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2023 ReportG O O C H & H O U S E G O A N N U A L R E P O R T 2 0 1 7 ANNUAL REPORT SEPTEMBER 2017 Gooch & Housego PLC Dowlish Ford, Ilminster TA19 0PF, United Kingdom T: +44 (0)1460 256440 E: info@goochandhousego.com goochandhousego.com GH35_AR_Covers_A4.indd 1 28/11/2017 12:26 > Gooch & Housego generates, controls, amplifies, connects, and measures lasers and light sources. Our expertise enables customers to push the boundaries of commercial applications of photonics technology. WELCOME CONTENTS Highlights Our Sectors and Applications Strategic Report Chairman’s Statement Chief Executive Officer’s Statement Market Overview Financial and Operating Review Strategy Overview Principal Risks and Uncertainties Governance Board of Directors Directors’ Report Audit Committee Report Nomination Committee Report Remuneration Committee Report Financial Statements Independent Auditors’ Report – Group Group Income Statement Group Statement of Comprehensive Income Group Balance Sheet Group Statement of Changes in Equity Group Cash Flow Statement Notes to the Group Cash Flow Statement Notes to the Financial Statements Company Balance Sheet Company Statement of Changes in Equity Company Cash Flow Statement Notes to the Company Cash Flow Statement Notes to the Company Financial Statements Shareholder Information Company Information Notice of Annual General Meeting 02 06 10 11 14 22 26 27 28 30 34 36 37 42 47 47 48 49 50 51 52 77 78 79 80 81 89 90 GOOCH & HOUSEGO PLC ANNUAL REPORT 2017 | 01 HIGHLIGHTS HIGHLIGHTS 02 | ANNUAL REPORT 2017 Operating and Strategic Highlights • Strong financial performance set against a backdrop of favourable market conditions in our three main sectors of industrial, aerospace & defence and life sciences • Demand was particularly high for critical components used in microelectronic manufacturing and hi-reliability fibre couplers used in undersea cable networks • Significant progress was made towards our strategic goals of further diversification and moving up the value chain • StingRay Optics, acquired in February 2017, has integrated well into the wider Group and is performing above our expectations • Investment in R&D up 16.2%, 22 new products introduced and 7 new patents granted • Substantial investments were made, enabling us to meet increased demand and laying the foundation for future growth Financial Highlights • Revenue for the year £112.0m, 30.2% higher than FY 2016, 18.7% on a constant currency basis The acquisition contributed £5.3m in the year • Adjusted profit before tax up 13.7% • Adjusted basic earnings per share up 16.2% • Strong cash performance delivering net cash of £14.9m at year end, an increase of 27.9% • Record year end order book of £72.1m, up 36.5% from 30 September 2016 GOOCH & HOUSEGO PLC HIGHLIGHTS Revenue (£m) 112.0 +30.2% 2016 86.1 Adjusted profit before tax* (£m) 16.1 +13.7% 2016 14.2 Statutory profit before tax (£m) 12.6 +24.8% 2016 14.2 Basic earnings per share (pence) 36.4 +25.1% 2016 29.1 2017 2016 2015 112.0 86.1 78.7 2014 70.1 2013 63.3 2017 2016 16.1 14.2 2015 12.9 2014 11.5 2013 9.7 2017 2016 2015 2014 2013 12.6 10.1 10.1 7.9 8.3 2017 2016 2015 36.4 29.1 30.9 2014 22.5 2013 27.7 HIGHLIGHTS Adjusted basic earnings per share* (pence) 49.4 +16.2% 2016 42.5 Total dividend per share (pence) 10.2 +13.3% 2016 9.0 Net cash (£m) 14.9 +27.9% 2016 11.7 2017 2016 2015 49.4 42.5 39.5 2014 35.6 2013 32.0 2017 2016 2015 2014 2013 10.2 9.0 8.2 7.2 6.3 2017 2016 2015 14.9 11.7 17.3 2014 8.7 2013 5.7 * adjusted figures exclude the amortisation of acquired intangible assets, impairment of goodwill, release of accrued contingent consideration, exceptional items being restructuring, provision for export compliance and transaction costs, and interest on deferred consideration and gain on bargain purchase. ANNUAL REPORT 2017 | 03 GOOCH & HOUSEGO PLC HIGHLIGHTS HIGHLIGHTS Manufacturing locations Sales offices Fremont AO PO Moorpark Cleveland EO PO Keene PO PO Orlando FO Bedford Glenrothes PO St Asaph Ilminster PO Norderstedt AO PO H Q FO Paris Torquay STG Nagoya Gooch & Housego demonstrates unparalleled capabilities in the following photonic technologies: • Acousto-optics (AO) • Electro-optics (EO) • Fiber optics (FO) • Precision optics (PO) REVENUE BY CURRENCY € EUR £ GBP $ USD 04 | ANNUAL REPORT 2017 £ GBP 22.5% £25.2m 2016 £20.7m 24.0% $ USD 72.1% £80.8m 2016 £60.1m 69.8% € EUR 5.4% £6.0m 2016 £5.3m 6.2% GOOCH & HOUSEGO PLC HIGHLIGHTS HIGHLIGHTS “G&H met its FY 2017 financial goals and was able to make strategically important investments in key skills, processes, systems and the latest capital equipment. Significant progress has been made towards meeting our strategic aims of diversifying the business and moving up the value chain. “These strategic initiatives combined with a record year end order book mean the Board remains confident that G&H is well positioned to deliver further progress in FY 2018 and beyond.” Mark Webster Chief Executive Officer Aerospace & Defence (£millions) 34.9 31.1% Scientific Research (£millions) 3.3 3.0% Industrial (£millions) 64.3 57.4% Life Sciences (£millions) 9.6 8.5% REVENUE BY SECTOR HISTORICAL REVENUE BY SECTOR (£ millions) Industrial 2017 2016 2015 2014 2013 Aerospace & Defence 2017 2016 2015 2014 2013 Life Sciences 2017 2016 2015 2014 2013 9.6 7.9 9.0 7.3 7.4 64.3 54.3 46.1 39.8 34.3 34.9 20.0 19.8 18.8 17.3 Scientific Research 2017 3.3 2016 3.9 2015 3.9 2014 4.1 2013 4.3 ANNUAL REPORT 2017 | 05 GOOCH & HOUSEGO PLC SECTORS AND APPLICATIONS OUR SECTORS AND APPLICATIONS Gooch & Housego’s wide range of photonic devices are deployed across a uniquely broad range of applications, often in challenging environments. INDUSTRIAL Telecommunications Photonics play an ever-increasing role in industrial manufacturing. G&H serves these applications and markets with a diverse product portfolio, from components to sub-assemblies and final test and measurement equipment. We serve the more demanding applications within telecommunications. Our customers deploy our fibre-based products in undersea networks and in space for satellite-to-satellite communications. In addition we supply specialist crystals into 40G and 100G modulation systems. Production Technologies Laser Material Processing Laser material processing is a broad term which encompasses production processes such as ablating, bending, cutting, curing, forming, fusing, marking, micro-machining, sintering, thermal annealing, via drilling, and welding. For these applications, we design and manufacture products which are used in laser cavities, to steer and control or to modulate the beam. Printing In lithography and micro-lithography, the production process is inherently photonic in nature. Computer-to-plate technologies, flexographic, and offset printing production components utilize laser processing to create the printing tools. We provide a variety of optical components into these applications where accurate transmitted wavefronts and high energy tolerance provide superior printed image quality and longevity in production. Test and Measurement Photonics is used across a wide variety of applications to ascertain quality, damage, motion, chemical composition, temperature, location, distance, and to automate these types of tests. Sensing Fibre optics are deployed in a wide variety of sensing applications. These applications may use fibre simply as the communication medium for speed, lack of ignition sources, or weight. They may also integrate fibre gratings as the sensor to leverage the superior resolution. We supply fibre optic and acousto-optic sub-assemblies and components to equipment manufacturers and installers of these systems. 06 | ANNUAL REPORT 2017 GOOCH & HOUSEGO PLC SECTORS AND APPLICATIONS OUR SECTORS AND APPLICATIONS AEROSPACE & DEFENCE Defence and avionics markets have been important drivers for our investment in operational quality and program management. We continue to invest in our continuous improvement and lean manufacturing programs, as well as production equipment and metrology to better serve our most demanding aerospace & defence customers. Communications Tactical communications require rugged, hi-reliability components and sub-systems; in some instances light-weight for maximum mobility. We support a number of C4ISR (command, control, communications, computers, intelligence, surveillance, and reconnaissance) applications including RF over fibre, secure fibre optic networks and surveillance and target acquisition. Our military-grade components are designed to survive under extreme conditions, manufactured in AS9100C facilities, and qualified to the necessary Telcordia, BSI, DIN, or MIL specifications as required. Imaging under Extreme Conditions Sights, telescopes, periscopes, and other imaging systems have long played a role in defence. In recent years photonics has broadened imaging systems to a wide variety of conditions (night, fog and haze, smoke, sand storm, aerial, and space) and adapted to a range of situations. G&H provides an array of photonic components, sub-assemblies, and systems into these applications which include building and asset surveillance, fire-fighting, policing and LIDAR mapping. Target Designation and Range-Finding used on Land-Based and Airborne Systems From missiles to guided bombs, photonic targeting and range-finding systems ensure correct deployment of munitions. Extreme conditions require athermalized, instant “on” systems. G&H designs and delivers a variety of sub-systems and components to prime contractors. Image by Jonathan Hamlet © Crown copyright 2010 Image by Pete Mobbs © Crown copyright 2011 Countermeasures for Ground-Based Systems and Airborne Platforms Infrared countermeasures protect military assets from missile attacks. These systems require accurate modulation of the infrared energy under extreme environmental conditions. We provide fibre optic, acousto-optic, and nonlinear crystal products which are used in customer-specific countermeasure applications, both ground based and airborne. Gyroscopes for Navigation Gyroscopes are used in inertial navigation systems in aircraft, guided missiles, submarines, ships, and spacecraft for rotation sensing to measure or maintain orientation. We design and produce components for ring laser gyroscopes and fibre optic gyroscopes which are deployed in commercial aircraft as well as missiles, satellites, and other military vehicles. Image by Hamish Burke © Crown copyright 2013 © Crown copyright 2011 Image by Russ Nolan © Crown copyright 2013 ANNUAL REPORT 2017 | 07 GOOCH & HOUSEGO PLC SECTORS AND APPLICATIONS OUR SECTORS AND APPLICATIONS SPACE G&H has a proven track record in the design and development of space hardware for European Space Agency (ESA), National Aeronautics and Space Administration (NASA), and other western allied national space agencies, missions and other, commercial projects, with components, modules and systems integrated within operational satellites and on board the probes and rovers. We maintain a leading role in research and development programs in Europe, the USA and Asia, through multiple projects and contracts centered on optical inter- and intra-satellite communication links. Our work on space projects fuels the company roadmap on a new generation of product lines. G&H works with major prime contractors and government agencies on ground-breaking scientific and technology development programs for navigation, earth observation and communication. Our enabling technologies span our core capabilities in Acousto-Optics, Fibre-Optics and Precision Optics. 08 | ANNUAL REPORT 2017 Image courtesy of ESA Image courtesy of ESA GOOCH & HOUSEGO PLC SECTORS AND APPLICATIONS OUR SECTORS AND APPLICATIONS LIFE SCIENCES G&H serves the life sciences markets with photonics engineering solutions from across the company’s technology portfolio. Optical Coherence Tomography (OCT) Widely used for ophthalmic imaging, OCT has proven invaluable in improving the diagnosis of glaucoma and macular degeneracy. We serve most of the world’s leading manufacturers of OCT retinal imaging systems. Medical and Cosmetic Laser Systems G&H is helping develop new laser products which enable less invasive surgical techniques. Applications include cataract replacement, vision correction, prostate surgery, varicose vein treatment, and mole treatment in addition to tattoo removal, teeth whitening, freckle removal, and wrinkle reduction. SCIENTIFIC RESEARCH G&H works with some of most prestigious Big Science projects in the world. We are a primary supplier of many critical optical components such as very large frequency conversion crystals used in the world’s most powerful laser system at the National Ignition Facility (NIF) at Lawrence Livermore National Laboratory. We supply similar products to the Commissariat à l’énergie atomique et aux énergies alternatives (CEA) and other inertial confinement fusion (ICF) programs around the world. Image: Julie Russell Image: James Pryatel ANNUAL REPORT 2017 | 09 GOOCH & HOUSEGO PLC systems, business development, human resources, supply-chain and research and development. These and planned future changes reflect a recent board review of the organisational structure of the G&H that had the objective of ensuring that it be optimised for delivering sustainable growth over the long term, as G&H grows both organically and by acquisition. In successfully responding to the challenges of 2017 an exceptional effort was required by many people. I would like to express my thanks to my fellow directors and to all employees of Gooch & Housego. I am pleased to welcome David Bauernfeind, who joined the board as a non-executive director and Chair of the Audit Committee on 1 May 2017. Gooch & Housego is stronger today than at any time in its past. With a sound financial foundation, new talents and capabilities, a pipeline of exciting new products and a record order book to start the year the Company is well-positioned to continue to deliver in 2018 and beyond. Gareth Jones Chairman 28 November 2017 STRATEGIC REPORT CHAIRMAN’S STATEMENT Set against a backdrop of favourable market conditions, your company has delivered a strong financial performance in 2017. This has been delivered through a mix of organic and acquisitive growth. Demand for certain of Gooch & Housego’s products, particularly from the microelectronics and undersea fibre optic communications sectors, reached unprecedented levels during the year. The resulting record order book presented a significant challenge for some of the Company’s manufacturing operations. Investments made in recent years in “lean manufacturing” and “continuous improvement” meant that G&H was in part able to respond to this demand through an enhanced ability to match capacity with demand across the Company’s various manufacturing locations. Combined with significant investments during the year in people, and in the latest manufacturing equipment, these initiatives made it possible to satisfy the needs of our customers and begin to reduce lead times towards the year-end. In February 2017 G&H acquired StingRay Optics LLC (StingRay), a USA based designer and manufacturer of specialist optical and opto-mechanical systems. StingRay was a particularly significant acquisition as it provides G&H with advanced optical systems design capabilities for harsh and demanding applications. These new capabilities support the Company’s twin strategic objectives of moving up the value chain and achieving greater diversification by enabling G&H to provide systems-level solutions to Aerospace & Defence (“A&D”) customers. In 2017 the StingRay acquisition helped sales into the A&D sector approach one third of total revenues. StingRay has delivered a consistently strong performance since acquisition. The acquisitions completed in the previous year (Alfalight and Kent Periscopes) also made valuable contributions in 2017. The investment in people during 2017 represents an important enhancement of the skills-base of G&H, and bodes well for the future. In order to meet the challenges of greater scale and complexity G&H has chosen to focus on specific high growth products and markets. Recent recruitment has reflected the need for a higher level of specialisation across a wide range of business functions including manufacturing processes and “Gooch & Housego is stronger today than at any time in its past.” 10 | ANNUAL REPORT 2017 CEO Mark Webster accepting the 2017 AIM Award for Global Achievement GOOCH & HOUSEGO PLC STRATEGIC REPORT CHIEF EXECUTIVE OFFICER’S STATEMENT Overview FY2017 Performance Gooch & Housego (“G&H”) benefited from positive market conditions and strong demand across its main sectors of industrials, aerospace & defence (“A&D”) and life sciences. Demand was particularly high for critical components used in microelectronic manufacturing and high reliability fibre couplers used in undersea cable networks. FY 2017 has been a ‘watershed’ year for the company, as we passed through the £100 million sales barrier for the first time. Revenue of £112.0 million represents year on year growth of 30.2%, or on a constant currency basis 18.7%. Adjusted PBT, which is less affected by foreign exchange fluctuations due to the natural hedging within the business, was £16.1 million, equating to a year on year profit growth of 13.7%. Strategically important investments in people, processes, systems and the latest capital equipment were made during the year, enabling us to address high levels of demand in FY2017 and provide an important platform for G&H’s future growth. Strategic Goals Considerable progress has been made towards our strategic goals of further diversification and moving up the value chain. A&D and life sciences both provide a counter balance to the exposure that the industrial laser sector has to the global economic cycle. These business areas have customer bases which include tier one A&D and medical diagnostic companies, who often prefer G&H to provide sub systems or systems rather than solely critical components, providing a strong impetus to move up the value chain. When coupled with the regulatory hurdles inherent in both A&D and life sciences, these markets provide a defensible business model with a high barrier to entry. Our aim is to establish a ‘critical mass’ of business in both the A&D and life science sectors. This has in large part been achieved in A&D, which now represents 31.1% of G&H’s FY2017 revenue (2016: 23.2%); this was made possible due to a combination of organic growth and by the three acquisitions made in FY 2016 and FY 2017. Life sciences has undergone good organic revenue growth, in particular with products utilising our optical coherence tomography technology and laser surgery, but the sector still needs further acquisitions to achieve the desired ‘critical mass’. Sub systems and systems now represent 22.1% of our business (2016: 15.1%), with the growth again helped by the recent acquisitions, most notably Kent Periscopes and StingRay. Kent Periscopes, acquired in FY 2016, moved to a larger custom fitted facility in St. Asaph, North Wales, during FY 2017. This was funded in large part by the Welsh Government. As well as being required for the growth of the existing Kent Periscopes business the facility is earmarked to become a hub for assembly of sub systems and systems across the Group. Acquisitions Strategic acquisitions remain an important part of G&H’s business model and in February 2017 we acquired StingRay Optics LLC (“StingRay”). StingRay is a USA based specialist designer and manufacturer of high performance optical and opto-mechanical sub systems for demanding defence and commercial applications. Their product range is focused on laboratory, ground based, airborne, unmanned aerial vehicles (‘UAVs”) and space applications for key US defence customers. Synergies include leveraging G&H’s greater reach through our global sales teams and our expertise in manufacturing infrared precision optics and specialist coatings. The partnership has proven to be very successful so far, with StingRay’s performance exceeding our expectations and their talented workforce integrating well into the wider company. Research and Development (“R&D”) There has been continued benefit from concentrating our R&D efforts on fewer higher return projects. During FY 2017 we introduced a record 22 new products and we expect the full value of these products to peak over the next three years. Revenue generated from new products this year was £11.1 million. “Gooch & Housego met its FY 2017 financial goals and was able to make strategically important investments in key skills, processes, systems and the latest capital equipment. Significant progress has been made towards meeting our strategic aims of diversifying the business and moving up the value chain, with A&D now representing 31.1% of our business. We acquired USA based StingRay in February 2017, which has integrated well into the wider organisation and performed strongly” ANNUAL REPORT 2017 | 11 GOOCH & HOUSEGO PLC STRATEGIC REPORT CHIEF EXECUTIVE OFFICER’S STATEMENT Good progress has been achieved in our key R&D areas of interest, notable among which are the following: our contribution to the new industrial laser systems that are currently in development. Microelectronics is entering a new phase of nano technology and the UV lithography and via drilling techniques required to achieve this need a new generation of precision lasers and laser systems which are being developed with our laser manufacturer and laser system partners. OCT technology dominates the retinal scanning and imaging arena, but the longer term development partnerships we have with medical diagnostic companies in the areas of cardiovascular disease and cancer detection are now moving to the prototype and early commercial model stage, with the prospect of new product launches in the near future. Our space communication group has gone from strength to strength with European Space Agency and UK Space agency funded work in satellite communications and is now attracting commercial interest from the USA and elsewhere. In addition to the grant funded work we have enhanced our $4 million commercial contract to provide communication systems for near term satellite launches. We are also developing similar technology for the adjacent market of UAVs. Various aspects of our R&D defence programmes in the US and Europe are classified, but we are able to say that we are making good headway in developing key parts of Kent Periscopes’ product portfolio, so they are compatible with USA military standards. We have recently moved some of our R&D effort into sensing technology, focusing on use in harsh environments with ruggedised photonics technology. We have been able to bring some of our space communications experience to problem solving in this arena. In order to accommodate the need for more system based projects, the Systems Technology Group (“STG”), primarily based at our Torquay site, has been expanded. The group consists of scientists and engineers who bring a wide range of skills such as electronic, software and mechanical engineering, which are required in order to present a complete sub system or system to our customers. Performance Improvement Programme In addition to the enhanced R&D performance outlined above, we have continued to expand our business development group, adding a microelectronic business development executive to the existing life science and A&D executives. The established business development executives have brought enhanced access to tier 1 A&D companies and multi-national medical diagnostic organisations and have been instrumental in the development of some of our most notable R&D projects. Our expectation is that with the addition of the new microelectronics business development executive we will be able to enhance 12 | ANNUAL REPORT 2017 G&H’s ongoing operational performance improvement programme was instrumental in enabling us to meet the challenge of this year’s high growth rate. The major infrastructure projects in Fremont, CA and Cleveland, OH are now substantially complete. Investment in key skills, lean processes and systems and the latest capital equipment was accelerated in sites that provide critical components for precision lasers used in microelectronic manufacturing, namely Ilminster, Fremont, CA and Torquay. We have built on the good work done in previous years to further improve efficiency, customer service and to establish a more scalable organisational model for future growth. Our ten manufacturing sites have been organised into three manufacturing centres. They are based on our sites’ areas of technical expertise, namely Acousto Optic / Electro Optic, Precision Optics and Fibre Optics. Each manufacturing area has a leader and their role is to ensure best practice is shared; there is process harmonisation and optimal allocation of resource. G&H is in a strong positon financially and is well positioned to make further investment in the business. Market and Applications Industrial The industrial sector represents 57.4% of G&H’s revenue and is composed of a diverse range of industrial applications aligned to our world class photonic technologies, including microelectronic manufacturing, semiconductor manufacturing and test, remote sensing, metrology and optical communications. Our industrials division grew by £10.0 million or 18.4% compared to the previous year, reflecting a positive performance across the range of industrial products. Critical components for precision lasers used in microelectronic manufacturing were in particular demand. This was driven by the next generation of smart phones and tablets and the consequent change in manufacturing technology required to produce them. The aforementioned ‘cutting edge’ technology is primarily dependent on the latest solid state lasers and we worked closely with the laser manufacturers and laser system suppliers to meet these demands. Precision inspection equipment for real time calibration in smart phone and tablet production continued to deliver significant revenue for us during FY 2017. The ongoing need for ever more data capacity from government, industry and the consumer continues to drive a strong optical telecommunications performance. G&H provides some of the more technically challenging elements to both land and undersea optical communications. Our ultra hi-reliability fibre couplers are GOOCH & HOUSEGO PLC STRATEGIC REPORT CHIEF EXECUTIVE OFFICER’S STATEMENT used in amplifiers that are a key part of undersea cable networks. Over the last couple of years there has been a positive step change in the requirement for these products, driven by technology firms laying their own cable networks in order to control the process of data delivery. This new level of demand has continued unabated throughout FY 2017. Aerospace & Defence A&D represented 31.1% of our revenue and grew year on year by £14.9 million or 74.5%. This was due to a combination of organic growth and acquisition, as highlighted earlier. G&H is now able to bring a wide range of photonic capabilities that very much represent the “direction of travel” in this sector. These include target designation, range finding, ring laser and fibre optic gyroscope navigational systems, infra-red and RF counter measures, periscopes and sighting systems for armoured vehicles and opto-mechanical sub systems for unmanned aerial vehicles. Delivering product quality, reliability and performance in challenging environments is essential in the A&D arena and this very much plays to G&H’s strengths. Our customers encompass the major European and USA A&D companies. Space satellite communication is undergoing a technology revolution. The use of fibre optic lasers to transmit information means the satellite communication systems are more efficient and robust, as well being significantly lighter. This has changed the economics of the sector and has led to smaller satellites and encouraged the move towards the use of satellite constellations as part of a communications network. The investment we have made in this area means we are at the forefront of some of these developments. Life Sciences Life Sciences represents 8.5% of G&H’s revenue and grew year on year by £1.7 million or 21.1%. Despite the increase in revenue the profit did decline year on year, which is primarily due to the investments made into future capabilities. Though life sciences is a relatively small sector for G&H we see this as a