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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 8 ANNUAL REPORT SEPTEMBER 2018 Gooch & Housego PLC Dowlish Ford, Ilminster TA19 0PF, United Kingdom T: +44 (0)1460 256440 E: info@goochandhousego.com goochandhousego.com GH79_AR_Covers_A4.indd 1 01/11/2018 10:34 > 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 Corporate Governance Directors’ Report Audit Committee Report Nomination Committee Report Remuneration Committee Report Financial Statements Independent Auditors’ Report – Group and Company 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 16 22 26 27 28 30 33 36 38 39 46 52 52 53 54 55 56 57 82 83 84 85 86 94 95 GOOCH & HOUSEGO PLC ANNUAL REPORT 2018 | 01 HIGHLIGHTS HIGHLIGHTS 02 | ANNUAL REPORT 2018 Operating and Strategic Highlights • A backdrop of generally favourable market conditions in our three main sectors of Industrial, Aerospace & Defence and Life Sciences / Biophotonics. • Demand was high for critical components used in microelectronic manufacturing. Hi- reliability fibre couplers used in undersea cable networks down overall, though came back strongly in the latter part of the year. • Strategically important investments were made in order to increase capacity in industrial and medical lasers and to exploit areas of R&D identified as having high growth potential for our photonic technologies. • Considerable progress was made towards our strategic goals of further diversification and moving up the value chain, including the acquisitions of ITL and Gould Fiber Optics in August and September 2018 respectively. Financial Highlights • Revenue 11.5% higher than FY 2017, 11.1% excluding foreign exchange and acquisitions / disposals. • Adjusted profit before tax up 16.4%. • Adjusted basic earnings per share up 15.8% • £24m invested in acquisitions and capital expenditure of £7.2m. Net debt of £10.6m (c.0.5 X EBITDA) • Record year end order book of £96.1m, up 33% from 30 September 2017, 17% excluding foreign exchange and acquisitions/ disposals. GOOCH & HOUSEGO PLC HIGHLIGHTS Revenue (£m) 124.9 +11.5% 2017 112.0 Adjusted profit before tax* (£m) 18.8 +16.4% 2017 16.1 Statutory profit before tax (£m) 10.1 -19.8% 2017 12.6 Basic earnings per share (pence) 29.3 -19.5% 2017 36.4 2018 2017 2016 2015 124.9 112.0 86.1 78.7 2014 70.1 2018 2017 18.8 16.1 2016 14.2 2015 12.9 2014 11.5 2018 2017 2016 2015 2014 10.1 12.6 10.1 10.1 7.9 2018 2017 2016 2015 29.3 36.4 29.1 30.9 2014 22.5 HIGHLIGHTS Adjusted basic earnings per share* (pence) 57.2 +15.8% 2017 49.4 Total dividend per share (pence) 11.3 +10.8% 2017 10.2 Net (debt) /cash (£m) (10.6) -£25.5m 2017 14.9 2018 2017 57.2 49.4 2016 42.5 2015 39.5 2014 35.6 2018 2017 2016 2015 2014 11.3 10.2 9.0 8.2 7.2 2018 (10.6) 2017 2016 2015 2014 14.9 11.7 17.3 8.7 * adjusted figures exclude the amortisation of acquired intangible assets, impairment of goodwill, adjustments to accrued contingent consideration, exceptional items being restructuring costs, site closure costs, transaction costs, and interest on deferred consideration. ANNUAL REPORT 2018 | 03 GOOCH & HOUSEGO PLC HIGHLIGHTS HIGHLIGHTS Manufacturing locations Sales offices Glenrothes Ashford PO S St Asaph Ilminster S Norderstedt AO PO H Q FO Paris Torquay STG Fremont AO PO Moorpark Keene S Cleveland EO PO FO Bedford FO Baltimore S Virginia Shanghai S Nagoya Gooch & Housego demonstrates unparalleled capabilities in the following photonic technologies: • Acousto-optics (AO) • Electro-optics (EO) • Fibre optics (FO) • Precision optics (PO) • Systems (S) REVENUE BY CURRENCY € EUR £ GBP $ USD 04 | ANNUAL REPORT 2018 £ GBP 27.8% £34.7m 2017 £25.2m 22.5% $ USD 66.1% £82.6m 2017 £80.8m 72.1% € EUR 6.1% £7.6m 2017 £6.0m 5.4% GOOCH & HOUSEGO PLC HIGHLIGHTS HIGHLIGHTS “G&H has had another good financial year. We have been able to take advantage of generally positive market conditions and continue to execute on our long term strategy. “Our strong performance has enabled us to continue to invest in manufacturing capacity and R&D, as well as bringing complementary new technologies and customers into G&H through acquisitions. “There has been some recent gradual softening in demand growth for critical components in microelectronic manufacturing, offset by a return to strong demand growth for our fibre optics business generally, and hi-reliability fibre couplers in particular. “We remain aware of potential macroeconomic and political risks. Overall G&H has a robust order book combined with greater diversification. The Board remains confident that the Group is well positioned to continue to deliver further progress in FY2019 and beyond.” Mark Webster Chief Executive Officer Aerospace & Defence (£millions) 40.8 32.7% Industrial (£millions) 72.9 58.4% Life Sciences (£millions) 11.2 8.9% REVENUE BY SECTOR HISTORICAL REVENUE BY SECTOR (£ millions) Industrial 2018 2017 2016 2015 2014 Aerospace & Defence 2018 2017 2016 2015 2014 72.9 64.3 54.3 46.1 39.8 40.8 34.9 20.0 19.8 18.8 Life Sciences 2018 2017 11.2 9.6 2016 7.9 2015 9.0 2014 7.3 ANNUAL REPORT 2018 | 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. 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. 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 2018 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. © Crown copyright 2010 © Crown copyright 2004 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. © Crown copyright 2017 © Crown copyright 2009 ANNUAL REPORT 2018 | 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 2018 Image courtesy of ESA Image courtesy of ESA GOOCH & HOUSEGO PLC 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. Product development and design Our new group company, ITL, provides full product development, design, manufacturing and after-sale service for the commercialisation of medical diagnostic, analytical, precision electro-mechanical and laboratory instruments. SECTORS AND APPLICATIONS ANNUAL REPORT 2018 | 09 GOOCH & HOUSEGO PLC As the Group grows we are committed to continue to improve the quality of corporate governance and in September confirmed that we would apply the UK Corporate Governance code to how we run the company. As a Board we are also very aware of the value of diversity and our need to improve women’s representation at all levels. We are supportive of the approaches suggested in the Hampton-Alexander review and are committed to improve representation of women at the Board and in senior leadership positions in the Group. While we remain conscious of potential risks arising from macroeconomic challenges and the growth of global protectionism, your business enters the new financial year with a record order book and enhanced opportunities derived from the continued investment in new technologies, capabilities and routes to market. The Group is well positioned to continue to deliver in FY2019 and beyond. Gary Bullard Chairman 27 November 2018 STRATEGIC REPORT CHAIRMAN’S STATEMENT 2018 was another year of significant progress in the development of your company. Broadly favourable market conditions, combined with development programmes entering production generated another positive set of results, while we responded to unprecedented demand patterns in some of our sites. G&H delivered record revenues, adjusted profits and adjusted earnings per share in the year. The business continued to execute well on its long standing strategies of diversification and moving up the value chain, enhanced by the acquisitions made during the year of VITL Ltd (“ITL”) and Gould Fiber Optics (“GFO”). ITL will substantially increase the group’s life sciences / biophotonics presence and provide a much improved systems capability. GFO consolidates G&H’s position as a world leader in fused fibre technology and gives enhanced access to the US aerospace and defence sector. During the year G&H accelerated its transformation programme and we enter next year with an organisation aligned to our target end clients in the industrial, life-sciences / biophotonics, and aerospace and defence sectors. Our manufacturing facilities have been brought together into four groups based on their underlying technology, each under dedicated leadership. This will enable an increased focus on investment in people, plant and processes and position the company well for future growth. In successfully responding to the challenges of FY2018 an exceptional effort was required of many people. I would like to express my thanks to my fellow directors and to all employees of G&H. During the year I took over from Gareth Jones as Chairman. On behalf of the Company and his colleagues I would like to thank Gareth for his huge contribution to G&H over the many years of his leadership both as CEO and then Chairman. Andrew Boteler, Chief Financial Officer, has informed the Board that he will retire in the summer of 2019 and step down from the Board. I would like to thank Andy for the support he has given me, the Board and the company and wish him the best for the future. The company has appointed a specialist recruitment agency and has begun a search for a new Chief Financial Officer. “Strong financial performance and executing the strategy.” 10 | ANNUAL REPORT 2018 GOOCH & HOUSEGO PLC STRATEGIC REPORT CHIEF EXECUTIVE OFFICER’S STATEMENT FY2018 Performance Strategic Goals FY 2018 revenue of £124.9 million represents an increase of 11.5% over the previous year or excluding foreign exchange and acquisitions / disposals, an increase of 11.1%. Adjusted profit before tax was £18.8 million, an increase of 16.4% over the previous year. Gooch and Housego enters the new financial year with a record order book, which, at 30 September 2018, stood at £96.1 million, an increase of 33% compared to the same time last year. Excluding the impact of foreign exchange and acquisitions and disposals this represents an increase of 17%. The Company benefited from generally positive market conditions, particularly for critical components used in microelectronic manufacturing, which experienced unprecedented levels of growth. Despite a lower year overall for high reliability fused fibre products used in undersea cables, they performed well in the latter part of the year and exited with a strong order book. Strategically important investments were made in people, processes, and “best in class” capital equipment during the year, allowing us to significantly increase capacity, especially at those sites supplying critical components used in microelectronic manufacturing. G&H was able to make further investment in areas identified as having high growth potential for our photonic technologies such as the latest industrial laser systems, harsh environment sensing, unmanned aerial vehicles (“UAVs”), novel aerospace and defence programmes, space satellite communications, laser surgery and medical diagnostics. We acquired two companies in the last two months of the financial year and they have strengthened our presence in life sciences and the aerospace and defence sector. The life science company, ITL, will enable us to move further up the value chain, with a much enhanced systems capability. Gould Fiber Optics allows enhanced access for our fibre products to US aerospace and defence markets. Considerable progress has been made towards our strategic goals of further diversification and moving up the value chain. Aerospace and defence (“A&D”) and life sciences both provide a counter balance to the exposure that the industrial laser sector has to the global economic cycle. Our main customers are the tier one A&D and medical diagnostic companies, who often prefer us to provide them with sub system and system solutions, providing a strong impetus to move up the value chain. This coupled with the regulatory and compliance hurdles inherent in A&D and life sciences, provides a very robust business model with high barriers to entry. We are increasingly well placed to serve these companies. Our aim is to achieve a ‘critical mass’ in both the A&D and life sciences sectors and in an ‘ideal world’ an equal split between the three main market sectors across G&H. In large part this has been achieved in A&D, which represented 32.7% of FY 2018 revenue ( FY 2017: 31.1%). Life sciences has a smaller share of FY 2018 revenue, representing 8.9 % (FY 2017: 8.5%), but the acquisition of ITL should see life science revenue take a substantial step forward in FY 2019. Sub systems and systems now represent 25.6% of our business ( FY 2017: 22.1%). Acquisitions and Disposals Kent Periscopes, acquired in July 2016, performed well in FY2018 and have now substantially achieved their full earn out potential. StingRay Optics, acquired in February 2017, received the first part of its earn out payment, having exceeded its first performance target. We were pleased with the performance of both companies during FY 2018 and the way they have both integrated into G&H. In August and September 2018 we acquired ITL and Gould Fiber Optics respectively. “Gooch & Housego has had another good year. We were able to take advantage of generally positive market conditions and meet our financial goals. At the same time we made substantial investments in people, process and “best in class” equipment in order to increase capacity in industrial and medical lasers, invested in R&D projects identified as delivering a high return for our photonic technologies, and brought on board complementary technologies and customers through acquisitions. Considerable progress was made towards our strategic goals of further diversification and moving up the value chain.” ANNUAL REPORT 2018 | 11 GOOCH & HOUSEGO PLC STRATEGIC REPORT CHIEF EXECUTIVE OFFICER’S STATEMENT ITL is a UK based specialist in the design, development and manufacture of high quality medical devices. It enables G&H to double its life science business and move up the value chain, as all of ITL’s sales come from system based products. GFO is a US based market leading supplier of key enabling components to tier one US A&D customers. It provides a platform for G&H to obtain enhanced access for our fibre based business with Tier 1 US based aerospace & defence companies. Both acquisitions are very recent, but, so far, we are pleased with their performance and level of integration. G&H shut down and sold most of the trade and assets of its Orlando light measurement business in September 2018. It was a non-core business and delivered marginal returns and made a small loss in FY2018. Its disposal will have a limited impact on future earnings. Research and Development (“R&D”) There has been continued benefit from concentrating our R&D efforts on fewer higher return projects. During FY 2018 we introduced a record 29 new products and we expect the full value of these products to come to fruition over the next three years. Revenue generated from new products this year was £12.0 million (FY 2017: £11.1 million). Good progress has been made in the areas which have been identified as offering the highest growth potential for our photonic technologies. Microelectronic manufacturing is entering a new phase of ultra fast lasers, which allow for improved capabilities in existing areas of use and new areas, such as via drilling techniques and extreme UV lithography, which is utilised in the production of nanoelectronics. The next generation of precision lasers and laser systems are being developed with our laser manufacturer and laser system partners. We have capitalised on our expertise and knowledge gained on space laser communications to provide solutions for applications such as harsh environment sensing which utilises our ruggedised photonic technologies. Two recent examples are projects in the areas of oil pipeline security and LIDAR wind detection for wind farms. Unmanned aerial vehicles have a variety of commercial and military uses and this is an area where we see significant potential for G&H. We design, engineer and manufacture bespoke complex optical arrays, often in the IR spectrum, that form part of the imaging system contained in the UAV’s gimbal. They typically provide targeting, surveillance and LIDAR capability. communication systems for near term satellite launches. We believe there is significant potential to expand this technology into small satellite platforms for constellations and near space UAVs. We have a number of ongoing R&D defence programmes in the US and Europe, which operate under ITAR regulations or confidentiality agreements, supporting future growth in what is now a substantial A&D business. Our optical coherence tomography (“OCT”) technology dominates the retinal scanning and imaging arena. 