Chief Executive Officer's Statement

FY2021 Performance

During the financial year 2021 G&H achieved revenue of £124.1m, representing an increase of 1.6% over previous year (FY2020: £122.1m), or excluding the impact of foreign exchange an increase of 6.4%. Adjusted profit before tax was £12.6m, an increase of 29.4% over last year (FY2020: £9.8m).

This reflected a strong and improving end market demand and initial benefits from our manufacturing streamlining programme, more than offsetting currency headwinds and some supply chain constraints. Overall, it was a far better business environment than last year, and we expect further improvement in the future.

Industrial laser demand continues to be strong, especially the semiconductor market, where there are a range of exciting growth opportunities for G&H technologies. Hi-reliability fibre couplers delivered a good performance, with greater usage in space satellites complementing the undersea cable business.

We completed a number of significant deliveries to our aerospace and defence customers. Life sciences performed well across the board. Medical diagnostics remained at previous high levels, with a product designed to improve respiratory function and oxygen uptake, as part of a ventilator system, performing particularly well. Orders for our specialist medical laser products have been strong as the market recovers from the low levels of elective surgery during the pandemic.

Our ambitious manufacturing streamlining programme has continued throughout FY2021, with further site consolidation and outsourcing of established products. The previously announced profit benefit of this programme is on track to be delivered in FY2022.

We have continued to invest in an active R&D portfolio and are working closely with many of our customers on their next generation products. New products contributed a record £18.1m of revenue in FY2021 (FY2020: £16.9m).

The Group delivered strong cash flow over the year and has further reduced its level of borrowings. Net debt, excluding lease liabilities was £2.6m at the year end, which places G&H in a strong position to pursue our strategic goals.

G&H has a robust order book. As at 30 September 2021 it stood at £97.8m (30 September 2020: £92.4m), 5.8% higher than the same period previous year or 8.6% excluding foreign exchange. The strength of the order book provides the Group with good momentum as it enters the new financial year. Industrial and medical lasers are demonstrating a sustained recovery, while telecommunications and medical diagnostics continue to perform at a high level.

Strategic Goals

Our long-term strategic goals of diversification and moving up the value chain have stood us in good stead during a challenging period. As the business environment is now showing significant improvement, we intend to pursue them with renewed vigour through internal investment and where appropriate, acquisitions.

Aerospace and defence (A&D) and life sciences provide a counterbalance to the exposure of the industrial laser business to the economic cycle. These sectors both have high product quality and compliance barriers to entry and tend to value systems over components. As they move towards greater use of photonics, G&H is increasingly well placed to serve these customers with our photonic technologies and enhanced systems capabilities.

Our aim is to provide a broadly equal split between the three sectors, industrials, A&D and life sciences. In FY2021 A&D represented 33.1% of our revenue and life sciences 22.1%. This represents considerable progress over the last few years, in particular with life sciences, which has benefited from organic growth in the traditional G&H areas of optical coherence tomography (OCT) and medical lasers and the acquisition of ITL.

Systems, subsystems and modules represent 33.2% of revenue. We have substantially improved our software, firmware, electronic and mechanical engineering capability, in large part through the acquisition of ITL. Its facility in Ashford, Kent has provided a platform for the creation of a systems engineering hub.

Streamlining of G&H's Manufacturing Base

Our streamlining programme has progressed well during FY2021. At the beginning of the financial year, we had 12 manufacturing sites and now have nine. We moved our Baltimore, MD production to our Boston, MA site creating a single US fibre facility. In the UK we have moved our Glenrothes, Scotland and St Asaph, Wales manufacturing to Ilminster, Somerset, creating a UK precision optics (PO) hub. Our world leading optical systems engineering team has been relocated to an innovation hub in St Asaph and they remain focused on target development projects. Outsourcing of our Ilminster AO production to a South-East Asian contract manufacturer is well advanced and the final product transfers are expected to be completed soon.

