Gooch & Housego PLC Preliminary Results (6461X)

Share Name	Share Symbol	Market	Type	Share ISIN	Share Description
Gooch & Housego Plc	LSE:GHH	London	Ordinary Share	GB0002259116	ORD 20P

	Price Change	% Change	Share Price	Bid Price	Offer Price	High Price	Low Price	Open Price	Shares Traded	Last Trade
	-8.00	-1.43%	550.00	550.00	568.00	550.00	540.00	540.00	6,750	08:22:35

Industry Sector	Turnover	Profit	EPS - Basic	PE Ratio	Market Cap
Optical Instruments & Lenses	148.48M	4.05M	0.1570	35.03	141.83M

TIDMGHH

RNS Number : 6461X

Gooch & Housego PLC

28 November 2017

 
 For immediate release   28 November 2017

Gooch & Housego PLC

("Gooch & Housego", "G&H", the "Company" or the "Group")

PRELIMINARY RESULTS FOR THE YEARED 30 SEPTEMBER 2017

Gooch & Housego PLC (AIM: GHH), the specialist manufacturer of optical components and systems, today announces its preliminary results for the year ended 30 September 2017.

 
 Year ended 30 September     2017   2016   Change 
-------------------------  ------  -----  ------- 
 Revenue (GBPm)             112.0   86.1    30.2% 
-------------------------  ------  -----  ------- 
 Adjusted profit before 
  tax (GBPm)*                16.1   14.2    13.7% 
-------------------------  ------  -----  ------- 
 Adjusted basic earnings 
  per share (pence)*         49.4   42.5    16.2% 
-------------------------  ------  -----  ------- 
 Statutory profit before 
  tax (GBPm)                 12.6   10.1    24.8% 
-------------------------  ------  -----  ------- 
 Basic earnings per 
  share (pence)              36.4   29.1    25.1% 
-------------------------  ------  -----  ------- 
 Total dividend per 
  share (pence)              10.2    9.0    13.3% 
-------------------------  ------  -----  ------- 
 Net cash (GBPm)             14.9   11.7    27.9% 
-------------------------  ------  -----  -------

*adjusted figures exclude the amortisation of acquired intangible assets, impairment of goodwill, release of accrued contingent consideration, exceptional items being restructuring, provision for export compliance and transaction costs, interest on deferred consideration and gain on bargain purchase.

Operating & Strategic Highlights

-- Strong financial performance set against a backdrop of favourable market conditions in our three main sectors of industrial, aerospace & defence and life sciences

-- Demand was particularly high for critical components used in microelectronic manufacturing and hi-reliability fibre couplers used in undersea cable networks

-- Significant progress was made towards our strategic goals of further diversification and moving up the value chain

-- StingRay Optics, acquired in February 2017, has integrated well into the wider group and is performing above our expectations

   --      Investment in R&D up 16.2%, 22 new products introduced and 7 new patents granted

-- Substantial investments were made, enabling us to meet increased demand and laying the foundation for future growth

Financial Highlights

-- Revenue for the year GBP112.0m, 30.2% higher than FY 2016, 18.7% on a constant currency basis. The acquisition contributed GBP5.3m in the year

   --      Adjusted profit before tax up 13.7% 
   --      Adjusted basic earnings per share up 16.2% 
   --      Strong cash performance delivering net cash of GBP14.9m at year end, an increase of 27.9% 
   --      Record year end order book of GBP72.1m, up 36.5% from 30 September 2016

Mark Webster, Chief Executive Officer, commented

"G&H met its FY 2017 financial goals and was able to make strategically important investments in key skills, processes, systems and the latest capital equipment. Significant progress has been made towards meeting our strategic aims of diversifying the business and moving up the value chain.

"These strategic initiatives combined with a record year end order book mean the Board remains confident that G&H is well positioned to deliver further progress in FY 2018 and beyond."

For further information please contact:

 
                        Mark Webster / Andrew 
 Gooch & Housego PLC     Boteler                 01460 256440 
 Investec Bank plc      Patrick Robb / David 
  (Nomad & Broker)       Anderson                020 7597 5970 
                         Mark Court / Sophie 
  Buchanan                Wills                   020 7466 5000

Expected Financial Calendar

 
 
     Annual General Meeting                     21 February 2018 
 
     Payment date for final dividend            2 March 2018 
     for the year ended 30 September 
     2017 to shareholders on the register 
     at close of business 26 January 
     2018.                                      June 2018 
     Subject to approval by shareholders 
     at the Annual General Meeting              30 September 2018 
 
     Interim Results announcement 
                                                November 2018 
     Financial Year End 
 
     Preliminary announcement of results 
     for the year ended 
     30 September 2018

Chairman's Statement

Set against a backdrop of favourable market conditions, your company has delivered a strong financial performance in 2017. This has been delivered through a mix of organic and acquisitive growth.