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. Performance Improvement Programme We have built on the work done in previous years to improve efficiency, customer service and to establish a more scalable organisational model for future growth. During FY 2018 eight of our sites were 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 centre has a leader and their role is to ensure best practice is shared, there is process harmonisation and optimal allocation of resource. Kent Periscopes and StingRay Optics will form a fourth manufacturing centre, called Systems, in the new financial year. This will represent the next stage of assimilation of these relatively recent acquisitions into G&H. The two latest acquisitions, ITL and GFO, will, in time, slot into the Systems and Fibre Optic manufacturing centres respectively. In FY 2019 we will introduce three customer facing business units, which will mirror our traditional market sectors of Industrials, A&D and Life Sciences / Biophotonics. Each of the business units will have a leader who will be responsible for the sector’s strategy and longer term planning. They will work closely with the four manufacturing heads to ensure our production resources match the strategy and longer term planning. This new approach will be underpinned by improved business systems. In the new financial year we will enter the second year of a phased introduction of new financial and business systems. Markets and Applications Industrial 58.4% of FY18 revenue Our space communication group has gone from strength to strength with European and UK space agency funded work as well as substantial commercial contracts to provide satellite The industrial division is composed of a diverse range of industrial applications aligned to our world class photonic technologies, including microelectronic manufacturing, semiconductor 12 | ANNUAL REPORT 2018 GOOCH & HOUSEGO PLC STRATEGIC REPORT CHIEF EXECUTIVE OFFICER’S STATEMENT manufacturing and test, remote sensing, metrology and optical communications. The acquisition of GFO provides enhanced access for our fibre based business to tier one US A&D companies. Our industrials division grew by £5.3 million or 7.8% compared to the previous year. For reporting purposes scientific research is now contained within the industrial sector, which is consistent with the previously discussed business units. Scientific research is a small, but prestigious and profitable area for G&H. The two traditionally largest areas of the industrial division, industrial lasers and high reliability fused fibre products for undersea cables, performed very differently during FY 2018. There was an unprecedented level of demand for critical components in precision lasers used for microelectronic manufacturing. This demand was driven, in large part, by the next generation of smart phones and tablets and the change in manufacturing technology required to make them. The technology is dependent on the latest solid state lasers being able to deliver a high level of precision. We worked closely with the laser manufacturers and laser system suppliers to meet demand and have, through a combination of investment and reorganisation of resources, made available substantial extra capacity for these products going forward. The ongoing need for ever more data from government, industry and the consumer continues to drive a need for more telecommunication capacity. This is especially true for undersea cable networks where well-capitalised ‘Silicon Valley’ technology companies are sponsoring installation of their own dedicated hardware. Our ultra high- reliability fused fibre products are used in repeaters that are a key part of the undersea cable networks. Our business in high-reliability fused fibre products underperformed in the year. This was due to delays in deployment of planned undersea networks in the first half of the year. The business though came back strongly in the latter part of the year, as the planned networks moved into their deployment phase and we have experienced good demand led growth for hi-reliability fused fibre products, with a robust order book, as at 30 September 2018. Aerospace & Defence 32.7% of FY18 Group Revenue A&D grew year on year by £5.9 million or 17.0%. This was due to a combination of organic growth and the full year impact of the StingRay Optics acquisition. G&H is now able to bring a wide range of photonic capabilities together that very much represent the “direction of travel” in this sector. These include target designation, range finding, ring laser and fibre optic gyroscopic 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 US and European A&D companies. Space satellite communication is undergoing a technological revolution. The use of fibre optic lasers to transmit information means the satellite communication systems are more efficient and robust, as well as 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 and near space UAVs, as part of a communications network. The investment we have made in this segment allows us to contribute at the forefront of these developments globally. Our Moorpark site, which has historically been profitable, remains key to our aerospace and defence business. However, it has recently struggled to grow its business during some difficult times in the commercial aerospace sector which has seen price pressure from a key customer. Whilst recent investment, improvements in the site’s operational set up, the adoption of LEAN manufacturing principles, and diversification of its customer base are moving the site in a favourable direction, an impairment of £2.7m has been recognised in respect of the carrying value of the goodwill relating to this site. Life Sciences/Biophotonics 8.9% of FY18 Group Revenue The principal applications are in 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 segment particularly in ophthalmology, prostate and cosmetic surgery and has significant potential to be exploited beyond these current areas of use. The acquisition of ITL, in August 2018, has the potential to be transformative for G&H in this sector. It will double the life science / biophotonics revenue and their greater electronic, software and mechanical engineering capability will substantially enhance our ability to present our photonic technology as part of a sub- system or system to our medical diagnostic customers. There is potential for photonic technology to be used in minimally invasive surgery, endoscopy and robotic surgery and this segment remains an area where G&H will continue to invest in R&D and to look for further strategic acquisitions. ANNUAL REPORT 2018 | 13 GOOCH & HOUSEGO PLC STRATEGIC REPORT Appointment of Non-Executive Chairman and CFO succession In December 2017 we announced that Gary Bullard was to be appointed to the Board at the Annual General Meeting in February 2018. He was duly appointed and has had a successful period in the post. Gareth Jones stepped down as Non-Executive Chairman after 37 years of loyal service with the Company. On behalf of myself and G&H, I would like to thank Gareth for his wisdom and guidance as Chairman and for his immense contribution to G&H’s growth as a business over many years. All his friends and colleagues at the Company wish him well in the future. After more than 10 years as CFO and some 12 years in G&H, Andy Boteler has decided to step down as a public company executive. Andy has been an important part of G&H’s success over many years and his deep knowledge of the business, energy and considerable ability will be missed. Everyone at G&H wishes him well in his future endeavours. As part of a managed succession process, a specialist recruitment agency has been appointed. Andy has committed to stay on until we have a successor in place. Outlook G&H has had another good year. We were able to take advantage of generally positive market conditions and meet our financial goals. At the same time we made substantial investments in people, process and “best in class” equipment in order to increase capacity in industrial and medical lasers, invested in R&D projects identified as delivering a high return for our photonic technologies and brought on board complementary new technologies and customers through acquisitions. Considerable progress was made towards our strategic goals of diversification and moving up the value chain. We will continue an active policy towards creating a more diverse and balanced business by building “critical mass” in A&D and life sciences / biophotonics, through a mix of investment in R&D and acquisitions. G&H is committed to making further investment in R&D in target areas that we believe represent the highest growth potential for our photonic technologies. These include the latest industrial laser systems, harsh environment sensing, UAVs, novel A&D programmes, space satellite communications, laser surgery and medical diagnostics. We will continue to execute on our performance management programme with the aim of improving operational efficiency, customer service and putting in place a scalable organisational model that will provide a platform for future growth. The introduction, in FY 2019, of the fourth manufacturing centre, based around systems and three customer facing business units, will be the next step in this process. There has been some recent gradual softening in demand growth for critical components used in microelectronic manufacturing, offset by a return to strong demand growth for our fibre optics business generally and hi-reliability fibre couplers in particular. We remain aware of the current potential macroeconomic and political risks. Overall G&H has a robust order book, combined with greater diversification. The Board remains confident that the Company is well positioned to deliver further progress in FY 2019 and beyond. Mark Webster Chief Executive Officer 27 November 2018 14 | ANNUAL REPORT 2018 Trade show exhibits at Photonics West, San Francisco and VISION, Stuttgart GOOCH & HOUSEGO PLC ANNUAL REPORT 2018 | 15 GOOCH & HOUSEGO PLCTITLE IN HERE STRATEGIC REPORT MARKET OVERVIEW Industrial Applications, Products and Markets 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. Microelectronics materials processing represents the largest end market and has grown strongly driven by 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 recent years. Metrology for laser-based, high-precision, non-contact measurement systems. The Group principally supplies its precision optics and acousto-optics into this market. Customers are typically blue-chip OEMs. 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. 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. Scientific Research the largest proportion being nuclear fusion research & 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 very large 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 16 | ANNUAL REPORT 2018 fusion and 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. Financial Performance • Our overall Industrial business grew by 7.8% in absolute terms during the year, with revenues of £72.9 million, compared with £67.6 million last year. Excluding foreign exchange and acquisitions / disposals this represented a 12.6% increase. This growth was driven by a combination of our industrial laser, semi-conductor and scientific research sub divisions. Growth in this sector was offset by a reduction in telecommunications revenues as a result of a pause in our customers’ ordering patterns earlier in FY2018, which have now recovered, with a healthy order book at the year end, demonstrating the benefits of diversification. Revenue from the Group’s industrial laser and semi-conductor business segments growth was driven by high demand for precision lasers & inspection equipment used in microelectronic manufacturing. Demand for the traditional Q Switch grew in 2018 and represented 15.5% of total group revenue (2017: 14.0%). • Adjusted operating profit for the Industrial division was marginally higher at £12.3 million, compared with £12.2 million last year. Percentage operating margin fell as a result of the lower overhead absorption in our optical communications segment. 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 FY2018 Gooch & Housego introduced 12 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 requiring complex design and engineering input and for a number of our products survivability in harsh environments. • To expand into and develop new geographical markets offering 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. The Company will continue to seek high quality acquisition opportunities as a route to grow its industrial business. GOOCH & HOUSEGO PLC Revenue (£millions) 72.9 +7.8% 2017 67.6 Adjusted Operating Profit (£millions) 12.3 +0.8% 2017 12.2 Percentage of Revenue 58.4% 2017 60.4% STRATEGIC REPORT Image courtesy of ESA ANNUAL REPORT 2018 | 17 GOOCH & HOUSEGO PLC STRATEGIC REPORT MARKET OVERVIEW Aerospace & Defence Applications, Products and Markets Financial Performance 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. 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. • A&D revenue was £40.8 million, up 17.0% on last year, driven by organic growth and benefitting from the full year effect of the StingRay acquisition in 2017 and a small benefit from the Gould acquisition in 2018. Excluding foreign exchange and acquisitions / disposals our A&D sector grew by 12%. These results were driven by a strong performance from our periscopes & sighting systems, opto-mechanical sub systems and target designation & range finding businesses. These results reinforce our belief that this division represents a growth opportunity for Gooch & Housego, as optical technologies continue to be increasingly deployed in this market. 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. 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, UK 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 a number of blue chip defence companies. Opto-mechanical sub systems for Unmanned Aerial Vehicles. 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. • Operating margins in this sector increased reflecting the higher volume and strong margins achieved by our systems & sub system based businesses in particular. Growth Strategy • To continue to focus energy and investment on moving from being a components supplier to a sub-systems provider. Our customers are changing their business models and are looking for companies such as Gooch & Housego that are capable of providing broader solutions. • To continue to invest in manufacturing processes and engineering in order to meet the exacting expectations of this sector, which are 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. • To introduce a greater number of new products, including products which look to fill a “market need”, in a managed and cost effective way, as well as projects initiated by our customers. During 2018 Gooch & Housego introduced 16 new products that address its aerospace & defence market. 18 | ANNUAL REPORT 2018 © Crown copyright 2001 GOOCH & HOUSEGO PLC Image courtesy of ESA © Crown copyright 2013 STRATEGIC REPORT Revenue (£millions) 40.8 +17.0% 2017 34.9 Adjusted Operating Profit (£millions) 5.7 +33.5% 2017 4.3 Percentage of Revenue 32.7% 2017 31.1% ANNUAL REPORT 2018 | 19 GOOCH & HOUSEGO PLC STRATEGIC REPORT MARKET OVERVIEW Life Sciences / Biophotonics Applications, Products and Markets Financial Performance • In 2018 life sciences / biophotonics revenue was up by 17.2% compared to the prior year. Excluding foreign exchange and acquisitions / disposals this division was broadly flat, with the majority of the growth being driven by the acquisition of ITL. • On the back of this increase in volume, adjusted operating margins in this sector increased 61.5% to £1.6 million. Growth Strategy • To continue to invest in longer term R&D projects, to develop the existing portfolio of products and to ensure that they remain competitive. During 2018 Gooch & Housego introduced one new product that addresses its life sciences / biophotonics market. • Where appropriate to sell the full range of our life sciences / biophotonics products to a wider range of customers. • To make strategic acquisitions that are synergistic and complementary to our existing life sciences / biophotonics business, to help us build critical mass in this sector. Gooch & Housego will continue to seek acquisition opportunities. 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. 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. Microscopy modern, laser-based techniques are revolutionising the field of microscopy. Gooch & Housego’s acousto-optic devices are used to control the multiple laser sources and analyse complex images. The end customers are typically medical equipment manufacturers. Systems following the acquisition of ITL, G&H now has a range of capabilities including full product development, design, manufacturing and after sale service for the commercialisation of high-quality medical diagnostic, in vitro diagnostic (IVD) devices, analytical, precision analytical, electro-mechanical and laboratory instruments. The growth strategy for life sciences / biophotonics mirrors that for aerospace & defence in many respects. This is particularly true in terms of the high growth potential of our photonic technologies and the desire of the customer base to “pull” Gooch & Housego up the value chain. 20 | ANNUAL REPORT 2018 GOOCH & HOUSEGO PLC Revenue (£millions) 11.2 +17.2% 2017 9.6 Adjusted Operating Profit (£millions) 1.6 +61.5% 2017 1.0 Percentage of Revenue 8.9% 2017 8.5% STRATEGIC REPORT ANNUAL REPORT 2018 | 21 GOOCH & HOUSEGO PLC STRATEGIC REPORT FINANCIAL AND OPERATING REVIEW Performance Overview Revenue The business has once again delivered strong and profitable growth. Group revenue for the year was a record £124.9million. This represents an increase of £12.9 million, or 11.5% over the previous year of £112.0 million. In August and September 2018 Gooch & Housego acquired ITL and the trade and assets of Gould Fiber Optics respectively, which, combined, contributed £2.5 million to group revenue in the year. Additionally, the full year incremental benefit of our 2017 acquisition, StingRay Optics LLC, was £3.0m. In September 2018, G&H sold the majority of the trade and assets of its Orlando, Florida facility. In FY 2018 the Orlando business contributed £5.0 million to Group revenue with marginal profitability. The cost of closing the site, net of disposals proceeds was £1.6m. Our organic revenue, net of acquisitions and disposals, was up by 6.6%. Excluding foreign exchange and acquisitions / disposals revenue growth was 11.1%, a higher rate of growth than the previous year. During 2018, G&H invested £6.0 million in property, plant and equipment and £24.0 million in acquisitions. This has resulted in the business moving into a net debt position of £10.6 million as at 30 September 2018 compared to a net cash position of £14.9 million, as at 30 September 2017. This represents approximately 0.5 X EBITDA. In the financial year under review, adjusted operating profits increased by £2.7 million to £19.1 million (2017: £16.4 million). At a percentage margin level, adjusted operating margins were 15.3%, compared to 14.6% in 2017. 2018 2017 Year ended 30 September £’000 % £’000 % Industrial 72,881 58.4% 67,586 60.4% Aerospace & Defence 40,789 32.7% 34,860 31.1% Life Sciences / Biophotonics 11,213 8.9% 9,570 8.5% Group Revenue 124,883 100% 112,016 100% In our Industrial segment, revenue grew by 7.8%, in absolute terms, from £67.6 million last year to £72.9 million this year. On a constant currency basis this sector increased by 12.6%. Revenue in our aerospace & defence business increased by 17.0% in absolute terms from £34.9 million to £40.8 million. Excluding the acquisition of Gould Fiber Optics and the full year impact of our 2017 acquisition, A&D revenue increased by 7.7%. Excluding foreign exchange and acquisitions / disposals this sector increased by 12.0% in the year. Life sciences / biophotonics revenue increased by 17.2% in absolute terms from £9.6 million to £11.2 million. Excluding the acquisition of ITL, life science / biophotonics revenue fell by 6.2%. Excluding foreign exchange and acquisitions / disposals this sector was broadly flat year on year. Group Earnings Performance All amounts in £’000 Adjusted Reported Year ended 30 September 2018 2017 2018 2017 Operating profit 19,100 16,406 10,796 13,278 Net finance costs (343) (295) (683) (676) Profit before taxation 18,757 16,111 10,113 12,602 Taxation (4,677) (4,059) (2,893) (3,710) Profit for the year 14,080 12,052 7,220 8,892 Basic earnings per share (p) 57.2p 49.4p 29.3p 36.4p Reconciliation of Adjusted Performance Measures Operating profit Net finance costs Taxation Earnings per share Year ended 30 September £’000 2018 £’000 2017 £’000 2018 £’000 2017 £’000 2018 £’000 2017 Reported 10,796 13,278 (683) (676) (2,893) (3,710) Amortisation of acquired intangible assets Site closure Impairment of goodwill Charge/(credit) in respect of accrued contingent consideration Restructuring costs Transaction fees Interest on deferred consideration Tax credit on US deferred tax due to rate change 2,141 1,569 2,708 417 864 605 – – 2,202 – 615 (615) 536 390 – – – – – – – – – – – – – – 340 – 381 – (276) (359) – – (169) (116) – (864) (168) – – – (105) (76) – – Adjusted 19,100 16,406 (343) (295) (4,677) (4,059) £’000 2018 29.3p 7.6p 4.9p 11.0p 1.7p 2.8p 2.0p 1.4p (3.5p) 57.2p £’000 2017 36.4p 8.3p – 2.5p (2.5p) 1.8p 1.3p 1.6p – 49.4p 22 | ANNUAL REPORT 2018 GOOCH & HOUSEGO PLC STRATEGIC REPORT FINANCIAL AND OPERATING REVIEW The Group adjusted profit before tax amounted to £18.8 million (2017: £16.1 million) and represented a margin of 15.0%. Statutory profit before tax was £10.1 million compared with £12.6 million last year. The adjusted effective rate of tax was 24.9% (2017: 25.2%). The reduction in the rate was due to US tax reforms, offset to a large extent by a greater proportion of the group’s profits being subject to state taxes in the US. The effective rate of tax of 28.6% (2017: 29.4%) was higher than the adjusted effective rate because of the effect of the goodwill impairment, which is not subject to tax, and which was partially offset by the one-off gain on re-measurement of the US deferred tax liabilities following the reduction of the US tax rate. 