7,290	602	(127)	11,940
EBITDA %	15.2%	21.1%	21.2%	14.1%	-	18.9%
Depreciation and amortisation	(550)	(220)	(907)	(143)	(294)	(2,114)
Operating profit before amortisation of acquired intangible assets	2,071	1,334	6,383	459	(421)	9,826
Amortisation of acquired     intangible assets	-	-	-	-	(875)	(875)
Operating profit	2,071	1,334	6,383	459	(1,296)	8,951
Operating profit margin %	12.0%	18.1%	18.6%	10.7%	-	14.2%

The above analysis has been restated to reflect the allocation of corporate expenses on a consistent basis with that adopted in respect of the year ended 30 September 2014.

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

Analysis of net assets/(liabilities) by location:

	2014	2014	2014	2013	2013	2013
	Assets	Liabilities	Net Assets	Assets	Liabilities	Net Assets
	£000	£000	£000	£000	£000	£000
United Kingdom	38,387	(12,388)	25,999	38,258	(11,418)	26,840
USA	54,282	(10,345)	43,937	47,751	(9,776)	37,975
Continental Europe	486	(497)	(11)	162	(42)	120
Asia Pacific	16	(4)	12	10	(6)	4
	93,171	(23,234)	69,937	86,181	(21,242)	64,939

Analysis of revenue by destination:

			2014 £000	2013 £000
United Kingdom			14,412	9,481
USA			29,657	30,213
Continental Europe			14,425	13,821
Asia Pacific and Other			11,562	9,737
Total revenue			70,056	63,252

3.             Income tax expense

Analysis of tax charge in the year

		2014 £000	2013 £000
Current taxation
UK Corporation tax		1,446	1,263
Overseas tax		630	238
Adjustments in respect of prior year tax charge		(165)	(304)
Total current tax		1,911	1,197
Deferred tax
Origination and reversal of temporary differences		49	677
Adjustments in respect of prior year deferred tax		504	234
Impact of UK tax rate change to 20% (2013: 20%)		18	43
Total deferred tax		571	954
Income tax expense per income statement		2,482	2,151

4.             Earnings per share

The calculation of earnings per 20p Ordinary Share is based on the profit for the year using as a divisor the weighted average number of Ordinary Shares in issue during the year.  The weighted average number of shares for the year ended 30 September is given below:

	2014	2013
Number of shares used for basic earnings per share	23,984,536	22,376,650
Dilutive shares	213,581	1,097,927
Number of shares used for dilutive earnings per share	24,198,117	23,474,577

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

	2014		2013
	£000	pence per share	£000	pence  per share
Basic earnings per share	5,399	22.5p	6,192	27.7p
Amortisation of acquired intangible assets (net of tax)	1,144	4.8p	650	2.9p
Goodwill impairment	1,538	6.4p	-	-
Gain on bargain purchase	(1,039)	(4.3p)	-	-
Acquisition costs (net of tax)	-	-	122	0.5p
Restructuring costs (net of tax)	1,467	6.2p	206	0.9p
Total adjustments net of income tax expense	3,110	13.1p	978	4.3p
Adjusted basic earnings per share	8,509	35.6p	7,170	32.0p
Basic diluted earnings per share	5,399	22.3p	6,192	26.4p
Adjusted diluted earnings per share	8,509	35.2p	7,170	30.5p

Basic and diluted earnings per share before amortisation and other adjustments has been shown because, in the opinion of the Directors, it provides a useful measure of the trading performance of the Group.

5.             Dividends

		2014 £000	2013 £000
Final 2013 dividend paid in 2014: 4.0p per share (Final 2012 dividend paid in 2013: 3.2p per share)		950	712
2014 Interim dividend paid: 2.6p per share (2013: 2.3p)		619	517
		1,569	1,229

The Directors propose a final dividend of 4.6p per share making the total dividend paid and proposed in respect of the 2014 financial year 7.2p (2013: 6.3p). 

6.             Cash generated from operating activities

		2014 £000	2013 £000
Profit before income tax		7,881	8,343
Adjustments for:
- Amortisation of acquired intangible assets		1,525	875
- Amortisation of other intangible assets		164	168
- Gain on bargain purchase of Spanoptic Limited		(1,039)	-
- Impairment of goodwill		1,538	-
- Depreciation		2,644	1,949
- Loss on disposal of property, plant and equipment		21	91
- Share based payment obligations		361	341
- Finance income		(8)	(15)
- Finance costs		522	623
Total		5,728	4,032
Changes in working capital
- Inventories		(538)	(970)
- Trade and other receivables		2,097	(882)
- Trade and other payables		130	(393)
Total		1,689	(2,245)
Cash generated from operating activities		15,298	10,130

7.             Post Balance Sheet Events

On 13 November 2014, the remaining €125,000 of deferred consideration in respect of the acquisition of Constelex Technology Enablers Limited was settled in the form of share capital.

On 14 November 2014, the Company refinanced its debt facilities with the Royal Bank of Scotland. The Group now has a committed revolving credit facility of $15m and an uncommitted flexible acquisition facility of $20m available until 30 April 2019.  Upon inception of the new facility, all existing RBS borrowings were repaid and $8m of the new revolving credit facility was drawn.  

 

END

 

 

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