Demand for certain of Gooch & Housego's products, particularly from the microelectronics and undersea fibre optic communications sectors, reached unprecedented levels during the year. The resulting record order book presented a significant challenge for some of the Company's manufacturing operations. Investments made in recent years in "lean manufacturing" and "continuous improvement" meant that G&H was in part able to respond to this demand through an enhanced ability to match capacity with demand across the Company's various manufacturing locations. Combined with significant investments during the year in people, and in the latest manufacturing equipment, these initiatives made it possible to satisfy the needs of our customers and begin to reduce lead times towards the year-end.

In February 2017 G&H acquired StingRay Optics LLC ("StingRay"), a USA based designer and manufacturer of specialist optical and opto-mechanical systems. StingRay was a particularly significant acquisition as it provides G&H with advanced optical systems design capabilities for harsh and demanding applications. These new capabilities support the Company's twin strategic objectives of moving up the value chain and achieving greater diversification by enabling G&H to provide systems-level solutions to Aerospace & Defence ("A&D") customers. In 2017 the StingRay acquisition helped sales into the A&D sector approach one third of total revenues. StingRay has delivered a consistently strong performance since acquisition. The acquisitions completed in the previous year (Alfalight and Kent Periscopes) also made valuable contributions in 2017.

The investment in people during 2017 represents an important enhancement of the skills-base of G&H, and bodes well for the future. In order to meet the challenges of greater scale and complexity G&H has chosen to focus on specific high growth products and markets. Recent recruitment has reflected the need for a higher level of specialisation across a wide range of business functions including manufacturing processes and systems, business development, human resources, supply-chain and research and development. These and planned future changes reflect a recent board review of the organisational structure of G&H that had the objective of ensuring that it be optimised for delivering sustainable growth over the long term, as G&H grows both organically and by acquisition.

In successfully responding to the challenges of 2017 an exceptional effort was required by many people. I would like to express my thanks to my fellow directors and to all employees of Gooch & Housego. I am pleased to welcome David Bauernfeind, who joined the board as a non-executive director and Chair of the Audit Committee on 1 May 2017.

Gooch & Housego is stronger today than at any time in its past. With a sound financial foundation, new talents and capabilities, a pipeline of exciting new products and a record order book to start the year the Company is well-positioned to continue to deliver in 2018 and beyond.

Gareth Jones

Chairman

Chief Executive Officer's Statement

Overview

FY2017 Performance

Gooch & Housego ("G&H") benefited from positive market conditions and strong demand across its main sectors of industrials, aerospace & defence ("A&D") and life sciences. Demand was particularly high for critical components used in microelectronic manufacturing and high reliability fibre couplers used in undersea cable networks.

FY 2017 has been a 'watershed' year for the company, as we passed through the GBP100 million sales barrier for the first time. Revenue of GBP112.0 million represents year on year growth of 30.2%, or on a constant currency basis 18.7%. Adjusted PBT, which is less affected by foreign exchange fluctuations due to the natural hedging within the business, was GBP16.1 million, equating to a year on year profit growth of 13.7%.

Strategically important investments in people, processes, systems and the latest capital equipment were made during the year, enabling us to address high levels of demand in FY2017 and provide an important platform for G&H's future growth.

Strategic goals

Considerable progress has been made towards our strategic goals of further diversification and moving up the value chain.

A&D and life sciences both provide a counter balance to the exposure that the industrial laser sector has to the global economic cycle. These business areas have customer bases which include tier one A&D and medical diagnostic companies, who often prefer G&H to provide sub systems or systems rather than solely critical components, providing a strong impetus to move up the value chain. When coupled with the regulatory hurdles inherent in both A&D and life sciences, these markets provide a defensible business model with a high barrier to entry.

Our aim is to establish a 'critical mass' of business in both the A&D and life science sectors.

This has in large part been achieved in A&D, which now represents 31.1% of G&H's FY2017 revenue (2016: 23.2%); this was made possible due to a combination of organic growth and by the three acquisitions made in FY 2016 and FY 2017. Life sciences has undergone good organic revenue growth, in particular with products utilising our optical coherence tomography technology and laser surgery, but the sector still needs further acquisitions to achieve the desired 'critical mass'.