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. Adjusted earnings per share (EPS) increased from 49.4p in FY2017 to 57.2p in FY2018. Reported basic EPS was 29.3p compared with 36.4p last year. 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, impairment of goodwill, adjustments to contingent consideration, costs associated with the acquisition and disposal of subsidiary companies, and the interest charge on deferred consideration. Research and Development (R&D) Gooch & Housego continues to invest in R&D and regards this as fundamental to the continued growth of the company. There were a record 29 product releases in 2018, together with 4 new patents granted. Expenditure on R&D in FY2018 increased by 2.4% from £8.6 million to £8.8 million. R&D expenditure represented 7.1% of revenue (2017: 7.7%). The Group capitalised £0.6m of development expenditure (2017: £0.7 million). Operations In September 2018 G&H shut down its Orlando, Florida, light measurement business. Most of the trade and assets of the business have been sold. It was a non-core business and in the recent past had delivered marginal returns. This business made a small loss in FY 2018. The cost of closing this facility, net of the sale of the majority of the trade & assets is £1.6 million in 2018. The Orlando property is owned by G&H and is being marketed for sale in FY2019. It is expected that following the sale of the property, the overall site closure will be cash neutral. Both the closure costs and any future profit on sale of the building will be treated as adjusting items. As reported in 2017, the Company won its legal dispute with the landlord of its Fremont facility, as a result of which, a Californian court awarded G&H in the region of $2 million in damages plus costs, arising from the landlord’s non-performance in respect of the lease. The landlord has commenced an appeal against this ruling and whilst legal opinion remains confident that the original ruling will be upheld, no recognition of the damages award has been made in this set of financial statements. Any net benefit will be treated as an exceptional item. As part of the plan to position G&H for future growth the business is in the process of being reorganised. As outlined in our FY2017 Annual Report, our manufacturing sites have been organised into manufacturing centres. In addition to the three areas of technical expertise, namely Acousto Optic / Electro Optic, Precision Optics and Fibre Optics announced in FY2017, G&H is also adding Systems as the fourth manufacturing centre, announced in FY2018. 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. In FY2018 the business has also announced three business units that mirror our traditional market sectors of Industrial, A&D and Life Sciences / Biophotonics. These business units will provide a market facing focus, tailored to the specific needs of these discrete and often very diverse market sectors. The fourth manufacturing centre and the three new business units will be introduced in the new financial year. 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 August 2018 G&H acquired ITL. This acquisition expands the Company’s presence in the life sciences sector and further enables G&H’s move into system based products. Founded in 1977, ITL is a UK based specialist in the design, development and manufacture of high quality medical and in vitro diagnostic (IVD) devices. ITL is a market leading supplier with an established group of long standing multi-national customers. It provides full product development, design, manufacturing and after sale service for the commercialisation of medical diagnostic, analytical, precision electro-mechanical and laboratory instruments. ITL is headquartered in Ashford, Kent, with manufacturing sites in Ashford and Shanghai, China, plus a US client servicing capability based in Virginia, USA. This acquisition enables G&H to take a significant step towards meeting its strategic objectives, including doubling the revenue of its life science business and accelerating ANNUAL REPORT 2018 | 23 GOOCH & HOUSEGO PLC STRATEGIC REPORT FINANCIAL AND OPERATING REVIEW the Company’s move up the value chain, with all of ITL’s sales coming from system based products. ITL’s core group of electronic, software and mechanical engineers, provides an enhanced platform on which G&H can expand its systems capabilities. Over time there are a number of potential benefits that will accrue from ITL becoming part of G&H. These include leveraging G&H’s commercial footprint in the US, China and Far East and combining the Company’s photonic expertise with ITL’s high level systems capability in order to provide a more attractive product offering to G&H’s medical diagnostic customer base. Acquired in quarter 4, ITL has performed well, contributing £2.2 million to group revenue and £0.5 million in profit before tax in the year. In September 2018 G&H acquired the trade and assets of Gould Technology LLC, trading as Gould Fiber Optics. This acquisition strengthens G&H’s position as the world leader in fused fibre optic technology and provides enhanced access to strategic US aerospace and defence customers. Founded in 1978 and headquartered in Baltimore, MD, USA, GFO is a specialist in the design, development and manufacture of fibre optic components and sub systems. GFO is a market leading supplier of key enabling components into tier 1 US Aerospace and Defence customers. The GFO product range is highly complementary to that of G&H. Whilst G&H is the leading manufacturer of high reliability undersea fused fibre optic components, together with a strong presence in the life sciences and fibre laser markets, GFO specialises in the supply of polarisation maintaining (“PM”) fibre components to the US defence market. As GFO was acquired very late in the financial year its contribution to the 2018 results has been minimal, adding circa £0.3 million to group revenue and a marginal contribution to profit. This acquisition enables G&H to take another step towards meeting its strategic objective of further diversification in its core markets. GFO brings the technology and routes to market required for G&H to access the US aerospace and defence fibre optic market. In turn G&H’s much larger US salesforce/business development group and the combined broader based product portfolio should provide the platform for greater expansion within this sector. As a result of an excellent trading performance in 2018, Kent Periscopes has substantially achieved its full earn out potential. Consequently, the provision for a proportion of this payment previously released in 2017, has been charged to the income statement for the current year. Non Trading Items Restructuring costs of £0.9 million (FY2017: £0.5 million) related to the legal dispute associated with the re-location of our Palo Alto facility to Fremont and to restructuring costs arising from the re-organisation of the manufacturing centres and the introduction of the customer facing business units. 24 | ANNUAL REPORT 2018 Transaction costs of £0.6 million relate to the acquisition of ITL and Gould Fiber Optics. Site closure costs relate to the closure of the Company’s Orlando facility. These comprise inventory write off costs and personnel expenses, net of the proceeds received. Provision of contingent consideration of £0.4 million related to the Kent Periscopes acquisition meeting its full earn-out. As part of its annual review of the carrying value of goodwill, the Board has taken the decision to impair the goodwill of the General Optics acquisition. General Optics, now referred to as Gooch & Housego Moorpark, was acquired in October 2008 for a consideration of $21m and, prior to the impairment, the carrying value of the associated goodwill was £6.4m. Over the last ten years this acquisition has played a vital role in Gooch & Housego’s diversification strategy, by providing the knowledge and routes to market required for the Group to become a credible player in the Aerospace and Defence market. However, on a stand-alone basis, Moorpark has recently struggled to grow its business during some difficult times in the commercial aerospace sector which has seen price pressure from a key customer. Whilst, recent improvements in the site’s operational set up, the adoption of LEAN manufacturing principles, and diversification of its customer base, are moving the performance of Moorpark in a favourable direction, an impairment charge of £2.7m has been recognised in relation to the carrying value of the Moorpark goodwill. Balance Sheet The Group’s total equity at the end of the year was £107.8 million, an increase of £9.7 million over the prior year. This increase comprised £4.6m from retained earnings, £2.7m from issues of share capital and a net increase of £2.4m from foreign exchange and other movements. Additions to property, plant and equipment totalled £6.0m (excluding acquisitions). The main additions related to investment in plant and machinery to deliver the capacity requirements in 2018. Working capital was 27.4% of revenue in the current year compared to 19.2% in 2017, due to higher inventory levels required to cope with the volume increase and a heavy weighting of shipments towards the end of the financial year driving up accounts receivable. This metric has also been affected by the two acquisitions and one site closure in the later part of the year. Excluding these the working capital was 24.6%. Inventory at year end was £24.4 million, an increase of £3.4 million over the prior year. Excluding the impact of the inventory attributable to the acquisitions and site closure, the underlying inventory increased by £2.3 million, or 10.7%, in the year. This increase is reflective of the increased activity in the year. Trade receivables at year end were £32.2 million, an increase of £11.7 million over the prior year. Excluding the impact attributable to the acquisitions and site closure, the underlying receivables GOOCH & HOUSEGO PLC STRATEGIC REPORT FINANCIAL AND OPERATING REVIEW increased by £8.7 million, or 42.6%, in the year. This increase was due a heavier than normal weighting of shipments in Q4. There has been good cash collection post year end. an increase of 10.8%. The final dividend, if approved, will be payable on 1 March 2019 to shareholders on the Company’s share register as at the close of business on 25 January 2019. Cash balances at 30 September 2018 were £19.4 million, compared with £26.4 million in the prior year. Net cash flows from operating activities totalled £9.2 million, compared with £17.6 million last year, reflecting a cash generated from operations to adjusted operating profit rate of 62.6% (2017: 119%) as a result of the increase in the working capital position. During the year the business moved from a net cash position of £14.9 million to a net debt position of £10.6 million, as a result of investing £24.0 million in the acquisitions and £6.0m in property, plant and equipment. In August 2018 G&H re-financed its banking facilities with its existing bankers, Natwest. The new arrangement, set for a three year term, comprises a committed $40 million revolving credit facility and an uncommitted $20 million accordion facility. Movement in Net Cash / (Debt) All amounts in £m Gross Gross Net Cash Debt Cash / (Debt) At 1 October2017 Operating cash flows Debt drawdown 26.4 20.7 17.3 Acquisitions / (disposals) (23.6) Net capital expenditure Working capital Interest, tax and dividends Exchange movements At 30 September 2018 Order Book (7.2) (8.8) (5.7) 0.3 19.4 (11.5) – (17.3) (0.4) – – – (0.8) (30.0) 14.9 20.7 – (24.0) (7.2) (8.8) (5.7) (0.5) (10.6) As at 30 September 2018, the Group order book stood at £96.1 million, compared to £72.1 million at the end of the 2017 financial year, a 33% increase. The net effect of the acquisitions and disposal added £10.3 million to the order book. Excluding foreign exchange and acquisitions / disposals the order book was 17% higher. The book to bill ratio for the business as a whole was 0.95 (six month rolling average) as at 30 September 2018 (2017: 1.08). This partly reflects the strong shipments in Q4. Staff The Group workforce increased from 823 at 30 September 2017 to 1,007 at the end of September 2018, an increase of 184. This is a net position and therefore reflects both the work the business has done in driving efficiency improvements and the additional headcount that has come from the recent acquisitions and investment in capacity. Dividends The Directors propose a final dividend of 7.1p per share making a total dividend per share for the year of 11.3p (2017: 10.2p), 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: Total revenue growth At actual exchange rates At constant exchange rates 2018 12% 16% 2017 30% 19% 2016 9% 3% 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) 2018 40.8 11.2 2017 34.9 9.6 2016 20.0 7.9 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 acquisition, StingRay Optics LLC, combined with a small contribution from Gould Fiber Optics in 2018. Net (debt) / cash analysis Net (debt) / cash (£m) 2018 (10.6) 2017 14.9 2016 11.7 In order to balance business risk with the investment needs of the Company, management closely monitors and manages net cash/ (debt). This year, following the acquisition of ITL and Gould Fiber Optics and the investment in capital assets the net cash reduced from a net cash position of £14.9 million to a net debt position of £10.6 million. This represents a Net Debt : EBITDA ratio of c. 0.5. Earnings per share (EPS) 2018 2017 Adjusted diluted EPS (pence) 56.5p 48.5p 2016 41.7p As a result of a strong trading performance, the business has been able to deliver growth in adjusted diluted EPS of 16.5%, from 48.5p to 56.5p in 2018. ANNUAL REPORT 2018 | 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 2018, Gooch & Housego grew its business in the areas of: • Industrial lasers • Semi-conductors b) Aerospace & Defence. • Acquisition of Gould Fiber Optics c) Life Sciences • Acquisition of ITL 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 • Further investment in systems based R&D projects • Acquisition of ITL Organic Research and Development To leverage Gooch & Housego’s world leading products, technologies and capabilities to develop innovative new products. Progress • In 2018 the company’s organic research & development programmes have delivered a record 29 new products. In addition, 4 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 2.4% in 2018. 26 | ANNUAL REPORT 2018 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 There is an ongoing risk of loss of market This is a key area of focus for the G&H management team. Fundamental to mitigating the share or price erosion due to the activities effects of our competitors is to maintain our product quality and on-time delivery performance of competitors in our market places. to ensure our customers’ expectations are fulfilled. This could lead to a reduction in revenue and profitability. Our significant investment in R&D enabled us to launch 29 new products during FY2018. 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 Our people are at the heart of our business. We maintain development and reward schemes to retaining and developing its highly skilled encourage individuals to play a long term role in the future development of the Group. management team and workforce in order to achieve its strategic objectives. CAPACITY MANAGEMENT Succession planning is reviewed by the senior management team on a regular basis. Recent market trends have led to There has been continued management focus on increasing efficiency during FY18 in order to unprecedented demand for certain products increase capacity. The grouping of our sites into manufacturing centres is expected increase which has exceeded the capacity of certain of efficiency going forward. our facilities during FY18. We have continued to invest in machinery and people. Significant progress has again been made in increasing capacity at strategically important plants. GLOBAL ECONOMIC TRENDS Adverse changes in the major markets in which the Group operates can have a significant impact on the Group’s performance. BREXIT Various Brexit scenarios could affect the group’s financial position, supply chain and people. US / CHINA TARIFFS 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 33% higher than the previous year, including the impact of acquisitions and disposals. Our Brexit steering group continually monitors the evolving impact of Brexit and oversees our response. Tariffs levied by the US and China could affect our sales and margins in certain markets. Our US/ China tariff steering group continually monitors progress and takes mitigating action where necessary, such as moving some production from our US to UK sites. The strategic report has been approved by the Board of Directors and signed on its behalf by: Mark Webster Chief Executive Officer 27 November 2018 ANNUAL REPORT 2018 | 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 2018 GOOCH & HOUSEGO PLC BOARD OF DIRECTORS Non-Executive Directors GOVERNANCE Gary Bullard Non-Executive Chairman (Appointed 21 February 2018) Gary previously held senior management positions, including sales and marketing roles, at IBM and BT Group plc was a non-executive director of Chloride Group plc. Gary most recently held the position of President of Logica UK until October 2012 and was a member of the Executive Committee of Logica plc. Gary is a non–executive director of Spirent Communications PLC and Rotork PLC. He is also founder and CEO of Catquin Limited and Chairman of New Model Identity Limited. Gary is a member of the Nomination and Remuneration Committees of the Gooch & Housego Board. 