Gooch & Housego Regulatory News (GHH)

Gooch & Housego PLC

INTERIM REPORT FOR THE SIX MONTHS ENDED 31 MARCH 2011

Gooch & Housego PLC ('G&H' or 'the Company'), the specialist manufacturer of optical components and systems, today announces its interim results for the six months ended 31 March 2011.

1 Adjusted for amortisation of acquired intangible assets, recognition of deferred tax asset and the cost of acquisitions.

Operational highlights

·; Strong demand lifts revenues and profits

·; Industrial sector driven by growing use of lasers in manufacturing

·; Further diversification into Aerospace & Defence and Life Sciences, enhanced by acquisitions

·; Acquisition of EM4, Inc. a specialist manufacturer of active fibre optics

·; Acquisition of Crystal Technology, LLC, a manufacturer of acousto-optics and crystals

·; Record order book going into the second half of FY2011.

·; Interim dividend of 2.0p per share declared.

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

"The work we put in during 2010 has enabled us to meet the continuing strong demand for our products in 2011 and deliver an encouraging set of results for the first half of the year. The acquisitions open up many exciting opportunities for the future while accelerating the diversification of the business and consolidating Gooch & Housego's leading position in high-end photonics solutions."

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Performance Overview

The first six months of the 2011 financial year were characterised by favourable market conditions and strong demand for Gooch & Housego's products from the Industrial, Aerospace & Defence and Life Sciences market sectors. The period was also notable for the completion of two strategically important acquisitions.

The trends established in 2010, of recovery followed by real growth in the Industrial sector (which generated an 89% increase in operating profits compared to the same period last year), combined with increasing traction in the Aerospace & Defence and Life Sciences markets (where operating profits increased by 127%), continued into 2011. The challenge of increasing production capacity to meet the demand also carried over into 2011, but thanks to the groundwork done the previous year in recruitment, training and investment in new manufacturing equipment we were able to raise output and reduce lead times. As a result Company revenues were up 33% to £27.2 million, when compared with the equivalent period last year. This included £1.0 million for two months trading in respect of our EM4 acquisition. Excluding the impact of acquisitions and on a constant currency basis, revenue grew by 29% compared to the same period last year. Adjusted profit before tax was up 128% to £5.0 million. Despite the reduction in lead times, the order book at the period end was up by 11% on a like-for-like basis, and by 41% including acquisitions, compared to 30 September 2010. At the end of March 2011 the order book stood at the record level of £32.7 million.

Both acquisitions are settling in and are performing well as the integration process progresses. The acquisitions have been well received by customers and their order intake levels since completion have been encouraging.

Operational & Strategy Review

Products and Markets - Industrial

The increase in the use of lasers in manufacturing, particularly in fields of microelectronics and flat panel displays, combined with the world's continuing appetite for smart phones and tablet computers, continues to be the main driver behind the demand for Gooch & Housego's acousto-optic products. It is also a significant factor in the growth in sales of electro-optics, fibre optics and precision optics. In parallel, other industrial sectors that use lasers in manufacturing, such as the automotive industry, are also experiencing growth and are contributing to the overall demand for laser components. As a result revenue in this sector increased by 42% on a like-for-like basis when compared to the same period last year. The rate of growth has stabilised in recent months to what appears to be a sustainable level, which combined with our success in increasing output, has enhanced our responsiveness.

Other industrial markets, ranging from semiconductor manufacturing & test equipment to undersea fibre optic telecommunications, also performed well in the first half of the year, driving increased sales across all product types.

Products and Markets - Aerospace & Defence

In addition to continued organic growth in this sector (18% on a like-for-like basis compared to the first six months of 2010), the acquisition of EM4 means that Gooch & Housego is now a participant in a number of significant commercial aerospace, defence and space programmes in both the US and Europe. The combination of passive fibre optic technology from Gooch & Housego's Torquay facility and EM4's active fibre optics expertise is unique, and addresses the market's stated desire to source high-level sub-assemblies in preference to low-level components. The integration of EM4 into Gooch & Housego to create a fibre optics business unit encompassing the Torquay and Boston operations is central to delivering this capability, and is already well advanced. The acquisition, and our plans to be able to provide a complete "actives & passives" capability, has been particularly well received by customers.