Sub systems and systems now represent 22.1% of our business (2016: 15.1%), with the growth again helped by the recent acquisitions, most notably Kent Periscopes and StingRay. Kent Periscopes, acquired in FY 2016, moved to a larger custom fitted facility in St. Asaph, North Wales, during FY 2017. This was funded in large part by the Welsh Government. As well as being required for the growth of the existing Kent Periscopes business the facility is earmarked to become a hub for assembly of sub systems and systems across the group.

Acquisitions

Strategic acquisitions remain an important part of G&H's business model and in February 2017 we acquired StingRay Optics LLC ("StingRay").

StingRay is a USA based specialist designer and manufacturer of high performance optical and opto- mechanical sub systems for demanding defence and commercial applications. Their product range is focused on laboratory, ground based, airborne, unmanned aerial vehicles ('UAVs") and space applications for key US defence customers. Synergies include leveraging G&H's greater reach through our global sales teams and our expertise in manufacturing infrared precision optics and specialist coatings. The partnership has proven to be very successful so far, with StingRay's performance exceeding our expectations and their talented workforce integrating well into the wider company.

Research and Development ("R&D")

There has been continued benefit from concentrating our R&D efforts on fewer higher return projects. During FY 2017 we introduced a record 22 new products and we expect the full value of these products to peak over the next three years. Revenue generated from new products this year was GBP11.1 million.

Good progress has been achieved in our key R&D areas of interest, notable among which are the following:

Microelectronics is entering a new phase of nano technology and the UV lithography and via drilling techniques required to achieve this need a new generation of precision lasers and laser systems which are being developed with our laser manufacturer and laser system partners.

OCT technology dominates the retinal scanning and imaging arena, but the longer term development partnerships we have with medical diagnostic companies in the areas of cardiovascular disease and cancer detection are now moving to the prototype and early commercial model stage, with the prospect of new product launches in the near future.

Our space communication group has gone from strength to strength with European Space Agency and UK Space agency funded work in satellite communications and is now attracting commercial interest from the USA and elsewhere. In addition to the grant funded work we have enhanced our $4 million commercial contract to provide communication systems for near term satellite launches. We are also developing similar technology for the adjacent market of UAVs.

Various aspects of our R&D defence programmes in the US and Europe are classified, but we are able to say that we are making good headway in developing key parts of Kent Periscopes' product portfolio, so they are compatible with USA military standards.

We have recently moved some of our R&D effort into sensing technology, focusing on use in harsh environments with ruggedised photonics technology. We have been able to bring some of our space communications experience to problem solving in this arena.

In order to accommodate the need for more system based projects, the Systems Technology Group ("STG"), primarily based at our Torquay site, has been expanded. The group consists of scientists and engineers who bring a wide range of skills such as electronic, software and mechanical engineering, which are required in order to present a complete sub system or system to our customers.

Performance improvement programme

In addition to the enhanced R&D performance outlined above, we have continued to expand our business development group, adding a microelectronic business development executive to the existing life science and A&D executives. The established business development executives have brought enhanced access to tier 1 A&D companies and multi- national medical diagnostic organisations and have been instrumental in the development of some of our most notable R&D projects. Our expectation is that with the addition of the new microelectronics business development executive we will be able to enhance our contribution to the new industrial laser systems that are currently in development.

G&H's ongoing operational performance improvement programme was instrumental in enabling us to meet the challenge of this year's high growth rate. The major infrastructure projects in Fremont, CA and Cleveland, OH are now substantially complete. Investment in key skills, lean processes and systems and the latest capital equipment was accelerated in sites that provide critical components for precision lasers used in microelectronic manufacturing, namely Ilminster, Fremont, CA and Torquay.

We have built on the good work done in previous years to further improve efficiency, customer service and to establish a more scalable organisational model for future growth. Our ten manufacturing sites have been organised into three manufacturing centres. They are based on our sites' areas of technical expertise, namely Acousto Optic / Electro Optic, Precision Optics and Fibre Optics. Each manufacturing area has a leader and their role is to ensure best practice is shared; there is process harmonisation and optimal allocation of resource.

G&H is in a strong position financially and is well positioned to make further investment in the business.

Market and Applications

Industrial

The industrial sector represents 57.4% of G&H's revenue and is composed of a diverse range of industrial applications aligned to our world class photonic technologies, including microelectronic manufacturing, semiconductor manufacturing and test, remote sensing, metrology and optical communications.

Our industrials division grew by GBP10.0 million or 18.4% compared to the previous year, reflecting a positive performance across the range of industrial products.