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 2018 | 29 GOOCH & HOUSEGO PLC GOVERNANCE CORPORATE GOVERNANCE Introduction The Board is accountable to shareholders and is committed to the highest standards of corporate governance. To this end, the company adopted the UK Corporate Governance Code (2016) during the year. The Code is available to download at www.frc.org.uk Gooch & Housego PLC adopted the code in September 2018 since when it has complied with the code, save that it was not in compliance with the following provision: Code Provision E1.1 states that the senior independent director should attend sufficient meetings with a range of major shareholders to listen to their views in order to help develop a balanced understanding of the issues and concerns of major shareholders. The senior independent director has not met with shareholders during the year, although the board believe the level of dialogue with shareholders during the year has been appropriate. The Chief Executive and Chief Financial Officers have regular meetings with the shareholders and following his appointment during the year, the Chairman also met with a number of key shareholders. All of the non executive directors receive a report prepared by our brokers summarising the shareholder feedback from the half and full year investor roadshows. The senior independent director was available at the annual general meeting and we will engage with shareholders in FY19 to determine if individual meetings are desired. How we govern the company The Board leads the Group’s governance framework. It is responsible for setting the strategic targets for the Group, monitoring progress made, approving proposed actions and for ensuring that the appropriate internal controls are in place and that they are operating effectively. The Board is assisted by three principal committees (Audit, Nomination and Remuneration) each of which is responsible for dealing with matters within its own terms of reference, which are available on the company’s web site. The Board 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 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. The terms of appointment of the Directors are available for inspection during business hours at the registered office of Gooch & Housego PLC and are also be available at the AGM. 30 | ANNUAL REPORT 2018 All the non-executive Directors are considered by the Board to be independent of management and free of any relationship which could materially interfere with the exercise of their independent judgement. The Nomination Committee is responsible for approving appointments to the board. The board’s policy is to appoint the highest calibre individuals regardless of an individual’s background, race or gender. The board has not set any specific objectives in relation to diversity, but understands and recognises the benefits that diversity can bring. Roles and responsibilities There is a documented clear division of responsibilities between the Chairman and the Chief Executive Officer to ensure that there is a balance of power and authority between leadership of the Board and executive leadership. All Directors are entitled to seek independent, professional advice at the Company’s expense in order to discharge their responsibilities as Directors. Gooch & Housego PLC maintains appropriate directors’ and officers’ insurance cover. Board activities Day to day responsibility for the running of the Company is delegated to executive management. However, there are a number of matters where, because of their importance to the Group, it is not considered appropriate to do this. The Board therefore has a documented schedule of matters reserved for its decision. This schedule is available on the company’s web site. There are typically 8 board meetings a year. At least once annually, the Board meets at one of Gooch & Housego’s locations other than its head office in Ilminster. This allows the Board, particularly the non-executive directors, the opportunity to gain a deeper understanding of other Gooch & Housego businesses and to meet local staff. Meetings between the non-executive directors, without the executive directors present are scheduled in the Board’s annual programme. These meetings are encouraged by the Chairman and provide the non-executive directors with a forum in which to share experiences and to discuss wider business topics, fostering debate in Board and committee meetings and strengthening working relationships. The Board has established a procedure for directors, if deemed necessary, to take independent professional advice at the Company’s expense in the furtherance of their duties. The Chairman ensures that the Board is kept properly informed and is consulted on all matters reserved to it. Board papers and other information are distributed in a timely fashion to allow directors to be properly briefed in advance of meetings. In accordance with best practice, the Chairman addresses the developmental needs of the Board as a whole, with a view to GOOCH & HOUSEGO PLC GOVERNANCE CORPORATE GOVERNANCE further developing its effectiveness as a team, and ensures that each director refreshes and updates his or her individuals skills, knowledge and expertise. A formal, comprehensive and tailored induction is given to all non-executive directors following their appointment, including access to external training courses, visits to key locations within the Group and meetings with members of the senior management team. Peter Bordui is the Senior Independent Director. His role includes providing a sounding board for the Chairman and acting as an intermediary for the non-executive directors, where necessary. The Board believes that Peter has the appropriate experience, knowledge and independence to continue this role. Board meeting attendance is presented in the following table. Executive Directors Mark Webster Andrew Boteler Alex Warnock Non-executive Directors Gary Bullard Peter Bordui Brian Phillipson David Bauernfeind Gareth Jones 8/8 8/8 8/8 6/6 8/8 8/8 8/8 3/3 Appointed 21 February 2018 Retired 21 February 2018 Maintaining a dialogue with shareholders The Chairman ensures that the Board maintains an appropriate dialogue with shareholders. The Chief Executive Officer and the Chief Financial Officer regularly meet with institutional investors to discuss strategic issues and to make presentations on the Company’s results. In addition to the full and half year results, the company publishes Regulatory News Service announcements through the London Stock Exchange. The Company’s web site contains an archive of information on the Company’s history, leadership, governance, financial results, dividend history and up to date share price information. Although the non-executive directors are not formally required to meet the shareholders of the Company, their attendance at the Annual General Meeting and at presentations of the interim and annual results is encouraged. Board effectiveness led by the Senior Independent Director, Peter Bordui. The Senior Independent Director annually arranges a meeting of the non-executive directors to appraise the Chairman’s performance. Due to appointment of Gary Bullard on 21 February 2018, this review did not take place during the year ended 30 September 2018. A first review of Gary’s performance will take place in the year ending 30 September 2019. 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. Board Committees The Board has established a number of committees to assist in the discharge of its duties. The formal terms of reference for the principal committees can be found on the company’s web site. The Board has three formally constituted committees, the Audit committee, the Remuneration committee and the Nomination committee. A report on the activities of each committee follows later in this report. Accountability 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. 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. 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. The Chairman is responsible, with assistance from the Nomination Committee, for ensuring that the Company has an effective Board with a suitable range of skills, expertise and experience. Every year, a performance evaluation of the Board is carried out. This year, the evaluation commenced in September 2018, and was The Audit Committee is responsible for reviewing the effectiveness of the Company’s financial reporting, internal control policies and procedures for the identification, assessment and reporting of risk. It is also responsible for Advising the Board on whether the Committee believes the Annual Report taken ANNUAL REPORT 2018 | 31 GOOCH & HOUSEGO PLC GOVERNANCE CORPORATE GOVERNANCE 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. 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. In FY2019, an internal audit function will be introduced. 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. Remuneration The Remuneration Committee is responsible for setting remuneration packages of the Executive Directors which are designed to promote the long term success of the Company and take account of current corporate governance practice. The committee ensures that performance related components of Executive Director remuneration are transparent, stretching and rigorously applied. The committee also monitors the level and structure of remuneration for other senior management. No director is involved in deciding his or her own remuneration. 32 | ANNUAL REPORT 2018 GOOCH & HOUSEGO PLC GOVERNANCE DIRECTORS’ REPORT The Directors present their report together with the audited consolidated financial statements for the year ended 30 September 2018. of foreign currency risk on the trading transactions undertaken by group companies and on the translation of the net assets of overseas subsidiaries. This exposure is principally to the US dollar. 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 16 to 21. Key Financial 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. 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. Dividends During the year ended 30 September 2018 a final dividend of 6.5p per share was paid for the previous financial year. The final 2016 dividend of 5.7p per share was paid in the year ended 30 September 2017. A further interim dividend of 4.2p per share was paid for the half year ended 31 March 2018 (2017: 3.7p). For the year ended 30 September 2018, the Directors propose that a final dividend of 7.1p per share be paid. 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. Substantial shareholdings Directors’ Indemnities As at 15 November 2018, 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 3,705,912 14.88% Investec Wealth & Investment 2,133,432 8.57% 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. Oppenheimer Funds 2,000,000 8.03% Employee Involvement Aberdeen Standard Investments 1,934,249 Canaccord Genuity Wealth Management 1,518,126 7.77% 6.10% Black Rock Investment Management 945,884 3.80% Franklin Templeton Investment Management 906,841 JM Finn & Co 756,236 3.64% 3.04% 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. 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 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. Statement on Equal Employment Opportunities The Group is committed to providing equal employment opportunities for all employees and applicants for employment. ANNUAL REPORT 2018 | 33 GOOCH & HOUSEGO PLC GOVERNANCE DIRECTORS’ REPORT The company does not discriminate in employment opportunity or practices on the grounds of gender, race, religion or belief, age, disability, sexual orientation, or any other characteristic protected by national laws under which the Group operates. Appropriate arrangements are made for the continued employment and training, career development and promotion of disabled persons employed by the group. If members of staff become disabled the group continues employment, either in the same or an alternative position, with appropriate retraining being given if necessary. Our employees have diverse backgrounds, skills, and ideas that collectively contribute to the Company’s success. The Group operates to national standards of diversity in employment including the Affirmative Action Program (AAP) in the United States which is designed to attract, retain and develop a diverse pool of talent and which operates to an audit and reporting system. 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: • select suitable accounting policies and then apply them consistently; • state whether applicable IFRSs as adopted by the European 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; • make judgements and accounting estimates that are reasonable and prudent; and • prepare the financial statements on the going concern basis 34 | ANNUAL REPORT 2018 unless it is inappropriate to presume that the company will continue in business. 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 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 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. Directors’ Confirmations 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. 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. 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. For this reason, the Directors continue to adopt the going concern basis in preparing the financial statements. Viability Statement Business planning processes within G&H require the preparation of detailed financial plans over a three year time period. The CEO leads an annual review of the ongoing plan, a process in which all functions are involved. The Group’s strategy is developed, GOOCH & HOUSEGO PLC GOVERNANCE and capital investment decisions are made based on cash flow forecasts over a medium term horizon. The Group’s strategy is key to understanding its prospects. Further details of the strategy can be found in the Strategic Report. Key to the strategy is moving up the value chain and diversification, which will reduce the exposure the Group has to global economic trends affecting the industrial laser market. 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: There are many factors which could affect the growth of G&H going forward. There are discussed regularly by the Executive management team and the board. The principal risk factors which the board concluded could affect business performance over the medium term are set out on page 27. Mark Webster Director 27 November 2018 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 at least a three year period. ANNUAL REPORT 2018 | 35 GOOCH & HOUSEGO PLC GOVERNANCE AUDIT COMMITTEE REPORT Membership Responsibilities The Audit Committee is chaired by David Bauernfeind, a Chartered Accountant, who is currently Chief Financial Officer of Domino’s Pizza Group PLC, a company listed on the London Stock Exchange. The Committee comprises David Bauernfeind, Peter Bordui and Brian Phillipson and 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 Dr Peter Bordui Brian Phillipson 3/3 3/3 3/3 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. 36 | ANNUAL REPORT 2018 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 Integrated Technologies Limited and Gould Fiber Optics 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 year of goodwill. These impairment reviews are based on future projected is appropriate and that the remaining carrying value of goodwill is cash flows and are therefore inherently judgmental. The Audit supportable. Committee reviewed the key judgements underpinning the impairment reviews performed. INVENTORIES The Committee has reviewed the sensitivity disclosures in note 17 and concluded that they are appropriate. 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. INTERNAL AUDIT The Group has not historically had an internal audit function. Senior Following the adoption of the UK Governance Code in the year, and in finance staff members performed periodic reviews at each site. recognition of the growing size of the group, the Audit Committee have External auditors 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. 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. decided to recruit a new senior finance team member in FY2019. This individual will spend a proportion of their time implementing an internal audit function. 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. Approval David Bauernfeind Chairman of the Audit Committee 27 November 2018 ANNUAL REPORT 2018 | 37 GOOCH & HOUSEGO PLC 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. Membership and attendance at meetings held in 2018 Non-executive Directors Dr Peter Bordui Gary Bullard Brian Phillipson David Bauernfeind Gareth Jones Executive Directors Mark Webster 4/4 2/2 3/4 4/4 2/2 4/4 Appointed 21 February 2018 Retired 21 February 2018 Areas of focus for the Nomination Committee during FY18 Approval • Appointment of a new Non-Executive Chairman following the retirement of Gareth Jones in February 2018. Peter Bordui Chairman of the Nomination Committee • Succession planning for other members of the Board. 27 November 2018 Advisors During FY18, the Committee appointed Edward Drummond, an external search agency, to assist with the identification of suitable Chairman candidates. Appointment Process As part of the appointments process, the Committee determined the selection criteria for the Chairman role. 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 Gary Bullard as Non-Executive Chairman on 21 February 2018. 38 | ANNUAL REPORT 2018 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. Following the review of the remuneration schemes in FY2017, the Remuneration Committee are satisfied that the schemes are appropriate. In recognition of the new Corporate Governance guidance, LTIPs granted in FY2019 will be subject to the usual three year performance period, but a further two year holding period will apply to any shares which vest, after disposals to fulfil tax obligations. The recipients will be permitted to dispose of shares required to fulfil tax obligations at the time of vesting. 50% of the remaining shares may be sold one year after vesting with the balance available for sale two years after vesting. No other changes are proposed to the remuneration schemes. Following the adoption of the UK governance code in the year, the Remuneration Committee has reviewed the remuneration of the senior management team directly below board level. 