Products and Markets - Life Sciences

Gooch & Housego's presence in the Life Sciences sector, which also saw continued organic, like-for-like growth of 51% compared to the first six months of 2010, has similarly been strengthened by this year's acquisitions. EM4 has enhanced Gooch & Housego's capabilities in the important optical coherence tomography (OCT) market, while Crystal Technology is active in microscopy. Our development of imaging systems continues to make encouraging progress in applications such as digital pathology and diagnostics as we shift our attention from R&D towards commercialisation.

Products and Markets - Scientific

Our activities in the Scientific market are dominated by a small number of large, long term programmes. These are progressing well, but this year, as expected, we have entered a phase of lower demand. Combined with the end of stimulus funding and the continuing resolution in the US, the effect has been a 19% reduction in revenues from the Scientific sector when compared to the same period last year.

Acquisitions and Diversification

Through the acquisitions of EM4 and Crystal Technology, Gooch & Housego has been able to further its objective of diversification while at the same time strengthening its core capabilities in materials and materials processing. With Aerospace & Defence now likely to account for approaching one third of revenues on an annualised basis, Gooch & Housego has broadened its customer and applications base resulting in less exposure to cyclical trends. Similarly, in terms of product and technology diversification, fibre optic products now account for approximately one quarter of total revenues on an annualised basis, up from zero four years ago.

The acquisition of Crystal Technology consolidates Gooch & Housego's market leadership position in acousto-optics and brings self-sufficiency in the strategically important crystals tellurium dioxide and lithium niobate. These materials in turn open up new opportunities in defence, telecommunications and consumer applications. As well as ensuring adequate supply, self-sufficiency in these materials supports our objective to control all critical aspects of the product that affect performance, quality and price, which is key to maintaining our leadership in the market.

Cash Flow and Financing

In the six months to 31 March 2011 Gooch & Housego generated net cash from operations of £5.5 million, compared to £4.0 million in the same period of 2010. Working capital increased by £0.1 million in the six month period to 31 March 2010 (2010: reduction of £0.7 million). Tax payments during the first six months of 2011 were £1.0 million compared to £0.5 million in 2010.

The ratio of operating cash flows to EBITDA was 95%. (2010: 109%)

Capital expenditure on property, plant and equipment increased to £1.2 million (2010: £0.2 million).

On 5 January 2011, Gooch & Housego raised approximately £10.2 million (net of expenses) through a placing of new 20p Ordinary Shares, and an additional £5 million in debt, in order to fund the acquisitions of EM4 Inc., and Crystal Technology LLC.

Cash, cash equivalents and bank overdrafts as at 31 March 2011 amounted to a positive cash position of £9.0 million, compared to £5.7 million at 30 September 2010, an improvement of £3.3 million.

Net debt reduced from £9.3 million at 31 March 2010 to £5.5 million at 31 March 2011, a reduction of 41% in absolute terms and 35% if measured on a constant currency basis. Since 30 September 2010, net debt has increased by 6%. The movement in net debt is outlined in the table below.

On 1 April 2011, Gooch & Housego renegotiated its banking facilities with its current bankers, the Royal Bank of Scotland. These facilities now comprise an $18 million dollar denominated term loan (fully drawn down), a £3.1 million sterling denominated term loan (fully dawn down), an $8 million revolving credit facility (drawn to $4 million as at 31 March 2011) and an undrawn capital expenditure facility of $8 million. All facilities are committed until April 2015.

The Company has reported compliance with banking covenants since January 2009. The Group monitors its financial performance against these covenants on a regular basis. Based upon its forecasts and current trading conditions, the Group considers that it has sufficient headroom to operate within these covenants.