strategically important one going forward. The principal applications are in optical coherence tomography (“OCT”), laser surgery and microscopy. OCT is widely used in ophthalmology for 3D retinal scanning and G&H has a dominant position in supplying critical components and sub systems to the main equipment suppliers. We also have a number of R&D collaborations with medical diagnostic companies in cardiovascular and cancer detection. Laser surgery is a fast growing area particularly in ophthalmology, prostate and cosmetic surgery and has significant potential to be exploited beyond these current areas of use. There is potential for photonic technology to be used in minimally invasive surgery, endoscopy and robotic surgery and this sector remains an area where G&H will continue to invest in R&D and look for strategic acquisitions. Scientific Research G&H’s research market is dominated by a small number of “big science” projects in the fields of nuclear fusion research and synchrotron radiation sources. It provides 3.0% of our revenue. The year on year decline was due to the phasing of one of the projects. This is a profitable sector for G&H, where we have some unique capabilities, that has the capacity to deliver growth and we will continue to selectively invest in this area. Outlook G&H met its FY 2017 financial goals and was able to make strategically important investments in key skills, processes, systems and the latest capital equipment. Significant progress has been made towards meeting our strategic aims of diversifying the business and moving up the value chain, with A&D now representing 31.1% of our business by revenue. We acquired USA based StingRay Optics LLC in February 2017, which has integrated well into the wider organisation and performed strongly. G&H will continue with an active policy of making further progress towards a more diverse and balanced business by building “critical mass” in A&D and life sciences, through a mix of investment in R&D and acquisitions. We are committed to making further investment in R&D in our targeted high growth areas. These include fibre and solid state laser systems, precision inspection equipment for microelectronic manufacturing, OCT medical diagnostics, laser surgery, space satellite communications, A&D sub systems and fibre optic sensing systems. G&H intends to take the performance improvement programme to the next level, by further investment in business development activity, focusing our global resources on a few high return R&D projects and continuing to improve operational efficiency. We believe the introduction of three well defined and focused manufacturing centres will provide a scalable platform for enhanced lean manufacturing practice These strategic initiatives combined with a record year end order book mean the Board remains confident that G&H is well positioned to deliver further progress in FY 2018 and beyond Mark Webster Chief Executive Officer 28 November 2017 ANNUAL REPORT 2017 | 13 GOOCH & HOUSEGO PLC STRATEGIC REPORT MARKET OVERVIEW Industrial Applications, Products and Markets Growth Strategy • To continue to invest in R&D and process engineering in order to develop our existing portfolio, bring to the market new products and to ensure that we remain at the cutting edge of technology in this important area. During 2017 Gooch & Housego introduced twelve new products that address its Industrial market. • To focus on niche markets that play to the strengths of Gooch & Housego, principally those that demand high levels of quality and reliability, typically require complex design and engineering input and for a number of our products require survivability in harsh environments. • To expand into and develop new geographical markets that offer high growth opportunities, through leveraging and expanding the Group’s global sales organisation. • To continue to focus our energies and investment on making the transition from a components supplier to a manufacturer of sub-assemblies, instruments and systems, where appropriate. • To invest in longer term R&D projects. • To make strategic acquisitions. Gooch & Housego will continue to seek high quality acquisition opportunities as a route to grow its industrial business. Industrial Lasers for materials processing applications. Gooch & Housego supplies Q-switches and other acousto-optic, electro- optic and fibre optic products. The end users for industrial lasers are extensive due to the ubiquitous adoption of this technology in high tech manufacturing. The microelectronics materials processing represents the largest end market. A move towards new laser enabled production techniques has driven strong growth in the microelectronic materials processing end market. Optical communications specifically for high reliability and high performance applications. The products supplied into this market are based upon the Group’s fibre optic, crystal growth and precision optics technologies. The end users of these products are typically global telecommunication equipment companies, and more recently large technology companies, for applications such as undersea and long haul telecommunication networks. The demand for more data from government, industry and particularly the consumer, has driven strong growth in this sector. Metrology for laser-based, high-precision, non-contact measurement systems. The Group principally supplies its precision optics, acousto-optics and instrumentation systems into this market; the customers are typically blue-chip OEMs. This market was flat on the previous year. Remote sensing for applications including asset protection, perimeter security, strain, temperature and pressure sensing. Gooch & Housego supplies fibre optic and acousto-optic components and sub-assemblies, including the recently developed Fibre-Q. Manufacturers of these systems address diverse end markets such as wind energy and oil and gas exploration and production. This area was lower in 2017 due to customer ordering patterns and a very strong FY2016 comparator. Semiconductor for lithography and test and measurement applications. The products supplied into this market are precision optics and acousto-optics. Customers are typically global semiconductor equipment manufacturers. This market is closely aligned with the micro-electronics industry and has demonstrated good growth across the year. G&H (Torquay) Integrity Award presentation from Sharing in Growth (SiG) CEO Andy Page 14 | ANNUAL REPORT 2017 GOOCH & HOUSEGO PLC Revenue (£millions) 64.3 +18.4% 2016 54.3 Adjusted Operating Profit (£millions) 11.8 +9.3% 2016 10.8 Percentage of Revenue 57.4% 2016 63.1% STRATEGIC REPORT ANNUAL REPORT 2017 | 15 GOOCH & HOUSEGO PLC STRATEGIC REPORT MARKET OVERVIEW Aerospace & Defence Applications, Products and Markets Growth Strategy Target designation and range finding used on both land-based and airborne systems. The products supplied into this market are based upon our precision optics and electro-optics technologies. Our customers are US and European defence contractors. In 2017 this business was in line with the previous financial year. • To continue to focus energy and investment on moving from being a components supplier to a sub-systems provider. Our Aerospace & Defence customers are changing their business models and are looking for companies such as Gooch & Housego that are capable of providing a full service. • To continue to invest in manufacturing processes and engineering in order to meet the exacting expectations of this sector, which is becoming increasingly demanding in terms of quality and price. • To make strategic acquisitions that will provide synergies, are complementary to our existing A&D business and will help us build a critical mass in this sector. G&H acquired StingRay Optics LLC, a USA based specialist designer and manufacturer of high performance optical and opto-mechanical subsystems for demanding defence applications. • To introduce a greater number of new products, including products which look to fill a “market need” as well as projects initiated by our customers. During 2017 Gooch & Housego introduced five new products that address its Aerospace & Defence market. Guidance and navigation components for ring laser gyroscope and fibre optic gyroscope inertial navigation systems. The products supplied into this market are based upon our precision optic and fibre optic technologies. Gooch & Housego navigation components are used in a variety of end markets, including civil and military aircraft, missiles, satellites and space exploration. In 2017 this business was in line with the previous financial year. Countermeasures for ground based systems and airborne platforms. The products supplied into this market are based upon fibre optic, acousto-optic and non-linear optics technologies. The customers are US and European defence contractors. In 2017 this business grew compared to the previous year. Space Photonics G&H is leveraging its heritage of ultra-high reliability components for space applications in order to address the next generation requirement for fibre optics on satellites. We are working with both the European Space Agency and commercial organisations to develop and deploy sub-systems for inter-satellite and satellite to ground communications, radio over fibre and optically inter-connected on-board processors within telecommunications satellites. Periscopes and Sighting Systems for land based Armoured Fighting Vehicles. G&H provides system level products for harsh environments, to an impressive list of blue chip defence companies. 2017 was a challenging year for this segment due to customer push outs, although prospects remain positive, supported by a strong order book. Opto-mechanical sub systems for Unmanned Aerial Vehicles. This capability was added during the year following the acquisition of StingRay Optics LLC. The business provides system level optical products for use in harsh environments to key US defence customers. This is a growing area in both the core defence and commercial markets. 16 | ANNUAL REPORT 2017 Image by Chris Hill © Crown copyright 2011 GOOCH & HOUSEGO PLC STRATEGIC REPORT Image by Andy Holmes © Crown copyright 2011 Revenue (£millions) 34.9 +74.5% 2016 20.0 Adjusted Operating Profit (£millions) 4.3 +186.7% 2016 1.5 Percentage of Revenue 31.1% 2016 23.2% Image by Graeme Main © Crown copyright 2011 Image courtesy of ESA ANNUAL REPORT 2017 | 17 GOOCH & HOUSEGO PLC STRATEGIC REPORT MARKET OVERVIEW Life Sciences Applications, Products and Markets Growth Strategy • To continue to invest in longer term R&D projects and to develop the existing portfolio of products, to ensure that they remain competitive. During 2017 Gooch & Housego introduced five new products that address its Life Sciences market. • Where appropriate seek to sell the full range of our Life Sciences products to a wider range of customers. • To make strategic acquisitions that are synergistic, are complementary to our existing Life Science business and will help us build critical mass in this sector. Gooch & Housego will continue to seek high quality acquisitions as a route to grow its Life Sciences business should the opportunity arise. Optical Coherence Tomography (OCT) primarily used in retinal imaging for the diagnosis of glaucoma and macular degeneration. Gooch & Housego provides a family of fibre optic products in this market, ranging from discrete components to full optical systems. Customers include most of the world’s leading manufacturers of OCT retinal imaging systems. This market grew in 2017 and we continue to work on the next generation of products with key customers. Laser surgery used in a wide range of applications including prostate surgery, scar correction, cataract surgery, freckle, mole and tattoo removal as well as wrinkle reduction and teeth whitening. The products supplied into this market are based upon electro-optic, fibre optic and acousto-optic technologies. The customers in this market include both laser system manufacturers and biomedical equipment manufacturers. This market remained buoyant in the year and continues to be a growth area. Microscopy modern, laser-based techniques are revolutionising the field of microscopy. Gooch & Housego’s acousto-optic devices and hyperspectral imaging systems are used to control the multiple laser sources and analyse complex images. The end customers are typically medical equipment manufacturers. This market was stable in the year for G&H. The growth strategy for Life Sciences mirrors that for Aerospace & Defence in many respects. This is particularly true in terms of the size of the available market and the desire of the customer base to “pull” Gooch & Housego up the value chain. 18 | ANNUAL REPORT 2017 GOOCH & HOUSEGO PLC STRATEGIC REPORT Revenue (£millions) 9.6 +21.1% 2016 7.9 Adjusted Operating Profit (£millions) 1.0 -37.5% 2016 1.6 Percentage of Revenue 8.5% 2016 9.2% Image courtesy of Michelson Diagnostics ANNUAL REPORT 2017 | 19 GOOCH & HOUSEGO PLC STRATEGIC REPORT MARKET OVERVIEW Scientific Research Applications, Products and Markets Growth Strategy • To maintain and develop the business’s capabilities in crystal growth and ultra-precision optics for nuclear fusion research and energy, university research and “Big Science” projects. Gooch & Housego is the custodian of some of the world’s most advanced optical technologies. • To continue to invest in R&D to develop and commercialise the next generation of Instrumentation products. Image courtesy of Lawrence Livermore National Laboratory Image courtesy of Lawrence Livermore National Laboratory Nuclear fusion research and energy laser technology is being used to recreate the conditions found in the core of the sun. At these temperatures and pressures isotopes of hydrogen fuse to form helium and in doing so release huge amounts of energy – the energy that powers the sun and stars. One of the most exciting potential applications of this research is using laser fusion to provide limitless quantities of clean, carbon-free energy to meet the world’s growing needs. The products supplied into this market utilise a wide range of the Company’s technologies including crystal growth, precision optics, thin-film coatings and fibre optics. Gooch & Housego supplies many of the world’s leading nuclear fusion energy research facilities. We are also the sole supplier of many critical optical components used in the world’s most powerful laser system at the National Ignition Facility (NIF) at Lawrence Livermore National Laboratory in Northern California. Instrumentation for applications in agricultural, solar, marine and industrial research. An example of an industrial research application is the development of Light Emitting Diode (LED) illumination systems. Instrumentation products are supplied from our Orlando facility and include photometers, radiometers, spectroradiometers and their associated calibration services. The customer base ranges from universities and research institutes to Government agencies and national standards laboratories. A small number of “Big Science” projects, which are reliant on government funding, dominate this market. The products supplied into this market span the complete breadth of the Company’s technology portfolio. Many of Gooch & Housego’s current products have evolved from early stage collaborations with universities and this is an area the Company will focus on, on a selective basis. 20 | ANNUAL REPORT 2017 GOOCH & HOUSEGO PLC STRATEGIC REPORT Revenue (£millions) 3.3 -14.2% 2016 3.9 Adjusted Operating Profit (£millions) 0.4 -42.9% 2016 0.7 Percentage of Revenue 3.0% 2016 4.5% Image courtesy of Lawrence Livermore National Laboratory ANNUAL REPORT 2017 | 21 GOOCH & HOUSEGO PLC STRATEGIC REPORT FINANCIAL AND OPERATING REVIEW Performance Overview Group Earnings Performance The business has once again delivered strong profitable growth. All amounts in £’000 Adjusted Reported Group revenue for the year was a record £112.0million. This represents an increase of £25.9 million, or 30.2% over the previous year of £86.1 million. During the year Gooch & Housego acquired StingRay Optics LLC, which contributed £5.3 million to Group revenue in the year, so organic revenue was up by 23.9%. On a constant currency basis revenue was 18.7% higher than the previous year. During 2017, Gooch & Housego invested £5.8 million in property, plant and equipment and £5.7 million in acquisitions. Despite this the business has increased its net cash position to £14.9 million at 30 September 2017 (2016: £11.7 million), through sustained strong operating cash flows. In the financial year under review, adjusted operating margins increased by £2.1 million in absolute terms to £16.4 million (2016: £14.3 million). At a percentage margin level, adjusted operating margins were 14.6%, compared to 16.6% in 2016, as a result of foreign exchange and planned investment in people and systems to support the growth. Revenue 2017 2016 Year ended 30 September £’000 % £’000 % Industrial 64,261 57.4% 54,296 63.1% Aerospace & Defence 34,860 31.1% 19,977 23.2% Life Sciences Scientific Research 9,570 3,325 8.5% 3.0% 7,904 3,874 9.2% 4.5% Group Revenue 112,016 100% 86,051 100% In our Industrial segment, revenue grew by 18.4% from £54.3 million last year to £64.3 million this year. Revenue in our Aerospace & Defence business increased by 74.5% from £20.0m to £34.9m. Excluding the acquisition in the year, A&D revenue increased by 48.0%. Life Sciences revenue increased by 21.1% whilst sales in our smallest segment, Scientific Research, reduced by 14.2%. Reconciliation of Adjusted Performance Measures Year ended 30 September 2017 2016 2017 2016 Operating profit 16,406 14,258 13,278 10,184 Net finance costs (295) (88) (676) (88) Profit before taxation 16,111 14,170 12,602 10,096 Taxation (4,059) (3,865) (3,710) (3,048) Profit for the year 12,052 10,305 8,892 7,048 Basic earnings per share (p) 49.4p 42.5p 36.4p 29.1p The Group adjusted profit before tax amounted to 16.1 million (2016: £14.2 million) and represented a net margin of 14.4%. Statutory profit before tax was £12.6 million compared with £10.1 million last year. The adjusted effective rate of tax was 25.2% (2016: 27.3%), the reduction caused by a number of factors including a lower applicable corporate tax rate in the UK, tax deductions being available on intangibles on recent US acquisitions and certain one off effects in the prior year. The effective rate of tax of 29.4% (2016: 30.2%) was higher than the adjusted effective rate because of the effect of the interest charge on deferred consideration which is not subject to tax, and the restructuring and acquisition costs being incurred in the UK which has a lower tax rate than the overall rate for the Group. The rate reflects a combination of the varying tax rates applicable throughout the countries in which the Group operates, principally the UK and the USA. The effective rate of tax should benefit in the future from further reductions in the UK tax rate, although the proportion of profit generated in the USA, where tax rates are higher, will affect this. Adjusted earnings per share (EPS) increased from 42.5p to 49.4p. Reported basic EPS was 36.4p compared with 29.1p last year. Operating Profit Net finance costs Taxation Earnings per share Year ended 30 September Reported £’000 2017 £’000 2016 13,278 10,184 £’000 2017 (676) £’000 2016 £’000 2017 £’000 2016 (88) (3,710) (3,048) Amortisation of acquired intangible assets 2,202 Gain on bargain purchase Impairment of goodwill Release of accrued contingent consideration Provision for regulatory compliance risk Restructuring costs Transaction fees Interest on deferred consideration – 615 (615) – 536 390 – 1,263 (578) 771 – 500 1,652 466 – Adjusted 16,406 14,258 – – – – – – – 381 (295) 22 | ANNUAL REPORT 2017 £’000 £’000 2017 36.4p 8.3p – 2.5p (2.5p) – 1.8p 1.3p 1.6p 2016 29.1p 3.8p (2.4p) 3.2p – 2.1p 5.2p 1.5p – – – – – – – – – (168) (333) – – – – (105) (76) – – – – – (391) (93) – (88) (4,059) (3,865) 49.4p 42.5p GOOCH & HOUSEGO PLC STRATEGIC REPORT FINANCIAL AND OPERATING REVIEW 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, costs associated with restructuring activities, interest on deferred consideration, impairment of goodwill and release of accrued contingent consideration. In 2016 they also included the provision for regulatory risk compliance and the gain on bargain purchase of Alfalight. Segmental Analysis Industrial Our Industrial business grew strongly during the year, with revenues of £64.3 million, compared with £54.3 million last year. This growth was largely driven by a combination of our industrial laser and telecommunications businesses. Revenue from the Group’s industrial laser business segment grew strongly, driven by high demand for precision lasers used in microelectronic manufacturing. Demand for the traditional Q Switch grew in 2017 and represented 14.0% of total Group revenue (2016: 10.2%). Adjusted operating profit for the Industrial sector as a whole was 10.1% higher at £11.8 million, compared with £10.8 million last year. Aerospace & Defence (A&D) A&D revenue was £34.9 million, up 74.5% on last year, benefitting from the full year effect of the two acquisitions in FY16 and the acquisition of StingRay in FY17. These results reinforce our belief that this sector represents a growth opportunity for Gooch & Housego, as optical technologies continue to be increasingly deployed in this market. Operating margins in this sector increased reflecting the higher volume and strong margins achieved by StingRay in particular. Life Sciences In 2017 Life Sciences revenue was up by 21.1% compared to the prior year. The majority of this growth was driven by a strong performance in our Optical Coherence Tomography (“OCT”) market driven largely by our customers’ development cycles. Despite this, adjusted operating margins in this sector were down on the previous year due to the competitive nature of the OCT market and the investment in this relatively small sector. Scientific Research Our activities in the Scientific Research market are dominated by a small number of large, long-term programmes. This market was down in 2017 due to demand phasing. Research and 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 a record 22 product releases in 2017, together with 7 new patents granted. Expenditure on R&D in the year to 30 September 2017 increased by 16.2% from £7.4 million to £8.6 million. A proportion of this increase was funded through UK and European grant funding. R&D expenditure represented 7.7% of revenue (2016: 8.6%). The Group capitalised £0.7m (2016: £0.7 million) of development expenditure. Operations As reported in our Interim Statement, the Company has committed to upgrading its Cleveland, Ohio facility. This facility, which houses G&H’s world leading crystal growth capabilities, is a key contributor to current and future profitability and will benefit from the modernisation that has been taking place. The upgrade is substantially complete and we will have invested in the region of $5 million. The refurbishment will help drive much needed operational efficiency, provide greater capacity, as well as a more compelling showcase of our capabilities for customers. The Company has concluded a legal dispute with the landlord of its Fremont facility. As a result of this, a Californian court has awarded G&H in the region of $2 million in damages arising from the landlord’s non-performance in respect of the lease. This will be accounted for in FY18. Investment in key skills, lean processes, systems and the latest capital equipment was accelerated in sites that provide critical components for precision lasers used in microelectronic manufacturing, namely Ilminster, Fremont, CA and Torquay. We have built on the good work done in previous years to further improve efficiency, customer service and to establish a more scalable organisational model for future growth. Our ten manufacturing sites have been organised into three manufacturing areas. They are based on our sites’ areas of technical expertise, namely Acousto Optic / Electro Optic, Precision Optics and Fibre Optics. Each manufacturing area has a leader and their role is to ensure best practice is shared, there is process harmonisation and optimal allocation of resources. Acquisitions G&H 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, G&H is now focussing on moving up the value chain in each of those markets. Whilst the business will continue to evaluate bolt on businesses in our core component technologies, continued strong focus is being placed on acquisition opportunities that enhance the Company’s ability to wrap electronics and software around core photonic products to yield system-level solutions. In February 2017 G&H acquired StingRay Optics LLC, a US based specialist designer and manufacturer of high performance ANNUAL REPORT 2017 | 23 GOOCH & HOUSEGO PLC STRATEGIC REPORT FINANCIAL AND OPERATING REVIEW optical and opto-mechanical subsystems for demanding defence and commercial applications. StingRay was founded in 2004 and has established itself as a market leading designer, manufacturer and supplier of world class custom optical assemblies. The business has a proven capability in providing system level optical products for use in harsh environments to key US defence customers. StingRay’s product range covers laboratory, ground based, airborne, unmanned aerial vehicles and space applications. The acquisition of StingRay is aligned with G&H’s strategic objectives of moving up the value chain and further diversification into the Aerospace & Defence sector. Potential synergies include leveraging G&H’s greater reach through our global sales teams and our expertise in manufacturing infrared precision optics and specialist coatings. StingRay has performed very well since acquisition, contributing £5.3 million to Group revenue and £1.6 million in profit before tax in the year. As a result of two key customers delaying the delivery of product from existing orders, Kent Periscopes did not reach its threshold for the first tranche of its earn-out to be triggered. Consequently, the provision for a proportion of this payment (approximately £0.6m), made under IFRS accounting rules, has been released to the income statement for the current year. Whilst the delay in delivery of these contracts has affected the anticipated results of Kent Periscopes for the earn-out period, the outlook for the business remains positive. The order book for the next two years remains very strong at approximately £12.5 million. Whilst the core value of this business remains strong, as part of its bi-annual review of the carrying value of goodwill, the Board has taken the decision to impair the goodwill of the Kent Periscopes acquisition to the sum of £0.6 million. Non Trading Items Restructuring costs of £0.5 million (2016: £1.7 million) related to the re-location of our Palo Alto facility to Fremont and to restructuring costs arising from the efficiency savings the business has put in place. Balance Sheet The Group’s total equity at the end of the year was £98.1 million, an increase of £8.0 million over the prior year. This increase comprised £6.6m from retained earnings, £2.0m from issues of share capital and a net reduction of £0.6m from foreign exchange and other movements. Additions to property, plant and equipment totalled £5.8m (excluding acquisitions). The main additions related to investment in plant and machinery, the expansion of our Torquay facility, and the refurbishment of our Cleveland facility. 