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) Gary Bullard Dr Peter Bordui David Bauernfeind Gareth Jones 4/4 2/2 4/4 4/4 2/2 Appointed 21 February 2018 Retired 21 February 2018 ANNUAL REPORT 2018 | 39 GOOCH & HOUSEGO PLC GOVERNANCE REMUNERATION COMMITTEE REPORT Remuneration Policy Table The table below summarises our policy for 2018 and the planned changes for 2019: Element of Purpose and link to FY18 Policy and approach Opportunity FY19 Policy and approach remuneration strategy Base Salary Takes into account • Reviewed annually with changes effective Base salary increases • The Remuneration Committee experience and personal contribution to the company’s strategy Attracts and retains executives of the quality required to deliver the company’s strategy from 1 October if applicable are applied in line approved a 5% increase to Mark with the outcome of Webster’s salary. This was in the annual review recognition of the growing scale and complexity of the group. The salaries of Alex Warnock and Andrew Boteler have been increased in line with inflation. • Consideration given to individual and company performance • General pay increases across the wider workforce are also taken into consideration • 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 • No changes proposed achievement of short-term financial targets that the Committee considers to be critical drivers • Introduction of broader performance base salary measures • Up to 60% payable for exceeding target EPS by 10%. of business growth • 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 pension 10% of base salary • No changes proposed with market plan The Committee keeps competitive pension scheme • Company contributes 10% of salary the benefit policy and benefit levels under regular review Benefits Provide employees • Executive Directors receive private health The Committee keeps • No changes proposed with market insurance, life assurance and long term the benefit policy and competitive benefits disability insurance benefit levels under regular review Long Term Incentivise executive • Awards vest after three years subject to Award levels are • LTIPs granted in FY19 will be Incentive Plan performance over achievement of targets. (LTIP) the longer term • Absolute TSR retained for 60% of awards, Performance with full vesting at 15% TSR per annum. measures linked to the long-term strategy of the business and the creation of shareholder value over the longer term • 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. • Awards may vest pro rata on retirement. determined by reference to an subject to a three year performance period and a further individual’s position two year holding period. At the and performance end of year three shares can be prior to grant. sold to meet tax obligations only. Annual awards of 120% of base salary for the CEO and 110% for the CFO and COO. Maximum award of 300% of base salary. At the end of year four, 50% of remaining shares vesting can be sold with the balance available for sale at the end of year five. • The above change brings the scheme into line with the guidance in the revised UK Governance code. 40 | ANNUAL REPORT 2018 GOOCH & HOUSEGO PLC REMUNERATION COMMITTEE REPORT Directors’ Remuneration 2018 Basic pay Performance Benefits Pension Subtotal LTIPs related bonus £’000 £’000 in kind £’000 contribution £’000 2018 £’000 exercised £’000 Executive M Webster A Boteler A Warnock Non-executive G Bullard* Dr P Bordui B Phillipson D Bauernfeind G Jones ** 326 213 241 45 40 40 40 32 977 190 128 137 – – – – – 455 13 7 15 – – – – 2 37 – 10 10 – – – – – 529 358 403 45 40 40 40 34 1,272 392 964 – – – – – 20 1,489 2,628 2017 Basic pay Performance Benefits in Pension Subtotal related bonus £’000 £’000 kind £’000 contribution £’000 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 Share options £’000 – 152 – 241 – – – – GOVERNANCE Total 2018 £’000 1,801 750 1,367 45 40 40 40 34 4,117 Total 2017 £’000 504 495 412 323 40 40 17 17 474 26 20 1,455 393 1,848 The above disclosure has been audited. * Gary Bullard was appointed on 21 February 2018. ** Gareth Jones resigned on 21 February 2018. *** David Bauernfeind was appointed 1 May 2017. **** Paul Heal retired on 22 February 2017. ANNUAL REPORT 2018 | 41 GOOCH & HOUSEGO PLC GOVERNANCE REMUNERATION COMMITTEE REPORT Basic Pay 2018 performance Related Bonuses 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 long term incentive 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. No such payments were made in FY2018. Gooch & Housego has continued to perform well in 2018, delivering strong financial performance and continuing to make progress in its key strategic goals of diversification and moving up the value chain. Bonuses in 2018 were based 60% on EPS, 20% on operating cash flow and 20% on personal strategic objectives. Details of the performance achieved against the EPS and cash flow targets are shown in the table below: Financial targets Performance Performance required to trigger bonus payment EPS target (adjusted diluted) Operating cash flow target 53.5p £22.1m required at maximum 58.9p £22.1m % payable at maximum performance 60% 20% Performance % bonus awarded outcome 56.5p £11.9m 46.7% – The EPS target for the year was exceeded, triggering a 46.7% pay-out against a maximum of 60%. However, due to the increase in working capital, the operating cash flow target was missed so this part of the bonus was not eligible for payment. is process harmonisation and optimal allocation of resource. In FY19, we will introduce the fourth manufacturing centre (systems) and we will also introduce three customer facing business units, which will mirror our three market sectors. Personal strategic objectives, which accounted for 20% of the bonus opportunity, were set at the start of the year. Our work to improve efficiency and customer service continued in FY18, resulting in eight of our sites being organised into three manufacturing centres to ensure best practice is shared, there The Remuneration Committee felt it appropriate to focus the Executive Directors’ personal objectives on the actions required to enable the above changes. Details of the objectives set are summarised in the table below: Mark Webster, CEO Alex Warnock, COO Andrew Boteler, CFO • Deliver the first phase of organisational • Deliver the first phase of operational • Deliver necessary changes to Business change to support the FY19 business plan organisational change to support the FY19 Systems and progress organisational change to meet business plan and progress organisational longer term growth objectives change to meet longer term growth • Deliver necessary changes to business objectives systems and processes • Deliver necessary changes to business • Mature planning for the second phase of systems and processes organisational change needed to underpin • Define and begin implementation of a target growth • Deliver detailed strategic plans approved by strategic plan for the manufacturing centres, sites and support functions • Develop new organisational structures, processes and procedures for the finance and IT groups • Introduce an internal trading system and revised legal / financial structure • Definition and implementation of a new organisational structure across BUs, Manufacturing Centres and Support the Board for the A&D Business Unit and the • Define and begin implementation of specific functions without compromising FY 2018 three Manufacturing Centres improvement plans for the Boston and performance • Ensure that the HR and general staff Moorpark sites • Develop Strategic Plans for the new management processes, systems and • Deliver improved operational performance in organisation structures objectives are consistent with and enable the On Time Delivery, RFQ lead time, Product targeted long term sustainable growth lead time and Forecast output accuracy The view of the Remuneration Committee is that excellent progress was made against the objectives set. After due consideration by the Committee, it was agreed the bonus pay outs on the personal objective part of the bonus scheme should be as follows: Mark Webster 83%, Alex Warnock 65% and Andrew Boteler 80%. 42 | ANNUAL REPORT 2018 GOOCH & HOUSEGO PLC GOVERNANCE REMUNERATION COMMITTEE REPORT Directors’ Pension Arrangements Long Term Incentive Plan 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 (2017: 2). Contributions to a scheme on behalf of continuing Directors amount to 10% of the Director’s basic salary. 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. 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 under the Long Term Incentive Scheme by the Directors are summarised below. Gareth Jones’ exercise in the year ended 30 September 2017 relates to LTIPs awarded to him during his tenure as an Executive Director. He retired on 21 February 2018 and no longer holds any unvested or unexercised share options. The exercises in FY2018 for Mark Webster and Alex Warnock were exceptional awards granted by the Remuneration Committee on appointment. 2018 Scheme Number of Director M Webster A Boteler A Warnock Share Options No. LTIP LTIP LTIP 90,866 28,032 68,878 2017 Scheme Number of Director A Boteler G Jones Share Options No. LTIP LTIP 12,873 19,784 Market Price p 1,400 1,400 1,400 Market Price p 1,182.9 1,216.3 Exercise Price p 0.0 0.0 0.0 Exercise Price p 0.0 0.0 Exercise Date 19/01/18 19/01/18 19/01/18 Exercise Date 27/02/17 01/03/17 Total Gain £’000 1,272 392 964 Total Gain £’000 152 241 Director Shareholdings The Directors’ beneficial interests in the issued ordinary share capital of the Company were as follows: Number of shares at % of salary as at Number of shares at % of salary as at 30 September 2018 30 September 2018 30 September 2017 30 September 2017 Executive Directors Mark Webster Andrew Boteler Alex Warnock Non-executive Directors Gary Bullard Dr Peter Bordui Brian Phillipson David Bauernfeind 21,429 26,181 16,430 3,172 – – – 127% 227% 127% N/A – – – – 26,181 – 196% – – – – – – – – – – ANNUAL REPORT 2018 | 43 GOOCH & HOUSEGO PLC GOVERNANCE Shareholding Guidelines The Gooch & Housego 2013 Long Term Incentive Plan Executive Directors are required to acquire and maintain a qualifying interest in the ordinary shares of the company equivalent to 100% of base salary. All were in compliance with this requirement as at 30 September 2018. 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 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 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. For any awards vested in relation to FY2019 grants, after sales to satisfy tax obligations, 50% must be held for a further year and 50% must be held for a further two years. The exercise price of all awards is nil. Date of grant 17.12.2014 23.12.2015 10.03.2017 21.12.2017 17.12.2014 23.12.2015 10.03.2017 21.12.2017 17.12.2014 23.12.2015 10.03.2017 21.12.2017 – Number of ordinary shares under option – At Awarded Exercised Lapsed At 01.10.2017 in year in year 30.09.2018 Expiry Date 90,866 36,080 34,606 – – – – 24,145 68,878 26,949 25,674 – – – – 16,968 28,032 22,661 21,680 – – – – 15,050 (90,866) – – – (68,878) – – – (28,032) – – – – – – – – – – – – – – – – 17.12.2018 36,080 34,606 24,145 23.12.2019 26.03.2021 21.12.2021 – 17.12.2018 26,949 25,674 16,968 23.12.2019 26.03.2021 21.12.2021 – 17.12.2018 22,661 21,680 15,050 23.12.2019 26.03.2021 21.12.2021 Executive M Webster M Webster M Webster M Webster A Warnock A Warnock A Warnock A Warnock A Boteler A Boteler A Boteler A Boteler 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. During the year ended 30 September 2018, £675,000 (2017: £587,000) 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) and £185,000 (2017: £446,000) in respect of employer’s national insurance contributions, based on a year end share price of £17.73 (2017: £14.20). Brian Phillipson Chairman of the Remuneration Committee 27 November 2018 44 | ANNUAL REPORT 2018 GOOCH & HOUSEGO PLC ANNUAL REPORT 2018 | 45 GOOCH & HOUSEGO PLCTITLE IN HERE FINANCIAL STATEMENTS REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS Report on the audit of the financial statements Our Opinion 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. 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 2018 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 International Financial Reporting Standards (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 2018; 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, 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. 46 | ANNUAL REPORT 2018 GOOCH & HOUSEGO PLC REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS FINANCIAL STATEMENTS Our Audit Approach Overview Key audit matters • Overall group materiality: £667,000 (2017: £620,000), based on 5% of profit before tax, after adding back a one-off impairment charge of £2.7m in relation to Moorpark. • Overall parent company materiality: £92,500 (2017: £122,000), based on 5% of profit before tax. • The UK audit team performed an audit of the complete financial information of two operating units in the USA (Gooch & Housego (Palo Alto) LLC, and Stingray Optics 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 five reporting units (post consolidation entries) account for 79% 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 one reporting unit in the UK (Kent Periscopes Limited). • Valuation of goodwill and intangibles (group) and investments (parent company) (Group and parent). • Acquisition accounting (Group). 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 2018 | 47 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 £2.7m impairment had been taken in relation to the Moorpark business, the goodwill and intangibles involves judgment result of a poorer than expected result. 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. 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. We concluded that the judgment that impairment was not required at any site, with the exception of Moorpark was reasonable. We note however that goodwill and intangibles held remain sensitive to changes in key assumptions. In particular, a failure to achieve These are areas of continued focus for the growth objectives for certain sites could give rise to an impairment in the future. Given this audit to ensure that assets are valued management has disclosed relevant sensitivities (see note 17). correctly and not overstated in the context of the trading performance of the relevant cash generating units. Group and parent From our review of the impairment assessments, we note no impairment is required for investments held by the parent company. We assessed the appropriateness of the accounting and related disclosures included in the financial statements. These are deemed reasonable. Acquisition accounting ITL Acquisition accounting involves a number of We reviewed the underlying transactions, agreed the fair value of the assets and liabilities judgements from management and is acquired to supporting schedules, tested the valuation of intangible assets identified as part of therefore a subjective area. the purchase price allocation, by reviewing the model and assumptions used, and reviewed the The risk is that the purchase price allocation disclosures in the financial statements. (PPA) model may not reflect the true value There were no significant issues noted from our work. of the acquisitions made, leading to misstatement in the financial statements. Group 48 | ANNUAL REPORT 2018 Included within the ITL total consideration was £8m 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 (£4.75m and £3.25m) will be made. We have reviewed the available information and based on our work consider that management’s judgment is reasonable. Gould Technologies LLC We reviewed the underlying transactions, agreed the fair value of the assets and liabilities acquired to supporting schedules, tested the valuation of intangible assets identified as part of the purchase price allocation, by reviewing the model and assumptions used, and reviewed the disclosures in the financial statements. There were no significant issues noted from our work. Included within the Gould total consideration was $3.4m 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 ($1.2m and $2.2m) will be made. We have reviewed the available information and based on our work consider that management’s judgment is reasonable. 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. 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. Materiality The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for 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 £667,000 (2017: £620,000). £92,500 (2017: £122,000). How we determined it 5% of profit before tax, after adding back a one-off 5% of profit before tax. impairment charges of £2.7m relating to Moorpark. 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. These one-off costs have been excluded from the determination of overall materiality, because in our view the users of the financial statements will focus on the underlying profit of the business rather than the generally accepted benchmark of profit before tax, which is not impacted by these one-off costs. 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 £92,670 and £633,000. 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 £33,000 (Group audit) (2017: £31,000) and £4,500 (Parent company audit) (2017: £6,100) as well as misstatements below those amounts that, in our view, warranted reporting for qualitative reasons. Going Concern In accordance with ISAs (UK) we report as follows: Reporting obligation Outcome We are required to report if we have anything material to add or draw attention to in We have nothing material to add or to draw respect of the directors’ statement in the financial statements about whether the directors attention to. However, because not all future considered it appropriate to adopt the going concern basis of accounting in preparing the events or conditions can be predicted, this financial statements and the directors’ identification of any material uncertainties to the statement is not a guarantee as to the group’s group’s and the parent company’s ability to continue as a going concern over a period of and parent company’s ability to continue as at least twelve months from the date of approval of the financial statements. a going concern. ANNUAL REPORT 2018 | 49 GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS 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. With respect to the Strategic Report, Directors’ Report and Corporate Governance Statement, 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, the Companies Act 2006 (CA06) and ISAs (UK) require us also to report certain opinions and matters as described below (required by ISAs (UK) unless otherwise stated). 