Based on the Company's current financial position and anticipated trading performance, the Directors are confident that the Company has adequate resources to continue as a going concern for at least the next twelve months.

People

As a result of our recruitment efforts and the recent acquisitions Gooch & Housego's headcount has increased by 25% to 576 since 1 October 2010. A particular benefit of the acquisitions has been the influx of highly skilled and capable people across all functions of the business, including at senior management level. We would like to welcome them to Gooch & Housego and thank all employees for their help in delivering a positive start to the year.

Dividends

The Directors have declared an interim dividend of 2.0p per share. This will be payable on 15 July 2011 to shareholders on the register as at 17 June 2011.

Summary & Outlook

Favourable trading conditions combined with success in increasing output and developing new markets has helped us to achieve encouraging results for the first six months of the year. The acquisitions of EM4 and Crystal Technology have enhanced Gooch & Housego's leading position in acousto-optics and high-end fibre optics, accelerated our diversification into new markets, decreased our exposure to cyclicality and reduced risk by securing our supply chain. Our priorities in the second half of the year are to integrate and consolidate the new acquisitions in order to deliver the considerable upside potential that they provide, while continuing to execute existing opportunities in a trading environment that remains favourable.

Julian Blogh Gareth Jones Andrew Boteler

Chairman Chief Executive Officer Chief Financial Officer

8 June 2011 8 June 2011 8 June 2011

Unaudited interim results for the 6 months ended 31 March 2011

Reconciliation of operating profit to adjusted operating profit:

Reconciliation of net finance costs to adjusted net finance costs:

Unaudited interim results for the 6 months ended 31 March 2011

Unaudited interim results for the 6 months ended 31 March 2011

Unaudited interim results for the 6 months ended 31 March 2011

 Cash, cash equivalents and bank overdrafts at the end of the period are made up of:

Notes to the Interim Report

1. Basis of Preparation

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

The Interim Report was approved by the Board of Directors and the Audit Committee on 7 June 2011. The Interim Report does not constitute statutory financial statements within the meaning of the Companies Act 2006 and has not been audited.

Comparative figures in the Interim Report for the year ended 30 September 2010 have been taken from the Group's audited statutory financial statements on which the Group's auditors, PricewaterhouseCoopers LLP, expressed an unqualified opinion. The comparative figures to 31 March 2010 are unaudited.

The Interim Report will be announced to all shareholders on the London Stock Exchange and published on the Group's website on 8 June 2011. Copies will be available to members of the public upon application to the Company Secretary at Dowlish Ford, Ilminster, Somerset, TA19 0PF.

The accounting policies adopted are consistent with those of the annual financial statements for the year ended 30 September 2010, as described in those financial statements, save for the adoption of the new standards referred to below.

2. Recent Accounting Developments

The following standards and amendments became effective for the current reporting period:

IFRS 2 (amendment) Group Cash-Settled Share-Based Payments

IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments

Application of these standards and interpretations has not had a material impact on the net assets of the Group.

The following standards and interpretations were issued but application was not mandatory for the period:

IFRS 9 Prepayment of Minimum Funding Requirement

The Directors anticipate that the adoption of these standards and interpretations will have no material impact on the net assets or results of the Group.

3. Estimates

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

In preparing these condensed consolidated interim financial statements, the significant judgements made by management in applying the Company's accounting policies and the key sources of estimation uncertainty were the same as those that applied to the consolidated financial statements for the year ended 30 September 2010, with the exception of changes in estimates that are required in determining the provision for income taxes.

4. Financial risk management

4.1 Financial risk factors

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

The interim condensed consolidated financial statements do not include all financial risk management information and disclosures required in the annual financial statements and should be read in conjunction with the Company's annual financial statements as at 30 September 2010.

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

4.2 Liquidity risk

Since 30 September 2010, Gooch & Housego has raised £10.2 million (net of expenses) through a share placing and increased its debt facility by £5.0 million in order to fund two acquisitions. Under deferred and conditional consideration arrangements associated with the acquisition of Crystal Technology LLC and EM4 Inc, the Company is obliged to pay the former owners of these companies an estimated $6.6 million on the 31 March 2012.