Critical components for precision lasers used in microelectronic manufacturing were in particular demand. This was driven by the next generation of smart phones and tablets and the consequent change in manufacturing technology required to produce them. The aforementioned 'cutting edge' technology is primarily dependent on the latest solid state lasers and we worked closely with the laser manufacturers and laser system suppliers to meet these demands.

Precision inspection equipment for real time calibration in smart phone and tablet production continued to deliver significant revenue for us during FY 2017.

The ongoing need for ever more data capacity from government, industry and the consumer continues to drive a strong optical telecommunications performance. G&H provides some of the more technically challenging elements to both land and undersea optical communications. Our ultra hi- reliability fibre couplers are used in amplifiers that are a key part of undersea cable networks. Over the last couple of years there has been a positive step change in the requirement for these products, driven by technology firms laying their own cable networks in order to control the process of data delivery. This new level of demand has continued unabated throughout FY 2017.

Aerospace & Defence

A&D represented 31.1% of our revenue and grew year on year by GBP14.9 million or 74.5%. This was due to a combination of organic growth and acquisition, as highlighted earlier. G&H is now able to bring a wide range of photonic capabilities that very much represent the "direction of travel" in this sector. These include target designation, range finding, ring laser and fibre optic gyroscope navigational systems, infra-red and RF counter measures, periscopes and sighting systems for armoured vehicles and opto-mechanical sub systems for unmanned aerial vehicles.

Delivering product quality, reliability and performance in challenging environments is essential in the A&D arena and this very much plays to G&H's strengths. Our customers encompass the major European and USA A&D companies.

Space satellite communication is undergoing a technology revolution. The use of fibre optic lasers to transmit information means the satellite communication systems are more efficient and robust, as well being significantly lighter. This has changed the economics of the sector and has led to smaller satellites and encouraged the move towards the use of satellite constellations as part of a communications network. The investment we have made in this area means we are at the forefront of some of these developments.

Life Sciences

Life Sciences represents 8.5% of G&H's revenue and grew year on year by GBP1.7 million or 21.1%. Despite the increase in revenue the profit did decline year on year, which is primarily due to the investments made into future capabilities. Though life sciences is a relatively small sector for G&H, we see this as a strategically important one going forward.

The principal applications are in optical coherence tomography ("OCT"), laser surgery and microscopy. OCT is widely used in ophthalmology for 3D retinal scanning and G&H has a dominant position in supplying critical components and sub systems to the main equipment suppliers. We also have a number of R&D collaborations with medical diagnostic companies in cardiovascular and cancer detection.

Laser surgery is a fast growing area particularly in ophthalmology, prostate and cosmetic surgery and has significant potential to be exploited beyond these current areas of use.

There is potential for photonic technology to be used in minimally invasive surgery, endoscopy and robotic surgery and this sector remains an area where G&H will continue to invest in R&D and look for strategic acquisitions.

Scientific Research

G&H's research market is dominated by a small number of "big science" projects in the fields of nuclear fusion research and synchrotron radiation sources. It provides 3.0% of our revenue. The year on year decline was due to phasing of one of the projects. This is a profitable and prestigious sector for G&H, where we have some unique capabilities, that has the capacity to deliver growth and we will continue to selectively invest in this area.

Outlook

G&H met its FY 2017 financial goals and was able to make strategically important investments in key skills, processes, systems and the latest capital equipment. Significant progress has been made towards meeting our strategic aims of diversifying the business and moving up the value chain, with A&D now representing 31.1% of our business by revenue. We acquired USA based StingRay Optics LLC in February 2017, which has integrated well into the wider organisation and performed strongly.

G&H will continue with an active policy of making further progress towards a more diverse and balanced business by building "critical mass" in A&D and life sciences, through a mix of investment in R&D and acquisitions.

We are committed to making further investment in R&D in our targeted high growth areas. These include fibre and solid state laser systems, precision inspection equipment for microelectronic manufacturing, OCT medical diagnostics, laser surgery, space satellite communications, A&D sub systems and fibre optic sensing systems.

G&H intends to take the performance improvement programme to the next level, by further investment in business development activity, focusing our global resources on a few high return R&D projects and continuing to improve operational efficiency. We believe the introduction of three well defined and focused manufacturing centres will provide a scalable platform for enhanced lean manufacturing practice.

These strategic initiatives combined with a record year end order book mean the Board remains confident that G&H is well positioned to deliver further progress in FY 2018 and beyond.

Mark Webster

Chief Executive Officer

Performance Overview

The business has once again delivered strong profitable growth.