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 2018 is consistent with the financial statements and has been prepared in accordance with applicable legal requirements. (CA06) 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. (CA06) The directors’ assessment of the prospects of the group and of the principal risks that would threaten the solvency or liquidity of the group As a result of the directors’ voluntary reporting on how they have applied the UK Corporate Governance Code (the “Code”), we are required to report to you if we have anything material to add or draw attention to regarding: 50 | ANNUAL REPORT 2018 • The directors’ confirmation on page 27 of the Annual Report that they have carried out a robust assessment of the principal risks facing the group, including those that would threaten its business model, future performance, solvency or liquidity. • The disclosures in the Annual Report that describe those risks and explain how they are being managed or mitigated. • The directors’ explanation on page 34 of the Annual Report as to how they have assessed the prospects of the group, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions. We have nothing to report in respect of this responsibility. Other Code Provisions As a result of the directors’ voluntary reporting on how they have applied the Code, we are required to report to you if, in our opinion: • The statement given by the directors, on page 34, that they consider the Annual Report taken as a whole to be fair, balanced and understandable, and provides the information necessary for the members to assess the group’s and parent company’s position and performance, business model and strategy is materially inconsistent with our knowledge of the group and parent company obtained in the course of performing our audit. • The section of the Annual Report on page 36 describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee. We have nothing to report in respect of this responsibility. Responsibilities for the Financial Statements and the Audit Responsibilities of the directors for the financial statements As explained more fully in the Statement of Directors’ Responsibilities, 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 GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS 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. Mark Ellis (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors Bristol 27 November 2018 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. 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: • we have not received all the information and explanations we require for our audit; or • 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. ANNUAL REPORT 2018 | 51 GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS GROUP INCOME STATEMENT For the year ended 30 September 2018 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 Charge / (release) re-accrued contingent Impairment of goodwill Site closure costs Restructuring costs Transaction fees Interest on discounted deferred consideration Adjusted profit before tax Note 7 9 11 12 12 13 15 15 Note 17 17 11 11 12 2018 £’000 124,883 (74,811) 50,072 (8,229) (9,237) (22,317) 507 10,796 16 (699) 10,113 (2,893) 7,220 29.3p 29.0p 2018 £’000 10,113 2,141 417 2,708 1,569 864 605 340 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 18,757 16,111 GROUP STATEMENT OF COMPREHENSIVE INCOME For the year ended 30 September 2018 Profit for the year Other comprehensive income / (expense) – items that may be reclassified subsequently to profit or loss Currency translation differences Other comprehensive income / (expense) for the year net of tax Total comprehensive income for the year attributable to the shareholders of Gooch & Housego PLC Note 26 2018 £’000 7,220 1,657 1,657 8,877 2017 £’000 8,892 (1,410) (1,410) 7,482 52 | ANNUAL REPORT 2018 GOOCH & HOUSEGO PLC GROUP BALANCE SHEET As at 30 September 2018 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 FINANCIAL STATEMENTS Note 16 17 24 18 19 20 21 22 23 22 24 25 26 26 26 26 2018 £’000 38,320 65,734 1,944 105,998 24,445 – 35,028 19,433 78,906 2017 £’000 33,890 40,250 2,703 76,843 21,078 267 24,723 26,425 72,493 (25,262) (23,758) (75) (309) (988) (5,774) (32,408) (6) (579) (888) (4,286) (29,517) 46,498 42,976 (29,964) (6,322) (8,363) (11,492) (5,938) (4,253) (44,649) (21,683) 107,847 98,136 4,982 15,530 7,262 7,231 72,842 107,847 4,903 15,530 4,640 5,574 67,489 98,136 The financial statements for Gooch & Housego PLC, registered number 00526832, on pages 52 to 81 were approved by the Board of Directors on 27 November 2018 and signed on its behalf by: Mark Webster Director Andrew Boteler Director ANNUAL REPORT 2018 | 53 GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS GROUP STATEMENT OF CHANGES IN EQUITY For the year ended 30 September 2018 Note Called up Share share capital £’000 4,852 premium account £’000 15,530 Merger reserve Retained Cumulative Total Earnings translation equity £’000 2,671 – – – – 1,969 – – £’000 60,135 8,892 – 8,892 (2,289) (15) 587 179 1,969 (1,538) 67,489 67,489 7,220 – 7,220 (2,647) (45) 675 150 – – – – 2,622 – – 2,622 (1,867) reserve £’000 6,984 – (1,410) (1,410) – – – – – 5,574 5,574 – 1,657 1,657 – – – – – £’000 90,172 8,892 (1,410) 7,482 (2,289) 2,005 587 179 482 98,136 98,136 7,220 1,657 8,877 (2,647) 2,656 675 150 834 – – – – 51 – – 51 – – – – – – – – – – – – 79 – – 79 – – – – – – – – 4,903 4,903 15,530 15,530 4,640 4,640 At 1 October 2016 Profit for the financial year Other comprehensive expense 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 2017 At 1 October 2017 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 14 25 14 25 At 30 September 2018 4,982 15,530 7,262 72,842 7,231 107,847 54 | ANNUAL REPORT 2018 GOOCH & HOUSEGO PLC GROUP CASH FLOW STATEMENT For the year ended 30 September 2018 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 Disposal of trade and assets 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 generated from / (used in) financing activities Net (decrease) / increase in cash Cash at beginning of the year Exchange gains / (losses) on cash Cash at the end of the year FINANCIAL STATEMENTS 2018 £’000 11,949 (2,779) 9,170 2017 £’000 19,526 (1,957) 17,569 (24,029) (5,658) 384 (5,849) – (1,377) 9 (304) – (5,799) 29 (604) 27 (326) (31,166) (12,331) 17,272 (16) (2,647) 14,609 (7,387) 26,425 395 19,433 5,918 (5,523) (2,289) (1,894) 3,344 23,167 (86) 26,425 ANNUAL REPORT 2018 | 55 GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS NOTES TO THE GROUP CASH FLOW STATEMENT For the year ended 30 September 2018 Reconciliation of cash generated from operations Profit before income tax Adjustments for: – Amortisation of acquired intangible assets – Amortisation of other intangible assets – Proceeds from sale of trade and assets – Impairment of goodwill – Charge / (release) re-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 (outflow) / inflow to movements in net cash / (debt) (Decrease) / increase in cash in the year Drawdown of borrowings Repayment of borrowings Changes in net cash resulting from cash flows Finance leases and borrowings acquired Translation differences Movement in net cash in the year Net cash at 1 October Net (debt) / cash at 30 September Analysis of net cash Cash at bank and in hand Debt due after 1 year Finance leases Net cash / (debt) 56 | ANNUAL REPORT 2018 At 1 Oct Cash flow Exchange Acquired At 30 Sep 2017 £’000 26,425 (11,480) (18) £’000 (7,387) (17,263) 7 14,927 (24,643) movement £’000 £’000 395 (930) – (535) – (334) (21) (355) 2018 £’000 19,433 (30,007) (32) (10,606) 2018 £’000 10,113 2,141 683 (384) 2,708 417 4,009 675 (370) (16) 699 2017 £’000 12,602 2,202 199 – 615 (615) 3,664 587 (370) (27) 703 10,562 6,958 (1,295) (7,847) 416 (8,726) (1,442) (1,465) 2,873 (34) 11,949 19,526 2018 £’000 (7,387) (17,272) 16 (24,643) (355) (535) (25,533) 14,927 (10,606) 2017 £’000 3,344 (5,918) 5,523 2,949 – 310 3,259 11,668 14,927 GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 September 2018 1. General information there are more detailed disclosure note requirements. 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 94. The consolidated financial statements of the Group for the year ended 30 September 2018 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 89. 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,the United States and China. 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 2018, 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 have been no new standards, amendments or interpretations issued and made effective for the financial year ended 30 September 2018 that have had a material impact on the financial statements of the group. 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’ Includes new regulations for the recognition of revenue that are independent of a specific industry or transaction. The new standard replaces the current risk and reward approach of IAS 18: Revenue with a contract-based five-step model. In addition to substantially more extensive application guidance for the accounting treatment of revenue from contracts with customers, Application of the standard is mandatory for financial years beginning on or after 1 January 2018. The Group has not elected to early adopt the standard which will therefore apply for the first time from 1 October 2018. The Group has elected to apply the fully retrospective method for initial application, applying IFRS 15 retrospectively (and restating comparatives if necessary) from the period beginning 1 October 2017. As part of the implementation, the Group has conducted an analysis of all material revenue streams and customer contracts and reviewed sales and accounting processes to identify the need for changes. The Directors have assessed the anticipated impact of implementing IFRS 15 to be not material to the Group balance sheet and income statement for the year ended 30 September 2018 based on the revenues generated during, and balance sheet position as at 30 September 2018. IFRS16 leases The Group is continuing to assess the impact of adopting IFRS 16, which will be effective for the year ending 30 September 2020. 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 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 ANNUAL REPORT 2018 | 57 GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 September 2018 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, G&H Property Holdings Limited, Integrated Technologies Limited, Integrated Technologies (Holdings) Limited, VITL Limited and ORF Limited are exempt from the requirement to file audited financial statements 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. • 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 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. 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: Intangible Assets a. Goodwill Goodwill represents the excess of the cost of a business 58 | ANNUAL REPORT 2018 GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 September 2018 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. 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 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 ANNUAL REPORT 2018 | 59 GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 September 2018 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. 60 | ANNUAL REPORT 2018 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 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 GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 September 2018 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. 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 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. All other leases are classified as operating leases. Operating lease rentals are expensed in equal annual amounts over the lease term. Share Capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares ANNUAL REPORT 2018 | 61 GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 September 2018 or options are shown in equity as a deduction, net of tax, from the proceeds. • to continue as a going concern, • to provide returns for shareholders and benefits for other Revenue Recognition stakeholders and 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. 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. 5. Financial Risk Management Capital Risk Management Management considers capital as equity, as shown in the Group balance sheet, excluding net debt. The Group’s objectives when managing capital are to safeguard the Group’s ability 62 | ANNUAL REPORT 2018 • 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. 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 2018 or 2017. GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 September 2018 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 2017, with all other variables constant, post tax profits for the year would have been unchanged (2017: £123,000 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 £738,000 lower (2017: £1,953,000 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 £901,000 higher (2017: £2,388,000 higher). b. Cash flow interest rate risk The Group has cash balances of £19.4m 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 £299,000 (2017: 146,000) had the Group’s borrowings been in place throughout the year. 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 2018 accounted for 25% of the Group’s revenue (2017: 25%). 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. 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. The Company’s facilities comprise a committed revolving credit facility of $40m of which $39m is drawn and an uncommitted flexible acquisition facility of $20m which is undrawn. Both are available until 31 August 2021. 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. Borrowings issued at variable interest rates expose the Group to cash flow interest rate risk. During 2017 and 2018, the The estimates and assumptions that have significant risk of causing a material adjustment to the carrying amounts of assets ANNUAL REPORT 2018 | 63 GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 September 2018 and liabilities within the next financial year are outlined below. Critical accounting judgements 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 ITL Limited and Gould Fiber Optics. 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. 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. Management do not consider there to be any key sources judgement uncertainty. 7. Segmental Analysis The Company’s segmental reporting reflects the information that management uses within the business. The business is divided into three market sectors, being Aerospace & Defence, Life Sciences / Biophotonics and Industrial, 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. The Scientific Research sector, which covers academic and government funded research including major multi-national projects, was merged with the Industrial sector in the year. For the year ended 30 September 2018 Aerospace Life Sciences/ Industrial Corporate Total & Defence Biophotonics £’000 £’000 £’000 £’000 £’000 Revenue Total revenue inter and intra-division External revenue Divisional expenses EBITDA1 EBITDA% Depreciation and amortisation Operating profit before amortisation of acquired intangible assets and goodwill impairment Amortisation of acquired intangible assets and goodwill impairment Operating profit Operating profit margin % Add back non-recurring items, amortisation of acquired intangible assets and goodwill impairment Adjusted operating profit Adjusted profit margin % Finance costs Profit before income tax expense 64 | ANNUAL REPORT 2018 41,023 (234) 40,789 (34,454) 6,335 15.5% (758) 5,577 – 5,577 13.7% 116 5,693 14.0% – 5,577 11,440 (227) 11,213 (9,189) 2,024 18.1% (399) 1,625 – 1,625 14.5% 17 1,642 14.6% – 1,625 80,363 (7,482) 72,881 (59,146) 13,735 18.8% (2,450) 11,285 – 11,285 15.5% 1,030 12,315 16.9% – 11,285 – – – (1,757) (1,757) – (1,085) (2,842) (4,849) (7,691) – 7,141 (550) – (683) (8,374) 132,826 (7,943) 124,883 (104,546) 20,337 16.3% (4,692) 15,645 (4,849) 10,796 8.6% 8,304 19,100 15.3% (683) 10,113 GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 September 2018 For the year ended 30 September 2017 Aerospace Life Sciences/ Industrial Corporate Total & Defence Biophotonics £’000 £’000 £’000 £’000 £’000 Revenue Total revenue inter and intra-division External revenue Divisional expenses EBITDA1 EBITDA% Depreciation and amortisation Operating profit before amortisation of acquired intangible assets Amortisation of acquired intangible assets and goodwill impairment Operating profit Operating profit margin % Add back amortisation of intangibles, goodwill impairment, and non-recurring items Adjusted operating profit Adjusted profit margin % Finance costs Profit before income tax expense 34,860 – 34,860 (29,880) 4,980 14.3% (715) 4,265 – 4,265 12.2% – 4,265 12.2% – 4,265 9,570 – 9,570 (8,165) 1,405 14.7% (388) 1,017 – 1,017 10.6% – 1,017 10.6% – 1,017 74,661 (7,075) 67,586 (53,238) 14,348 21.2% (2,136) 12,212 – 12,212 18.1% – 12,212 18.1% – – – – (1,389) (1,389) – (625) (2,014) (2,202) (4,216) – 3,128 (1,088) – (676) 119,091 (7,075) 112,016 (92,672) 19,344 17.3% (3,864) 15,480 (2,202) 13,278 11.9% 3,128 16,406 14.6% (676) 12,212 (4,892) 12,602 ¹EBITDA = Earnings before interest, tax, depreciation and amortisation Management have added back the amortisation of intangibles, impairment of goodwill, restructuring costs, site closure costs, charge / release in respect of contingent consideration 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 2018 2018 2018 2017 2017 2017 Assets Liabilities Net Assets Assets Liabilities Net Assets £’000 £’000 93,311 (56,955) 90,382 (19,999) 495 716 (42) (61) £’000 36,356 70,383 453 655 £’000 75,104 73,641 545 46 £’000 £’000 (32,612) 42,492 (18,477) 55,164 (98) (13) 447 33 184,904 (77,057) 107,847 149,336 (51,200) 98,136 For the year to 30 September 2018 non-current asset additions were £3.8m (2017: £1.9m) for the UK and for the USA £3.6m (2017: £4.5m). There were no additions to non-current assets in respect of Europe (2017: £nil) or the Asia Pacific region (2017: £nil). The value of non-current assets in the USA was £62.4m (2017: £47.9m), the United Kingdom £45.7m (2017: £29.0m) and Europe £nil (2017: £nil). There were no non-current assets in the Asia-Pacific region. ANNUAL REPORT 2018 | 65 GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 September 2018 Analysis of revenue by destination: United Kingdom North America 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 Impairment of goodwill Charge / (release) of accrued contingent consideration Other income and expenses 9. Other Income and Expenses Grants receivable Amounts claimed under the RDEC Other (expense) / income 2018 £’000 21,081 44,899 29,788 29,115 2017 £’000 18,624 45,485 24,233 23,674 124,883 112,016 Note 2018 £’000 2017 £’000 42,794 35,598 (1,005) (710) 10 49,989 46,508 12,858 12,991 4,009 2,141 683 2,708 417 (507) 3,664 2,202 199 615 (615) (1,714) 114,087 98,738 9 2018 £’000 1,002 370 (865) 507 2017 £’000 1,285 370 59 1,714 The other expense includes £1m of the site closure costs incurred in the year. The other site closure costs are included in the relevant income statement line. 66 | ANNUAL REPORT 2018 GOOCH & HOUSEGO PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 September 2018 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 2018 £’000 2017 £’000 40,898 37,841 3,499 675 3,323 1,594 3,434 587 3,233 1,413 49,989 46,508 2018 2017 Number Number 574 292 866 2018 £’000 7,025 675 651 512 263 775 2017 £’000 5,732 587 187 8,351 6,506 Key management comprise the Executive Board and the senior operational staff. Directors’ remuneration, including the highest paid Director, has been included on page 41 of the Remuneration Committee Report. These disclosures have been audited. ANNUAL REPORT 2018 | 67 GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 September 2018 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 (gains) / losses on foreign exchange Operating lease rentals Transaction fees Impairment of goodwill Charge / (credit) in relation to accrued contingent consideration on acquisitions 2018 £’000 46 140 25 14 33 65 (145) 1,714 605 2,708 417 2017 £’000 45 105 82 66 – 45 225 1,732 390 615 (615) Restructuring costs of £864,000 were incurred in the year (2017: £536,000). These related to the Palo Alto site move (£384,000) and reorganisation costs of £480,000. The costs have been included in the income statement within cost of revenue, administration costs and other income and expenses as appropriate. The charge in relation to accrued contingent consideration on acquisitions relates to Kent Periscopes Limited. The business performed better than expected in FY2018 and therefore part of the amount released in FY2017 was charged back to the income statement. 