This has been achieved at a time when travel, especially to Asia, has been challenging and the results are a tribute to the tenacity of the G&H teams involved in delivering these projects. The previously announced FY2022 profit benefit of £1.75m is on track to be delivered.

We will continue to assess future opportunities for consolidation of our operations.

Research and Development (R&D)

Our global R&D team has reaped considerable benefit from concentrating our resources on fewer, higher return projects that the Group has identified as offering the best growth potential for our photonic technologies and system capabilities. During FY2021 we introduced 48 new products and delivered record new product revenue.

G&H continues to work closely with our industrial laser partners to develop their next generation products. There is especially strong activity with lasers that are used to manufacture semiconductors. Our industrial laser development activity ranges from 'state of the art' extreme ultra-violet ('EUV') lithography lasers used for nanoelectronics, redesigned market leading germanium AO modulators and specialist AO deflectors, through to providing critical components for the next generation designs of established products.

G&H's 'laser engine' technology is gaining real traction in directional sensing for wind turbines and security and defence applications. Our partner company is now selling their directional sensing unit for wind turbines into the large Chinese market.

Unmanned aerial vehicles (UAVs) represent significant growth potential for G&H. We have expertise in the design, engineering and manufacturing of bespoke complex optical arrays in the IR spectrum for UAV imaging and communication systems. This area has been a source of multiple new products and systems in FY2021. We are currently working on 'thermal overlay' of our traditional optical sighting systems for armoured vehicles. This will be the first new product to come out of our innovation hub in St Asaph.

In November 2020, in collaboration with NEC Corporation and JAXA (Japan Aerospace Exploration Agency), G&H fibre optic photonics and systems were at the heart of the successful launch of a satellite laser communication system. To our knowledge this is the first system of its type, and the aim is to demonstrate that laser communications can be a viable solution for future high speed and scalable space communications. This success has raised the profile of the teams based in Torquay and Boston, MA that developed the system and has led to further contracts in this area.

OCT is a non-invasive laser-based technology that delivers cross sectional diagnostic images. G&H is the market leader in supplying the technology for retinal scanning, which our customers deploy in opticians' offices. We are working with our partners on developing the next generation systems. The same technology is being applied to cancer and cardiovascular disease diagnosis. Our most recent cardiovascular diagnostic collaboration is now undertaking medical registration trials in the USA.

The acquisition of ITL brought a burgeoning medical diagnostics business and enhanced system capability. In addition to developing the next generation of existing products the R&D team at ITL are working on a range of novel medical diagnostics systems and the Group has expanded to meet the demands of our customers. We have three collaborations with Chinese medical diagnostics companies through our facility in Shanghai. We believe this has the potential to be a source of substantial growth as the Chinese Government is backing the development of a 'home grown' medical diagnostics industry.

Corporate Responsibility

We are proud of the way the organisation has responded to the challenges of the pandemic and have worked hard to ensure all our sites are fully COVID compliant. The health and safety of our staff, customers and suppliers remains our priority.

The Board is accountable to its shareholders and is committed to the highest standards of corporate governance. To this end the Company has adopted the UK Corporate Governance Code (2018). In order to ensure the Company is meeting the most up to date standards, regular reviews of policy are held by the relevant committees of the Board of Directors.

G&H is committed to providing equal employment opportunities for all and aims to improve diversity at all levels of the organisation. Our recruitment partners have been instructed to ensure that they include women in all shortlist applications and we are actively engaged with encouraging women in engineering.

G&H is committed to conducting our business in an environmentally responsible and sustainable manner. We are consolidating our manufacturing facilities, and introducing other initiatives aimed at reducing our environmental footprint, such as the introduction of solar power at our three UK sites. The Executive Directors have specific environmental management and carbon reduction goals in their remuneration metrics.

Outlook

The business environment improved markedly over the pandemic-affected 2020. We believe there will be further improvement in the next financial year and over the longer term.