24 | ANNUAL REPORT 2017 Working capital was 19.2% of revenue in the current year compared to 24.5% in 2016. This metric has benefitted from the year end GBP:USD exchange rate being higher than the average for the year, but also reflects management efforts to reduce working capital as a percentage of sales. Inventory at the year end was £21.1 million, an increase of £2.1 million over the prior year. Excluding the impact of currency and the inventory attributable to the acquisition, the underlying inventory increased by £1.6m, or 8.5%, in the year. This increase is reflective of the increased activity in the year. Trade receivables were unchanged at £20.5m. The effect of a strong shipment profile towards the end of the year and the acquisition of StingRay were largely offset by movements in the dollar exchange rate. Cash balances at 30 September 2017 were £26.4 million, compared with £23.2 million at 30 September 2016. Net cash flows from operating activities totalled £17.6 million, compared with £12.6 million last year, reflecting a cash generated from operations to adjusted operating profit rate of 119% (2016: 96%). During the year the business increased its net cash position from £11.7m to £14.9 million, despite investing £5.7m in the acquisition of StingRay and £5.8m in property, plant and equipment. Movement in Net Cash All amounts in £m Gross Gross Cash Debt Net Cash At 1 October2016 Operating cash flows Debt repayment (net of drawdown) Acquisitions Net capital expenditure Working capital Interest, tax and dividends Exhange movements 23.2 19.8 0.4 (5.7) (6.4) (0.3) (4.5) (0.1) (11.5) – (0.4) – – – – 0.4 At 30 September 2017 26.4 (11.5) 11.7 19.8 – (5.7) (6.4) (0.3) (4.5) 0.3 14.9 Order Book As at 30 September 2017, the Group order book stood at £72.1 million, compared to £52.8 million at the end of the 2016 financial year, a 36.5% increase. The acquisition of StingRay added £3.5 million to the order book. On a constant currency basis the order book was 39.1% higher. The book to bill ratio for the business as a whole was 1.08 (six month rolling average) as at 30 September 2017 (2016: 1.01). Staff The Group workforce increased from 755 at 30 September 2016 to 823 at the end of September 2017, an increase of 68. This is a net position and therefore reflects both the work the business has done in driving efficiency improvements and the GOOCH & HOUSEGO PLC FINANCIAL AND OPERATING REVIEW STRATEGIC REPORT Net cash analysis Net cash (£m) 2017 14.9 2016 11.7 2015 17.3 In order to balance business risk with the investment needs of the Company, management closely monitors and manages net cash. This year, following the acquisition of StingRay and the investment in capital assets the net cash position increased from £11.7 million to £14.9m. Earnings per share (EPS) 2017 2016 2015 Adjusted diluted EPS (pence) 48.5p 41.7p 38.9p As a result of a strong trading performance, the business has been able to deliver growth in adjusted diluted EPS of 16.3%, from 41.7p to 48.5p in 2017. The revenue, cash and earnings per share targets for the year were met. additional headcount that has come from the recent acquisitions and investment in capacity. Dividends The Directors propose a final dividend of 6.5p per share making a total dividend per share for the year of 10.2p (2016: 9.0p), an increase of 13.3%. The final dividend, if approved, will be payable on 2 March 2018 to shareholders on the Company’s share register as at the close of business on 26 January 2018. 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. In striving to achieve these strategic objectives, the main financial performance measures monitored by the Board are: All amounts in £m At actual exchange rates At constant exchange rates 2017 30% 19% 2016 9% 3% 2015 12% 8% The Board is focused on driving revenue growth by investing both organically and through acquisitions. The Group business has delivered strong underlying growth. Target market revenue Aerospace & Defence (£m) Life Sciences (£m) 2017 34.9 9.6 2016 20.0 7.9 2015 19.8 9.0 The Group targeted 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 increase in A&D revenue includes the full year effect of last year’s acquisitions, combined with the acquisition of StingRay in FY17. ANNUAL REPORT 2017 | 25 GOOCH & HOUSEGO PLC STRATEGIC REPORT STRATEGY OVERVIEW Gooch & Housego’s strategy is built around the twin pillars of diversification and moving up the value chain. In order to ensure its strategic goals are met management considers investment in R&D, acquisitions and strategic partnerships. STRATEGIES Diversification 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, while also reducing our exposure to cyclicality in any particular sector. Progress a) Diversification within the Industrial market. In 2017, Gooch & Housego grew its business in the areas of: • Telecommunications • Semi-conductors b) Aerospace & Defence. • Acquisition of StingRay Optics LLC c) Life Sciences • 26.5% growth in Optical Coherence Tomography business Moving up the Value Chain To leverage our excellence in materials and components to move up the value chain to more complex sub-assemblies and systems. Progress • Continued expansion of the Systems Technology Group to further focus the business’s drive up the value chain. • Acquisition of StingRay Optics LLC. Organic Research and Development To leverage Gooch & Housego’s world leading products, technologies and capabilities to develop innovative new products. Progress • In 2017 the company’s organic research and development programmes have delivered a record 22 new products. In addition, 7 new patents have been awarded. • The Group continues to invest in longer term R&D projects in all of its key markets. Investment in R&D increased by 16.2% in 2017. 26 | ANNUAL REPORT 2017 GOOCH & HOUSEGO PLC STRATEGIC REPORT PRINCIPAL RISKS AND UNCERTAINTIES Gooch & Housego adopts a formal risk identification and management process designed to ensure that risks are properly identified, prioritised, evaluated and mitigated to the extent possible. A formal Group wide risk register is maintained and approved by the Board on an annual basis. The following represent the significant risks identified in the Group’s risk register. RISK COMPETITION MITIGATION The Group recognises the importance of retaining and developing This is a key area of focus for the G&H management team. its highly skilled management team and workforce in order to Fundamental to mitigating the effects of our competitors is to maintain achieve its strategic objectives. our product quality and on-time delivery performance to ensure our customers’ expectations are fulfilled. Our significant investment in R&D enabled us to launch 22 new products during FY2017. The Group also has a cost reduction roadmap in place including the roll out of lean manufacturing practices across our sites, and the use of lower cost manufacturing partners where it is efficient to do so. Our business development teams maintain a presence in the market place and attend key trade shows which enables them to monitor competitor activity and respond accordingly. RETENTION OF KEY PERSONNEL The Group recognises the importance of retaining and developing its Our people are at the heart of our business. We maintain development highly skilled management team and workforce in order to achieve its and reward schemes to encourage individuals to play a long term role in strategic objectives. CAPACITY PLANNING the future development of the Group. Recent market trends have led to unprecedented demand for certain There has been significant management focus on increasing efficiency products which has exceeded the capacity of certain of our facilities during FY17 in order to increase capacity. This included investment in during FY17. GLOBAL ECONOMIC TRENDS Adverse changes in the major markets in which the Group operates can have a significant impact on the Group’s performance. machinery and people, and removing bottlenecks from production lines. Significant progress has been made in increasing capacity at strategically important plants. Gooch & Housego PLC has seen substantial growth in its business in recent years. Through its strategies of market diversification and moving up the value chain, the Group seeks to provide routes to new markets and reduce its dependence on any one market sector. Whilst the continued growth in the business remains challenging to predict, the year-end order book was 37% higher than the previous year, including the impact of an acquisition. The strategic report has been approved by the Board of Directors and signed on its behalf by: Mark Webster Chief Executive Officer 28 November 2017 ANNUAL REPORT 2017 | 27 GOOCH & HOUSEGO PLC GOVERNANCE BOARD OF DIRECTORS Executive Directors Mark Webster Chief Executive Officer (Appointed January 2015) Mark was previously Chief Executive Officer of Bio Products Laboratory Ltd. He has extensive executive experience and has held a number of senior leadership roles, such as Senior Vice President, Bayer Healthcare AG, Head of Global Strategic Marketing and M&A/Business Development, Shire Pharmaceuticals Group PLC and Vice President, Abbott Laboratories Inc. Mark was a non-executive Director of Gooch & Housego PLC before becoming an Executive Officer. He has also been a non-executive Director at Abcam PLC. Mark holds an honours degree in Chemistry from the University of Durham. Andrew Boteler Chief Financial Officer (Appointed August 2009) Andrew Boteler is a Chartered Accountant, having trained with Ernst & Young and qualified in 1993. He has an honours degree from Exeter University. In 2002 Andrew was part of the team that bought out the US telecommunications components group JDSU’s UK fibre optics business, to establish SIFAM Fibre Optics Ltd. There, he held the position of Finance Director until the company was acquired by Gooch & Housego PLC in May 2007. Between 2007 and 2009 Andrew held the positions of Head of Finance for Europe, Middle East and Africa and Acting Chief Financial Officer for Gooch & Housego PLC, before joining the Board in August 2009. Alex Warnock Chief Operating Officer (Appointed November 2014) Alex Warnock is a Chartered Engineer and member of the Institute of Engineering & Technology and Institute of Directors. Prior to joining Gooch & Housego PLC, Alex held senior positions at Optos PLC, most recently Chief Operating Officer. He has also worked in senior roles at Johnson & Johnson and Pace Micro Technology Inc. Alex has an honours degree in Electrical and Electronic Engineering. He has lived and worked in the USA and Germany. 28 | ANNUAL REPORT 2017 GOOCH & HOUSEGO PLC BOARD OF DIRECTORS Non-Executive Directors GOVERNANCE Gareth Jones Non-Executive Chairman (Appointed January 2015. Gareth was formerly Chief Executive Officer from January 2003) Gareth Jones has an honours degree in Physics from Imperial College and is a Fellow of the Institute of Physics. He joined Gooch & Housego in 1978 and was instrumental in the development of new products and capabilities that helped transform the business from a craft-based optical engineering company into today’s global technology business. Gareth became Technical Director in 1985 and Managing Director in 1995. In 1997 he was a member of the team that led Gooch & Housego’s IPO on the Alternative Investment Market. In 2000, he left Gooch & Housego to become a Partner in a leading UK venture capital firm. He re-joined Gooch & Housego in 2003 as Chief Executive Officer. Dr Peter Bordui (Appointed February 2012) Peter Bordui has thirty years’ experience in the photonics industry in senior leadership roles within Bookham, NewFocus, JDSU and Crystal Technology (at the time a subsidiary of Siemens) and has held a number of additional non-executive director roles. He is a governing trustee of a private charitable foundation and a director of the non-profit organisation American Citizens Abroad. Peter has bachelors, masters and PhD degrees from MIT. Peter has taken on the role of Senior Independent Director from 1 October 2016. He is Chairman of the Nomination Committee and a member of the Remuneration and Audit Committees. Brian Phillipson (Appointed 1 September 2015) Brian has extensive experience of the Aerospace & Defence industry in both Strategic and Operational roles across a range of locations. Most recently he has been a Board Member and Business Unit MD at Marshall Aerospace & Defence Group. Previously he held a number of senior roles within BAe Systems PLC, including Director of Strategy; Group Managing Director Major Programme Assurance; Group Managing Director Sea Systems; and first CEO, then later COO, of Eurofighter GmbH based in Munich. Brian holds an MA (Hons) in Engineering from Cambridge University. Brian Phillipson took over the role of Chairman of the Remuneration Committee with effect from 1 October 2016. Brian is a member of the Audit and Nomination Committees. David Bauernfeind (Appointed 1 May 2017) David is Chief Financial Officer of Connect Group PLC, a specialist distribution company listed on the London Stock Exchange. Prior to his current role, David was Chief Financial Officer and Executive Director at Xchanging PLC, a position he held from 2011 until its takeover and delisting in 2016. David was also a director of Xchanging Solutions Limited (formerly Cambridge Solutions Limited), a subsidiary of Xchanging PLC with a dual listing on the National Stock Exchange of India and the Bombay Stock Exchange. Before joining Xchanging in 2001, David held management roles in BAE Systems PLC and Johnson Matthey PLC. David is Chairman of the Audit Committee and a member of the Remuneration and Nomination Committees of the Gooch & Housego Board. ANNUAL REPORT 2017 | 29 GOOCH & HOUSEGO PLC GOVERNANCE DIRECTORS’ REPORT The Directors present their report together with the audited consolidated financial statements for the year ended 30 September 2017. A review of the development and performance of the Group during the year and its future prospects is set out in the Financial Highlights on page 2 and in the Financial and Operating Review on pages 22 to 25. An outline of the business’s principal activities, strategy and the Group’s progress in the year towards these strategies is given in the Strategic Report on pages 10 to 27. An analysis of the segmental information by market sector is given on pages 14 to 21. Key Performance Indicators (“KPIs”) The Group uses a selection of KPIs to monitor and review the performance of the business. These are detailed from page 25 of the Financial and Operating Review. Dividends During the year ended 30 September 2017 a final dividend of 5.7p per share was paid for the previous financial year. The final 2015 dividend of 5.2p per share was paid in the year ended 30 September 2016. A further interim dividend of 3.7p per share was paid for the half year ended 31 March 2017 (2016: 3.3p). For the year ended 30 September 2017, the Directors propose that a final dividend of 6.5p per share be paid. Substantial shareholdings As at 15 November 2017, the following shareholders had notified the Company that they held an interest in 3% or more of its issued ordinary share capital: Shareholder Octopus Investments Number % holding 3,835,243 15.64% Investec Wealth & Investment 2,192,019 8.94% Aberdeen Standard Investments 1,884,407 7.69% Hargreave Hale 1,590,027 6.49% Black Rock Investment Management 1,525,047 Franklin Templeton Investment Management 1,297,550 JM Finn & Co 776,825 6.22% 5.29% 3.17% Save for these interests, the Directors have not been notified that any person is directly or indirectly interested in 3% or more of the issued ordinary share capital of the Company. Treasury Policies The Group’s treasury policies are designed to manage financial risk to the Group that arises from operating in a number of foreign currencies and to maximise interest income on cash deposits, whilst maintaining the security of these deposits. As an international group of companies, the main exposure is in respect of foreign currency risk on the trading transactions undertaken 30 | ANNUAL REPORT 2017 by Group companies and on the translation of the net assets of overseas subsidiaries. This exposure is principally to the US dollar. Monthly cash management reporting and forecasting is in place to facilitate management of this currency risk. The operations of Group treasury take place at head office. All balances not immediately required for Group operations are placed on short-term deposit with leading international highly rated financial institutions. At a transactional level, the Group seeks to offset its exposure to foreign exchange movements by contracting with significant supply partners in US Dollars and undertakes regular financial reviews to assess whether it would be appropriate for the Group to enter into currency hedging contracts to mitigate the currency risk. During the year there were no forward contracts in place. The Group’s bank borrowings are denominated in US Dollars, which acts as a partial hedge of a net investment against its US Dollar denominated companies within the Group. Research and Development The Group has a continuing commitment to a high level of research and development. This commitment is to actively develop new technologies and capabilities that will become a key part of the Group’s future product portfolio and revenue. Directors’ Indemnities The Directors have the benefit of an indemnity which is a qualifying third party indemnity provision as defined by Section 234 of the Companies Act 2006. The indemnity was in force throughout the last financial year and is currently in force. The Company also purchased and maintained throughout the financial year Directors’ and Officers’ liability insurance in respect of itself and its Directors. Employee Involvement The Group is committed to including all employees in the performance and development of the business. An established employee appraisal and reward scheme is in operation and employees are appraised regularly with relevant development support provided by the Group. The Group attaches considerable importance to informing and involving its employees on matters which concern them and in the achievement of its business objectives. The Group has a formal employee communication plan involving regular meetings between management and employees and the provision of a comprehensive employee handbook. Corporate Governance The Board recognises the importance of good corporate governance and has put in place procedures it considers appropriate. GOOCH & HOUSEGO PLC DIRECTORS’ REPORT The Board currently comprises three executive and four non-executive Directors. The directors holding office during the period of this report and their biographies are detailed from page 28 and are also available on our website; www.goochandhousego.com The Board focuses on formulation of strategy, management of effective business controls and review of business performance. The Board is specifically responsible for the approval of annual and interim results and interim management statements, acquisitions and disposals, major capital expenditure, borrowings, director and company secretary appointments and removals, any material litigation, strategic forecasting and major development projects. A framework of delegated authorities is in place that details the structure of delegation below Board level and includes matters reserved for the Board. All the non-executive Directors are considered by the Board to be independent in character and judgement. In accordance with the Company’s Articles of Association all directors will retire at the Annual General Meeting and, being eligible, offer themselves for re-election. The Board has three formally constituted committees, the Audit committee, the Remuneration committee and the Nomination committee. Board membership and meeting attendance is presented in the following table. Executive Directors Mark Webster Andrew N Boteler Alex Warnock Non-executive Directors Gareth Jones Peter Bordui Brian Phillipson David Bauernfeind Paul Heal 8/8 8/8 7/8 8/8 8/8 8/8 3/3 3/3 GOVERNANCE The Group does not have an internal audit department, but senior finance staff regularly visit the sites to perform reviews of controls and processes in place. Annual budgets and three year strategic plans are prepared for each company. Financial and operational reports enable the Board to compare performance against budget and to take action where appropriate. During the year all senior staff within the organisation undertook Anti Bribery training. Financial Risk Management An explanation of the Group’s financial risk management objectives is contained in note 5. Environmental Policy The policy of the Group is to meet the statutory environmental requirements placed upon it and to apply good environmental practice in its operations while recognising that it is contractually obliged to meet its customer requirements. Statement of Directors’ Responsibilities The directors are responsible for preparing the Annual Report and Financial Statements in accordance with applicable law and regulations. Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have prepared the Group financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union and parent company financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and parent company and of the profit or loss of the Group for that period. In preparing these financial statements, the directors are required to: (Appointed 1 May 2017) • select suitable accounting policies and then apply them (Retired 22 February 2017) consistently; Risk management and internal control • state whether applicable IFRSs as adopted by the European The Directors acknowledge that they are responsible for the Group’s system of internal financial control. The system can provide only reasonable, and not absolute, assurance against material misstatements and losses. Union have been followed for the Group financial statements and IFRSs as adopted by the European Union have been followed for the company financial statements, subject to any material departures disclosed and explained in the financial statements; There are defined lines of responsibility and delegation of authorities. There are also internal financial controls in existence which are centrally maintained and documented and provide reasonable assurance of the maintenance of proper accounting records and the reliability of financial information used within the business. • make judgements and accounting estimates that are reasonable and prudent; and • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business. ANNUAL REPORT 2017 | 31 GOOCH & HOUSEGO PLC Going Concern Based on Management’s operating projections and cash flow forecasts, the Directors believe that the Group will generate sufficient cash and have access to working capital facilities to enable it to meet its funding requirements for at least the next 12 months and will continue to comply with its banking covenants. Accordingly, the Directors have formed a judgement, at the time of approving the financial statements, that there is a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. For this reason, the Directors continue to adopt the going concern basis in preparing the financial statements. Independent Auditors A resolution to reappoint PricewaterhouseCoopers LLP as auditors to the Company and the Group will be proposed at the Annual General Meeting. Approved and signed on behalf of the Board of Directors by: Mark Webster Director 28 November 2017 GOVERNANCE DIRECTORS’ REPORT The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group and parent company’s transactions and disclose with reasonable accuracy at any time the financial position of the Group and parent company and enable them to ensure that the financial statements comply with the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. The directors are also responsible for safeguarding the assets of the Group and parent company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The directors of the ultimate parent company are responsible for the maintenance and integrity of the ultimate parent company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. The directors consider that the annual report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group and parent company’s performance, business model and strategy. Each of the directors, whose names and functions are listed on pages 28 and 29 confirm that, to the best of their knowledge: • the parent company financial statements, which have been prepared in accordance with IFRSs as adopted by the European Union, give a true and fair view of the assets, liabilities and financial position of the parent company; • the Group financial statements, which have been prepared in accordance with IFRSs as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit of the Group; and • the Annual Report and Financial Statements includes a fair review of the development and performance of the business and the position of the Group and parent company, together with a description of the principal risks and uncertainties that it faces. In the case of each director in office at the date the Directors’ Report is approved: • so far as the director is aware, there is no relevant audit information of which the Group and company’s auditors are unaware; and • they have taken all the steps that they ought to have taken as a director in order to make themselves aware of any relevant audit information and to establish that the Group and parent company’s auditors are aware of that information. 32 | ANNUAL REPORT 2017 GOOCH & HOUSEGO PLC GOVERNANCE ANNUAL REPORT 2017 | 33 GOOCH & HOUSEGO PLC GOVERNANCE AUDIT COMMITTEE REPORT Membership Responsibilities The Audit Committee comprises all of the non-executive directors and is chaired by David Bauernfeind, a Chartered Accountant, who is currently Chief Financial Officer of Connect Group PLC, a company listed on the London Stock Exchange. The Audit Committee is considered to have had an appropriate balance between those individuals with finance or accounting training and those from a general business background. How the Committee operates The Committee met three times during the year as part of its standard schedule to consider matters planned around the Group’s financial calendar. Attendance at those meetings is summarised below: Non-executive Directors David Bauernfeind Gareth Jones Dr Peter Bordui Brian Phillipson Paul Heal 2/2 2/3 3/3 3/3 1/1 (Appointed 1 May 2017) (Retired 22 February 2017) At the invitation of the Committee, representatives of the external auditor, PwC LLP, attended meetings together with the Chief Executive, Chief Financial Officer, Chief Operating Officer and the Company Secretary. The Committee also seeks to meet regularly with the external auditor without the Executive Directors in attendance. In the year, the Committee met twice with representatives from PwC LLP without others being present. The role and responsibilities of the Committee are set out in its terms of reference, which are available on the Company’s web site and from the Company Secretary on request. The terms of reference are reviewed annually by the Committee. The principal responsibilities of the Committee are: • reviewing the effectiveness of the Company’s financial reporting, internal control policies and procedures for the identification, assessment and reporting of risk; • Advising the Board on whether the Committee believes the Annual Report taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s performance, business model and strategy; • Considering and making recommendations to the Board as to the appointment, reappointment or removal of the external auditor and the approval of their remuneration and terms of engagement; • Assessing the external auditor’s independence and objectivity and the effectiveness of the audit process; • Reviewing the policy on the engagement of the external auditor to supply non-audit services. 