2018 £’000 2017 £’000 16 27 (358) (1) (340) (699) (321) (1) (381) (703) 12. Finance Income and Costs Finance income comprises: – Bank interest Finance costs comprise: – Bank interest – Finance lease interest – Interest on discounted deferred consideration 68 | ANNUAL REPORT 2018 GOOCH & HOUSEGO PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 September 2018 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 2018 £’000 1,895 1,381 – 3,276 481 – (864) (383) 2017 £’000 1,318 2,165 (1,315) 2,168 227 1,315 – 1,542 Income tax expense per income statement 2,893 3,710 The taxation expense for the year is higher (2017: 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 19.0% for the year (2017: 19.5%) Income not subject to tax Permanent differences Adjustments in respect of foreign tax rates Total tax expense Factors Affecting the Future Tax Charge 2018 £’000 10,113 2017 £’000 12,602 1,921 2,457 – 233 739 2,893 (72) (132) 1,457 3,710 Overseas tax losses of £3.8m (2017: £3.7m) and UK tax losses of £0.8m (2017: £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 2017. 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 2018 | 69 GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 September 2018 14. Dividends Final 2017 dividend paid in 2018: 6.5p per share (Final 2016 dividend paid in 2016: 5.7p per share) 2018 Interim dividend paid: 4.2p per share (2017: 3.7p) 2018 £’000 1,608 1,039 2,647 2017 £’000 1,383 906 2,289 The Directors propose a final dividend of 7.1p per share making the total dividend paid and proposed in respect of the 2018 financial year 11.3p (2017: 10.2p). 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 shares used for basic earnings per share Dilutive shares Number of shares used for dilutive earnings per share A reconciliation of the earnings used in the earnings per share calculation is set out below: 2018 Number 2017 Number 24,629,591 24,457,701 265,817 412,901 24,895,408 24,870,602 Basic earnings per share Amortisation of acquired intangible assets (net of tax) Goodwill impairment Charge / (release) re accrued contingent consideration Site closure costs (net of tax) Restructuring costs (net of tax) Transaction fees (net of tax) Interest on deferred consideration One off credit due to US tax rate change Total adjustments net of income tax expense Adjusted basic earnings per share Basic diluted earnings per share Adjusted diluted earnings per share 2018 2017 £’000 pence per share £’000 pence per share 7,220 1,865 2,708 417 1,210 695 489 340 (864) 6,860 14,080 7,220 14,080 29.3p 7.6p 11.0p 1.7p 4.9p 2.8p 2.0p 1.4p (3.5p) 27.9p 57.2p 29.0p 56.5p 8,892 2,034 615 (615) – 431 314 381 – 3,160 12,052 8,892 12,052 36.4p 8.3p 2.5p (2.5p) – 1.8p 1.3p 1.6p – 13.0p 49.4p 35.8p 48.5p Basic and diluted earnings per share before amortisation and other adjustments has been shown because, in the opinion of the Directors, it provides a useful measure of the trading performance of the Group. 70 | ANNUAL REPORT 2018 GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 September 2018 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 Cost or valuation At 1 October 2016 Additions Acquired Disposals Reclassification Exchange rate differences At 30 September 2017 Additions Acquired Disposals Reclassification Exchange rate differences 2,849 3,374 – – (656) (214) 5,353 1,151 – – (3,805) 5 At 30 September 2018 2,704 10,676 9,013 12,005 – – – – (3) 9,010 14 1,650 – – 2 1,652 168 – (3) 1,817 174 – 2 139 5 (43) 93 (371) 11,828 243 – (201) 3,445 428 15,743 1,970 773 (42) (95) 2,606 889 (97) 94 29,185 1,866 67 (326) 510 (448) 30,854 4,273 326 (974) 323 441 3,355 385 26 (71) 53 (42) 3,706 265 99 (213) 61 30 35,243 3,948 18,259 2,361 (326) (267) 20,027 2,522 (925) 240 2,152 359 (71) (23) 2,417 421 (199) 24 – – – – – – – – – 1,993 3,492 21,864 2,663 2,849 5,353 2,704 7,361 7,193 8,683 10,035 9,222 12,251 10,926 10,827 13,379 1,203 1,289 1,285 52 – – (8) – (1) 43 12 12 56,459 5,764 98 (448) – (1,079) 60,794 5,958 2,087 (16) (1,404) – – 51 42 3 (8) – 37 3 (8) 1 33 10 6 18 24 (906) 68,365 24,075 3,664 (447) (388) 26,904 4,009 (1,229) 361 30,045 32,384 33,890 38,320 Accumulated depreciation At 1 October 2016 Charge for the year Disposals Exchange rate differences At 30 September 2017 Charge for the year Disposals Exchange rate differences At 30 September 2018 Net book value At 1 October 2016 At 30 September 2017 At 30 September 2018 At 30 September 2018, plant and machinery purchased under a hire purchase or finance lease agreement had a cost of £77,000 (2017: £38,000) and net book value of £40,000 (2017: £25,000). No interest was capitalised in the year (2017: £Nil). ANNUAL REPORT 2018 | 71 GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 September 2018 17. Intangible Assets Cost or valuation At 1 October 2016 Additions Acquired Disposals Exchange rate differences At 30 September 2017 Additions Acquired Disposals Reclassifications Exchange rate differences At 30 September 2018 Accumulated amortisation and impairment At 1 October2016 Charge for the year Disposals Exchange rate differences At 30 September 2017 Charge for the year Disposals Exchange rate differences At 30 September 2018 Net book value At 1 October 2016 At 30 September 2017 At 30 September 2018 Goodwill Acquired Capitalised Software Total intangible R&D, Patents and other assets £’000 and licences intangibles £’000 £’000 £’000 17,044 – 7,986 – (757) 24,273 – 9,943 – – 408 34,624 11,681 2,202 – (218) 13,665 2,141 – 226 3,123 584 – (23) (27) 3,657 497 – (3) (24) 19 1,849 102 – (44) (9) 1,898 958 – (114) – 6 50,641 686 14,085 (67) (1,631) 63,714 1,455 28,828 (117) (24) 977 4,146 2,748 94,833 976 83 (3) (5) 1,051 618 (3) (19) 1,643 116 (43) (8) 1,708 65 (105) 4 20,725 3,016 (46) (231) 23,464 5,532 (108) 211 £’000 28,625 – 6,099 – (838) 33,886 – 18,885 – – 544 53,315 6,425 615 – – 7,040 2,708 – – 9,748 16,032 1,647 1,672 29,099 22,200 26,846 43,567 5,363 10,608 18,592 2,147 2,606 2,499 206 190 1,076 29,916 40,250 65,734 Goodwill is allocated according to each operating site as follows: Cleveland (£2.1m), Ilminster (£1.5m), Torquay (£1.6m), Moorpark (£3.6m), Boston (£5.1m), Palo Alto (£0.9m), St Asaph (£4.0m), Keene (£5.8m), Baltimore (£8.7m) and Ashford (£10.2m). 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 2023 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. 72 | ANNUAL REPORT 2018 GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 September 2018 The Boston cash generating unit’s performance was lower than expected during FY18 largely due to reduced demand from certain customers. As part of our work on driving efficiency, the Boston site has now been organised into our fibre optic manufacturing centre. It is therefore under new management, and a new strategy has been developed for the business. The strategy focusses on developing the product side of the business for which a number of target customers and markets have been identified. The impairment calculation for Boston utilises a specific set of growth assumptions based on revenue increasing by an average of 13% per annum in the period to 30 September 2023, 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, but acknowledge a significant improvement in the site’s results is required to continue to support the carrying value of goodwill. If the discount rate were increased to 12.2%, the headroom on the impairment calculation would be reduced to zero. If the average annual EBITDA were reduced by 35%, then an impairment of £460,000 would arise. The Moorpark site had a difficult year. The site has recently struggled to grow its business during some difficult times in the commercial aerospace sector which has seen price pressure from a key customer. Whilst recent improvements in the site’s operational set up, the adoption of LEAN manufacturing principles, and diversification of its customer base, are moving Moorpark in the right direction, an impairment of £2.7m has been booked following this year’s impairment review. The impairment calculation for the Moorpark cash generating unit is based on an average annual forecast revenue growth and EBITDA to 2023 of 8% and £0.6m respectively. A further impairment charge may arise if the business’s results fall short of these forecasts. 18. Inventories Raw materials Work in progress Finished goods 2018 £’000 9,043 10,992 4,410 2017 £’000 7,374 9,819 3,885 24,445 21,078 The cost of inventories recognised as an expense and included in cost of revenue amounted to £74.8m (2017: £67.0m). The movement in the inventories provision is as follows: At 1 October Acquired (Utilisation of) / increase in provision Exchange rate movement At 30 September 2018 £’000 5,260 868 (459) 61 2017 £’000 4,208 328 783 (59) 5,730 5,260 ANNUAL REPORT 2018 | 73 GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 September 2018 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 Other 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 Acquired Utilisation of provision Increase in provision Exchange rate movement At 30 September 20. Cash and Cash Equivalents Cash at bank and on hand 74 | ANNUAL REPORT 2018 2018 £’000 32,231 1,344 484 969 2017 £’000 20,504 2,025 1,535 659 35,028 24,723 2018 £’000 14,172 19,370 1,245 241 2017 £’000 9,041 14,334 1,342 6 35,028 24,723 2018 £’000 23,190 6,980 2,453 2017 £’000 15,417 4,139 1,327 32,623 20,883 (392) (379) 32,231 20,504 2018 £’000 2017 £’000 379 7 (113) 117 2 392 219 – (35) 198 (3) 379 2018 £’000 2017 £’000 19,433 26,425 GOOCH & HOUSEGO PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 September 2018 21. Trade and Other Payables Trade payables Other taxation and social security Grant funding held in trust account Accruals 22. Borrowings Current: Bank borrowings Finance leases Non-current: Bank borrowings Finance leases Total borrowings FINANCIAL STATEMENTS 2018 £’000 9,188 864 484 14,726 25,262 2017 £’000 6,610 1,095 1,535 14,518 23,758 2018 £’000 2017 £’000 61 14 75 – 6 6 29,947 11,480 17 12 29,964 11,492 30,039 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 NatWest Bank. The Group’s facilities were renewed in the year and now comprise a $40m dollar revolving credit facility and a $20m flexible acquisition facility. At 30 September 2018, the balance drawn on the revolving credit facility was $39m (2017: $8m) and on the flexible acquisition facility nil (2017: $7.5m). The facilities above are committed until 31 August 2021 and attract an interest rate of between 1.2% and 1.7% above US 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 2018 £’000 75 29,964 30,039 2017 £’000 6 11,492 11,498 ANNUAL REPORT 2018 | 75 GOOCH & HOUSEGO PLC 2017 £’000 940 80 (135) 13 (10) 888 2017 £’000 (2,132) (1,542) 146 – 148 145 2018 £’000 (3,235) 383 67 (1,231) (268) (94) (4,378) (3,235) FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 September 2018 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 2018 £’000 888 50 – 46 4 988 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. 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 Credited / (charged) to the income statement Acquired Arising on acquired intangible assets (Debited) / credited directly to equity Exchange movements Net liability at 30 September 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 2018 £’000 2017 £’000 587 453 888 16 906 721 814 262 1,944 2,703 (3,641) (2,681) (6,322) (4,378) (3,827) (2,111) (5,938) (3,235) Overseas tax losses of £3.8m (2017: £3.7m) and UK tax losses of £0.8m (2017: £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 (2017: £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. 76 | ANNUAL REPORT 2018 GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 September 2018 25. Called Up Share Capital Issued and fully paid At 1 October Shares issued and fully paid At 30 September 2018 Number 2017 Number 2018 £’000 2017 £’000 24,514,561 24,260,024 4,903 4,852 393,270 254,537 79 51 24,907,831 24,514,561 4,982 4,903 During the year 227,403 shares (2017: 72,734 shares) were allotted under share option schemes. 26. Reserves At 1 October 2017 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 2018 Share premium account £’000 15,530 – – – – – – Merger reserve £’000 4,640 – – 2,622 – – – 15,530 7,262 Cumulative translation reserve £’000 5,574 – – – – – 1,657 7,231 Retained earnings £’000 67,489 7,220 (2,647) (45) 675 150 – 72,842 ANNUAL REPORT 2018 | 77 GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 September 2018 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 six 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 2018 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 21 Dec 2017 10 Mar 2017 23 Dec 2015 96,123 29% 0.56% 914,164 133,146 147,458 26% 0.9% 25% 0.9% 784,041 629,506 Outstanding at 1 October Awarded Exercised Lapsed Outstanding at 30 September Exercisable at 30 September 2018 2017 Number Weighted average Number Weighted average exercise price exercise price 486,008 96,123 (227,403) (12,461) 342,267 – – – – – – – 512,852 133,146 (72,734) (87,256) 486,008 – – – – – – – The weighted average fair value of options granted in the year was 786.0p per option (2017: 589.0p per option). For the options exercised, the average market price was 1,400p per share. Share options outstanding at the end of the year expire one year after their respective vesting dates and have the following exercise prices: 2013 LTIP Weighted average Number of share options exercise price 0.0p 2018 342,267 2017 486,008 The total charge for the year relating to share options was £675,000 (2017: £587,000), all of which related to equity-settled share based payment transactions. 78 | ANNUAL REPORT 2018 GOOCH & HOUSEGO PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 September 2018 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 2018 £’000 1,804 4,319 6,123 2017 £’000 1,166 3,900 5,066 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 2018 £’000 4,927 12,202 2,233 71 2017 £’000 16,438 8,101 1,849 37 2018 £’000 356 2017 £’000 18 29,683 11,480 – – – – 19,433 26,425 30,039 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 2018 £’000 325 2017 £’000 1,440 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 2018 | 79 GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 September 2018 32. Acquisition of Integrated Technologies Limited On 7 August 2018, the Group completed the acquisition of the entire share capital of VITL Limited, an Ashford, Kent, based specialist in the design, development and manufacture of high quality medical and in vitro diagnostic devices. The acquisition strengthened the Group’s position in the life sciences sector, and further enables G&H’s move into system based products. The consideration for the acquisition will be up to £22m comprising initial consideration of £12.6m paid in cash and £1.4m paid in new G&H ordinary shares. There is also deferred contingent consideration of up to £8m, payable in cash, based on the performance of the business for a period of two 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 Finance lease acquired Bank borrowings acquired Net assets acquired Consideration paid: Cash and shares paid on completion Deferred consideration Goodwill Provisional fair value £’000 2,074 6,839 1,623 1,669 1,489 (1,144) (1,429) (21) (334) 10,766 14,000 6,978 10,212 The fair value of the intangible assets represents the estimated fair value of ITL’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 ITL’s employees and their contacts in target markets. Post-acquisition, the acquired business contributed £2.2 million of revenue and £0.5 million of profit after tax to the consolidated income statement. 