FY2021 saw strong demand for industrial and medical lasers, telecommunications and medical diagnostics. The drivers of a sustained recovery in industrial lasers remain in place, as new technologies such as 5G roll out, along with greater use of new more flexible materials in microelectronic manufacturing and strong worldwide demand for semiconductors. We expect this demand led growth to continue in these sectors. Our year end order book is robust and 8.6% higher than the same time last year, excluding the impact of foreign exchange.

A&D sub-sectors of space satellite communications, optical arrays for gimbals on UAVs, and targeting and sighting systems all performed well in the last financial year. G&H supplies laser based navigational products for commercial and military aircraft. Our internal forecasts expect that the commercial aspect of this business will start to return to growth in 2023.

In FY2021 there was some 'drag' on performance due to currency headwinds, self-isolation and supply chain issues in parts of our business. It is possible that we may still see these factors affect performance in the near term. Mitigating actions have been taken by management in each of these areas.

G&H's plans to streamline our manufacturing operations have been largely completed during FY2021 and we are on track to deliver the previously announced FY2022 profit improvements. The benefits of having our US fibre optic capability housed on a single site and our UK precision optics (PO) production on one site should start to positively impact performance. Ilminster has throughout its history been a mixed AO and PO site and the efficiency and capacity improvements we envisage as the exclusively PO site embraces its new role should enable an enhanced offering to its predominately A&D customers.

New products are becoming an increasingly important part of our portfolio, as we continue to deliver record new product sales from an increasingly productive R&D group. We remain committed to invest in those areas identified as having the greatest potential. There continues to be substantial long term growth potential for our photonic technologies and system capabilities in all our target sectors.

G&H remains committed to our long-term strategic goals of further diversification and moving up the value chain. We intend to vigorously pursue these goals through internal investment and where appropriate, acquisitions. The Board remains confident that G&H is well positioned to deliver further progress in FY2022 and substantial long-term growth.

Mark Webster

Chief Executive Officer

30 November 2021

Operations Review

Industrial

Revenue                                        £55.6m (2020: £54.8m)

Adjusted Operating Profit         £7.1m (2020: £4.1m)

Operating Profit                           £4.5m (2020: £3.2m)

Percentage of Revenue            44.8% (2020: 44.9%)

Market Drivers

·      Post pandemic recovery in the industrial laser market.

·      Roll out of 5G, new more flexible materials in microelectronic manufacturing and greater worldwide demand for semiconductors.

·      Next generation products such as EUV lithography lasers for nanoelectronics and new design germanium modulators.

·      Increasing investment in continental connectivity of data centres.

·      Greater use of our hi-reliability fibre optic technology in space satellites.

·      Increased investment in wind farms and border and infrastructure asset protection, both using a version of our 'laser engine' sensing technology.

Performance

Overall, sales of products into our industrial markets grew by 1.4% (7.2% excluding foreign exchange) compared to the prior year. We saw strong and sustained growth in our industrial laser and semiconductor revenues thanks to the recovery of the global economy from the effects of the pandemic. Our Asian markets led the recovery from the beginning of the calendar year but this was then supported in the second half of the trading period by demand from our US and European markets. The roll out of new technologies such as 5G, along with greater use of new materials in microelectronic manufacturing, are fuelling demand. We secured important new programme positions for our recently developed germanium acousto-optic modulator product, which will lead to recurring revenues for many years to come. This product is integrated in to the heart of the most advanced and efficient laser systems currently being developed by our OEM customers for use in semiconductor manufacturing. The movement of our Ilminster AO Q-switch production to a South East Asian manufacturer will enable us to more effectively compete in the increasingly price sensitive China market.

Our sensing modules generally form part of large infrastructure projects and there were some end customer programme delays that impacted on our revenues in this subsector during the period. Nevertheless, the underlying trend remains in our favour with photonics sensing products increasingly seen as the way to protect and improve the efficiency of infrastructure assets. For example, G&H products are used extensively to improve the performance of wind turbines used for clean energy generation and the focus on switching to energy created from renewable sources provides G&H with sustainable underpinning demand for its products in this area.