Group revenue for the year was a record GBP112.0million. This represents an increase of GBP25.9 million, or 30.2% over the previous year of GBP86.1 million. During the year Gooch & Housego acquired StingRay Optics LLC, which contributed GBP5.3 million to group revenue in the year, so organic revenue was up by 23.9%. On a constant currency basis revenue was 18.7% higher than the previous year.

During 2017, Gooch & Housego invested GBP5.8 million in property, plant and equipment and GBP5.7 million in acquisitions. Despite this the business has increased its net cash position to GBP14.9 million at 30 September 2017 (2016: GBP11.7 million), through sustained strong operating cash flows.

 
 REVENUE 
-------------------------------  ------  --------  -------- 
 
                             2017               2016 
                       ----------------  ------------------ 
 Year ended 30          GBP'000       %   GBP'000       % 
  September 
---------------------  --------  ------  --------  ------ 
 Industrial              64,261   57.4%    54,296   63.1% 
---------------------  --------  ------  --------  ------ 
 Aerospace & Defence 
  (A&D)                  34,860   31.1%    19,977   23.2% 
---------------------  --------  ------  --------  ------ 
 Life Sciences            9,570    8.5%     7,904    9.2% 
---------------------  --------  ------  --------  ------ 
 Scientific Research      3,325    3.0%     3,874    4.5% 
---------------------  --------  ------  --------  ------ 
 Group Revenue          112,016    100%    86,051    100% 
---------------------  --------  ------  --------  ------

In the financial year under review, adjusted operating margins increased by GBP2.1 million in absolute terms to GBP16.4 million (2016: GBP14.3 million). At a percentage margin level, adjusted operating margins were 14.6%, compared to 16.6% in 2016, as a result of foreign exchange and planned investment in people and systems to support the growth.

In our Industrial segment, revenue grew by 18.4% from GBP54.3 million last year to GBP64.3 million this year. Revenue in our Aerospace & Defence business increased by 74.5% from GBP20.0m to GBP34.9m. Excluding the acquisition in the year, A&D revenue increased by 48.0%. Life Sciences revenue increased by 21.1% whilst sales in our smallest segment, Scientific Research, reduced by 14.2%.

 
 GROUP EARNINGS PERFORMANCE 
------------------------------  --------  --------  ---------- 
 
 All amounts in            Adjusted             Reported 
  GBP'000 
                                          -------------------- 
 Year ended 30            2017      2016      2017      2016 
  September 
--------------------  --------  --------  --------  -------- 
 Operating profit       16,406    14,258    13,278    10,184 
--------------------  --------  --------  --------  -------- 
 Net finance costs       (295)      (88)     (676)      (88) 
--------------------  --------  --------  --------  -------- 
 Profit before 
  taxation              16,111    14,170    12,602    10,096 
--------------------  --------  --------  --------  -------- 
 Taxation              (4,059)   (3,865)   (3,710)   (3,048) 
--------------------  --------  --------  --------  -------- 
 Profit for the 
  year                  12,052    10,305     8,892     7,048 
 Basic earnings 
  per share (p)          49.4p     42.5p     36.4p     29.1p 
--------------------  --------  --------  --------  --------

The Group adjusted profit before tax amounted to GBP16.1 million (2016: GBP14.2 million) and represented a net margin of 14.4%. Statutory profit before tax was GBP12.6 million compared with GBP10.1 million last year.

The adjusted effective rate of tax was 25.2% (2016: 27.3%), the reduction caused by a number of factors including a lower applicable corporate tax rate in the UK, tax deductions being available on intangibles on recent US acquisitions and certain one off effects in the prior year. The effective rate of tax of 29.4% (2016: 30.2%) was higher than the adjusted effective rate because of the effect of the interest charge on deferred consideration which is not subject to tax, and the restructuring and acquisition costs being incurred in the UK which has a lower tax rate than the overall rate for the Group. The rate reflects a combination of the varying tax rates applicable throughout the countries in which the Group operates, principally the UK and the USA.

The effective rate of tax should benefit in the future from further reductions in the UK tax rate, although the proportion of profit generated in the USA, where tax rates are higher, will affect this.

Adjusted earnings per share (EPS) increased from 42.5p to 49.4p. Reported basic EPS was 36.4p compared with 29.1p last year.

