Gooch & Housego Regulatory News (GHH)

Gooch & Housego PLC

INTERIM REPORT FOR THE SIX MONTHS ENDED 31 MARCH 2012

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 2012.

1 Adjusted for amortisation of acquired intangible assets, redundancy costs, acquisition costs, the impairment of goodwill and the write back of the EM4 earn out provision.

Operational highlights

·; Challenging trading conditions in first quarter

·; Improving order activity through second quarter and continuing into second half

·; Aerospace & Defence affected by delays but strong pipeline of near term opportunities

·; Industrial Laser market recovering and customer inventories normalising

·; Recent successes with Fibre-Q product

·; Management team strengthened and organisational changes introduced

·; Interim dividend of 2.0p per share declared.

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

"Despite the challenges experienced during the period we have remained focussed on positioning G&H to deliver sustainable long-term growth in our target markets. With a strong pipeline of opportunities and more favourable trading conditions we retain a cautiously optimistic outlook."

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Performance Overview

Revenue for the six months ended 31 March 2012 was £27.8 million, up 2% from £27.2 million for the corresponding period last year. After taking account of the acquisition of EM4 and Crystal Technology, and foreign exchange, like for like group revenue was down 23% over the same period.

In sharp contrast to 2011, trading conditions in the first six months of our 2012 financial year were challenging as adverse macro-economic factors combined with a downturn in the semiconductor equipment and microelectronics sectors to create a difficult business environment. The impact was reduced demand for our products. In the Aerospace & Defence sector there were delays in the placing of a number of large contracts. With revenue growth held back, we found it necessary to revise our earnings forecasts for the full year.

Trading conditions improved in the second quarter as customer call-offs resumed, their inventory levels began to normalise and order activity picked up in most sectors. Order intake in the second quarter was 64% higher than in the first quarter.

Trading conditions have continued to improve going into the second half of the year with good levels of order activity and an encouraging pipeline of near term opportunities. A number of these opportunities are in the Aerospace & Defence sector. Whilst defence budgets have come under great pressure we continue to be of the view that this sector provides significant growth potential for Gooch & Housego given both our current small market share and because priority spend is directed towards system upgrades that frequently require sophisticated photonic solutions to deliver performance enhancements.

The group's profit before tax was £2.5 million, 36% below the £3.9 million reported last year. This reflects the difficult trading conditions that we announced to the market in late February 2012. In response to this the business undertook a programme of cost reduction measures which are expected to deliver net cost savings in the current financial year of £0.6 million.

Operational & Strategy Review

Products & Markets - Industrial

Gooch & Housego's principal industrial markets are industrial lasers, telecommunications, metrology/sensing and semiconductor manufacturing and inspection. Industrial lasers are used in a diverse range of precision manufacturing applications ranging from microelectronics to automotive.

The start of our financial year coincided with a slowdown in the industrial laser market. The effect of reduced underlying demand together with high levels of inventory at our customers resulted in a sharp drop in Q-switch shipments in the first quarter of this financial year. An upswing in the semiconductor manufacturing equipment sector during our second quarter was reflected in an increase in the level of Q-switch demand as customer inventory levels began to normalise and call-offs resumed. Although there is still some excess inventory in the supply-chain this is decreasing steadily as a result of sustained higher levels of usage, and recent evidence of increased investment in microelectronics manufacturing in China augers well for the future.

We have seen a similar upturn in demand for precision optics and acousto-optics for use in laser-based metrology applications, ranging from semiconductor manufacturing and inspection equipment, to precision engineering and civil engineering.

Telecommunications demand for our products was adversely affected in the first half of 2012 by a combination of the floods in Thailand and delays to large scale undersea cable infrastructure projects as a result of uncertainties over funding. Gooch & Housego is well-placed to benefit from this market once these issues are resolved.

The fibre-laser market has been the fastest growing subset of the industrial laser market in recent years and is becoming an increasingly important source of revenue. A major contributor to this revenue is the Fibre-Q, which is an optimised "Q-switch" for fibre lasers that was developed by combining Gooch & Housego's traditional acousto-optics expertise with its more recently acquired fibre optic capabilities. After an extensive period of qualification testing we have received our first volume production orders for fibre laser applications in recent months. Other versions of the Fibre-Q have been optimised for remote sensing applications and have also recently made the transition to volume manufacturing. The total value of Fibre-Q orders in recent months is in excess of £1.6 million.

Products & Markets - Aerospace & Defence

The Aerospace & Defence market for Gooch & Housego is characterised by high-value, long-term programmes involving the main US and European defence contractors. During the first six months of 2012 we have worked with our customers to progress these programmes through the often protracted development and qualification phases. While we are approaching the completion of the initial phases of a number of programmes, overall revenues from Aerospace & Defence were slightly down on the same period last year.