Volumes for our hi-reliability fibre couplers used in undersea cable networks remained at the raised level seen in FY2020. There is strong demand thanks to a sustained market drive for the transmission of more and more data for both business and personal consumption and the greater use of the same technology in space satellites.

Applications

·      Industrial lasers for materials processing applications. G&H supplies Q-switches and other acousto-optic, electro-optic and fibre optic products.

·      Semiconductor for lithography and test and measurement applications.

·      Metrology for laser-based, high-precision, non-contact measurement systems.

·      Optical communications specifically for high reliability and high performance applications.

·      Remote sensing for applications including asset protection, perimeter security, strain, temperature and pressure sensing.

·      Scientific research the largest proportion being nuclear fusion research and energy - laser technology is being used to recreate the conditions found in the core of the sun.

Growth Strategy

·      To work in collaboration with our customers to invest in R&D and process engineering in order to develop products that meet their most demanding needs.

·      To bring to the market new products and to ensure that we remain at the cutting edge of technology in this important area. During FY2021 G&H introduced six new products in industrials generating £5.1m of revenue. We also completed important milestones on a multi-year contract with a laser system company to develop the next generation of Extreme UV lithography lasers for production of atomic level nanoelectronics.

·      To focus on niche markets that play to the strengths of G&H, principally those that demand high levels of quality and reliability, typically requiring technically challenging design and engineering input incorporating a range of our products. Those markets may require 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. During the year we added to our Asian sales team so as to be able to exploit the growing market demand we see in that region.

·      To continue to focus our energies and investment on making the transition from a components supplier to a manufacturer of subassemblies, instruments and systems, where appropriate.

·      To maintain the strong relationships we have with our customers' development teams to ensure we are their preferred choice for supporting them in developing their next generation products.

A&D

Revenue                                        £41.1m (2020: £41.4m)

Adjusted Operating Profit         £3.1m (2020: £2.8m)

Operating Profit                           £0.6m (2020: £1.5m)

Percentage of Revenue            33.1% (2020: 33.9%)

Market Drivers

·      A&D markets require high product quality, reliability and high performance in harsh environments, which plays to G&H's strengths.

·      A&D is transitioning to photonic components and systems across a broad range of sub-sectors to secure size, weight, power and reliability benefits.

·      IR optical arrays deliver targeting, range finding, navigation and surveillance capabilities for the growing UAV market.

·      Similar capability combined with photonic sensor suites are now being used across a range of remotely controlled A&D systems for land, sea and air.

·      Space satellite systems developed by G&H have the ability to be deployed across a range of standard satellite, constellation satellite and near space UAV systems.

·      Optical systems used in armoured vehicles are being developed with additional digital capability.

·      Direct energy capability will utilise optical and laser expertise.

·      Emerging inertial navigation platforms.

Performance

Our A&D revenues declined by 0.7% during FY2021, compared with the equivalent period last year, but grew 4.3% excluding foreign exchange. In the UK we completed deliveries of optical sensor systems on several significant vehicles programmes working closely with the overall vehicle manufacturers. Future UK and European vehicle sustainment programmes which include the upgrade of the vehicles' optical sensor suite provide G&H with the prospect of significant future programme business in this area. We believe the investment we have made in prototyping vehicle based multi-wave band sensor systems positions G&H well to be selected on these programmes.

The launch of a G&H enabled satellite laser-based communication system was completed in November 2020. To the best of our knowledge this is the first of its type and this 'proof of principle' should provide the basis for further business in standard and constellation satellites and near space UAVs.

In the US our deliveries of gimballed optical systems for a multi-year unmanned air vehicle contract came to an end and although new programme positions were agreed for secure communication systems using photonics technologies, these will only move in to volume production in the coming financial years.

In the US we secured further business for our IR optical arrays used in the gimbals on UAVs for targeting, range finding and surveillance. They will come on stream with volume production in the near term.

Our Boston, MA facility transitioned two significant programmes from development to the volume production phase and we expect orders for further productions volumes to be secured in the coming financial year.