 
 RECONCILIATION OF ADJUSTED PERFORMANCE MEASURES 
 
 
                            Operating          Net finance          Taxation           Earnings 
                              Profit              costs                                per share 
---------------------  ------------------  ------------------  ------------------  ---------------- 
 Year ended                2017      2016      2017      2016      2017      2016     2017     2016 
  30 September           GBP000    GBP000    GBP000    GBP000    GBP000    GBP000    pence    pence 
---------------------  --------  --------  --------  --------  --------  --------  -------  ------- 
 Reported                13,278    10,184     (676)      (88)   (3,710)   (3,048)    36.4p    29.1p 
---------------------  --------  --------  --------  --------  --------  --------  -------  ------- 
 Amortisation 
  of acquired 
  intangible 
  assets                  2,202     1,263         -         -     (168)     (333)     8.3p     3.8p 
---------------------  --------  --------  --------  --------  --------  --------  -------  ------- 
 Gain on bargain 
  purchase                    -     (578)         -         -         -         -        -   (2.4p) 
---------------------  --------  --------  --------  --------  --------  --------  -------  ------- 
 Impairment 
  of goodwill               615       771         -         -         -         -     2.5p     3.2p 
---------------------  --------  --------  --------  --------  --------  --------  -------  ------- 
 Release of 
  accrued contingent 
  consideration           (615)         -         -         -         -         -   (2.5p)        - 
---------------------  --------  --------  --------  --------  --------  --------  -------  ------- 
 Provision 
  for regulatory 
  compliance 
  risk                        -       500         -         -         -         -        -     2.1p 
---------------------  --------  --------  --------  --------  --------  --------  -------  ------- 
 Restructuring 
  costs                     536     1,652         -         -     (105)     (391)     1.8p     5.2p 
---------------------  --------  --------  --------  --------  --------  --------  -------  ------- 
 Transaction 
  fees                      390       466         -         -      (76)      (93)     1.3p     1.5p 
---------------------  --------  --------  --------  --------  --------  --------  -------  ------- 
 Interest 
  on deferred 
  consideration               -         -       381         -         -         -     1.6p        - 
---------------------  --------  --------  --------  --------  --------  --------  -------  -------

 Adjusted                16,406    14,258     (295)      (88)   (4,059)   (3,865)    49.4p    42.5p 
---------------------  --------  --------  --------  --------  --------  --------  -------  -------

NON GAAP MEASURES

The Company uses a number of non GAAP measures which are shown in the table above and in the segmental analysis. These measures are used to illustrate the impact of non-recurring and non-trading items on the Company's financial results. These are the impact of the amortisation of acquired intangible assets, costs associated with restructuring activities, interest on deferred consideration, impairment of goodwill and release of accrued contingent consideration. In 2016 they also included the provision for regulatory risk compliance and the gain on bargain purchase of Alfalight.

SEGMENTAL ANALYSIS

Industrial

Our Industrial business grew strongly during the year, with revenues of GBP64.3 million, compared with GBP54.3 million last year. This growth was largely driven by a combination of our industrial laser and telecommunications businesses. Revenue from the Group's industrial laser business segment grew strongly, driven by high demand for precision lasers used in microelectronic manufacturing. Demand for the traditional Q Switch grew in 2017 and represented 14.0% of total group revenue (2016: 10.2%).

Adjusted operating profit for the Industrial sector as a whole was 10.1% higher at GBP11.8 million, compared with GBP10.8 million last year.

Aerospace & Defence (A&D)

A&D revenue was GBP34.9 million, up 74.5% on last year, benefitting from the full year effect of the two acquisitions in FY16 and the acquisition of StingRay in FY17. These results reinforce our belief that this sector represents a growth opportunity for Gooch & Housego, as optical technologies continue to be increasingly deployed in this market. Operating margins in this sector increased reflecting the higher volume and strong margins achieved by StingRay in particular.

Life Sciences

In 2017 Life Sciences revenue was up by 21.1% compared to the prior year. The majority of this growth was driven by a strong performance in our Optical Coherence Tomography ("OCT") market driven largely by our customers' development cycles. Despite this, adjusted operating margins in this sector were down on the previous year due to the competitive nature of the OCT market and the investment in this relatively small sector.

Scientific Research

Our activities in the Scientific Research market are dominated by a small number of large, long-term programmes.

This market was down in 2017 due to demand phasing.

RESEARCH & DEVELOPMENT (R&D)

Gooch & Housego continues to invest in R&D in all areas of the business and regards this as fundamental to the continued growth of the company. There were a record 22 product releases in 2017, together with 7 new patents granted.

Expenditure on R&D in the year to 30 September 2017 increased by 16.2% from GBP7.4 million to GBP8.6 million. A proportion of this increase was funded through UK and European grant funding. R&D expenditure represented 7.7% of revenue (2016: 8.6%). The Group capitalised GBP0.7m (2016: GBP0.7 million) of development expenditure.