In recognition of the potential of this sector we have created a new senior business development position and established a dedicated sales team focussed solely on Aerospace & Defence. A primary objective is to extend the best practice established at our Boston and Ilminster operations to our other locations. These sites have been successful in migrating the business from a component level sale to higher-value integrated modules and sub-systems by acting in the role of strategic partner, rather than simply as a supplier, to our customers.

In parallel, we have in recent months committed to a total investment of approximately £1.1 million at our Torquay and Boston facilities in order to meet the requirement of our US and European Aerospace & Defence customers to be able to source locally-manufactured product. These investments ensure that Gooch & Housego is well-positioned to benefit from the trend we are observing for defence contractors to outsource more manufacturing in response to budgetary constraints.

These initiatives and commitments reflect the increased visibility we now have of significant opportunities to participate in long-term programmes as a result of the planning and preparation we are doing with several of our principal customers.

Products & Markets - Life Sciences

Our Life Sciences activities fall into two main revenue streams - fibre optic modules for optical coherence tomography (OCT) applications, and acousto-optic and electro-optic Q-switches for laser surgery applications - and one area of technology development - diagnostic systems based on hyperspectral imaging technology. The principal commercial application of OCT systems is retinal imaging, and Gooch & Housego continues to be the leading provider of fibre optic solutions (products and design services) to this industry. The first half of the year has seen a high level of activity and the addition of a significant new customer entering the field. We have a similarly strong market position in the medical laser market, with a number of orders from the industry leaders in recent months. In preparation for engaging with commercial partners to exploit our diagnostic work we have initiated a number of studies, including a limited trial to demonstrate the capabilities of our technology. These investigations are expected to be completed in the second half of the year.

Products & Markets - Scientific Research

The principal application for our scientific products is high energy laser physics, and in particular, laser inertial confinement fusion, where lasers are used to create the conditions found in the core of a star. Our main customer is the National Ignition Facility (NIF) at Lawrence Livermore National Laboratory (LLNL). After more than a decade in the building NIF is now complete and operational, hence the gradual decline in revenues. This trend may reverse if NIF is successful in achieving its objective of "ignition" and energy gain later this year, thereby paving the way for future programmes, notably Laser Inertial Fusion Energy (LIFE), aimed at realising energy generation from nuclear fusion. During the first half of this year we have been actively engaged in discussions with LLNL about the role Gooch & Housego could play in a future LIFE programme.

Strategy

During the first half of 2012 we introduced a number of significant changes to the way the business is run in order to facilitate the execution of our strategy.

Five years ago we embarked on a strategy to transform Gooch & Housego into a leading, medium-sized photonics business with a portfolio of world-class products and a global capability. The aim was to deliver above average growth and returns by diversifying into new markets (Aerospace & Defence and Life Sciences) and by moving up the value-chain from materials and components to sub-systems and instruments. Through the acquisition of best-in-class businesses, Gooch & Housego today has a uniquely broad range of photonics technology and we have established a presence in our target markets. The build phase is essentially complete and the focus has now moved on to executing on the strategy.

With the emphasis shifting from acquisition to innovative organic growth and business development we recognised the need to introduce new skills and revise the organisational structure. We have appointed two new non-executive directors, established a new Operational Board as the executive decision making body, created the new Operational Board position of Chief Technology Officer (CTO), and introduced new Business Development and Business Unit Manager positions.

In February 2012 we announced the appointment of Peter Bordui and Mark Webster to the main board bringing, respectively, extensive experience of the photonics and healthcare industries. In April 2012 Murray Reed joined Gooch & Housego as CTO to provide the leadership needed to drive the introduction of innovative new products and technologies.

Focussing on the needs of our customers and markets, the new Business Development positions are aimed at achieving greater penetration of our target markets through greater sector specialisation. The Aerospace & Defence business development team was launched in April.

Looking internally, having acquired four businesses over the past five years we are seeking to derive greater efficiency and effectiveness from our manufacturing operations, which fall into natural groupings by product type. In order to leverage the commonality within the business units and to enable them to achieve their full potential, we have created two new Business Unit Manager positions in Fibre Optics and Acousto-Optics.

Cash Flow and Financing

In the six months to 31 March 2012 Gooch & Housego generated net cash from operations of £1.9 million, compared to £5.5 million in the same period of 2011.

The Company has invested in working capital during the first six months of the year. Inventories have increased by £2.9 million since the year end as the company has sought to secure supply of key components, build strategic inventories and, in particular, manage the transfer of crystal growth from California to Ohio.

Capital expenditure on property, plant and equipment increased to £2.5 million (2011: £1.2 million). The largest proportion of this (£1.1 million) related to the crystal growth & fabrication transfers.