G&H has a market leading position in supplying laser based navigational systems for military and commercial aircraft. Our internal forecasts do not expect the commercial aspect of this business to return to growth until FY2023. This business improved across FY2021 and we are maintaining this important capability at our Moorpark, CA facility.

Applications

·      Target designation and range finding used on both land-based and airborne systems.

·      Guidance and navigation components for ring laser gyroscope and fibre optic gyroscope inertial navigation systems.

·      Countermeasures for ground-based systems and airborne platforms.

·      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.

·      Periscopes and sighting systems for land based armoured fighting vehicles.

·      Opto-mechanical subsystems for unmanned aerial vehicles.

Growth Strategy

·      To continue to invest to move up the value chain from being a components supplier to a subsystems provider. Our customers are changing their business models and are looking for further outsourcing opportunities to companies such as G&H that are capable of providing broader solutions.

·      Further upgrading of our manufacturing processes and engineering in order to meet the needs of our customers. The investments made in new surface polishing machines for our newly formed UK Precision Optics centre of excellence in Ilminster are evidence of our intent to secure further market share 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 take on projects with a high technical content initiated by our customers. During FY2021 G&H introduced 33 new products and generated £9.4m of revenue from new products that addressed the A&D market including space satellite laser based communication systems, new sighting systems and IR lens assemblies for UAVs.

Life Sciences/Biophotonics

Revenue                                        £27.4m (2020: £25.9m)

Adjusted Operating Profit         £4.2m (2020: £4.7m)

Operating Profit                           £3.5m (2020: £4.4m)

Percentage of Revenue            22.1% (2020: 21.2%)

Market Drivers

·      Strong post pandemic recovery in laser enabled aesthetic procedures to tackle the pent-up demand caused by the COVID-19 response.

·      A larger, more affluent worldwide middle class influenced by social media and eager to access cosmetic and aesthetic procedures.

·      A strong, government driven programme within China to develop an indigenous life sciences sector, reducing its dependency upon Western equipment and technologies.

·      A growing aging population demanding a shift towards early diagnosis supports demand for our capabilities.

·      More point of care and personalised medicine drives demand for volume diagnostic products.

·      New applications for optical coherence technologies.

Performance

Our life sciences/biophotonics revenue grew by 5.9% in the year to 30 September 2021, compared with the prior year. When measured at constant currency this represents growth of 8.1%. Medical diagnostic demand remained at the high levels seen in the second half of FY2020. The continued strong performance of a product designed to improve respiratory function as part of a ventilator system has been a key factor.

In the financial year our ITL business secured important new programme positions with customers seeking our expertise to productionise medical diagnostic product concepts. In line with our established business model, we expect to secure recurring production revenues from these programmes once the initial work to develop producible product has been completed. We have expanded the medical diagnostics R&D group to meet the demand. The enhanced software, firmware, electronic and mechanical engineering capability enables further systems business within and outside G&H's life science business sector.

OCT systems and components delivered growth during the period. Demand for our specialist medical laser products, which was adversely affected by the pandemic induced reduction in elective procedures during FY 2020, has started to demonstrate a marked improvement in performance. Medical lasers using our components are able to provide new cosmetic procedures to patients, for example to significantly clear acne scarring. Overall these two sub-sectors were up 27% in the year, excluding foreign exchange.

Applications

·      Optical coherence tomography (OCT) primarily used in retinal imaging for the diagnosis of glaucoma and macular degeneration, but now including cardiovascular disease and cancer diagnostics.

·      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.

·      Microscopy: Modern, laser-based techniques are revolutionising the field of microscopy.

·      Systems: G&H has a range of capabilities including full product development, design, manufacturing, certification and after sale service for the commercialisation of high-quality medical diagnostic, in vitro diagnostic (IVD) devices, precision analytical, electro-mechanical and laboratory instruments.

Growth Strategy

·      To continue to invest in R&D projects in close collaboration with our customers, to develop the existing portfolio of products and to ensure that they remain competitive. During FY2021 G&H introduced nine new products and generated £3.6m of revenue from products that address its life sciences/biophotonics market, especially in the medical instrumentation market.