OPERATIONS

As reported in our Interim Statement, the Company has committed to upgrading its Cleveland, Ohio facility. This facility, which houses G&H's world leading crystal growth capabilities, is a key contributor to current and future profitability and will benefit from the modernisation that has been taking place. The upgrade is substantially complete and we will have invested in the region of $5 million. The refurbishment will help drive much needed operational efficiency, provide greater capacity, as well as a more compelling showcase of our capabilities for customers.

The Company has concluded a legal dispute with the landlord of its Fremont facility. As a result of this, a Californian court has awarded G&H in the region of $2 million in damages arising from the landlord's non-performance in respect of the lease. This will be accounted for in FY18.

Investment in key skills, lean processes, systems and the latest capital equipment was accelerated in sites that provide critical components for precision lasers used in microelectronic manufacturing, namely Ilminster, Fremont, CA and Torquay.

We have built on the good work done in previous years to further improve efficiency, customer service and to establish a more scalable organisational model for future growth. Our ten manufacturing sites have been organised into three manufacturing areas. They are based on our sites' areas of technical expertise, namely Acousto Optic / Electro Optic, Precision Optics and Fibre Optics. Each manufacturing area has a leader and their role is to ensure best practice is shared, there is process harmonisation and optimal allocation of resources.

ACQUISITIONS

G&H will continue to evaluate acquisition opportunities that have the potential to accelerate delivery of the Company's strategic objectives. Having established a presence in its target markets, G&H is now focussing on moving up the value chain in each of those markets. Whilst the business will continue to evaluate bolt on businesses in our core component technologies, continued strong focus is being placed on acquisition opportunities that enhance the Company's ability to wrap electronics and software around core photonic products to yield system-level solutions.

In February 2017 G&H acquired StingRay Optics LLC, a US based specialist designer and manufacturer of high performance optical and opto-mechanical subsystems for demanding defence and commercial applications.

StingRay was founded in 2004 and has established itself as a market leading designer, manufacturer and supplier of world class custom optical assemblies. The business has a proven capability in providing system level optical products for use in harsh environments to key US defence customers. StingRay's product range covers laboratory, ground based, airborne, unmanned aerial vehicles and space applications.

The acquisition of StingRay is aligned with G&H's strategic objectives of moving up the value chain and further diversification into the Aerospace & Defence sector. Potential synergies include leveraging G&H's greater reach through our global sales teams and our expertise in manufacturing infrared precision optics and specialist coatings.

StingRay has performed very well since acquisition, contributing GBP5.3 million to group revenue and GBP1.6 million in profit before tax in the year.

As a result of two key customers delaying the delivery of product from existing orders, Kent Periscopes did not reach its threshold for the first tranche of its earn-out to be triggered. Consequently, the provision for a proportion of this payment (approximately GBP0.6m), made under IFRS accounting rules, has been released to the income statement for the current year. Whilst the delay in delivery of these contracts has affected the anticipated results of Kent Periscopes for the earn-out period, the outlook for the business remains positive. The order book for the next two years remains very strong at approximately GBP12.5 million. Whilst the core value of this business remains strong, as part of its bi-annual review of the carrying value of goodwill, the Board has taken the decision to impair the goodwill of the Kent Periscopes acquisition to the sum of GBP0.6 million.

NON TRADING ITEMS

Restructuring costs of GBP0.5 million (2016: GBP1.7 million) related to the re-location of our Palo Alto facility to Fremont and to restructuring costs arising from the efficiency savings the business has put in place.

BALANCE SHEET

The Group's total equity at the end of the year was GBP98.1 million, an increase of GBP8.0 million over the prior year. This increase comprised GBP6.6m from retained earnings, GBP2.0m from issues of share capital and a net reduction of GBP0.6m from foreign exchange and other movements.

Additions to property, plant and equipment totalled GBP5.8m (excluding acquisitions). The main additions related to investment in plant and machinery, the expansion of our Torquay facility, and the refurbishment of our Cleveland facility.

Working capital was 19.2% of revenue in the current year compared to 24.5% in 2016. This metric has benefitted from the year end GBP:USD exchange rate being higher than the average for the year, but also reflects management efforts to reduce working capital as a percentage of sales.

Inventory at the year end was GBP21.1 million, an increase of GBP2.1 million over the prior year. Excluding the impact of currency and the inventory attributable to the acquisition, the underlying inventory increased by GBP1.6m, or 8.5%, in the year. This increase is reflective of the increased activity in the year.

Trade receivables were unchanged at GBP20.5m. The effect of a strong shipment profile towards the end of the year and the acquisition of StingRay were largely offset by movements in the dollar exchange rate.