Except as above there have been no material changes in contractual undiscounted cash flows for financial liabilities.

5. Segmental analysis

5. Segmental analysis (continued)

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

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

Analysis of revenue by destination

Sales between segments are made on normal commercial terms.

6. Income tax expense

Analysis of tax charge in the year to date

Income tax expense for the six months ended 31 March 2011 and 31 March 2010, respectively, has been estimated at prevailing rates. Taxation for the year ended 30 September 2010 is the actual provision for the year.

7. Earnings per share

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

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

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

8. Dividend

The Directors have declared an interim dividend of 2.0 pence per share for the half year ending 31 March 2011. This dividend has not been accounted for within the period to 31 March 2011 as it is yet to be paid.

No dividends were paid in the comparative periods.

9. Borrowings

On 1 April 2011, Gooch and Housego renegotiated its banking facilities with its current bankers, the Royal Bank of Scotland. These facilities now comprise of an $18m dollar denominated term loan (fully drawn down) and a £3.1m sterling denominated term loan (fully dawn down).

The Company has a working capital facility of US$8.0m of which US$4.0m is drawn down.

In addition the Group has been granted a capital expenditure facility of US$8.0m, which has not been drawn down.

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

10. Cash generated from operating activities

11. Acquisition of EM4 Inc

On 25 January 2011, the company acquired the entire share capital of EM4 Inc. a US based manufacturer of active fibre optics components and subassemblies, based near Boston, Massachusetts for an initial consideration of $11.6 million (approximately £7.3 million). To fund this acquisition, the Company raised approximately £10.6 million (approximately £10.2 million net of expenses) through a placing of new ordinary shares at 450 pence per new ordinary share, on 5 January 2011.

The following table summarises the consideration paid for EM4 Inc., and the provisional fair values of the assets and liabilities at the acquisition date.

The goodwill in respect of this acquisition arises from a number of sources including well established customer relationships with many of the major US defence contractors, world leading technology, and a well-respected brand.

The contingent consideration arrangement requires Gooch & Housego to pay the sum of 1.2 times the EBITDA generated by EM4 Inc. in calendar year 2011.

The potential undiscounted amount of all future payments that Gooch & Housego could be required to make under this arrangement is between nil and $7.0 million.

The fair value of the contingent consideration arrangement of £2.0 million was estimated by reference to latest business forecasts.

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

The revenue included in the consolidated income statement from 23 January 2011 to 31 March 2011 contributed by EM4 Inc. was £1.0 million. EM4 Inc. also contributed profit of £0.1 million over the same period.

12. Acquisition of Crystal Technologies LLC.

On 31 March 2011, the company acquired the entire share capital of Crystal Technology LLC, a Palo Alto, California, based manufacturer of acousto-optic, electro-optic and fibre optic components and systems, and oxide single crystal materials for optical applications. The total consideration of $13.75 million (approximately £8.6 million) comprises $9.625 million for the business and $4.125 million in respect of near cash equivalents being left in the business at acquisition.

The following table summarises the consideration paid for Crystal Technology LLC, and the provisional fair values of the assets and liabilities at the acquisition date.

The goodwill in respect of this acquisition arises from a number of sources including technology in key crystal growth capabilities and a well-respected brand.

The deferred consideration arrangement requires Gooch & Housego to pay the sum of $3.25 million on 31 March 2011.

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

As Crystal Technology was acquired on 31 March 2011 it contributed no revenue or profits to the current period.

13. Called Up Share Capital

14. Derivative financial instruments

The notional principal amount of the outstanding interest swap contract at 31 March 2011 was $7.7 million (2010: $10.3 million). The end date for the interest rate swap is 14 October 2013.

At 31 March 2011, the fixed rate of the interest rate swap was 3.19% and the floating rate was US dollar LIBOR.