34 | ANNUAL REPORT 2017 GOOCH & HOUSEGO PLC GOVERNANCE AUDIT COMMITTEE REPORT Financial Reporting During the year, the Audit Committee reviewed the appropriateness of the Group’s interim and full year financial statements, including the consideration of significant financial reporting judgements made by management taking into account reports from management and the external auditors. The main area of focus considered by the Committee during the year were as follows: AREA OF FOCUS ACQUISITION ACCOUNTING CONCLUSION The Audit Committee reviewed the accounting for the acquisition of The Committee reviewed the nature of the intangible assets identified StingRay Optics LLC during the year. and the assumptions underpinning management’s valuation thereof. The Committee satisfied itself that the acquisition accounting was reasonable. GOODWILL IMPAIRMENT REVIEWS Management perform annual impairment reviews of the carrying value The Committee is satisfied that the impairment recognised in the of goodwill. These impairment reviews are based on future projected year is appropriate and that the remaining carrying value of goodwill cash flows and are therefore inherently judgmental. The Audit is supportable. Committee reviewed the key judgements underpinning the impairment reviews performed. INVENTORIES The Committee reviewed management’s estimates in relation to The Committee was satisfied that the provisions made adequately inventory ageing and obsolescence. reflected the risk of impairment. EXCEPTIONAL ITEMS The Committee considered the appropriateness of the measure The Committee was satisfied that the presentation of normalised profit of adjusted profits, quality of earnings, and the classification and before tax provides a reasonable view of the underlying performance of transparency of items separately disclosed as Exceptional items. the Group and that there was transparent and consistent disclosure of items shown separately as Exceptional items. External auditors Approval David Bauernfeind Chairman of the Audit Committee 28 November 2017 Under its terms of reference the Committee is responsible for assessing the scope, fee, objectivity and effectiveness of external audits and for making a recommendation to the Board regarding the appointment, reappointment or removal of the auditor on an annual basis. In line with professional standards, the Company’s external auditor (PwC LLP) has a policy of rotating engagement partners every five years. As FY16 was the fifth audit overseen by Colin Bates, a new partner, Mark Ellis, was appointed to undertake the FY17 audit. The Committee also regularly reviews the nature, extent, objectivity and cost of non-audit services provided by the auditors. In doing this the Committee does not approve additional services which would compromise the auditors’ independence. The auditors are required to make a formal report to the Audit Committee on an annual basis on the safeguards that are in place to maintain their independence and the internal safeguards in place to ensure their objectivity. To ensure compliance with this policy, the Audit Committee reviewed and approved the remuneration received by PwC for the audit service, audit-related services and non-audit work. ANNUAL REPORT 2017 | 35 GOOCH & HOUSEGO PLC Membership and attendance at meetings held in 2017 Non-executive Directors Dr Peter Bordui Gareth Jones Brian Phillipson David Bauernfeind Paul Heal Executive Directors Mark Webster Approval 5/5 5/5 5/5 3/3 1/1 5/5 (Appointed 1 May 2017) (Retired 22 February 2017) Peter Bordui Chairman of the Nomination Committee 28 November 2017 GOVERNANCE NOMINATION COMMITTEE REPORT The Nomination Committee, which consists of the Chief Executive Officer and all four Non-Executive Directors, is responsible for the composition of the Board. Role of the Committee • Reviews the composition of the Board and its committees. • Identifies and recommends for Board approval suitable candidates to be appointed to the Board. • Considers succession planning for Directors and other senior executives and in doing this considers diversity, experience, knowledge and skills. Areas of focus for the Nomination Committee during FY17 • Appointment of a new Non-Executive Director to act as Chairman of the Audit Committee following the retirement of Paul Heal in February 2017. • Succession planning for other members of the Board. Advisors During FY17, the Committee appointed Edward Drummond, an external search agency, to assist with the identification of suitable Non-Executive Director candidates to take over as Chairman of the Audit Committee. Appointment Process As part of the appointments process, the Committee determined the selection criteria for the Chairman and Non-Executive Director roles. The Committee worked with Edward Drummond who drew up a list of external candidates from a range of industries and backgrounds for initial appraisal by the Committee. From this, a shortlist of suitable candidates that met the search and selection criteria was prepared and these candidates were interviewed by the Board. Following these interviews, the Nomination Committee recommended to the Board, which duly approved, the appointment of David Bauernfeind as Non-Executive Director on 1 May 2017. 36 | ANNUAL REPORT 2017 GOOCH & HOUSEGO PLC GOVERNANCE REMUNERATION COMMITTEE REPORT Introduction It is an objective of the Group to attract and retain high calibre Directors and employees and reward them in a way which encourages the creation of value for shareholders. The incentive and remuneration schemes employed by G&H were largely developed and introduced in 2013, and few changes have been made to the schemes since then. The Group’s market capitalisation has increased threefold in less than five years, during which time there have also been significant changes to governance expectations. Accordingly, the Remuneration Committee felt it appropriate to update our remuneration schemes during 2017, to which end the Committee engaged FIT Remuneration Consultants to assist the Committee with a review of the G&H remuneration policy for Executive Directors and other senior management. This review confirmed that our schemes continue to be appropriate and that they are in line with practise not just on AIM, but also among many FTSE SmallCaps on the Main Market. However, following the review it was felt appropriate to make some adjustments to the Annual Bonus and Long Term Incentive Plan criteria. None of these proposed changes require shareholder approval, although we have consulted with our major shareholders who have been supportive of the proposals. Further detail of the changes are given in the Remuneration Policy table on the following page. The Committee values all feedback from shareholders and hopes to receive your support at the forthcoming AGM. Operation of the Remuneration Committee The Remuneration Committee is chaired by Brian Phillipson and comprises all the non–executive directors. Although not a member of the committee, the Chief Executive Officer submits a report outlining proposals and is usually requested to present the report to the committee. After presenting the report he withdraws from the meeting and does not participate in the decision making or voting processes. The Committee has three scheduled meetings each year to deal with ordinary business. In addition to these, the Committee meets on an ad hoc basis when there are additional matters to deal with. Brian Phillipson gives an update on the Remuneration Committee’s activities at each Board meeting. Non-executive Directors Brian Phillipson (Chairman) Gareth Jones Brian Phillipson David Bauernfeind Paul Heal 4/4 4/4 4/4 2/2 1/1 (Appointed 1 May 2017) (Retired 22 February 2017) ANNUAL REPORT 2017 | 37 GOOCH & HOUSEGO PLC GOVERNANCE REMUNERATION COMMITTEE REPORT Remuneration Policy Table The table below summarises our policy for 2017 and the planned changes for 2018: Element of Purpose and link to FY17 Policy and approach Opportunity FY18 Policy and approach remuneration strategy Base Salary Takes into account • Reviewed annually with changes Base salary increases • The FIT review identified that Mark experience and effective from 1 October if are applied in line with Webster’s salary was lower than personal contribution applicable the outcome of the the median for AIM 100 Company annual review CEOs and the Committee therefore increased his base pay accordingly with effect from 1 October 2017. to the company’s strategy Attracts and retains executives of the quality required to deliver the company’s • Consideration given to individual and company performance • General pay increases across the wider workforce are also taken into consideration strategy • Where the company considers it appropriate and necessary, larger increases may be awarded in exceptional circumstances Annual Bonus Incentivise • Awarded annually Maximum of 100% of • Introduction of broader performance achievement of short- term financial targets that the Committee considers to be critical drivers of business growth • Award level is based upon level of normalised diluted earnings per share and operating cash flow against internal targets • 50% of the maximum bonus is payable for reaching threshold targets • Maximum bonus is achieved for reaching 10% over threshold targets base salary measures • Up to 60% payable for exceeding target EPS by 10%. • 20% of bonus payable for achieving target operating cash flow. Nil if not met. • 0-20% of bonus payable for achievement of personal objectives linked to operational performance and major initiatives. Pension Provide employees • Defined contribution personal 10% of base salary • No changes proposed with market pension plan competitive pension scheme The Committee keeps • Company contributes 10% of salary the benefit policy and benefit levels under regular review Benefits Provide employees • Executive Directors receive private The Committee keeps • No changes proposed with market health insurance, life assurance the benefit policy and competitive benefits and long term disability insurance benefit levels under regular review Long Term Incentivise executive • Award levels are determined by Maximum award of • No changes to maximum awards. Incentive Plan performance over the reference to an individual’s position 120% of base salary (LTIP) longer term and performance prior to grant • Absolute TSR retained for 60% of awards, with full vesting at 15% TSR Performance • Awards vest after three years per annum. measures linked to the subject to achievement of Total long-term strategy Shareholder Return targets. of the business and the creation of shareholder value over the longer term 38 | ANNUAL REPORT 2017 • Introduction of an EPS target for remaining 40% of awards. Full vesting at 15% EPS growth per annum. • 15% growth per annum target is in line with the Board’s objective of doubling the size of the company over a period of 5 years. GOOCH & HOUSEGO PLC GOVERNANCE REMUNERATION COMMITTEE REPORT Directors’ Remuneration 2017 Basic pay Performance Benefits in Pension Subtotal related bonus £’000 £’000 kind £’000 contribution £’000 2017 £’000 Share options £’000 Total 2017 £’000 Executive M Webster A Boteler A Warnock Non-executive G Jones Dr P Bordui B Phillipson D Bauernfeind * P Heal ** 306 199 239 77 40 40 17 17 935 190 130 154 – – – – – 8 4 9 5 – – – – – 10 10 – – – – – 504 343 412 82 40 40 17 17 – 152 – 241 – – – – 474 26 20 1,455 393 2016 Basic pay Performance Benefits in Pension Subtotal related bonus £’000 £’000 kind £’000 contribution £’000 2016 £’000 Executive M Webster A Boteler A Warnock Non-executive G Jones P Heal ** Dr P Bordui B Phillipson 294 178 225 36 40 18 37 828 146 100 119 – – – – 365 34 6 12 4 – – – 56 – 25 16 38 – – – 79 The above disclosure has been audited. * David Bauernfeind was appointed 1 May 2017. ** Paul Heal retired on 22 February 2017. *** During the year ended 30 September 2016, Peter Bordui was paid £19,140 for consultancy services in addition to the amounts shown. This arrangement ceased on 30 September 2016 since when his entire remuneration has been paid through the payroll. 504 495 412 323 40 40 17 17 1,848 Total 2016 £’000 474 617 372 577 40 18 37 Share options £’000 – 308 – 499 – – – 474 309 372 78 40 18 37 1,328 807 2,135 ANNUAL REPORT 2017 | 39 GOOCH & HOUSEGO PLC GOVERNANCE REMUNERATION COMMITTEE REPORT Basic Pay Executive Directors are paid a basic salary together with annual bonus payments based on the achievement of Group profitability and cash targets. In addition, Executive Directors participate in a share option scheme and receive benefits in kind, including medical expenses and insurance. Non-executive directors are paid a fee to attend board meetings and to serve as members of the Audit, Nomination and Remuneration committees. Further payments may be made in respect of additional services provided at the request of the Company. 2017 performance Related Bonuses Gooch & Housego has continued to perform well in 2017, delivering strong financial performance and continuing to make progress in its key strategic goals of diversification and moving up the value chain. In terms of financial performance, adjusted profit before tax increased by 13.7% to £16.1m. Once again a strong cash performance resulted in the Group reporting a net cash position of £14.9m, after significant investment in property, plant and equipment, and a successful acquisition. The increasing strength of the balance sheet meant that the Company was able to recommend a 13.3% increase in the total dividend for the year. Delivering growth through diversification within our sectors and by moving up the supply chain to provision of higher value offerings, as well as improvements in operational performance, have continued to be the principal strategic themes of the business. The trend towards a more balanced spread of business across the Company’s principal market sectors has continued. New product development at both the operational sites and within the Systems Technology Group continues to deliver with 22 new products being launched in 2017. The business has made progress on its drive for operational efficiency, through its continued adoption of lean principles, as well as investments in plant, equipment, staff and processes. The Executive Directors’ 2017 bonus outcomes were 69% of maximum, reflecting the strong results for the year. Directors’ Pension Arrangements During the year the Company contributed to a money purchase pension scheme on behalf of the executive Directors. The number of Directors who are currently accruing benefits under a pension scheme is 2 (2016: 2). Contributions to a scheme on behalf of continuing Directors amount to 10% of the Director’s basic salary. Gareth Jones sacrificed part of his salary in exchange for increased company pension contributions, until the arrangement ceased on 31 August 2016. Mark Webster has sacrificed his entitlement to company pension scheme contributions in exchange for an increase to his salary of an equal amount. Alex Warnock and Andrew Boteler have both sacrificed part of their pension entitlement for an increase in salary of the same amount during the year. Directors’ Contracts The Executive Directors have rolling service contracts that are subject to either six or twelve months’ notice. The Chairman and non-executive Directors do not have contracts of service. Exercises of Share Options by Directors Exercises of share options under the Long Term Incentive Scheme by the Directors are summarised below. Gareth Jones’ exercises relate to LTIPs awarded to him during his tenure as an Executive Director. He no longer holds any unvested or unexercised share options. Share Options Exercised 2017 Scheme Number of Director A Boteler G Jones Share Options No. LTIP LTIP 12,873 19,784 2016 Scheme Number of Director A Boteler A Boteler G Jones G Jones LTIP LTIP LTIP LTIP 40 | ANNUAL REPORT 2017 Share Options No. 27,500 7,576 27,500 29,376 Market Price p 1,182.9 1,216.3 Market Price p 878.2 875.0 878.2 875.0 Exercise Price p 0.0 0.0 Exercise Price p 0.0 0.0 0.0 151.0 Exercise Date 27/02/17 01/03/17 Exercise Date 08/01/16 11/01/16 08/01/16 11/01/16 Total Gain £’000 152 241 Total Gain £’000 242 66 242 257 GOOCH & HOUSEGO PLC GOVERNANCE REMUNERATION COMMITTEE REPORT Director Shareholdings Shareholding Guidelines The Directors’ beneficial interests in the issued ordinary share capital of the Company were as follows: Number of shares Number of shares at 30 September at 30 September 2017 2016 Executive Directors Mark Webster Andrew Boteler Alex Warnock Non-executive Directors Gareth Jones Dr Peter Bordui Brian Phillipson David Bauernfeind – 26,181 – – 26,181 – 65,401 55,401 – – – – – – Following the review during the year, formal Executive Director shareholding guidelines have been introduced. Executive Directors are required to acquire and maintain a qualifying interest in the ordinary shares of the company equivalent to 100% of base salary. For LTIPs granted in March 2017 and subsequent awards, the Directors will not be permitted to sell shares unless the specified shareholding has been achieved, other than sale of shares to satisfy tax obligations. For LTIPs granted in 2014 and 2015, until the minimum holding is achieved the Directors are permitted to sell up to 50% of shares vesting, after sufficient have been sold to settle tax liabilities. The Gooch & Housego 2013 Long Term Incentive Plan The Gooch & Housego 2013 LTIP was adopted on 9 April 2013. Under the plan, awards will be made annually to key employees based on a percentage of salary or management grade. Subject to the satisfaction of the required TSR performance criteria and EPS financial performance, these grants will vest upon publication of the results of the Company three years after the grant date. The exercise price of all awards is nil. – Number of ordinary shares under option – Date of grant At Awarded Exercised 01.10.2016 in year in year Lapsed in year At 30.09.2017 Expiry Date 17.12.2014 23.12.2015 10.03.2017 17.12.2014 23.12.2015 10.03.2017 01.12.2013 17.12.2014 23.12.2015 10.03.2017 90,866 36,080 – – 34,606 68,878 26,949 – – 25,674 25,911 28,032 22,661 – – – – 21,680 – – – – – – – – (12,873) (13,038) – – – – – – 90,866 36,080 34,606 68,878 26,949 25,674 – 28,032 22,661 21,680 17.12.2018 23.12.2019 23.12.2021 17.12.2018 23.12.2019 26.03.2021 16.12.2017 17.12.2018 23.12.2019 26.03.2021 Executive M Webster M Webster M Webster A Warnock A Warnock A Warnock A Boteler A Boteler A Boteler A Boteler Non-executive G Jones 01.12.2013 39,822 – (19,784) (20,038) – 16.12.2017 The Gooch & Housego 2013 Long Term Incentive Plan specifies that the Company will operate within the standard dilution limit of 10% of the Company’s issued share capital over a 10 year period, but excluding the dilution arising from the 2010 Value Creation Plan. and £446,000 (2016: £36,000) in respect of employer’s national insurance contributions, based on a year end share price of £14.20 (2016: £10.10). During the year to 30 September 2017, £587,000 (2016: £638,000) was charged to the income statement in respect of the IFRS 2 share based payments charge on all share option schemes (valued using the Monte Carlo option pricing model) Brian Phillipson Chairman of the Remuneration Committee 28 November 2017 ANNUAL REPORT 2017 | 41 GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS Our Audit Approach Context Gooch & Housego PLC is listed on the Alternative Investment Market (AIM) of the London Stock Exchange and its principal activities comprise the research, design, engineering and manufacture of advanced photonic systems, components and instruments in the Aerospace & Defence, Industrial, Life Sciences and Scientific Research sectors. It has operations across the USA and Europe. In February 2017, the Group completed the acquisition of StingRay Optics LLC in Keene, USA. The acquisition allows the business to further its strategic objective of broadening its product offering and diversifying its markets and follows two previous acquisitions in FY16. The Group’s strategic objectives remain the diversification of its product offering and moving up the value chain. Report on the audit of the financial statements Our Opinion In our opinion, Gooch & Housego PLC’s Group financial statements and parent company financial statements (the “financial statements”): • give a true and fair view of the state of the Group’s and of the parent company’s affairs as at 30 September 2017 and of the Group’s profit and the Group’s and the parent company’s cash flows for the year then ended; • have been properly prepared in accordance with IFRSs as adopted by the European Union and, as regards the parent company’s financial statements, as applied in accordance with the provisions of the Companies Act 2006; and • have been prepared in accordance with the requirements of the Companies Act 2006. We have audited the financial statements, included within the Annual Report and Financial Statements (the “Annual Report”), which comprise: the Group and company balance sheets as at 30 September 2017; the Group income statement and Group statement of comprehensive income, the Group and company cash flow statements, the notes to the Group and company cash flow statements, and the Group and company statements of changes in equity for the year then ended; and the notes to the Group and company financial statements, which include a description of the significant accounting policies. Basis for Opinion We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities under ISAs (UK) are further described in the Auditors’ responsibilities for the audit of the financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We remained independent of the Group in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, which includes the FRC’s Ethical Standard, as applicable to listed entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. 42 | ANNUAL REPORT 2017 GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS Overview • Overall Group materiality: £620,000 (2016: £635,000), based on 5% of profit before tax. • Overall parent company materiality: £122,000 (2016: £92,000), based on 5% of profit before tax. • The UK audit team performed an audit of the complete financial information of one operating unit in the USA (Gooch & Housego (Palo Alto) LLC and two operating units in the UK (Gooch & Housego (UK) Limited and Gooch & Housego (Torquay) Limited) as well as the Parent company based in the UK (Gooch & Housego PLC). • Additional procedures were also performed at a Group level over centralised processes and functions, including the audit of consolidation journals. • Taken together, these four reporting units (post consolidation entries) account for 87% of Group profit before tax. • Specific audit procedures were also performed by the UK audit team on certain other balances and transactions and the remaining sixteen reporting units. In particular, additional detailed testing was performed on revenue at three reporting units in the USA (Gooch & Housego (Ohio) LLC, StingRay Optics LLC and EM4 Inc.). • Valuation of goodwill and intangibles (Group) and investments (parent company) (Group and parent). • Acquisition accounting (Group). Key audit matters The scope of our audit Key audit matters As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements. In particular, we looked at where the directors made subjective judgements, for example in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits we also addressed the risk of management override of internal controls, including evaluating whether there was evidence of bias by the directors that represented a risk of material misstatement due to fraud. Key audit matters are those matters that, in the auditors’ professional judgement, were of most significance in the audit of the financial statements of the current year and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by the auditors, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters, and any comments we make on the results of our procedures thereon, were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. This is not a complete list of all risks identified by our audit. ANNUAL REPORT 2017 | 43 GOOCH & HOUSEGO PLCMaterialityAudit scope FINANCIAL STATEMENTS REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS KEY AUDIT MATTER HOW OUR AUDIT ADDRESSED THE KEY AUDIT MATTER Valuation of goodwill and intangibles We examined management’s impairment assessment, auditing in detail the key underlying (Group) and investments (parent company) assumptions in the discounted cash flow models. The assessment of the carrying value of We noted that a £0.6m impairment had been taken in relation to the Kent Periscopes business, goodwill and intangibles involves judgment the result of a poorer than expected first full year post acquisition. and any impairment of the carrying value of such assets could have a material impact on the Group’s financial statements. Similarly, the assessment of the carrying value of investments held involves judgment and any impairment of the carrying value of such assets could have a material impact on the parent company’s financial statements. These are areas of continued focus for the audit to ensure that assets are valued correctly and not overstated in the context of the trading performance of the relevant cash generating units. Group and parent We met with management and key operational personnel to update our understanding of the various sites and considered the discounted cash flow models with reference to current performance. We assessed each of the key assumptions in turn and sensitised management’s model, which itself built in an element of sensitivity against budget, to reflect uncertainty in the future cash flows. We also compared key assumptions such as discount rate and long-term growth with market data in the UK and the US for reasonableness. Based on our work, we determined that the judgment of management that a £0.6m impairment was required at Kent Periscope was reasonable. We also concluded that the judgment that no further impairment was required at either this site or any other was also reasonable. We note however that goodwill and intangibles held remain sensitive to changes in key assumptions. In particular, a failure to achieve growth objectives for certain sites could give rise to an impairment in the future. Given this management has disclosed relevant sensitivities (see note 17). We assessed the appropriateness of the accounting and related disclosures included in the financial statements. These are deemed reasonable. Acquisition accounting StingRay Acquisition accounting involves a number of judgements from management and is therefore a subjective area. The risk is that the purchase price allocation (PPA) model may not reflect the true value of the acquisitions made, leading to misstatement in the financial statements. Group We reviewed the underlying transactions, tested the fair value of the assets and liabilities acquired together with the intangible assets identified as part of the purchase price allocation and reviewed the disclosures in the financial statements. There were no significant issues noted from our work. Included within the StingRay total consideration was $10m of deferred consideration payable based on performance over two earn out periods subsequent to the acquisition. Management have reassessed this deferred consideration at the balance sheet date. Based on the current activity within the business, historical growth rates and the latest forecasts for the business, management consider that both payments ($6.0m and $4.0m) will be made. We have reviewed the available information and based on our work consider that management’s judgment is reasonable. Kent Periscopes We note that a reassessment was also made of the deferred consideration associated with the acquisition of Kent Periscopes (acquired in 2016). Based on the current activity levels, historical performance and forecasts for the coming period, management concluded that the first earn out target would be missed, but the second would be achieved. A £0.6m adjustment was made to the deferred consideration, reflecting the amount no longer payable. We have reviewed the available information and based on our work consider that the adjustment made is reasonable. Further, the decision to hold the remaining deferred consideration as due against the second earn out is deemed reasonable. 44 | ANNUAL REPORT 2017 GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS How we tailored the audit scope We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole, taking into account the structure of the Group and the parent company, the accounting processes and controls, and the industry in which they operate. The Group comprises four divisions, being Industrial, Aerospace & Defence, Life Sciences and Scientific Research and we focused our audit work on the Group’s largest operating units, within these divisions, in the USA and UK. The UK audit team conducted an audit of the complete financial information of four operating units (the largest in the USA, the two largest in the UK and the Parent company based in the UK) due to their size and risk characteristics. In addition, procedures were performed at a Group level over centralised processes and functions, including the audit of consolidation journals. Specific audit procedures were also performed by the UK team on certain balances and transactions material to the Group financial statements at the remaining reporting units. Taken altogether, these procedures gave us the evidence we needed for our opinion on the Group financial statements as a whole. Materiality The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the individual financial statement line items and disclosures and in evaluating the effect of misstatements, both individually and in aggregate on the financial statements as a whole. Based on our professional judgement, we determined materiality for the financial statements as a whole as follows: Group financial statements Parent company financial statements Overall materiality £620,000 (2016: £635,000). How we determined it 5% of profit before tax. £122,000 (2016: £92,000). 