On 25 March 2012, Gooch & Housego paid £2.0 million in respect of the deferred consideration on the 2011 Crystal Technology acquisition. Contingent consideration was not paid on the EM4 acquisition due the earnings threshold not being reached as a result of a delay of a major contract, which was subsequently awarded after the end of the earn out period.

Cash, cash equivalents and bank overdrafts as at 31 March 2012 amounted to a positive cash position of £5.7 million, compared to £9.0 million at 30 September 2011.

Since 30 September 2011, net debt has increased by £3.7 million. The movement in net debt is outlined in the table below.

At 31 March 2012, the banking facilities for Gooch & Housego with its bankers, the Royal Bank of Scotland, comprise of an $18 million dollar denominated term loan, a £3.1 million sterling denominated term loan, an $8 million revolving credit facility and an undrawn capital expenditure facility of $6 million. All facilities are committed until April 2015. The term loan balances at 31 March 2012 were $13.5 million and £2.7 million sterling, whilst the business utilised $4 million of its revolving credit facility.

People

Gooch & Housego has a loyal and skilled workforce that helps make us a leader in our industry. It is with regret that we found it necessary to reduce manufacturing headcount, as part of a number of cost saving measures, in response to the lower levels of demand that we experienced in the first quarter. Overall headcount decreased by 4% from 623 to 597 during the first six months of the year.

Dividends

The Directors have declared an interim dividend of 2.0p per share (2011 : 2.0p per share). This will be payable on 27 July 2012 to shareholders on the register as at 22 June 2012.

Summary & Outlook

After a very challenging first quarter, trading conditions have shown a steady and sustained improvement. We have used the period to make changes to our management team and put in place the structure to facilitate future growth as we execute our strategy. We have continued to make significant progress behind the scenes in developing our business in the Aerospace & Defence sector. Overall, we retain a positive outlook despite the wider uncertainties affecting the global economy.

Julian Blogh Gareth Jones Andrew Boteler

Chairman Chief Executive Officer Chief Financial Officer

12 June 2012 12 June 2012 12 June 2012

Unaudited interim results for the 6 months ended 31 March 2012

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 2012

Unaudited interim results for the 6 months ended 31 March 2012

Unaudited interim results for the 6 months ended 31 March 2012

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

Reconciliation of net cash inflow to movements in net debt

Analysis of net debt

1 RCF = Revolving Credit Facility

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 11 June 2012. 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 2011 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 2011 are unaudited.

The Interim Report will be announced to all shareholders on the London Stock Exchange and published on the Group's website on 12 June 2012. 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 2011, as described in those financial statements, save for the adoption of the new standards referred to below.

2. Application of IFRS

Adoption of new standards

During the current reporting period there were no new standards or amendments which had a material impact on the net assets of the Group. In addition, standards or amendments issued but not yet effective are not expected to have a material impact on the net assets of the Group. However, the Group is closely monitoring the IASB projects on Contract Revenue recognition and the Lease accounting overhaul as they could potentially have a material impact on the Group's results.

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 judgments 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 2011, 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 2011.

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

Notes to the Interim Report (continued)

4.2 Liquidity risk

Under deferred consideration arrangements associated with the acquisition of Crystal Technology LLC, the Company was obliged to pay the former owners $3.25 million on 25 March 2012. The Company's other acquisition in 2011, EM4 Inc, did not reach its threshold for the contingent consideration element to be paid. 

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.

Sales between segments are made on normal commercial terms.

Analysis of revenue by destination

6. Income tax expense

Analysis of tax charge in the period

Income tax expense for the six months ended 31 March 2012 and 31 March 2011, respectively, has been estimated at prevailing rates. Taxation for the year ended 30 September 2011 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 2012. This dividend has not been accounted for within the period to 31 March 2012 as it is yet to be paid.

9. Borrowings

The group's banking facilities with the Royal Bank of Scotland comprise of an $18 million dollar denominated term loan (fully drawn down), a £3.1 million sterling denominated term loan (fully dawn down). The term loan balances at 31 March 2012 were $13.5 million and £2.7 million sterling respectively.

In addition, the Company has a working capital facility of $8.0 million of which $4.0 million is utilised and an undrawn capital expenditure facility of $6.0 million.

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. Called Up Share Capital

11. Derivative financial instruments

The notional principal amount of the outstanding interest swap contract at 31 March 2012 was $15.75 million (2011: $7.7 million). The end date for the interest rate swap is 1 April 2015. At 31 March 2012, the fixed rate of the interest rate swap was 2.14% and the floating rate was US dollar LIBOR. The fair value of the swap is a mark to market calculation based on future interest rate expectations over the life of the swap. This is a level 2 method of determining fair value as defined by IFRS 7.