Cash balances at 30 September 2017 were GBP26.4 million, compared with GBP23.2 million at 30 September 2016. Net cash flows from operating activities totalled GBP17.6 million, compared with GBP12.6 million last year, reflecting a cash generated from operations to adjusted operating profit rate of 119% (2016: 96%). During the year the business increased its net cash position from GBP11.7m to GBP14.9 million, despite investing GBP5.7m in the acquisition of StingRay and GBP5.8m in property, plant and equipment.

MOVEMENT IN NET CASH

 
 All amounts in GBPm            Gross    Gross     Net 
                                 Cash     Debt    Cash 
-----------------------------  ------  -------  ------ 
 At 1 October 2016               23.2   (11.5)    11.7 
 Operating cash flows            19.8        -    19.8 
 Debt repayment (net of 
  drawdown)                       0.4    (0.4)       - 
 Acquisitions                   (5.7)        -   (5.7) 
 Net capital expenditure        (6.4)        -   (6.4) 
 Working capital                (0.3)        -   (0.3) 
 Interest, tax and dividends    (4.5)        -   (4.5) 
 Exchange movement              (0.1)      0.4     0.3 
-----------------------------  ------  -------  ------ 
 At 30 September 2017            26.4   (11.5)    14.9 
-----------------------------  ------  -------  ------

ORDER BOOK

As at 30 September 2017, the Group order book stood at GBP72.1 million, compared to GBP52.8 million at the end of the 2016 financial year, a 36.5% increase. The acquisition of StingRay added GBP3.5 million to the order book. On a constant currency basis the order book was 39.1% higher. The book to bill ratio for the business as a whole was 1.08 (six month rolling average) as at 30 September 2017 (2016: 1.01).

STAFF

The Group workforce increased from 755 at 30 September 2016 to 823 at the end of September 2017, an increase of 68. This is a net position and therefore reflects both the work the business has done in driving efficiency improvements and the additional headcount that has come from the recent acquisitions and investment in capacity.

DIVIDS

The Directors propose a final dividend of 6.5p per share making a total dividend per share for the year of 10.2p (2016: 9.0p), an increase of 13.3%. The final dividend, if approved, will be payable on 2 March 2018 to shareholders on the Company's share register as at the close of business on 26 January 2018.

KEY PERFORMANCE INDICATORS (KPIs)

The Group objective is to deliver sustainable, long-term growth in revenue and profits. This is to be achieved through the execution of the Board's strategies.

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

 
 Total revenue growth    2017   2016   2015 
----------------------  -----  -----  ----- 
 At actual exchange 
  rates                   30%     9%    12% 
----------------------  -----  -----  ----- 
 At constant exchange 
  rates                   19%     3%     8% 
----------------------  -----  -----  -----

The Board is focused on driving revenue growth by investing both organically and through acquisitions. The Group business has delivered strong underlying growth.

 
 Target market revenue    2017   2016   2015 
-----------------------  -----  -----  ----- 
 Aerospace & Defence 
  (GBPm)                  34.9   20.0   19.8 
-----------------------  -----  -----  ----- 
 Life Sciences (GBPm)      9.6    7.9    9.0 
-----------------------  -----  -----  -----

The Group targeted markets of Aerospace & Defence and Life Sciences provide a route to sustainable growth, and a more diversified revenue base. These markets also provide significant opportunities for Gooch & Housego to migrate up the value chain from materials and components to higher value sub-assemblies, modules and systems in response to the trend for our larger customers to outsource increasingly complex parts of their business. The increase in A&D revenue includes the full year effect of last year's acquisitions, combined with the acquisition of StingRay in FY17.

 
 Net cash analysis    2017   2016   2015 
-------------------  -----  -----  ----- 
 Net cash (GBPm)      14.9   11.7   17.3 
-------------------  -----  -----  -----

In order to balance business risk with the investment needs of the Company, management closely monitors and manages net cash. This year, following the acquisition of StingRay and the investment in capital assets the net cash position increased from GBP11.7 million to GBP14.9m.

 
 Earnings per share       2017    2016    2015 
  (EPS) 
----------------------  ------  ------  ------ 
 Adjusted diluted EPS 
  (pence)                48.5p   41.7p   38.9p 
----------------------  ------  ------  ------

As a result of a strong trading performance, the business has been able to deliver growth in adjusted diluted EPS of 16.3%, from 41.7p to 48.5p in 2017.

The revenue, cash and earnings per share targets for the year were met.

Group Income Statement