5% of profit before tax. Rationale for benchmark applied Based on the benchmarks used in the annual report We believe that profit before tax is the primary and our understanding of the business, profit before measure used by the shareholders in assessing tax is the primary measure used by the shareholders the performance of the entity, and is a generally in assessing the performance of the Group, and is a accepted auditing benchmark. generally acceptable auditing benchmark. For each component in the scope of our Group audit, we allocated a materiality that is less than our overall Group materiality. The range of materiality allocated across components was between £122,000 and £589,000. Certain components were audited to a local statutory audit materiality that was also less than our overall Group materiality. We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £31,000 (Group audit) (2016: £31,750) and £6,100 (Parent company audit) (2016: £4,600) as well as misstatements below those amounts that, in our view, warranted reporting for qualitative reasons. Conclusions Relating to Going Concern We have nothing to report in respect of the following matters in relation to which ISAs (UK) require us to report to you when: • the directors’ use of the going concern basis of accounting in the preparation of the financial statements is not appropriate; or • the directors have not disclosed in the financial statements any identified material uncertainties that may cast significant doubt about the Group’s and parent company’s ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the financial statements are authorised for issue. However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the Group’s and parent company’s ability to continue as a going concern. Reporting on Other Information The other information comprises all of the information in the Annual Report other than the financial statements and our auditors’ report thereon. The directors are responsible for the other information. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except to the extent otherwise explicitly stated in this report, any form of assurance thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If we identify an apparent material inconsistency or material misstatement, we are required to perform procedures to conclude whether there is a material misstatement of the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report based on these responsibilities. ANNUAL REPORT 2017 | 45 GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS With respect to the Strategic Report and Directors’ Report, we also considered whether the disclosures required by the UK Companies Act 2006 have been included. Based on the responsibilities described above and our work undertaken in the course of the audit, ISAs (UK) require us also to report certain opinions and matters as described below. Strategic Report and Directors’ Report In our opinion, based on the work undertaken in the course of the audit, the information given in the Strategic Report and Directors’ Report for the year ended 30 September 2017 is consistent with the financial statements and has been prepared in accordance with applicable legal requirements. In light of the knowledge and understanding of the Group and parent company and their environment obtained in the course of the audit, we did not identify any material misstatements in the Strategic Report and Directors’ Report. A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditors’ report. Use of this report This report, including the opinions, has been prepared for and only for the parent company’s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. Other Required Reporting Companies Act 2006 exception reporting Under the Companies Act 2006 we are required to report to you if, in our opinion: Responsibilities for the Financial Statements and the Audit • we have not received all the information and explanations we require for our audit; or Responsibilities of the directors for the financial statements As explained more fully in the Statement of Directors’ Responsibilities set out on pages 31 and 32, the directors are responsible for the preparation of the financial statements in accordance with the applicable framework and for being satisfied that they give a true and fair view. The directors are also responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the directors are responsible for assessing the Group’s and the parent company’s ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or the parent company or to cease operations, or have no realistic alternative but to do so. Auditors’ responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. 46 | ANNUAL REPORT 2017 • adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or • certain disclosures of directors’ remuneration specified by law are not made; or • the parent company financial statements are not in agreement with the accounting records and returns. We have no exceptions to report arising from this responsibility. Other Voluntary Reporting Directors’ remuneration The parent company voluntarily prepares a Directors’ Remuneration Report in accordance with the provisions of the Companies Act 2006. The directors requested that we audit the part of the Directors’ Remuneration Report specified by the Companies Act 2006 to be audited as if the parent company were a quoted company. In our opinion, the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the CA06. Mark Ellis (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors Bristol 28 November 2017 GOOCH & HOUSEGO PLC GROUP INCOME STATEMENT For the year ended 30 September 2017 Revenue Cost of revenue Gross profit Research and Development Sales and Marketing Administration Other income and expenses Operating profit Finance income Finance costs Profit before income tax expense Income tax expense Profit for the year Basic earnings per share Diluted earnings per share Reconciliation of operating profit to adjusted operating profit: Profit before tax Amortisation of acquired intangible assets Gain on bargain purchase Release of accrued contingent consideration Impairment of goodwill Provision for regulatory compliance risk Restructuring costs Transaction fees Interest on discounted deferred consideration Adjusted profit before tax FINANCIAL STATEMENTS Note 7 9 11 12 12 13 15 15 Note 17 17 23 11 11 2017 £’000 112,016 (65,937) 46,079 (8,119) (9,459) (16,937) 1,714 13,278 27 (703) 12,602 (3,710) 8,892 36.4p 35.8p 2017 £’000 12,602 2,202 – (615) 615 – 536 390 381 16,111 2016 £’000 86,051 (53,752) 32,299 (6,697) (6,469) (11,425) 2,476 10,184 39 (127) 10,096 (3,048) 7,048 29.1p 28.6p 2016 £’000 10,096 1,263 (578) – 771 500 1,652 466 – 14,170 GROUP STATEMENT OF COMPREHENSIVE INCOME For the year ended 30 September 2017 Profit for the year Other comprehensive (expense) / income – items that may be reclassified subsequently to profit or loss Currency translation differences Other comprehensive (expense) / income for the year net of tax Note 26 2017 £’000 8,892 2016 £’000 7,048 (1,410) (1,410) 5,954 5,954 Total comprehensive income for the year attributable to the shareholders of Gooch & Housego PLC 7,482 13,002 ANNUAL REPORT 2017 | 47 GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS GROUP BALANCE SHEET As at 30 September 2017 Non-current assets Property, plant and equipment Intangible assets Deferred income tax assets Current assets Inventories Income tax assets Trade and other receivables Cash and cash equivalents Current liabilities Trade and other payables Borrowings Income tax liabilities Provision for other liabilities and charges Deferred consideration Net current assets Non-current liabilities Borrowings Deferred income tax liabilities Deferred consideration Net assets Shareholders’ equity Called up share capital Share premium account Merger reserve Cumulative translation reserve Retained earnings Total equity Note 16 17 24 18 19 20 21 22 23 22 24 25 26 26 26 26 2017 £’000 33,890 40,250 2,703 76,843 21,078 267 24,723 26,425 72,493 2016 £’000 32,384 29,916 2,674 64,974 18,973 394 22,679 23,167 65,213 (23,758) (19,624) (6) (579) (888) (4,286) (29,517) (4) (891) (940) – (21,459) 42,976 43,754 (11,492) (5,938) (4,253) (21,683) (11,494) (4,806) (2,256) (18,556) 98,136 90,172 4,903 15,530 4,640 5,574 67,489 98,136 4,852 15,530 2,671 6,984 60,135 90,172 The financial statements for Gooch & Housego PLC, registered number 00526832, on pages 47 to 76 were approved by the Board of Directors on 28 November 2017 and signed on its behalf by: Mark Webster Director Andrew Boteler Director 48 | ANNUAL REPORT 2017 GOOCH & HOUSEGO PLC GROUP STATEMENT OF CHANGES IN EQUITY For the year ended 30 September 2017 FINANCIAL STATEMENTS Note Called up Share share capital £’000 4,818 premium account £’000 15,530 Merger reserve Retained Cumulative Total Earnings translation equity £’000 2,671 – – – – – – – – – – – – 1,969 – – £’000 54,318 7,048 – 7,048 (2,055) (34) 638 220 (1,231) 60,135 60,135 8,892 – 8,892 (2,289) (15) 587 179 1,969 (1,538) reserve £’000 1,030 – 5,954 5,954 – – – – – 6,984 6,984 – (1,410) (1,410) – – – – – £’000 78,367 7,048 5,954 13,002 (2,055) – 638 220 (1,197) 90,172 90,172 8,892 (1,410) 7,482 (2,289) 2,005 587 179 482 – – – – 34 – – 34 – – – – – – – – – – – – 51 – – 51 – – – – – – – – 4,852 4,852 15,530 15,530 2,671 2,671 At 1 October 2015 Profit for the financial year Other comprehensive income for the year Total comprehensive income for the year Dividends Shares issued Fair value of employee services Tax credit relating to share option schemes Total contributions by and distributions to owners of the parent recognised directly in equity At 30 September 2016 At 1 October 2016 Profit for the financial year Other comprehensive income for the year Total comprehensive income / (expense) for the year Dividends Shares issued Fair value of employee services Tax credit relating to share option schemes Total contributions by and distributions to owners of the parent recognised directly in equity 14 14 At 30 September 2017 4,903 15,530 4,640 67,489 5,574 98,136 ANNUAL REPORT 2017 | 49 GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS GROUP CASH FLOW STATEMENT For the year ended 30 September 2017 Cash flows from operating activities Cash generated from operations Income tax paid Net cash generated from operating activities Cash flows from investing activities Acquisition of subsidiaries, net of cash acquired Purchase of property, plant and equipment Sale of property, plant and equipment Purchase of intangible assets Interest received Interest paid Net cash used in investing activities Cash flows from financing activities Drawdown of borrowings Repayment of borrowings Dividends paid to ordinary shareholders Net cash (used in) / generated from financing activities Net increase / (decrease) in cash Cash at beginning of the year Exchange (losses) / gains on cash Cash at the end of the year 2017 £’000 19,526 (1,957) 17,569 (5,658) (5,799) 29 (604) 27 (326) 2016 £’000 13,897 (1,324) 12,573 (5,687) (9,710) – (629) 39 (111) (12,331) (16,098) 5,918 (5,523) (2,289) (1,894) 3,344 23,167 (86) 26,425 5,426 (39) (2,055) 3,332 (193) 22,556 804 23,167 50 | ANNUAL REPORT 2017 GOOCH & HOUSEGO PLC NOTES TO THE GROUP CASH FLOW STATEMENT For the year ended 30 September 2017 Reconciliation of cash generated from operations FINANCIAL STATEMENTS 2017 £’000 12,602 2016 £’000 10,096 2,202 1,263 199 – 615 (615) 3,664 587 (370) (27) 703 355 (578) 771 – 3,042 638 (270) (39) 127 6,958 5,309 (1,442) (1,465) 2,873 (34) 223 (4,436) 2,705 (1,508) 19,526 13,897 2017 £’000 3,344 (5,918) 5,523 2,949 – 310 3,259 11,668 14,927 2016 £’000 (193) (5,426) 39 (5,580) (25) (55) (5,660) 17,328 11,668 At 1 Oct 2016 Cash flow Exchange At 30 Sep 2017 £’000 23,167 (11,474) (25) 11,668 £’000 3,344 (402) 7 2,949 movement £’000 (86) 396 – 310 £’000 26,425 (11,480) (18) 14,927 ANNUAL REPORT 2017 | 51 Profit before income tax Adjustments for: – Amortisation of acquired intangible assets – Amortisation of other intangible assets – Gain on bargain purchase of Alfalight – Impairment of goodwill – Release of accrued contingent consideration – Depreciation – Share based payment charge – Amounts claimed under the RDEC – Finance income – Finance costs Total Changes in working capital – Inventories – Trade and other receivables – Trade and other payables Total Cash generated from operating activities Reconciliation of net cash inflow to movements in net cash Increase / (Decrease) in cash in the year Drawdown of borrowings Repayment of borrowings Changes in net cash resulting from cash flows Finance leases acquired Translation differences Movement in net cash in the year Net cash at 1 October Net cash at 30 September Analysis of net cash Cash at bank and in hand Debt due after 1 year Finance leases Net cash GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 September 2017 1. General information Gooch & Housego PLC (the “Company”) is incorporated and domiciled in the United Kingdom. The Company is listed on the Alternative Investment Market (“AIM Market”) of the London Stock Exchange. The address of the registered office of the Company is given on page 89. The consolidated financial statements of the Group for the year ended 30 September 2017 comprise the Company, Gooch & Housego PLC, and its subsidiaries (together referred to as the “Group”). A listing of the Company’s subsidiaries is set out on page 84. The Group is a manufacturer of specialist optoelectronic components, materials and systems and specialist instrumentation and life sciences devices. The Group has facilities in the United Kingdom, Germany and the United States. 2. Basis of Preparation These financial statements have been prepared under the historical cost convention as modified by financial assets and financial liabilities (including derivative instruments) at fair value and in accordance with International Financial Reporting Standards as adopted by the European Union (“IFRS”) and IFRIC Interpretations in issue at 30 September 2017, and with those parts of the Companies Act 2006 applicable to companies preparing financial statements in accordance with IFRS. The financial statements have been prepared on a going concern basis. 3. Application of IFRS Adoption of New Standards There has been no material impact from the adoption of new standards or revised standards or interpretations which are relevant to the Group: • Annual Improvements 2012-2014 • Amendment to IAS16 “Property, plant and equipment” and IAS 38 “Intangible Assets” on depreciation and amortisation • Amendments to IAS27 “Separate financial statements” on equity accounting • Amendments to IFRS10 “Consolidated financial statements” and IAS28 “Investments in associates and joint ventures” on applying the consolidation exemption • Amendments to IAS1 “Presentation of financial statements” disclosure initiative ISA (UK) 700 ISA (UK) 700 “Forming an opinion and reporting on financial statements” applies to AIM listed entities for periods commencing on or after 17 June 2016. The form and content of the audit report contained within the financial statements has been extended. 52 | ANNUAL REPORT 2017 The following standards will apply to the Group in future accounting periods: IFRS 9 Financial Instruments This standard will apply for the first time in the year ending 30 September 2019. Management do not currently envisage this standard having a material effect on the financial statements, because the Group does not currently utilise derivatives, although there may be some changes to the disclosure related to financial instruments. IFRS 15 Revenue from Contracts with Customers IFRS15 will apply to the Group for the first time in the year ending 30 September 2019. Management have been monitoring the potential effect of the Standard on the Group’s financial statements. The majority of the Group’s revenue is derived from sale of products, none of which have warranty terms extended beyond the standard for the industry. Because of this, management do not currently expect IFRS15 to have a material impact on the financial statements, but will continue to monitor this as the adoption date gets closer. IFRS 16 Leases This new standard will apply to the Group for the first time in the year ending 30 September 2020. Following adoption of the standard, management expect all of the Group’s operating leases to be reclassified onto the balance sheet. This will entail the recognition of right of use assets and lease liabilities relating to existing operating leases, although we do not currently envisage a material effect on the Group’s net assets or profit before tax. 4. Accounting Policies The principal accounting policies adopted in the preparation of the financial statements are set out below. The policies have been consistently applied to all of the years presented, unless otherwise stated. Consolidation Subsidiaries are entities that are directly or indirectly controlled by the Group. Control exists where the Group has the power to govern the financial and operating policies of the entity so as to obtain benefits from its activities. In assessing control, potential voting rights that are currently exercisable or convertible are taken into account. The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of a business combination is measured as the fair value of the assets given, equity instruments issued, the fair value of contingent or deferred consideration and liabilities incurred or assumed at the date of exchange. Costs directly attributable to the business combination are charged to the income statement. The excess of the costs of a business combination over the fair value of the identifiable net assets acquired is recorded as goodwill. If the cost of a business combination is less than the fair value of the net assets of the GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 September 2017 subsidiary acquired, the difference is recognised directly in the income statement. Should the fair value of contingent or deferred consideration vary from the actual value on settlement date, the difference is recognised directly in the income statement. Where deferred consideration is payable in cash, the amount is discounted to present value at the date of acquisition, using the Group’s weighted average cost of capital. The financing charge which arises on the discounted consideration between the acquisition date and the date of payment is included within finance costs. Transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated but considered an impairment indicator of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. Subsidiary audit Exemptions Gooch & Housego (UK) Limited, Gooch & Housego (Torquay) Limited, Spanoptic Limited, Kent Periscopes Limited, G&H US Holdings Limited and G&H Property Holdings Limited are exempt from the requirement to file audited accounts by virtue of Section 479A of the Companies Act 2006. Segment Reporting A business segment is a grouping of operations engaged in providing products or services that are subject to risks and returns that are different from those of other business segments. A market segment is engaged in providing products or services within a particular economic environment that are subject to risks and returns which are different from those of segments operating in other economic environments. The chief operating decision maker in determining a business or operating segment is the Board of Directors. Foreign Currency Translation a. Functional and presentation currency The consolidated financial statements are presented in Pounds Sterling, which is the Group’s presentation currency. Items included in the financial statements of each of the Group’s subsidiaries are measured using the currency of the primary economic environment in which the entity operates (the “functional currency”). b. Transactions and Balances Foreign currency transactions are translated into an entity’s functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at balance sheet exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except when deferred in equity as qualifying cash flow hedges and qualifying net investment hedges. c. Subsidiaries The results and financial position of subsidiaries that have a functional currency different from the presentation currency are translated into the presentation currency as follows: • assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; • income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the rate on the dates of the transactions); and • all resulting exchange differences are recognised in other comprehensive income and as a separate component of equity. On consolidation, exchange differences arising from the translation of the net investment in foreign operations, and of borrowings and other currency instruments designated as hedges of such investments, are taken to shareholders’ equity. When a foreign operation is partially disposed of or sold, exchange differences that were recorded in equity are recognised in the income statement as part of the gain or loss on sale. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. Property, Plant and Equipment Property, plant and equipment is stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items. No depreciation is charged on freehold land or capital work in progress. Certain plant used in the manufacturing process which is constructed from precious metals is not depreciated. Depreciation on other assets is calculated to allocate their cost over their estimated useful lives, as follows: • Freehold buildings 2-3% Straight line • Leasehold property over term of lease Straight line • Plant and machinery 10-20% Straight line • Fixtures, fittings and computers 10-33% Straight line • Motor vehicles 25% Reducing balance ANNUAL REPORT 2017 | 53 GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 September 2017 The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. Where an asset’s carrying amount is greater than its estimated recoverable amount, the asset’s carrying amount is written down immediately to its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell or an asset’s value in use. Intangible Assets a. Goodwill Goodwill represents the excess of the cost of a business combination over the fair value of the net identifiable assets of the acquired business. Goodwill arising from business combinations is included in ‘intangible assets’. Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. The impairment testing requires an estimation of the ‘value in use’ of the Cash-generating unit (the “CGU”) to which goodwill is allocated using appropriately discounted cash flow projections. Any impairment is recognised immediately as an expense to the income statement and is not subsequently reversed. For the purpose of impairment testing a CGU is defined as either a business segment or an operating entity, as appropriate. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. b. Patents, Trademarks and Licenses Internally incurred costs associated with the filing and perfection of patents and trademarks are capitalised and carried at cost less accumulated amortisation. Amortisation is calculated using the straight line method to allocate the cost over their useful economic lives and are charged to Research and Development in the income statement. Acquired patents, trademarks and licences are shown at historical cost. Patents, trademarks and licences have a finite useful life and are carried at cost less accumulated amortisation. Amortisation is calculated using the straight line method to allocate the cost over their useful economic lives. c. Computer Software Costs associated with developing or maintaining computer software programmes are recognised as an expense as incurred. Costs that are directly associated with the development of identifiable and unique software products controlled by the Group, and that will probably generate economic benefits exceeding costs beyond one year, are capitalised and recognised as intangible assets. Costs include the software development employee costs and an appropriate portion of relevant overheads. Acquired computer software and licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. 54 | ANNUAL REPORT 2017 Capitalised software costs are amortised using the straight line method over their estimated useful lives of up to 5 years and charged to Administration in the income statement. d. Research and Development Expenditure on research activities, undertaken with the prospect of gaining new scientific or technical knowledge and understanding, is recognised as an expense as incurred. Development costs incurred after the point at which the commercial and technical feasibility of the product have been proven, and the decision to complete the development has been taken and resources made available, are capitalised. The expenditure capitalised includes the cost of materials, direct labour and an appropriate proportion of overheads. Capitalised development expenditure is stated at cost less accumulated amortisation and impairment losses. Development costs are amortised using the straight line method over their estimated useful life lives, which is typically 5 years, and are charged to Research and Development in the income statement. e. Acquired Intangibles Other acquired intangible assets are stated at fair value less accumulated amortisation and impairment losses. The useful life of each of these assets is assessed based on the differing natures of each of the intangible assets acquired. Amortisation is charged on a straight-line basis over the estimated useful life of the assets acquired and charged to administration in the Income Statement. • Customer relationships • Brand names up to 10 years up to 10 years • Acquired patents, trademarks and licences up to 3 years Government Grants Government grants are accounted for on an accruals basis. Grants are credited to the income statement over the life of the project. Where grants are used to fund the acquisition of property, plant and equipment, the grant is initially credited to deferred income then credited to the income statement over the estimated economic life of the asset. Impairment of Non-financial Assets The Group assesses at each balance sheet date whether an asset may be impaired. If any such indicator exists, the Group tests for impairment by estimating the recoverable amount which is the higher of the value in use and the fair value less costs to sell. If the recoverable amount is less than the carrying value of the asset, the asset is impaired and the carrying value is reduced to its recoverable amount. In addition to this, assets with indefinite lives are tested for impairment annually. Non-financial assets other than goodwill which have suffered GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 September 2017 an impairment are reviewed for possible reversal of the impairment at each balance sheet date. Loans and Receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except those with maturities greater than 12 months from the balance sheet date. These are classified as non-current assets. Loans and receivables are classified as trade and other receivables in the balance sheet. Inventories Inventories are stated at the lower of weighted average cost and net realisable value. The cost of finished goods and work in progress comprises design costs, raw materials, direct labour, other direct costs and related production overheads (based on normal operating capacity). It excludes borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses. Long term contract balances included in work in progress comprise costs incurred on long term contracts, net of any amounts transferred to trading expenditure, after deducting foreseeable losses and related payments on account. Costs include all direct material and labour costs incurred in bringing a contract to its state of completion at the year end. Provisions for estimated losses on contracts are made in the period in which such losses are foreseen. Long term contract balances do not include attributable profit. The amount by which customer billings exceed the revenue recognised on a contract is shown as a payment on account. Trade Receivables Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments (more than 30 days overdue) are considered indicators that the trade receivable may be impaired. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account, and the amount of the loss is recognised in the income statement within ‘Administration costs’. When a trade receivable is uncollectible, it is written off against the allowance account for trade receivables. Subsequent recoveries of amounts previously written off are credited against ‘Administration costs’ in the income statement. Cash and Cash Equivalents Cash and cash equivalents for the purpose of the cash flow statement includes cash in hand and deposits held on call with banks with original maturities of three months or less. Trade Payables Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method. Borrowings Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest method. Borrowing costs which are directly attributable to the acquisition, construction or production of a qualifying asset are capitalised as part of the cost of that asset. Borrowing costs are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date. Financial Instruments Financial instruments are initially recognised at fair value on the date that a contract is entered into and are subsequently remeasured at their fair value. The Group documents the relationship between the hedging instrument and the hedged item and, on a periodic basis, assesses whether the hedge is effective. Current and Deferred Income Tax Income tax on the profit or loss for the year comprises current and deferred tax. Current tax is the expected tax payable on the taxable income for the year using rates enacted at the balance sheet date, and any adjustments to tax payable in respect of prior years. Amounts claimed under the RDEC scheme have been recognised within operating profit. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, the deferred income tax is not accounted for, if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance ANNUAL REPORT 2017 | 55 GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 September 2017 sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred income tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred income tax is provided on temporary differences arising on investments in subsidiaries, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred income tax is recognised in the income statement except to the extent that it relates to items recognised directly in other comprehensive income and equity, in which case it is recognised in other comprehensive income and equity. In the UK and US, the Company is entitled to a tax deduction for amounts treated as compensation on exercise of certain employee share options under each jurisdiction’s tax rules. As explained under “Share options” below, a compensation expense is recorded in the Company’s income statement over the period from the grant date to the vesting date of the relevant options. As there is a temporary difference between the accounting and tax bases, a deferred income tax asset is recorded. The deferred income tax asset arising is calculated by comparing the estimated amount of tax deduction to be obtained in the future (based on the Company’s share price at the balance sheet date) with the cumulative amount of the compensation recorded in the income statement. If the amount of estimated future tax deduction exceeds the cumulative amount of the remuneration expense at the statutory rate, the excess is recorded directly in equity. Employee benefits a. Pension Obligations The Group operates money purchase pension schemes for UK employees and Section 401(k) plans for US employees. The Group pays contributions to publicly or privately administered pension insurance plans on a mandatory, contractual or voluntary basis. The Group has no further payment obligations once the contributions have been paid. The contributions are recognised as an employee benefit expense in the income statement when they are due. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in the future payments is available. b. Profit Share and Bonus Plans The Group recognises a liability and an expense for bonuses and profit-sharing, based on a formula that takes into consideration the profit attributable to the Group’s shareholders after certain adjustments. The Group recognises a provision where contractually obliged or where there is a past practice that has created a constructive obligation. 56 | ANNUAL REPORT 2017 c. Share Options The Group operates a number of share option schemes. In accordance with IFRS 2 the fair value of the employee services received in exchange for the grant of the options is recognised as an expense in the income statement. The total amount to be expensed over the vesting period is determined by reference to the fair value of the options granted, excluding the impact of any non-market vesting conditions (for example, profitability targets). Non-market vesting conditions are included in assumptions about the number of options that are expected to vest. Employer’s National Insurance in the United Kingdom and equivalent taxes in other jurisdictions are payable on the exercise of certain share options. In accordance with IFRS 2, this is treated as a cash-settled transaction. A provision is made, calculated using the fair value of the Company’s shares at the balance sheet date, pro-rated over the vesting period of the options. At each balance sheet date, for awards with non market vesting conditions, the entity revises its estimates of the number of options that are expected to vest. It recognises the impact of the revision to original estimates, if any, in the income statement, with a corresponding adjustment to equity. The fair value of the options under the Gooch & Housego 2013 Long Term Incentive Plan are determined by using the Monte Carlo option pricing model. The proceeds received net of any directly attributable transaction costs are credited to share capital (nominal value) and share premium when the options are exercised. Provisions Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. The Group monitors and assesses its warranty provision requirement on a continuing basis. The provision for other liabilities and charges provides for the anticipated cost of repair and rectification of products under warranty, based on historical repair and replacement costs. In addition the Directors will also assess expected changes in future costs based on current information. Exceptional Items Transactions are classified as exceptional where they relate to an event that falls outside the ordinary activities of the business and where individually or in aggregate they have a material impact on the financial statements. Leases Leases which transfer substantially all the risks and rewards of ownership of an asset are treated as a finance lease. Assets held under a finance lease are capitalised at their fair value at GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 September 2017 the inception of the lease and depreciated over the estimated useful economic life of the asset or lease term if shorter. Finance charges are associated with the finance lease are expensed in proportion to the capital amount outstanding. Dividend distribution Dividend distributions to the Company’s shareholders are recognised as a liability in the Group’s financial statements in the period in which the dividends are approved by the Company’s shareholders. All other leases are classified as operating leases. Operating lease rentals are expensed in equal annual amounts over the lease term. 5. Financial Risk Management Capital Risk Management Share Capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. Management considers capital as equity, as shown in the Group balance sheet, excluding net cash. The Group’s objectives when managing capital are to safeguard the Group’s ability • to continue as a going concern, Revenue Recognition • to provide returns for shareholders and benefits for other Revenue comprises the fair value of the consideration received or receivable for the sale of goods and services in the ordinary course of the Group’s activities. Revenue is shown net of value-added tax, returns, rebates and discounts and after eliminating sales within the Group. The Group recognises revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to the entity and when specific criteria have been met for each of the Group’s activities as described below. The amount of revenue is not considered to be reliably measurable until all contingencies relating to the sale have been resolved. a. Sale of Goods Revenue is recognised when the risks and rewards of the underlying sale have been transferred to the customer, and when collectability of the related receivable is reasonably assured. Depending on the terms of business, this occurs either on the dispatch/delivery of the goods supplied or on acceptance by the customer. b. Long Term Contracts Revenue is recognised on long term contracts by reference to the stage of completion of the contract activity at the balance sheet date. Revenue and profits are determined by estimating the outcome of the contract and determining the costs and profit attributable to the stage of completion. Where the outcome of the contract cannot be reliably estimated, contract costs are recognised as an expense when incurred and revenue is recognised to the extent of the costs incurred that are expected to be recoverable. In both cases, any expected contract loss is recognised immediately. c. Interest Income Interest income is recognised on a time-proportion basis using the effective interest method. stakeholders and • to maintain an optimal capital structure to reduce the cost of capital. The Board is satisfied that these objectives have been met during the year. Actions taken during the year to achieve these objectives are outlined in the Chief Executive Officer’s Review. In order to maintain or adjust the capital structure, the Group may • adjust the amount of dividends paid to shareholders, • return capital to shareholders, • issue new shares, • sell assets to reduce debt and • vary the level of debt financing. While the Group’s debt to equity ratio is consistently monitored, changes in the Group’s need for capital and the selection of the source and funding of capital are assessed against a number of criteria which may have a direct effect on the Group debt to equity ratio. The Group’s capital needs include, but are not solely limited to, its • investment in non-current assets; • investment in working capital; and • acquisition of businesses, technologies and other intangible assets. ANNUAL REPORT 2017 | 57 GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 September 2017 The criteria against which the Group’s capital needs are assessed include, but are not limited to, • availability of and cost of debt financing; • ability to raise equity financing at an acceptable share price; and • ratio of debt to equity. Financial Risks The Group’s activities expose it to a variety of financial risks: market risk (including foreign exchange risk and cash flow interest rate risk), credit risk and liquidity risk. The Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group’s financial performance. Where considered appropriate, the Company will use derivative financial instruments to hedge risk exposures, although no such arrangements were in place during the year ended 30 September 2017 or 2016. i. Market risk a. Foreign exchange risk The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the US Dollar. Foreign exchange risk arises from • future commercial transactions; • recognised assets and liabilities; and • net investments in foreign operations. The Group has certain investments in foreign operations, whose net assets are exposed to foreign currency translation risk. Currency exposure arising from the net assets of the Group’s foreign operations is managed primarily through borrowings denominated in the relevant foreign currencies. No financial derivatives have been entered into to manage foreign exchange exposure. As a significant amount of the Group’s profit is earned by its US subsidiaries, the Group’s profit is sensitive to movements in the US Dollar exchange rate. If the average US Dollar exchange rate for the year had been consistent with the closing exchange rate at 30 September 2016, with all other variables constant, post tax profits for the year would have been £123,000 lower (2016: £447,000 lower) as a result of the translation in US Dollars. Equity is more sensitive to movement in the US Dollar exchange rate as a significant amount of the Group’s net assets are held in the Group’s US subsidiaries. If the US Dollar weakened by 10% against Pound Sterling with all other variables held constant, the net assets of the Group would be £1,953,000 lower (2016: £1,821,000 lower). If the US Dollar strengthened by 10% against Pound Sterling with all other variables held constant, the net assets of the Group would be £2,388,000 higher (2016: £2,226,000 higher). b. Cash flow interest rate risk The Group has cash balances of £26.4m which are held in interest bearing current accounts. The Group’s income and operating cash flows are substantially independent of changes in market interest rates. The Group’s interest rate risk arises from its revolving credit facility. A 1% increase in the cost of borrowing would have resulted in an annualised increase in interest expense of £146,000 (2016: £68,000) had the Group’s borrowings been in place throughout the year. Borrowings issued at variable interest rates expose the Group to cash flow interest rate risk. During 2016 and 2017, the Group’s borrowings at variable interest rates were denominated in Pound Sterling and US Dollars as detailed in Note 22. ii. Credit Risk Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations. It arises principally from the Group’s trade receivables. a. Trade and other receivables The management of credit risk exposure is the responsibility of each business unit which has credit policies in place to mitigate the risk. The credit policies seek to verify a customer’s credit worthiness prior to trading and maintain the level of trading within agreed credit limits. Changes to credit limits require authorisation in accordance with internal control policies. The Group is exposed to concentration of credit risk. The Group’s top ten customers in 2017 accounted for 25% of the Group’s revenue (2016: 26%). No individual customer made up more than 6% of revenue in either the current or prior year. The Group’s trade receivables are analysed in note 19. b. Cash Cash is held in current and deposit accounts with financial institutions which have credit ratings of A- or greater. 58 | ANNUAL REPORT 2017 GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 September 2017 iii. Liquidity Risk Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group aims to achieve a balance between certainty of funding and a flexible, cost effective borrowing structure. Inventory Provision The Group continually monitors and assesses the provision for old and slow moving inventory. Factors considered by the Directors include the expected future usage and the potential obsolescence and deterioration of the Inventory. The Company’s facilities comprise a committed revolving credit facility of $15m of which $8m is drawn and an uncommitted flexible acquisition facility of $20m of which $7.5m is drawn. Both are available until 30 April 2019. These are analysed in Notes 22 and 29. The Group aims to ensure that there are sufficient funds or credit lines available to supplement cash flows generated from trading to meet known obligations in the next twelve months. 6. Critical accounting estimates and judgments The preparation of financial statements in accordance with International Financial Reporting Standards (IFRS) requires the Directors to make critical accounting estimates and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates and judgments are continually evaluated and are based on historical experiences and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The resulting accounting estimates will on occasions fail to equal actual results. The estimates and assumptions that have significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are outlined below. Impairment of Goodwill The Group tests goodwill for impairment at least annually. This requires an estimation of the value in use of the Cash Generating Units (the “CGUs”) to which goodwill is allocated. The value in use calculations are based on forecast cash flows of the CGU discounted at the Group’s weighted average cost of capital. These calculations have a number of significant variables including forecast revenue and margins, working capital movements and maintenance capital expenditure levels. The calculations are also sensitive to the discount rate used. Further details are given in note 17. Accounting for Acquisitions An assessment of the fair value of the purchase consideration and net assets acquired has been undertaken in respect of the acquisition of StingRay Optics LLC. Determining the fair value of the consideration involves an estimate of the deferred consideration payable, which is dependent on post-acquisition performance, and therefore inherently uncertain. Intangible assets relating to customer relationships, the order book and the brand have been recognised based on an estimate of the future cash flows to be derived from those assets. ANNUAL REPORT 2017 | 59 GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 September 2017 7. 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. For the year ended 30 Spetember 2017 Aerospace Life Industrial Scientific Corporate Total Revenue Total revenue inter and intra-division External revenue Divisional expenses EBITDA1 EBITDA% & Defence Sciences Research £’000 £’000 £’000 £’000 £’000 £’000 34,860 9,570 71,336 3,325 – – (7,075) – 34,860 9,570 64,261 3,325 – – – 119,091 (7,075) 112,016 (29,880) (8,165) (50,417) (2,821) (1,389) (92,672) 4,980 14.3% 1,405 14.7% 13,844 21.5% 504 (1,389) 19,344 15.2% – 17.3% Depreciation and amortisation (715) (388) (2,000) (136) (625) (3,864) Operating profit before amortisation of acquired intangible assets, goodwill impairment and release of 4,265 1,017 11,844 368 (2,014) 15,480 contingent consideration Amortisation of acquired intangible assets, goodwill – – – – (2,202) (2,202) impairment and release of contingent consideration Operating profit Operating profit margin % 4,265 12.2% 1,017 10.6% 11,844 18.4% 368 11.1% (4,216) – 13,278 11.9% Add back non-recurring items and amortisation of acquired intangibles, goodwill impairment and release of contingent – – – – 3,128 3,128 consideration Adjusted operating profit Adjusted profit margin % Finance costs 4,265 12.2% – 1,017 10.6% – 11,844 18.4% – Profit before income tax expense 4,265 1,017 11,844 368 11.1% – 368 (1,088) 16,406 – 14.6% (676) (676) (4,892) 12,602 60 | ANNUAL REPORT 2017 GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 September 2017 For the year ended 30 Spetember 2016 Aerospace Life Industrial Scientific Corporate Total Revenue Total revenue inter and intra-division External revenue Divisional expenses EBITDA1 EBITDA% Depreciation and amortisation Operating profit before amortisation of acquired & Defence Sciences Research £’000 £’000 £’000 £’000 £’000 £’000 19,977 7,904 59,875 3,874 – – (5,579) – 19,977 7,904 54,296 3,874 – – – 91,630 (5,579) 86,051 (18,055) (6,017) (42,719) (2,881) (1,342) (71,014) 1,922 9.6% (545) 1,887 23.9% 11,577 21.3% 993 (1,342) 25.6% – 15,037 17.5% (335) (1,776) (310) (431) (3,397) intangible assets 1,377 1,552 9,801 683 (1,773) 11,640 Amortisation of acquired intangible assets, gain on bargain purchase and goodwill impairment Operating profit Operating profit margin % Add back amortisation of intangibles, impairment of goodwill, gain on bargain purchase and non-recurring items Adjusted operating profit Adjusted profit margin % Finance costs – 1,377 6.9% 108 1,485 7.4% – – 1,552 19.6% 53 1,605 20.3% – – 9,801 18.1% 960 10,761 19.8% – Profit before income tax expense 1,377 1,552 9,801 – 683 17.6% 37 720 18.6% – 683 (1,456) (1,456) (3,229) – 10,184 11.8% 2,916 (313) – (88) 4,074 14,258 16.6% (88) (3,317) 10,096 ¹EBITDA = Earnings before interest, tax, depreciation and amortisation Management have added back the amortisation of intangibles, gain on bargain purchase, impairment of goodwill, restructuring costs, provision for export compliance risk and transaction fees in the above analysis. This has been shown because the Directors consider the analysis to be more meaningful excluding the impact of these non-recurring expenses. All of the amounts recorded are in respect of continuing operations. Analysis of net assets / (liabilities) by location: United Kingdom USA Continental Europe Asia Pacific 2017 2017 2017 2016 2016 2016 Assets Liabilities Net Assets Assets Liabilities Net Assets £’000 75,104 73,641 545 46 £’000 £’000 (32,612) 42,492 (18,477) 55,164 (98) (13) 447 33 £’000 70,336 59,077 726 48 £’000 £’000 (30,580) 39,756 (9,112) 49,965 (318) (5) 408 43 149,336 (51,200) 98,136 130,187 (40,015) 90,172 ANNUAL REPORT 2017 | 61 GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 September 2017 For the year to 30 September 2017 non-current asset additions were £1.9m (2016: £2.0m) for the UK and for the USA £4.5m (2016: £7.3m). There were no additions to non-current assets in respect of Europe (2016: £nil) or the Asia Pacific region (2016: £nil). The value of non-current assets in the USA was £47.9m (2016: £34.7m), the United Kingdom £29.0m (2016: £30.1m) and Europe £nil (2016: £nil). There were no non-current assets in the Asia-Pacific region. 2017 £’000 18,624 45,485 24,233 23,674 112,016 2016 £’000 17,247 34,918 19,189 14,697 86,051 2017 £’000 2016 £’000 35,598 27,424 (710) 1,357 47,290 12,209 3,664 2,202 199 – 615 (615) 38,280 6,429 3,042 1,263 355 (578) 771 – Note 10 9 (1,714) (2,476) 98,738 75,867 2017 £’000 1,285 370 59 2016 £’000 2,220 270 (14) 1,714 2,476 Analysis of revenue by destination: United Kingdom USA Continental Europe Asia Pacific and Other 8. Expenses by Nature Raw materials and consumables Changes in inventory Employee costs Other operating charges Depreciation Amortisation of acquired intangible assets Amortisation of other intangible assets Gain on bargain purchase – Alfalight Impairment of goodwill Release of accrued contingent consideration Other income and expenses 9. Other Income and Expenses Grants receivable Amounts claimed under the RDEC Other income / (expense) 62 | ANNUAL REPORT 2017 GOOCH & HOUSEGO PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 September 2017 10. Employee Benefit Expense Wages and salaries Social security costs Share based payment charge Medical and other insurance Other pension costs The average monthly number of employees during the year was: Manufacturing Sales, finance and administration Key management compensation Salaries and other short-term benefits Share based payments Other pension costs FINANCIAL STATEMENTS 2017 £’000 2016 £’000 37,841 30,971 3,434 587 4,015 1,413 2,551 638 2,851 1,269 47,290 38,280 2017 2016 Number Number 512 263 775 2017 £’000 5,732 587 187 471 204 675 2016 £’000 4,908 638 230 6,506 5,776 Key management comprise the Executive Board and the senior operational staff. Directors’ remuneration, including the highest paid Director, has been included on page 39 of the Remuneration Committee Report. These disclosures have been audited. ANNUAL REPORT 2017 | 63 GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 September 2017 11. Operating Profit Operating profit is stated after charging / (crediting): Fees payable to the Company’s auditors for the audit of the parent company and consolidated financial statements Fees payable to the Company’s auditors and its associates for other services: – audit of the Company’s subsidiaries pursuant to legislation – taxation compliance services – taxation advisory services – taxation advisory services related to abortive acquisitions – due diligence services related to grant funding Net losses / (gains) on foreign exchange Operating lease rentals Transaction fees Impairment of goodwill Release of accrued contingent consideration 2017 £’000 45 105 82 66 – 45 225 1,732 390 615 (615) 2016 £’000 45 110 78 117 10 97 (860) 1,520 466 771 – Restructuring costs of £536,000 were incurred in the year (2016: £1,652,000). These related to the Palo Alto site move (£180,000) and redundancy costs of £356,000. The costs have been included in the income statement within cost of revenue, administration costs and other income and expenses as appropriate. 12. Finance Income and Costs Finance income comprises: – Bank interest Finance costs comprise: – Bank interest – Finance lease interest – Interest on discounted deferred consideration 2017 £’000 2016 £’000 27 39 (321) (1) (381) (703) (126) (1) – (127) 64 | ANNUAL REPORT 2017 GOOCH & HOUSEGO PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 September 2017 13. Income Tax Expense Analysis of tax charge in the year Current taxation UK Corporation tax Overseas tax Adjustments in respect of prior year tax charge Total current tax Deferred tax Origination and reversal of temporary differences Adjustments in respect of prior year deferred tax Impact of change in the UK tax rate Total deferred tax FINANCIAL STATEMENTS 2017 £’000 2016 £’000 1,318 2,165 (1,315) 2,168 227 1,315 – 1,542 1,760 887 (77) 2,570 218 290 (30) 478 Income tax expense per income statement 3,710 3,048 The taxation expense for the year is higher (2016: higher) than the standard rate of corporation tax in the UK. An explanation of the differences is detailed below: Profit before income tax Profit at the effective standard rate of tax of 19.5% for the year (2016: 20.0%) Income not subject to tax Permanent differences Adjustments in respect of foreign tax rates Re-measurement of deferred tax – change in UK tax rate Adjustments in respect of prior year Total tax expense Factors Affecting the Future Tax Charge 2017 £’000 2016 £’000 12,602 10,096 2,457 2,019 (72) (132) 1,457 – – (116) 134 828 (30) 213 3,710 3,048 Overseas tax losses of £3.7m (2016: £3.8m) and UK tax losses of £0.8m (2016: £0.8m) are available against future profits of the Group. The utilisation of these losses is not sufficiently certain to recognise a deferred tax asset. Changes to the UK corporation tax rates were substantively enacted as part of the Finance Act 2016 in September 2016. These included the replacement of the 18% rate from 1 April 2020 with a lower rate of 17%. To date, no further changes have been announced. The Group operates internationally; as a result, it is subject to various overseas tax rules and regulations. A change in the assessment of their implementation could result in an increase in G&H’s liability, though no such change is currently considered necessary. ANNUAL REPORT 2017 | 65 GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 September 2017 14. Dividends Final 2016 dividend paid in 2017: 5.7p per share (Final 2015 dividend paid in 2016: 5.2p per share) 2017 Interim dividend paid: 3.7p per share (2016: 3.3p) 2017 £’000 1,383 906 2,289 2016 £’000 1,254 801 2,055 The Directors propose a final dividend of 6.5p per share making the total dividend paid and proposed in respect of the 2017 financial year 10.2p (2016: 9.0p). 15. 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: Number of dilutive shares Dilutive shares A reconciliation of the earnings used in the earnings per share calculation is set out below: 2017 Number 2016 Number 24,457,701 22,248,471 412,901 436,112 24,870,602 24,684,583 Basic earnings per share Amortisation of acquired intangible assets (net of tax) Goodwill impairment Release of accrued contingent consideration Gain on bargain purchase of Alfalight Provision for regulatory compliance Restructuring costs (net of tax) Transaction fees (net of tax) Interest on deferred consideration Total adjustments net of income tax expense Adjusted basic earnings per share Basic diluted earnings per share Adjusted diluted earnings per share 2017 2016 £’000 pence per share £’000 pence per share 8,892 2,034 615 (615) – – 431 314 381 3,160 12,052 8,892 12,052 36.4p 7,048 8.3p 2.5p (2.5p) – – 1.8p 1.3p 1.6p 13.0p 49.4p 35.8p 48.5p 930 771 – (578) 500 1,261 373 – 3,257 10,305 7,048 10,305 29.1p 3.8p 3.2p – (2.4p) 2.1p 5.2p 1.5p – 13.4p 42.5p 28.6p 41.7p 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. 