80 | ANNUAL REPORT 2018 GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 September 2018 33. Acquisition of Gould Fiber Optics On 5 September 2018, the Group completed the acquisition of the trade and assets of Gould Technology LLC, a Baltimore, Maryland, based specialist in the design, development and manufacture of fibre optic components and sub systems. The acquisition strengthened the Group’s position as the world leader in fused fibre optic technology and provides enhanced access to strategic US Aerospace and Defence customers. The consideration for the acquisition will be up to $16.4m comprising initial consideration of $11.6m paid in cash and $1.4m paid in new G&H ordinary shares. There is also deferred contingent consideration of up to $3.4m, payable in cash, based on the performance of the business over the period to 30 September 2019. The fair value of the assets acquired is summarised as follows: Property, plant and equipment Intangible assets Trade and other receivables Inventory Trade and other payables Net assets acquired Consideration paid: Cash and shares paid on completion Deferred consideration Goodwill Provisional fair value £’000 27 3,104 369 322 (141) 3,681 10,120 2,234 8,673 The fair value of the intangible assets represents the estimated fair value of Gould’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 Gould’s employees and their contacts in target markets. Post-acquisition, the acquired business contributed £0.3 million of revenue and £0.1 million of profit after tax to the consolidated income statement. ANNUAL REPORT 2018 | 81 GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS COMPANY BALANCE SHEET As at 30 September 2018 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 (liabilities) / 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 2018 2017 5 6 7 9 8 3,934 2,605 6,539 10 (9,692) 9 11 51,045 6,641 892 666 59,244 – – – – (3,153) (11) (6,978) 49,102 4,982 15,530 4,591 23,999 49,102 3,974 10,298 14,272 (5,301) 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 The financial statements on pages 82 to 93, were approved by the Board of Directors on 27 November 2018 and signed on its behalf by: Mark Webster Director Andrew Boteler Director 82 | ANNUAL REPORT 2018 GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS COMPANY STATEMENT OF CHANGES IN EQUITY For the year ended 30 September 2018 Called up Share premium Merger Note Share capital account £’000 4,852 £’000 15,530 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 At 30 September 2017 At 1 October 2017 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 4 4 Reserve £’000 – – – – 1,969 – – – – – 2,622 – – Retained earnings £’000 21,211 1,962 1,962 (2,289) (15) 587 166 21,622 21,622 4,157 4,157 (2,647) (45) 675 237 2,622 (1,780) Total equity £’000 41,593 1,962 1,962 (2,289) 2,005 587 166 469 44,024 44,024 4,157 4,157 (2,647) 2,656 675 237 921 – – – 51 – – 51 – – – – – – – – – – 79 – – 79 – – – – – – – 1,969 (1,551) 4,903 4,903 15,530 15,530 1,969 1,969 At 30 September 2018 4,982 15,530 4,591 23,999 49,102 ANNUAL REPORT 2018 | 83 GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS COMPANY CASH FLOW STATEMENT For the year ended 30 September 2018 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 Net cash generated from financing activities Net (decrease) / increase in cash Cash at beginning of the year Cash at the end of the year 2018 £’000 2017 £’000 2,374 1,461 – – 2,374 1,461 (12,602) (41) (896) 7 (13,532) – (106) – 21 (85) 6,112 4,000 (2,647) (2,289) 3,465 1,711 (7,693) 10,298 3,087 7,211 2,605 10,298 84 | ANNUAL REPORT 2018 GOOCH & HOUSEGO PLC NOTES TO THE COMPANY CASH FLOW STATEMENT For the year ended 30 September 2018 Reconciliation of cash generated from operations Profit before income tax Adjustments for: - Dividends received from subsidiaries - Amortisation of other intangible assets - Depreciation - Share based payment charge - Finance income 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 FINANCIAL STATEMENTS 2018 £’000 4,116 2017 £’000 1,549 (6,112) (4,000) 51 504 675 (7) 109 483 587 (21) (4,889) (2,842) 2,455 692 3,147 209 2,545 2,754 2,374 1,461 At 1 Oct 2017 Cash flow At 30 Sep 2018 £’000 10,298 10,298 £’000 (7,693) (7,693) £’000 2,605 2,605 ANNUAL REPORT 2018 | 85 GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS NOTES TO THE COMPANY FINANCIAL STATEMENTS For the year ended 30 September 2018 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 2018, 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 have been no new standards, amendments or interpretations issued and made effective for the financial year ended 30 September 2018 that have had a material impact on the financial statements of the Company. 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. 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. 86 | ANNUAL REPORT 2018 GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS NOTES TO THE COMPANY FINANCIAL STATEMENTS For the year ended 30 September 2018 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. 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. ANNUAL REPORT 2018 | 87 GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS NOTES TO THE COMPANY FINANCIAL STATEMENTS For the year ended 30 September 2018 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 £4,157,000 (2017: £1,962,000 profit). Fees payable to the Company auditors for the statutory audit for the year amounted to £16,000 (2017: £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 (2017: 12), all of whom were administrative. Directors’ Remuneration Directors’ remuneration Medical and other insurances Directors’ pension scheme contributions 2018 £’000 2,611 304 30 675 43 2017 £’000 2,035 443 26 587 38 3,663 3,129 2018 £’000 1,432 37 20 2017 £’000 1,409 26 20 1,489 1,455 The aggregate emoluments of the highest paid Director including gain on exercise of share options were £1,801,000 (2017: £504,000). Further information is included in the Remuneration Committee report on page 39. The aggregate gain on Directors’ share option exercises in the year was £2,628,000 (2017: £393,000). The number of Directors who are accruing retirement benefits under a money purchase pension scheme is 2 (2017: 2). 4. Dividends Final 2017 dividend paid in 2018: 6.5p per share. (Final 2016 dividend paid in 2017: 5.7p per share) 2018 Interim dividend paid: 4.2p per share (2017: 3.7p) 2018 £’000 1,608 1,039 2,647 2017 £’000 1,383 906 2,289 The Directors propose a final dividend of 7.1p per share making the total dividend paid and proposed in respect of the 2018 financial year 11.3p (2017: 10.2p). Should the final dividend be approved at the Company Annual General Meeting, cut-off dates for payment are: - Record date 25 January 2019 - Payment date 1 March 2019 5. Investments Cost and net book value at 1 October Additions Cost and net book value at 30 September 88 | ANNUAL REPORT 2018 2018 £’000 28,811 22,234 51,045 2017 £’000 27,169 1,642 28,811 GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS NOTES TO THE COMPANY FINANCIAL STATEMENTS For the year ended 30 September 2018 The subsidiary companies at 30 September 2018, 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 Integrated Technologies Limited 100% Viking House, Ellingham Way, Ashford, TN23 6NF Development and manufacture of high quality medical and in vitro diagnostic devices Integrated Technologies 100% Viking House, Ellingham Way, Ashford, TN23 6NF Non-trading company (Holdings) Limited ORF Limited VITL Limited 100% Viking House, Ellingham Way, Ashford, TN23 6NF Non-trading company 100% Viking House, Ellingham Way, Ashford, TN23 6NF Non-trading company ITL (Virginia) Inc. 100% 305 Ashcake Rd, VA23005, USA Development and manufacture of high quality medical and in vitro diagnostic devices Integrated Electronic Systems 100% T3-11 Factory Building Unit 201, 5001 Huadong Development and manufacture of high quality (Shanghai) Ltd Road, Shanghai 201201 China medical and in vitro diagnostic devices The directors believe that the carrying value of the investments is supported by their underlying net assets. ANNUAL REPORT 2018 | 89 GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS NOTES TO THE COMPANY FINANCIAL STATEMENTS For the year ended 30 September 2018 6. Property, Plant and Equipment Freehold land Plant and Fixtures and Computer Total and buildings machinery £’000 £’000 fittings £’000 equipment £’000 6,183 – 6,183 14 6,197 1,247 108 1,355 109 1,464 4,936 4,828 4,733 3,987 – 3,987 – 3,987 2,055 265 2,320 265 2,585 1,932 1,667 1,402 1,392 – 1,392 – 1,392 797 93 890 93 983 595 502 409 498 105 603 27 630 479 17 496 37 533 19 107 97 £’000 12,060 105 12,165 41 12,206 4,578 483 5,061 504 5,565 7,482 7,104 6,641 Assets in the Computer Other Total course of software construction £’000 £’000 £’000 £’000 – – – 842 842 – – – – – – – 842 1,216 – 1,216 – 1,216 1,159 45 1,204 12 1,216 57 12 – 465 – 465 54 519 366 64 430 39 469 99 35 50 1,681 – 1,681 896 2,577 1,525 109 1,634 51 1,685 156 47 892 Cost or valuation At 1 October 2016 Additions At 30 September 2017 Additions At 30 September 2018 Accumulated depreciation At 1 October2016 Charge for the year At 30 September 2017 Charge for the year At 30 September 2018 Net book value At 1 October 2016 At 30 September 2017 At 30 September 2018 7. Intangible Assets Cost or valuation At 1 October 2016 Additions At 30 September 2017 Additions At 30 September 2018 Accumulated amortisation At 1 October2016 Charge for the year At 30 September 2017 Charge for the year At 30 September 2018 Net book value At 1 October 2016 At 30 September 2017 At 30 September 2018 90 | ANNUAL REPORT 2018 GOOCH & HOUSEGO PLC NOTES TO THE COMPANY FINANCIAL STATEMENTS For the year ended 30 September 2018 8. Other Receivables Amounts owed by Group undertakings Prepayments and accrued income Group tax relief receivable FINANCIAL STATEMENTS 2018 £’000 – 119 3,815 3,934 2017 £’000 791 102 3,081 3,974 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 Charged / (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 2018 £’000 732 (102) 25 655 2017 £’000 580 17 135 732 2018 £’000 2017 £’000 (11) 453 213 655 (61) 632 161 732 UK tax losses of £0.8m (2017: £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. ANNUAL REPORT 2018 | 91 GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS NOTES TO THE COMPANY FINANCIAL STATEMENTS For the year ended 30 September 2018 10. Trade and Other Payables Trade payables Amounts owed to Group undertakings Taxation and Social Security Accruals and deferred income Deferred consideration payable 2018 £’000 686 4,165 518 2,186 2,137 9,692 2017 £’000 221 2,593 583 1,904 – 5,301 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. 11. Called Up Share Capital Allotted, issued and fully paid At 1 October Shares issued and fully paid At 30 September 2018 Number 2017 Number 2018 £’000 2017 £’000 24,514,561 24,260,024 4,903 4,852 393,270 254,537 79 51 24,907,831 24,514,561 4,982 4,903 During the year 227,403 shares (2017: 72,734 shares) were allotted under share option schemes. 92 | ANNUAL REPORT 2018 GOOCH & HOUSEGO PLC FINANCIAL STATEMENTS NOTES TO THE COMPANY FINANCIAL STATEMENTS For the year ended 30 September 2018 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 six 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 2018 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 21 Dec 2017 10 Mar 2017 23 Dec 2015 96,123 29% 0.56% 914,164 133,146 147,458 26% 0.9% 25% 0.9% 784,041 629,506 Outstanding at 1 October Awarded Exercised Lapsed Outstanding at 30 September Exercisable at 30 September 2018 2017 Number Weighted average Number Weighted average exercise price exercise price 486,008 96,123 (227,403) (12,461) 342,267 – – – – – – – 512,852 133,146 (72,734) (87,256) 486,008 – – – – – – – The weighted average fair value of options granted in the year was 786.0p (2017: 589.0p). For the options exercised, the average market price was 1,400.0p per share. Share options outstanding at the end of the year expire one year after their respective vesting dates and have the following exercise prices: 2013 LTIP Weighted average Number of share options exercise price 0.0p 2018 486,008 2017 512,852 The total charge for the year relating to share options was £675,000 (2017: £587,000), 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. ANNUAL REPORT 2018 | 93 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 20 February 2019 Payment date for final dividend for the year ended 30 September 2018 to shareholders on the register at close of 1 March 2019 business 25 January 2019. 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 2019 June 2019 30 September 2019 November 2019 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 Wills 01460 256440 020 7597 5970 020 7466 5000 94 | ANNUAL REPORT 2018 GOOCH & HOUSEGO PLC NOTICE OF ANNUAL GENERAL MEETING SHAREHOLDER INFORMATION Form of proxy You will not receive a form of proxy for the 2019 AGM in the post. Instead, you can vote online at www.signalshares.com. To register you will need your Investor Code, which can be found on your share certificate. You will still be able to vote in person at the AGM, and may request a hard copy proxy form directly from our Registrars, Link Asset Services on 0871 664 0300. Calls cost 12p per minute plus your phone company’s access charge. If you are outside the United Kingdom, please call +44 371 664 0300. Calls outside the United Kingdom will be charged at the applicable international rate. Lines are open between 9.00 am – 5.30 pm, Monday to Friday excluding public holidays in England and Wales. Notice is hereby given that the Annual General Meeting of the Company will be held at Dowlish Ford, Ilminster, Somerset, TA19 0PF on 20 February 2019 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 2018 together with the Directors’ Report and Auditors’ Report thereon. To receive and approve the Remuneration Committee Report set out on pages 39 to 44 (excluding page 40) of the Annual Report and Financial Statements for the financial year ended 30 September 2018. 3 To declare a final dividend, as recommended by the Directors, of 7.1 pence per ordinary share for the financial year ended 30 September 2018. 4 To elect Gary Bullard as a Director. 5 To re-elect Mark Webster as a Director. 6 To re-elect Alex Warnock as a Director. 7 To re-elect Andrew Boteler as a Director. 8 To re-elect Peter Bordui as a Director. 9 To re-elect Brian Phillipson as a Director. 10 To re-elect David Bauernfeind as a Director 11 To re-appoint Messrs PricewaterhouseCoopers LLP as Auditors. 12 To authorise the Directors to fix the remuneration of the Auditors. 13 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 20 May 2020 (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 £1,660,522 (representing approximately one third of the total ordinary share capital of the Company in issue at 27 November 2018). The Directors shall be entitled 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: 14 (a) 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 13 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 £249,078 (representing approximately 5 per cent. of the total ordinary share capital of the Company in issue at 27 November 2018); and ANNUAL REPORT 2018 | 95 GOOCH & HOUSEGO PLC SHAREHOLDER INFORMATION NOTICE OF ANNUAL GENERAL MEETING (b) THAT the Directors of the Company be authorised in addition to any authority granted under Resolution 14(a) to allot equity securities (as defined in section 560 of the Act) for cash under the authority conferred by resolution 13 above as if section 561 of the Act did not apply to any such allotment, provided that the power hereby conferred shall be: (i) limited to the allotment of equity securities up to an aggregate nominal amount of £249,078 (representing approximately 5 per cent. of the total ordinary share capital of the Company in issue at 27 November 2018); and (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 20 May 2020 (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. (ii) used only for the purpose of financing (or refinancing, if the authority is to be used within 6 months after the original transaction) a transaction which the Directors determine to be an acquisition or other capital investment of a kind contemplated by the Statement of Principles on Disapplying Pre-Emption Rights most recently published by the Pre-Emption Group prior to the date of this notice. By order of the Board Gareth J Crowe Company Secretary 27 November 2018 Registered Office: Dowlish Ford, Ilminster, Somerset TA19 0PF Registered Number: 526832 The powers hereby conferred in this Article 14 shall expire at the conclusion of the next Annual General Meeting of the Company or 20 May 2020 (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. 15 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 2,490,783 (representing approximately 10 per cent. of the total ordinary share capital of the Company in issue at 27 November 2018); (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; 96 | ANNUAL REPORT 2018 GOOCH & HOUSEGO PLC NOTES 1 2 3 4 5 6 Shareholders can vote online by logging on to www.signalshares.com and following the instructions. Alternatively shareholders can request a hard copy proxy form by contacting our registrars, Link Asset Services, on 0871 664 0300 from the UK (calls cost 12p per minute plus network extras) or +44371 664 0300 from outside the UK (calls chargeable at the applicable international rate) and returning it according to paragraph 4 below. Explanatory note on Resolution 2: Resolution 2 is an advisory vote only. The Remuneration Committee Report is set out on pages 39 to 44 of the Annual Report and Financial Statements for the financial year ended 30 September 2018. Pages 39, 41, 42, 43 and 44 of the Remuneration Committee Report set out the pay and benefits received by each of the directors for the year ended 30 September 2018. The Company’s policy on remuneration and potential pay outs to directors in the future, which is set out on page 40 of the Annual Report and Financial Statements for the financial year ended 30 September 2018, is specifically excluded from this Resolution. Resolutions 1 to 13 (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 14 and 15 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. 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. To vote by proxy outside of the CREST system, you can do so online via www.signalshares.com, or you can request a proxy form from our Registrars (see Note 1). 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. 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 SHAREHOLDER INFORMATION 7 8 9 someone other than the Chairman and give them the relevant instructions directly. 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 message must be received by the issuer’s agent by 11.00 a.m. on 18 February 2019. For this purpose, the time of receipt will be taken to be the time (as determined by the timestamp applied to the message by the CREST Applications Host) from which the issuer’s agent is able to retrieve the message. After this time any change of instructions to a proxy appointed through CREST should be communicated to the proxy by other means. CREST Personal Members or other CREST sponsored members, and those CREST Members who have appointed voting service provider(s) should contact their CREST sponsor or voting service provider(s) for assistance with appointing proxies via 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 18 February 2019. 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. 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 18 February 2019 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. 10 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 ANNUAL REPORT 2018 | 97 GOOCH & HOUSEGO PLC 98 | ANNUAL REPORT 2018 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 8 ANNUAL REPORT SEPTEMBER 2018 Gooch & Housego PLC Dowlish Ford, Ilminster TA19 0PF, United Kingdom T: +44 (0)1460 256440 E: info@goochandhousego.com goochandhousego.com GH79_AR_Covers_A4.indd 1 01/11/2018 10:34
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