66 | ANNUAL REPORT 2017 GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 September 2017 16. Property, Plant and Equipment Capital work Freehold Leasehold Plant and Fixtures, Motor Total in progress land and property machinery fittings and vehicles buildings computers £’000 £’000 £’000 £’000 £’000 £’000 £’000 9,001 3,163 25,451 2,868 50 44,246 Cost or valuation At 1 October 2015 Additions Acquired Disposals Reclassification Exchange rate differences At 30 September 2016 Additions Acquired Disposals Reclassification Exchange rate differences At 30 September 2017 Accumulated depreciation At 1 October2015 Charge for the year Acquired Disposals Exchange rate differences At 30 September 2016 Charge for the year Disposals Exchange rate differences At 30 September 2017 Net book value At 1 October 2015 At 30 September 2016 At 30 September 2017 3,713 6,894 – – (8,013) 255 2,849 3,374 – – (656) (214) 5,353 – – – – – – – – – – – – – 12 9,013 – – – – (3) 4 22 – 7,636 1,180 12,005 139 5 (43) 93 (371) 1,247 290 (4) 359 1,842 29,185 1,866 67 (326) 510 (448) 217 112 (4) 40 122 3,355 385 26 (71) 53 (42) 9,010 11,828 30,854 3,706 1,471 168 – – 13 1,652 168 – (3) 1,335 401 7 – 227 1,970 773 (42) (95) 14,762 2,190 151 – 1,156 18,259 2,361 (326) (267) 1,728 277 68 (4) 83 2,152 359 (71) (23) 1,817 2,606 20,027 2,417 3,713 2,849 5,353 7,530 7,361 7,193 1,828 10,035 9,222 10,689 10,926 10,827 1,140 1,203 1,289 – – – – 2 52 – – (8) – (1) 43 35 6 – – 1 42 3 (8) – 37 15 10 6 8,362 424 (8) 22 3,413 56,459 5,764 98 (448) – (1,079) 60,794 19,331 3,042 226 (4) 1,480 24,075 3,664 (447) (388) 26,904 24,915 32,384 33,890 At 30 September 2017, plant and machinery purchased under a hire purchase or finance lease agreement had a cost of £38,000 (2016: £38,000) and net book value of £19,000 (2016: £25,000). No interest was capitalised in the year (2016: £Nil). ANNUAL REPORT 2017 | 67 GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 September 2017 17. Intangible Assets Cost or valuation At 1 October 2015 Additions Acquired Disposals Reclassification Exchange rate differences At 30 September 2016 Additions Acquired Disposals Exchange rate differences At 30 September 2017 Accumulated amortisation and impairment At 1 October2015 Charge for the year Acquired Disposals Exchange rate differences At 30 September 2016 Charge for the year Disposals Exchange rate differences At 30 September 2017 Net book value At 1 October 2015 At 30 September 2016 At 30 September 2017 Goodwill Acquired Capitalised intangible R&D, Patents Software and other Total assets £’000 and licences intangibles £’000 £’000 £’000 £’000 22,035 – 4,620 – – 1,970 28,625 – 6,099 – (838) 11,471 – 4,768 – – 805 17,044 – 7,986 – (757) 2,404 624 52 (3) (22) 68 3,123 584 – (23) (27) 1,733 70 5 (1) – 42 1,849 102 – (44) (9) 33,886 24,273 3,657 1,898 5,654 771 – – – 6,425 615 – – 9,640 1,263 – – 778 11,681 2,202 – (218) 729 218 3 (3) 29 976 83 (3) (5) 1,465 137 3 (1) 39 1,643 116 (43) (8) 37,643 694 9,445 (4) (22) 2,885 50,641 686 14,085 (67) (1,631) 63,714 17,488 2,389 6 (4) 846 20,725 3,016 (46) (231) 7,040 13,665 1,051 1,708 23,464 16,381 22,200 26,846 1,831 5,363 10,608 1,675 2,147 2,606 268 206 190 20,155 29,916 40,250 Goodwill is allocated to operating sites as follows: Cleveland (£2.1m), Ilminster (£1.5m), Torquay (£1.6m), Moorpark (£6.2m), Boston (£4.9m), Palo Alto (£0.9m), St Asaph (£4.0m) and Keene (£5.7m). Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. The impairment testing requires an estimation of the ‘value in use’ of the CGU. The value in use calculations use post-tax cash flow projections based on the latest projections approved by the Board for year one. For the purposes of the impairment review, the following key assumptions were made in respect of the cash flows beyond year one: • Projected gross profit margins of 22% to 44% • Average growth in EBITDA to 2022 of up to 10%, and 2% thereafter • 8.3% post tax discount rate used to discount cash flows The projected gross profit margin and average growth is based on past performance and the Directors’ expectations for the foreseeable future. 68 | ANNUAL REPORT 2017 GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 September 2017 The Boston cash generating unit’s performance improved significantly over FY16, reflecting the effect of the Alfalight acquisition in the prior year, and improved sales of the Boston site’s existing products and services. Management expect the new combined business to continue to grow profitably and it remains a key part of the Group’s Space Photonics activities. The impairment calculation for the Boston cash generating unit utilises a specific set of growth assumptions based on revenue increasing by an average of 6% per annum in the period to 30 September 2022, which results in an average annual forecast EBITDA of £1.5m over the same period. Management do not consider any impairment of goodwill to have arisen in the year because of the significantly improved result and the growth opportunities of the new enlarged business. If the discount rate were increased to 9.7%, or if the average annual EBITDA were reduced by £0.3m, the headroom on the impairment calculation would be reduced to zero. The impairment calculation for the Moorpark cash generating unit is based on an average annual forecast EBITDA to 2022 of £1.2m. The headroom on the calculation (of £2.1m) would be reduced to zero if the average annual EBITDA to 2022 were reduced by £0.3m or the discount rate increased to 9.4%. The Directors are satisfied that no impairment is necessary. Kent Periscopes’ performance in the year was lower than the targets set for the deferred consideration which was potentially payable in the year. Accordingly, a release of the accrued contingent consideration of £0.6m has been credited to the income statement. Management performed an impairment review of the goodwill based on an average annual EBITDA to 2022 of £0.7m. Following this review, the Directors consider it appropriate to impair the goodwill by £0.6m. If the discount rate were increased to 9.3%, then a further impairment of £1.0m would arise. However, the Directors expect a significant improvement in the results going forward, and are therefore satisfied no further impairment is necessary. 18. Inventories Raw materials Work in progress Finished goods 2017 £’000 7,374 9,819 3,885 2016 £’000 6,955 8,689 3,329 21,078 18,973 The cost of inventories recognised as an expense and included in cost of revenue amounted to £67.0m (2016: £56.8m). The movement in the inventories provision is as follows: At 1 October Acquired Increase in provision Exchange rate movement At 30 September 2017 £’000 4,208 328 783 (59) 2016 £’000 3,582 264 71 291 5,260 4,208 ANNUAL REPORT 2017 | 69 GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 September 2017 19. Trade and Other Receivables Trade receivables Other receivables Grant funding held in trust account Prepayments The carrying amount of the Group’s trade and other receivables is denominated in the following currencies: Pound Sterling US Dollar Euro Yen At 30 September The ageing of trade receivables by due date is as follows: Current 1 to 3 months Over 3 months Less provision for impairment Net trade receivables None of the trade receivables are with customers where we have had any history of default. The movement on the provision for impairment of trade receivables is as follows: At 1 October Utilisation of provision Increase in provision Exchange rate movement At 30 September 20. Cash and Cash Equivalents Cash at bank and on hand 70 | ANNUAL REPORT 2017 2017 £’000 2016 £’000 20,504 20,451 2,025 1,535 659 1,326 230 672 24,723 22,679 2017 £’000 9,041 14,334 1,342 6 2016 £’000 9,929 11,861 884 5 24,723 22,679 2017 £’000 15,417 4,139 1,327 2016 £’000 14,567 4,701 1,402 20,883 20,670 (379) (219) 20,504 20,451 2017 £’000 219 (35) 198 (3) 379 2016 £’000 183 – 28 8 219 2017 £’000 2016 £’000 26,425 23,167 GOOCH & HOUSEGO PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 September 2017 21. Trade and Other Payables Trade payables Other taxation and social security Grant funding held in trust account Accruals 22. Borrowings Current: Finance leases Non-current: Bank borrowings Finance leases Total borrowings FINANCIAL STATEMENTS 2017 £’000 6,610 1,095 1,535 14,518 23,758 2016 £’000 6,386 553 230 12,455 19,624 2017 £’000 2016 £’000 6 6 4 4 11,480 11,473 12 21 11,492 11,494 11,498 11,498 The carrying values of the bank borrowings and finance leases are not materially different from their fair values and are included as part of the fair value disclosure for all financial instruments in note 29. Gooch & Housego’s primary lending bank is The Royal Bank of Scotland plc. The Group’s facilities comprise a $15m dollar revolving credit facility and a $20m flexible acquisition facility. At 30 September 2017, the balance drawn on the revolving credit facility was $8m (2016: $15m) and on the flexible acquisition facility $7.5m (2016: nil). The facilities above are committed until 30 April 2019 and attract an interest rate of between 0.9% and 1.8% above LIBOR dependent upon the Company’s leverage ratio, payable on rollover dates, typically quarterly. Maturity Profile of Bank and Other Borrowings Within one year Between one and five years 2017 £’000 6 11,492 11,498 2016 £’000 4 11,494 11,498 ANNUAL REPORT 2017 | 71 GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 September 2017 23. Provision for Other Liabilities and Charges The movements in the Group provision for other liabilities and charges during the year are as follows: At 1 October Acquired Utilised during year Charged to the income statement Exchange movements At 30 September 2017 £’000 2016 £’000 940 80 (135) 13 (10) 888 342 38 – 556 4 940 The Group provision for other liabilities and charges includes amounts provided for the anticipated cost of repair and rectification of products under warranty, based on known exposures and historical occurrences. In 2016, a provision for £500,000 was recorded in respect of a potential penalty related to two isolated potential violations of export control laws, which were voluntarily disclosed to the relevant authorities after having been identified by an internal review. This matter is ongoing, and therefore the provision has been retained. 24. Deferred Tax Assets and Liabilities The movements in the Group’s deferred tax assets and liabilities during the year are as follows: At 1 October Charged to the income statement Acquired Arising on acquired intangible assets Credited directly to equity Exchange movements Net liability at 30 September 2017 £’000 (2,132) (1,542) 146 – 148 145 2016 £’000 (480) (478) (28) (1,121) 45 (70) (3,235) (2,132) The deferred tax provided for in the financial statements is disclosed under the following balance sheet headings and can be analysed as follows: Deferred income tax assets Intangible assets Share options Provisions Other timing differences Deferred income tax liabilities Property, plant and equipment Intangible assets Deferred tax balance at 30 September 72 | ANNUAL REPORT 2017 2017 £’000 2016 £’000 906 721 814 262 1,071 573 788 242 2,703 2,674 (3,827) (2,111) (5,938) (3,235) (2,446) (2,360) (4,806) (2,132) GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 September 2017 Overseas tax losses of £3.7m (2016: £3.8m) and UK tax losses of £0.8m (2016: £0.8m) are available to offset against future profits of the Group. The Group has not recognised a deferred income tax asset of £1.4m (2016: £1.4m) in respect of these losses due to uncertainty as to whether they would be utilised within the foreseeable future. No deferred tax has been provided in relation to unremitted earnings from overseas subsidiaries on the basis that no incremental tax charge is currently anticipated to arise upon remittance of these earnings to the UK. 25. Called Up Share Capital Issued and fully paid At 1 October Shares issued and fully paid At 30 September 2017 Number 2016 Number 2017 £’000 24,260,024 24,091,118 4,852 254,537 168,906 51 24,514,561 24,260,024 4,903 2016 £’000 4,818 34 4,852 During the year 72,734 shares (2016: 168,906 shares) were allotted under share option schemes. 26. Reserves At 1 October 2016 Profit for the financial year Dividends paid Shares issued Fair value of share options Tax credit relating to share options Currency translation differences At 30 September 2017 Share premium account £’000 15,530 – – – – – – Merger reserve £’000 2,671 – – 1,969 – – – 15,530 4,640 Cumulative translation reserve £’000 6,984 – – – – – (1,410) 5,574 Retained earnings £’000 60,135 8,892 (2,289) (15) 587 179 – 67,489 ANNUAL REPORT 2017 | 73 GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 September 2017 27. Share Options The Company operates the Gooch & Housego 2013 Long Term Incentive Plan (the “2013 LTIP”). The Gooch & Housego 2013 Long Term Incentive Plan The Gooch & Housego 2013 Long Term Incentive Plan was adopted on 9 April 2013. Under the plan, awards are made annually to key employees based on a percentage of salary. Subject to the satisfaction of the required TSR performance criteria and EPS financial performance, these grants will vest upon publication of the results of the Company three years after the grant date. There have been five grants of options under the 2013 Long Term Incentive Plan. The remuneration report provides further details on the share options awarded and exercised during the financial year. The 2013 Long Term Incentive Plan Awards were valued using the Monte Carlo option pricing model. The expected volatility used in the model was based on the historical volatility of the Company’s share price over the three years prior to the grant date. The details of awards extant as at 30 September 2017 are summarised below: No. of options granted Expected volatility Risk free rate Fair value (£) A reconciliation of total share option movements is shown below: Grant date 10 Mar 2017 23 Dec 2015 17 Dec 2014 133,146 147,458 260,193 26% 0.9% 25% 0.9% 29% 0.8% 784,041 629,506 878,475 Outstanding at 1 October Awarded Exercised Lapsed Outstanding at 30 September Exercisable at 30 September 2017 2016 Number Weighted average Number Weighted average exercise price exercise price 512,852 133,146 (72,734) (87,256) 486,008 – – – – – – – 546,300 147,458 (168,906) (12,000) 512,852 – – – – – – – The weighted average fair value of options granted in the year was 589.0p per option (2016: 427.0p per option). For the options exercised, the average market price was 1,238.0p per share. Share options outstanding at the end of the year have the following expiry dates and exercise prices: 2013 LTIP 8-Apr-2023 0.0p exercise price 2017 486,008 2016 512,852 Expiry date Weighted average Number of share options The total charge for the year relating to share options was £587,000 (2016: £638,000), all of which related to equity-settled share based payment transactions. 74 | ANNUAL REPORT 2017 GOOCH & HOUSEGO PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 September 2017 28. Operating Leases The future aggregate minimum lease payments under non-cancellable operating leases are as follows: Within one year Between one to five years 29. Financial Instruments FINANCIAL STATEMENTS 2017 £’000 1,166 3,900 5,066 2016 £’000 1,199 3,652 4,851 The Group’s financial instruments comprise bank borrowings, cash at bank, finance leases and various items such as trade receivables and trade payables that directly arise from its operations. The main risks arising from the Group’s financial instruments are interest rate risk, liquidity risk and foreign currency risk. The Board’s policy on these risks is set out in note 5. Operations are financed through a mixture of retained profits, cash reserves, bank borrowings and finance leases. Other than finance leases the Board’s policy is to use variable rate borrowings whenever possible. The currency profile for the Group’s financial assets and liabilities are set out below. Pound Sterling US Dollar Euro Yen Financial assets Financial liabilities 2017 £’000 16,438 8,101 1,849 37 2016 £’000 11,269 9,999 1,857 42 2017 £’000 18 2016 £’000 24 11,480 11,474 – – – – 26,425 23,167 11,498 11,498 The financial assets listed in the above table are subject to floating rates of interest. The interest rates on the financial liabilities are provided in Note 22. The financial assets include cash at bank but exclude short-term receivables, prepayments and other receivables. The financial liabilities includes bank borrowings and finance leases. Other short-term payables are excluded from this disclosure. 30. Capital Commitments Authorised and contracted but not provided for All capital commitments relate to property, plant and equipment. 31. Related Party Transactions 2017 £’000 1,440 2016 £’000 264 No contracts or arrangements have been entered into during the year, nor existed at the end of the year, in which a director or key manager had a material interest. Details of key management compensation are given in note 10. ANNUAL REPORT 2017 | 75 GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 September 2017 32. Acquisition of StingRay Optics LLC On 21 February 2017, the Group completed the acquisition of the entire unit capital of StingRay Optics LLC, a Keene, New Hampshire, based specialist designer and manufacturer of high performance optical and opto-mechanical subsystems for demanding defence and commercial applications. The acquisition strengthened the Group’s position in the aerospace & defence sector. The consideration for the acquisition will be up to $20m comprising initial consideration of $7.5m paid in cash and $2.5m paid in new G&H ordinary shares. There is also deferred contingent consideration of up to $10m, payable in cash, based on the performance of the business for a period of up to three years post acquisition. The fair value of the assets acquired is summarised as follows: Property, plant and equipment Intangible assets Cash Trade and other receivables Inventory Trade and other payables Current and deferred tax assets Net assets acquired Consideration paid: Cash and shares paid on completion Deferred consideration Goodwill Provisional fair value £’000 98 7,986 231 655 1,058 (1,274) 156 8,910 7,996 7,013 6,099 The fair value of the intangible assets represents the estimated fair value of StingRay’s order book, its customer relationships and its brand. These have been valued using a discounted cash flow model. The deferred consideration has been discounted using the company’s weighted average cost of capital. The goodwill arising on acquisition reflects items not separately recognised, including the expertise of StingRay’s employees and their contacts in target markets. Post-acquisition, the acquired business contributed £5.3 million of revenue and £1.0 million of profit after tax to the consolidated income statement. 33. Post Balance Sheet Events In October 2017 the Company concluded a legal dispute with the landlord of its Fremont facility. As a result of this, a Californian court has awarded G&H in the region of $2 million in damages arising from the landlord’s non-performance in respect of the lease. 76 | ANNUAL REPORT 2017 GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS COMPANY BALANCE SHEET As at 30 September 2017 Non-current assets Investments Property, plant and equipment Intangible assets Deferred income tax assets Current assets Other receivables Cash and cash equivalents Current liabilities Trade and other payables Net current assets Non-current liabilities Deferred income tax liabilities Deferred consideration Net assets Shareholders’ equity Called up share capital Share premium account Merger reserve Retained earnings Total equity Note £’000 £’000 £’000 £’000 2017 2016 5 6 7 9 8 3,974 10,298 14,272 10 (5,301) 9 11 28,811 7,104 47 793 36,755 – – – – 8,971 (61) (1,641) 44,024 4,903 15,530 1,969 21,622 44,024 2,769 7,211 9,980 (3,774) 27,169 7,482 156 681 35,488 – – – – 6,206 (101) – 41,593 4,852 15,530 – 21,211 41,593 The financial statements on pages 77 to 88, were approved by the Board of Directors on 28 November 2017 and signed on its behalf by: Mark Webster Director Andrew Boteler Director ANNUAL REPORT 2017 | 77 GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS COMPANY STATEMENT OF CHANGES IN EQUITY For the year ended 30 September 2017 Called up Share premium Merger At 1 October 2015 Profit for the financial year Total comprehensive income for the year Dividends Proceeds from shares issued Fair value of employee services Tax credit relating to share option schemes Total contributions by and distributions to owners of the parent recognised directly in equity At 30 September 2016 At 1 October 2016 Profit for the financial year Total comprehensive income for the year Dividends Proceeds from shares issued Fair value of employee services Tax credit relating to share option schemes Total contributions by and distributions to owners of the parent recognised directly in equity Note Share capital account £’000 4,818 £’000 15,530 4 4 – – – 34 – – 34 – – – – – – – 4,852 4,852 15,530 15,530 – – – 51 – – 51 – – – – – – – Reserve £’000 – – – – – – – – – – – – – 1,969 – – Retained earnings £’000 18,611 3,750 3,750 (2,055) (34) 638 301 Total equity £’000 38,959 3,750 3,750 (2,055) – 638 301 (1,150) (1,116) 21,211 21,211 1,962 1,962 (2,289) (15) 587 166 41,593 41,593 1,962 1,962 (2,289) 2,005 587 166 469 1,969 (1,551) At 30 September 2017 4,903 15,530 1,969 21,622 44,024 78 | ANNUAL REPORT 2017 GOOCH & HOUSEGO PLC COMPANY CASH FLOW STATEMENT For the year ended 30 September 2017 Cash flows from operating activities Cash generated from operations Income tax paid Net cash generated from operating activities Cash flows from investing activities Acquisition of subsidiaries, net of cash acquired Purchase of property, plant and equipment Purchase of intangible assets Interest received Net cash used in investing activities Cash flows from financing activities Dividends received from subsidiary companies Dividends paid to ordinary shareholders Interest paid Net cash generated from financing activities Net increase / (decrease) in cash Cash at beginning of the year Cash at the end of the year FINANCIAL STATEMENTS 2017 £’000 2016 £’000 1,461 4,280 – (41) 1,461 4,239 – (7,999) (106) – 21 (15) (13) 36 (85) (7,991) 4,000 4,905 (2,289) (2,055) – (13) 1,711 2,387 3,087 7,211 10,298 (915) 8,126 7,211 ANNUAL REPORT 2017 | 79 GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS NOTES TO THE COMPANY CASH FLOW STATEMENT For the year ended 30 September 2017 Reconciliation of cash generated from operations 2017 £’000 1,549 2016 £’000 2,561 (4,000) (4,905) 109 483 587 (21) – 154 469 638 (36) 13 (2,842) (3,667) 209 2,545 2,754 4,038 1,348 5,386 1,461 4,280 At 1 Oct 2016 Cash flow At 30 Sep 2017 £’000 7,211 7,211 £’000 3,087 3,087 £’000 10,298 10,298 Profit before income tax Adjustments for: - Dividends received from subsidiaries - Amortisation of other intangible assets - Depreciation - Share based payment charge - Finance income - Finance costs Total Changes in working capital - Trade and other receivables - Trade and other payables Total Cash generated from operating activities Analysis of net cash Cash at bank and in hand Net cash 80 | ANNUAL REPORT 2017 GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS NOTES TO THE COMPANY FINANCIAL STATEMENTS For the year ended 30 September 2017 1. Company Accounting Policies Basis of Preparation These financial statements have been prepared under the historical cost convention as modified by financial assets and liabilities (including derivative financial instruments) at fair value and in accordance with International Financial Reporting Standards as adopted by the European Union (“IFRS”) and IFRIC interpretations in issue at 30 September 2017, and with those parts of the Companies Act 2006 applicable to companies preparing financial statements in accordance with IFRS. The financial statements have been prepared on a going concern basis. The accounting policies have been consistently applied over the period reported. Adoption of New Standards There has been no material impact from the adoption of new standards or revised standards or interpretations which are relevant to the Group: • Annual Improvements 2012-2014 • Amendment to IAS16 “Property, plant and equipment” and IAS 38 “Intangible Assets” on depreciation and amortization • Amendments to IAS27 “Separate financial statements” on equity accounting • Amendments to IFRS10 “Consolidated financial statements” and IAS28 “Investments in associates and joint ventures” on applying the consolidation exemption • Amendments to IAS1 “Presentation of financial statements” disclosure initiative The following standard will apply to the Company in future accounting periods: IFRS 9 Financial Instruments This standard will apply for the first time in the year ending 30 September 2019. Management do not currently envisage this standard having a material effect on the financial statements. Pension Schemes The Company operates a money purchase pension scheme for Directors and staff. The assets of the scheme are held in separately administered funds. Contributions are recognised as an employee benefit expense in the income statement when they are due. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in the future payments is available. Share Options The Company operates a number of share option schemes. In accordance with IFRS 2 the fair value of the employee services received in exchange for the grant of the options is recognised as an expense in the income statement. The total amount to be expensed over the vesting period is determined by reference to the fair value of the options granted, excluding the impact of any non-market vesting conditions (for example, profitability targets). Non-market vesting conditions are included in assumptions about the number of options that are expected to vest. Employer’s National Insurance in the United Kingdom and equivalent taxes in other jurisdictions are payable on the exercise of certain share options. In accordance with IFRS 2, this is treated as a cash-settled transaction. A provision is made, calculated using the fair value of the Company’s shares at the balance sheet date, pro-rated over the vesting period of the options. At each balance sheet date, for awards with non market vesting conditions, the entity revises its estimates of the number of options that are expected to vest. It recognises the impact of the revision to original estimates, if any, in the income statement, with a corresponding adjustment to equity. The fair value of the options under the Gooch & Housego 2013 Long Term Incentive Plan are determined by using the Monte Carlo option pricing model. The proceeds received net of any directly attributable transaction costs are credited to share capital (nominal value) and share premium when the options are exercised. Foreign Currency Translation a. Functional and presentation currency The financial statements are presented in Pounds Sterling, which is the Company’s presentation currency. ANNUAL REPORT 2017 | 81 GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS NOTES TO THE COMPANY FINANCIAL STATEMENTS For the year ended 30 September 2017 b. Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at balance sheet exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except when deferred in equity as qualifying cash flow hedges and qualifying net investment hedges. Property, Plant and Equipment Property, plant and equipment is stated at historical purchase cost less accumulated depreciation. Cost includes expenditure that is directly attributable to the acquisition of the items. No depreciation is charged on freehold land or capital work in progress. Depreciation on other assets is calculated to allocate their cost over their estimated useful lives, as follows: • Freehold buildings 2-3% Straight line • Plant and machinery 10-20% Straight line • Fixtures, fittings and computers 10-33% Straight line • Capitalised software and licences 25-33% Straight line Investments Investments are stated at cost less provision for any impairment in value. Where overseas borrowing is required to finance the investment in overseas subsidiaries, the investment is retranslated at the exchange rate ruling at the balance sheet date. Deferred Tax Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, the deferred income tax is not accounted for, if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred income tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred income tax is provided on temporary differences arising on investments in subsidiaries, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred income tax is recognised in the income statement except to the extent that it relates to items recognised directly in other comprehensive income and equity, in which case it is recognised in other comprehensive income and equity. In the UK and US, the Company is entitled to a tax deduction for amounts treated as compensation on exercise of certain employee share options under each jurisdiction’s tax rules. As explained under “Share options” below, a compensation expense is recorded in the Company’s income statement over the period from the grant date to the vesting date of the relevant options. As there is a temporary difference between the accounting and tax bases, a deferred income tax asset is recorded. The deferred income tax asset arising is calculated by comparing the estimated amount of tax deduction to be obtained in the future (based on the Company’s share price at the balance sheet date) with the cumulative amount of the compensation recorded in the income statement. If the amount of estimated future tax deduction exceeds the cumulative amount of the remuneration expense at the statutory rate, the excess is recorded directly in equity. Trade Payables Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method. Provisions Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. Dividend Distribution Dividend distributions to the Company’s shareholders are recognised as a liability in the Group’s financial statements in the period in which the dividends are approved by the Company’s shareholders. 82 | ANNUAL REPORT 2017 GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS NOTES TO THE COMPANY FINANCIAL STATEMENTS For the year ended 30 September 2017 Financial Instruments The Company has not used derivative financial instruments to hedge its exposure to currency risk. Share Capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. 2. Company Profit and Loss Account Gooch & Housego PLC has taken advantage of section 408(3) of the Companies Act 2006 and has not included its own profit and loss account in these financial statements. The Company’s profit after tax was £1,962,000 (2016: £3,750,000 profit). Fees payable to the Company auditors for the statutory audit for the year amounted to £16,000 (2016: £16,000). 3. Employee Benefit Expense Wages and salaries Social security costs Medical and other insurances Share based payments Pension costs The average number of employees during the year was 13 (2016: 12), all of whom were administrative. Directors’ Remuneration Directors’ remuneration Relocation allowance Medical and other insurances Directors’ pension scheme contributions 2017 £’000 2,035 443 26 587 38 2016 £’000 1,635 170 33 638 100 3,129 2,576 2017 £’000 1,409 – 26 20 2016 £’000 1,192 23 33 80 1,455 1,328 The aggregate emoluments of the highest paid Director including gain on exercise of share options were £504,000 (2016: £617,000). Further information is included in the Remuneration Committee report on page 37. The aggregate gain on Directors’ share option exercises in the year was £393,000 (2016: £807,000). The number of Directors who are accruing retirement benefits under a money purchase pension scheme is 2 (2016: 2). These disclosures have been audited. 4. Dividends Final 2016 dividend paid in 2017: 5.7p per share. (Final 2015 dividend paid in 2016: 5.2p per share) 2017 Interim dividend paid: 3.7p per share (2016: 3.3p) Cost and net book value at 30 September 2017 £’000 1,383 906 2,289 2016 £’000 1,254 801 2,055 The Directors propose a final dividend of 6.5p per share making the total dividend paid and proposed in respect of the 2017 financial year 10.2p (2016: 9.0p). Should the final dividend be approved at the Company Annual General Meeting, cut-off dates for payment are: - Record date 26 January 2018 - Payment date 2 March 2018 ANNUAL REPORT 2017 | 83 GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS NOTES TO THE COMPANY FINANCIAL STATEMENTS For the year ended 30 September 2017 5. Investments Cost and net book value at 1 October Additions Cost and net book value at 30 September 2017 £’000 27,169 1,642 28,811 2016 £’000 19,170 7,999 27,169 The subsidiary companies at 30 September 2017, all of which are wholly owned either directly or indirectly, are listed below: Company Name % Registered Office Activity ownership of ordinary shares Gooch & Housego (UK) Limited 100% Dowlish Ford, Ilminster, Somerset, TA19 0PF Manufacturer of acousto-optic products and precision optics Gooch & Housego (Torquay) 100% Dowlish Ford, Ilminster, Somerset, TA19 0PF Manufacturer of fibre-optic products Limited Spanoptic Limited 100% Telford Road, Glenrothes, KY7 4NX Manufacturer of precision optics Kent Periscopes Limited 100% 6 Ffordd Richard Davies Manufacturer of periscopes and vehicle St Asaph, LL17 0LJ sights Gooch & Housego (Deutschland) 100% Berliner Allee 55, 22850 Norderstedt, Germany Provider of sales and customer service GmbH functions Constelex Technology Enablers 100% Sarou 12, Athens 15125, Greece Designer and manufacturer of advanced Limited photonic systems Gooch & Housego (Ohio) LLC 100% 676 Alpha Drive, Highland Heights, OH44143, USA Manufacturer of electro-optic products and crystals Gooch & Housego (California) LLC 100% 5390 Kazuko Court, Moorpark, CA93021, USA Manufacturer of precision optics Gooch & Housego (Florida) LLC 100% 676 Alpha Drive, Highland Heights, OH44143, USA Non-trading company Optronic Laboratories LLC 100% 4632 36th St, Orlando, FL32811,USA Manufacturer of instruments for measuring optical radiation EM4 Inc. 100% 7 Oak Park Drive, Bedford, MA 01730, USA Manufacturer of fibre optics products Gooch & Housego (Palo Alto) LLC 100% 44247 Nobel Dr, Fremont, CA94538, USA Manufacturer of acousto-optic, electro-optic and fibre optic components and systems StingRay Optics LLC 100% 17A Bradco Street, Keene, NH 03431 USA Designer and manufacturer of optical and opto-mechanical subsystems Gooch & Housego Japan KK 100% Level 4, Nikko Shiken Building, 3-2-3 Sakae, Provider of sales and customer service Nagoya, Japan functions G&H (Property) Holdings Limited 100% Dowlish Ford, Ilminster, Somerset, TA19 0PF Property holding company G&H (US Holdings) Limited 100% Dowlish Ford, Ilminster, Somerset, TA19 0PF Holding company G&H Holdings (Delaware) Inc. 100% 676 Alpha Drive, Highland Heights, OH44143, USA Holding company G&H Capital Holdings (Florida) Inc. 100% 676 Alpha Drive, Highland Heights, OH44143, USA Non-trading company The directors believe that the carrying value of the investments is supported by their underlying net assets. 84 | ANNUAL REPORT 2017 GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS NOTES TO THE COMPANY FINANCIAL STATEMENTS For the year ended 30 September 2017 6. Property, Plant and Equipment Freehold land Plant and Fixtures and Computer Total Cost or valuation At 1 October 2015 Additions At 30 September 2016 Additions At 30 September 2017 Accumulated depreciation At 1 October2015 Charge for the year At 30 September 2016 Charge for the year At 30 September 2017 Net book value At 1 October 2015 At 30 September 2016 At 30 September 2017 7. Intangible Assets Cost or valuation At 1 October 2015 Additions At 30 September 2016 Additions At 30 September 2017 Accumulated depreciation At 1 October2015 Charge for the year At 30 September 2016 Charge for the year At 30 September 2017 Net book value At 1 October 2015 At 30 September 2016 At 30 September 2017 and buildings machinery £’000 £’000 fittings £’000 equipment £’000 6,183 – 6,183 – 6,183 1,139 108 1,247 108 1,355 5,044 4,936 4,828 3,987 – 3,987 – 3,987 1,790 265 2,055 265 2,320 2,197 1,932 1,667 1,392 – 1,392 – 1,392 704 93 797 93 890 688 595 502 483 15 498 105 603 476 3 479 17 496 7 19 107 £’000 12,045 15 12,060 105 12,165 4,109 469 4,578 483 5,061 7,936 7,482 7,104 Computer Other Total software £’000 £’000 £’000 1,216 – 1,216 – 1,216 1,086 73 1,159 45 1,204 130 57 12 452 13 465 – 465 285 81 366 64 430 167 99 35 1,668 13 1,681 – 1,681 1,371 154 1,525 109 1,634 297 156 47 ANNUAL REPORT 2017 | 85 GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS NOTES TO THE COMPANY FINANCIAL STATEMENTS For the year ended 30 September 2017 8. Other Receivables Amounts owed by Group undertakings Prepayments and accrued income Group tax relief receivable 2017 £’000 791 102 3,081 3,974 2016 £’000 251 86 2,432 2,769 Amounts owed by Group undertakings are unsecured and due within one year. Non-trading amounts owed by US Group undertakings are charged interest at the US LIBOR rate applicable for the year. Non-trading amounts owed by UK Group undertakings are charged interest at the UK LIBOR rate applicable for the year. 9. Deferred Tax The movement in the deferred tax asset / (liability) during the year was as follows: At 1 October Credited to the income statement Credited directly to reserves At 30 September The deferred tax provided for in the financial statements can be analysed as follows: Property, plant and equipment Share options Other timing differences Factors Affecting the Future Tax Charge 2017 £’000 580 17 135 732 2017 £’000 (61) 632 161 732 2016 £’000 394 61 125 580 2016 £’000 (101) 497 184 580 UK tax losses of £0.8m (2016: £0.8m) are available against future profits of the Group. The utilisation of these losses is not sufficiently certain to recognise a deferred tax asset. Changes to the UK corporation tax rates were substantively enacted as part of the Finance Act 2016 in September 2016. These included the replacement of the 18% rate from 1 April 2020 with a lower rate of 17%. To date, no further changes have been announced. 86 | ANNUAL REPORT 2017 GOOCH & HOUSEGO PLC NOTES TO THE COMPANY FINANCIAL STATEMENTS For the year ended 30 September 2017 10. Trade and Other Payables Trade payables Amounts owed to Group undertakings Taxation and Social Security Accruals and deferred income FINANCIAL STATEMENTS 2017 £’000 221 2,593 583 1,904 5,301 2016 £’000 410 1,264 226 1,874 3,774 Amounts owed to Group undertakings are unsecured and due within one year. Non-trading amounts owed to US Group undertakings are charged interest at the US LIBOR rate applicable for the year. Non-trading amounts owed to UK Group undertakings are charged interest at the UK LIBOR rate applicable for the year. In 2016, a provision for £500,000 was recorded in respect of a potential penalty related to two isolated potential violations of export control laws, which were voluntarily disclosed to the relevant authorities after having been identified by an internal review. This matter is ongoing, and therefore the provision has been retained. 11. Called Up Share Capital Allotted, issued and fully paid At 1 October Shares issued and fully paid At 30 September 2017 Number 2016 Number 2017 £’000 24,260,024 24,091,118 4,852 254,537 168,906 51 24,514,561 24,260,024 4,903 2016 £’000 4,818 43 4,852 During the year 72,734 shares (2016: 168,906 shares) were allotted under share option schemes. ANNUAL REPORT 2017 | 87 GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS NOTES TO THE COMPANY FINANCIAL STATEMENTS For the year ended 30 September 2017 12. Share Options The Company operates the Gooch & Housego 2013 Long Term Incentive Plan (the “2013 LTIP”). The Gooch & Housego 2013 Long Term Incentive Plan The Gooch & Housego 2013 Long Term Incentive Plan was adopted on 9 April 2013. Under the plan, awards are made annually to key employees based on a percentage of salary or management grade. Subject to the satisfaction of the required TSR performance criteria and EPS financial performance, these grants will vest upon publication of the results of the Company three years after the grant date. There have been five grants of options under the 2013 Long Term Incentive Plan. The remuneration report provides further details on the share options awarded and exercised during the financial year. The 2013 Long Term Incentive Plan Awards were valued using the Monte Carlo option pricing model. The expected volatility used in the model was based on the historical volatility of the Company’s share price over the three years prior to the grant date. Details of awards extant as at 30 September 2017 are summarised below: No. of options granted Expected volatility Risk free rate Fair value (£) A reconciliation of total share option movements is shown below: Grant date 10 Mar 2017 23 Dec 2015 17 Dec 2014 133,146 147,458 260,193 26% 0.9% 25% 0.9% 29% 0.8% 784,041 629,506 878,475 Outstanding at 1 October Awarded Exercised Lapsed Outstanding at 30 September Exercisable at 30 September 2017 2016 Number Weighted average Number Weighted average exercise price exercise price 512,852 133,146 (72,734) (87,256) 486,008 – – – – – – – 546,300 147,458 (168,906) (12,000) 512,852 – – – – – – – The weighted average fair value of options granted in the year was 589.0p per option (2016: 427.0p per option). For the options exercised, the average market price was 1,238.0p per share. Share options outstanding at the end of the year have the following expiry dates and exercise prices: 2013 LTIP 8-Apr-2023 0.0p exercise price 2017 486,008 2016 512,852 Expiry date Weighted average Number of share options The total charge for the year relating to share options was £587,000 (2016: £638,000), all of which related to equity-settled share based payment transactions. 13. Related Party Disclosures The company recharges certain costs and provides financing to its subsidiaries in the ordinary course of business. The closing balances due from and to the subsidiary companies are shown in notes 8 and 10 respectively. No other material contracts or arrangements have been entered into during the year, nor existed at the end of the year, in which a director or key manager had a material interest. 88 | ANNUAL REPORT 2017 GOOCH & HOUSEGO PLC SHAREHOLDER INFORMATION COMPANY INFORMATION Nominated Adviser and Broker Independent Auditors Investec Bank plc 2 Gresham Street London EC2V 7QP Legal Advisers Burges Salmon LLP One Glass Wharf Bristol BS2 0ZX PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors 2 Glass Wharf Bristol BS2 0FR Registrars Link Asset Services 65 Gresham Street London EC2V 7NQ Company Secretary and Registered Office COMPANY SECRETARY Gareth J Crowe REGISTERED OFFICE Dowlish Ford Ilminster Somerset TA19 0PF United Kingdom COMPANY NUMBER 00526832 Expected Financial Calendar Annual General Meeting 21 February 2018 Payment date for final dividend for the year ended 30 September 2017 to shareholders on the register at close of 2 March 2018 business 26 January 2018. Subject to approval by shareholders at the Annual General Meeting. Interim Results announcement Financial Year End Preliminary announcement of results for the year ending 30 September 2018 June 2018 30 September 2018 November 2018 For further information please contact: Gooch & Housego PLC Mark Webster / Andrew Boteler Investec Bank plc (Nomad & Broker) Patrick Robb / David Anderson Buchanan Mark Court / Sophie Cowles 01460 256440 020 7597 5970 020 7466 5000 ANNUAL REPORT 2017 | 89 GOOCH & HOUSEGO PLC SHAREHOLDER INFORMATION NOTICE OF ANNUAL GENERAL MEETING Notice is hereby given that the Annual General Meeting of the Company will be held at Dowlish Ford, Ilminster, Somerset, TA19 0PF on 21 February 2018 at 11.00 a.m. for the following purposes: To consider and, if thought fit, to pass the following resolutions as Ordinary Resolutions: 1 2 To receive the Annual Report and Financial Statements for the financial year ended 30 September 2017 together with the Directors’ Report and Auditors’ Report thereon. To receive and approve the Remuneration Committee Report set out on pages 37 to 41 (excluding page 38) of the Annual Report and Financial Statements for the financial year ended 30 September 2017. 3 To declare a final dividend, as recommended by the Directors, of 6.5 pence per ordinary share for the financial year ended 30 September 2017. under such authority to make at any time prior to the expiry of such authority any offer or agreement which would or might require shares in the Company to be allotted after the expiry of such authority and the Directors may allot shares in pursuance of such offer or agreement as if such authority had not expired. To consider and, if thought fit, to pass the following resolutions as Special Resolutions: 13 THAT the Directors of the Company be, and they are hereby, generally and unconditionally empowered pursuant to section 570 of the Companies Act 2006 (the “Act”), in substitution for any existing authority to the extent unused, to allot equity securities (as defined in section 560 of the Act) for cash pursuant to the authority conferred by Resolution 12 above as if section 561 of the Act did not apply to such allotment, provided that the power hereby conferred shall be limited to: (i) the allotment of equity securities in connection with an offer of securities, open for acceptance for a period fixed by the Directors, by way of rights to the holders of ordinary shares in proportion (as nearly as may be) to the respective numbers of ordinary shares held by them on a record date fixed by the Directors and subject to such exclusions or other arrangements as the Directors may deem necessary or expedient to deal with legal or practical problems under the laws of any overseas territory or the requirements of any regulatory body or any stock exchange in any territory or in connection with fractional elements or otherwise howsoever; and (ii) otherwise than pursuant to sub-paragraph (i) above, the allotment of equity securities up to an aggregate nominal amount of £490,291 (representing approximately 10 per cent. of the total ordinary share capital of the Company in issue at 28 November 2017), and the power hereby conferred shall expire at the conclusion of the next Annual General Meeting of the Company or 22 May 2019 (whichever is the earlier), save that the Company may before such expiry make an offer or agreement which would or might require equity securities in the Company to be allotted after such expiry and the Directors may allot equity securities in pursuance of such offer or agreement as if the power conferred hereby had not expired. 4 To re-elect Mark Webster as a Director. 5 To re-elect Alex Warnock as a Director. 6 To re-elect Andrew Boteler as a Director. 7 To re-elect Peter Bordui as a Director. 8 To re-elect Brian Phillipson as a Director. 9 To elect David Bauernfeind as a Director 10 To re-appoint Messrs PricewaterhouseCoopers LLP as Auditors. 11 To authorise the Directors to fix the remuneration of the Auditors. 12 THAT the Directors of the Company be, and they are hereby, generally and unconditionally authorised in accordance with section 551 of the Companies Act 2006 (the “Act”), in substitution for any existing authority to the extent unused, to exercise all the powers of the Company to allot shares in the Company or grant rights to subscribe for or to convert any security into shares in the Company on, and subject to, such terms as the Directors may determine. The authority hereby conferred shall, subject to section 551 of the Act, be for a period commencing on the date of the passing of this Resolution and expiring at the conclusion of the next Annual General Meeting of the Company or 21 May 2019 (whichever is the earlier) unless reviewed, varied or revoked by the Company in General Meeting and the maximum nominal amount of shares which may be allotted pursuant to such authority shall be £1,634,304 (representing approximately one third of the total ordinary share capital of the Company in issue at 28 November 2017). The Directors shall be entitled 90 | ANNUAL REPORT 2017 GOOCH & HOUSEGO PLC NOTICE OF ANNUAL GENERAL MEETING SHAREHOLDER INFORMATION 14 THAT the Company be and is hereby generally and unconditionally authorised for the purposes of section 701 of the Companies Act 2006 (the “Act”) to make one or more market purchases (within the meaning of section 693(4) of the Act) of fully paid ordinary shares of £0.20 each in the capital of the Company on such terms and in such manner as the Directors may determine, provided that: (a) the maximum aggregate number of ordinary shares hereby authorised to be purchased is 2,451,456 (representing approximately 10 per cent of the total ordinary share capital of the Company in issue at 28 November 2017); (b) the minimum price (exclusive of expenses) which may be paid for each ordinary share is 20 pence per share; (c) the maximum price (exclusive of expenses) which may be paid for each ordinary share shall not be more than 5 per cent. above the average of the middle market quotations for an ordinary share as derived from the AIM section of the London Stock Exchange Daily Official List for the five business days immediately preceding the date on which the ordinary share is contracted to be purchased; (d) unless previously renewed, varied or revoked, the authority hereby conferred shall expire at the conclusion of the next Annual General Meeting of the Company or 21 May 2019 (whichever is the earlier); (e) the Company may, pursuant to the authority hereby conferred, enter into a contract to purchase ordinary shares which would, will or might be executed wholly or partly after the expiry of such authority and the Company may make a purchase of ordinary shares in pursuance of such contract as if the authority conferred hereby had not expired. By order of the Board Gareth J Crowe Company Secretary 28 November 2017 Registered Office: Dowlish Ford, Ilminster, Somerset TA19 0PF Registered Number: 526832 ANNUAL REPORT 2017 | 91 GOOCH & HOUSEGO PLC SHAREHOLDER INFORMATION NOTES 1 Explanatory note on Resolution 2: Resolution 2 is an advisory vote message must be received by the issuer’s agent by 11.00 a.m. on 19 only. The Remuneration Committee Report is set out on pages 37 to February 2018. For this purpose, the time of receipt will be taken to 41 of the Annual Report and Financial Statements for the financial be the time (as determined by the timestamp applied to the message year ended 30 September 2017. Pages 37, 39, 40 and 41 of the by the CREST Applications Host) from which the issuer’s agent is able Remuneration Committee Report set out the pay and benefits to retrieve the message. After this time any change of instructions received by each of the directors for the year ended 30 September to a proxy appointed through CREST should be communicated to the 2017. The Company’s policy on remuneration and potential pay outs proxy by other means. CREST Personal Members or other CREST to directors in the future, which is set out on page 38 of the Annual sponsored members, and those CREST Members who have appointed Report and Financial Statements for the financial year ended 30 voting service provider(s) should contact their CREST sponsor or September 2017, is specifically excluded from this Resolution. voting service provider(s) for assistance with appointing proxies via 2 Resolutions 1 to 12 (inclusive) are proposed as Ordinary Resolutions. This means that for those resolutions to be passed, more than half of the votes cast on such resolutions must be in favour of such resolutions. Resolutions 13 and 14 are proposed as Special Resolutions. This means that for those resolutions to be passed, at least three-quarters of the votes cast on such resolutions must be in favour of such resolutions. 3 A member entitled to attend and vote at the meeting is entitled to appoint one or more proxies to exercise all or any of the member’s rights to attend, speak and vote at the meeting (or any adjournment of the meeting). A proxy need not be a member of the Company. If a member appoints more than one proxy in relation to the meeting, each proxy must be appointed to exercise the rights attached to a different share or shares held by that member. If a member submits more than one valid proxy appointment in relation to the same share, the appointment received last before the latest time for receipt of proxies will take precedence. A member may only appoint a proxy in accordance with the procedures described in notes 4,5 and 6. 4 To appoint a proxy outside of the CREST system, a form of proxy is enclosed for use. To be valid, this form of proxy (and any power of attorney or other authority (if any) under which it is signed) must by duly completed and signed and sent to or deposited at the office of the Company’s registrars, Link Asset Services, PXS, 34 Beckenham Road, Beckenham, Kent BR3 4TU so as to be received not less than 48 hours before the time for holding the meeting (or any adjournment of the meeting). Completion of a form of proxy does not preclude a member from attending and voting in person at the meeting if that member so wishes. 5 To appoint as a proxy a person other than the Chairman of the meeting, a member must insert the proxy’s full name in the box on the proxy form. If a member signs and returns a proxy form with no name in the box, the Chairman of the meeting will be deemed to be the member’s proxy. Where a member appoints as a proxy someone other than the Chairman, the member is responsible for ensuring that the proxy attends the meeting and is aware of the member’s voting intentions. If a member wishes a proxy to make any comments on the member’s behalf, the member will need to appoint someone other than the Chairman and give them the relevant instructions directly. 6 To appoint a proxy or to give or amend an instruction to a previously appointed proxy via the CREST system (Link ID: RA10), the CREST 92 | ANNUAL REPORT 2017 CREST. For further information on CREST procedures, limitations and system timings please refer to the CREST Manual. The Company or its Registrars may treat as invalid a proxy appointment sent by CREST in the circumstances set out in Regulation 35(5) (a) of the Uncertificated Securities Regulations 2001. In any case your Form of Proxy must be received by the Company’s Registrars by no later than 11.00 a.m. on 19 February 2018. 7 A member which is a corporation is entitled to appoint one or more corporate representatives to exercise the same powers on behalf of the corporation as the corporation could exercise if it were an individual member. If a member which is a corporation appoints more than one corporate representative in relation to the meeting (or any adjournment of the meeting), each such corporate representative shall be entitled to exercise the same powers on behalf of that corporation as that corporation could exercise if it were an individual member, provided that if such persons purport to exercise those powers the same way, those powers shall be treated as exercised in that way, but if those persons purport to exercise those powers in different ways, those powers shall be treated as not exercised. In the case of a member which is a corporation, the proxy form must be executed under the corporation’s common seal or signed on its behalf by a duly authorised officer of the corporation or an attorney for the corporation. 8 Pursuant to Regulation 41 of the Uncertificated Securities Regulations 2001, the Company specifies that only those members entered in the Company’s register of members at close of business on 19 February 2018 shall be entitled to attend and vote at the meeting in respect of the number of shares registered in their names at that time. Changes in the Company’s register of members after that time shall be disregarded in determining the rights of any person to attend and vote at the meeting. If the meeting is adjourned, the time which is 48 hours (disregarding any part of a day which is not a working day) before the time fixed for the adjourned meeting shall apply for the purpose of determining the entitlement of members to attend and vote at the adjourned meeting. 9 Copies of Directors’ service agreements and letters of appointment and the rules of the Company’s share option schemes will be available for inspection at the registered office of the Company from the date of this Notice of AGM until the date of the meeting during normal business hours, and at the place of the meeting from 10.45 a.m. until its conclusion. GOOCH & HOUSEGO PLC >| G O O C H & H O U S E G O A N N U A L R E P O R T 2 0 1 7 ANNUAL REPORT SEPTEMBER 2017 Gooch & Housego PLC Dowlish Ford, Ilminster TA19 0PF, United Kingdom T: +44 (0)1460 256440 E: info@goochandhousego.com goochandhousego.com GH35_AR_Covers_A4.indd 1 28/11/2017 12:26
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