·      Where appropriate to sell the full range of our life sciences/biophotonics products to a wider range of customers.

·      To utilise our systems capability to present our breadth of technologies as part of subsystems or systems.

·      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. G&H continues to seek acquisition opportunities and has the financial resources to execute on that strategy as it develops.

Financial Review

Overview of the Year

Having demonstrated its resilience during the pandemic the Group's trading recovered well in FY2021. Group revenue for the year totalled £124.1m. This represents growth of 1.6% over the previous year, or 6.4% excluding foreign exchange.

We have seen sustained growth from our Industrial markets and revenues from our life sciences products and services remained at the high levels seen in the previous financial year. In our A&D sector deliveries to a number of important defence programmes grew, more than offsetting reduced demand from our commercial aerospace customers.

Our order book stood at £97.8m at the end of the financial year and intake exceeded revenue by 9% in the second half of the year providing good visibility for future revenue growth.

The Group's adjusted profit before tax increased to £12.6m (2020: £9.8m) representing a margin of 10.2% (2020: 8.0%). After the impact of adjusting items, including restructuring costs and amortisation charges for acquired intangible assets the Group's full year statutory profit before tax was £4.7m compared with £5.4m in the prior year. Adjusted profit before tax is a key alternative performance measure by which the Board evaluates the Group's performance as it better represents the underlying trading of the Group with restructuring costs, acquisition and disposal items excluded from this measure. Further details of alternative performance measures are provided later in this review.

We were pleased with the Group cash performance in the year with working capital levels reducing by £0.5m despite the increase in volumes of 6.4% compared to the prior year. At the same time investment in our production facilities continued with total capital investments of £6.2m made in the year. Our net debt excluding lease liabilities fell from £6.5m at the end of the prior year to £2.6m representing leverage of just 0.1x meaning we are well placed to execute on our acquisition strategy.

Revenue

Revenue for the year totalled £124.1m. Revenues from our semiconductor and industrial laser markets recovered strongly from the end of the first financial quarter. Demand for hi-reliability fibre couplers also grew albeit more slowly from the higher prior year comparative. These were partly offset by reductions in revenues to sensing markets where customer programme slowdowns impacted revenues.

In A&D significant optical system deliveries for armoured vehicles were completed on a number of customer programmes more than offsetting low levels of demand from our commercial aerospace customers.

Our life sciences/biophotonics business delivered year-on-year growth of 5.9% (8.1% at constant currency). Our medical diagnostics business grew further despite strong prior year comparators and there was a pleasing return of demand for our component used in skin medical laser treatments which had been impacted by the pandemic slowdown in the previous year.

Operating Profit

The Group's statutory operating profit was £5.4m (2020: £6.3m) after a charge for items excluded from adjusted operating profit of £7.9m (2020: £4.4m) including £5.9m (2020: £2.6m) in respect of the Group's manufacturing footprint consolidation programme and £2.1m in respect of the amortisation of intangible assets arising on business combinations (2020: £2.7m) Adjusted operating profit was £13.3m (2020: £11.2m) with the increase the result of improving volumes and the initial financial benefits of the Group's restructuring programme. A reconciliation between adjusted profit and statutory profit is shown below.

Alternative Performance Measures

Alternative performance measures are presented in these financial statements as management believe they provide investors with a means of evaluating the performance of the Group on a consistent basis. These alternative performance measures exclude the impact of non-underlying items on the Group's financial results. The Group's alternative performance measures and their reconciliation to IFRS measures are shown in the table below.

Net Finance Costs

The net underlying interest expense of £0.7m (2020: £1.5m) reduced by £0.8m. The reduction was the result of repayments made during the year by the Group against its credit facilities, detailed further below.

Tax

The tax charge for the year was £1.3m (2020: £1.6m) with an underlying tax charge of £2.4m (2020: £2.1m) after excluding a credit on non-underlying items of £1.1m. This resulted in an underlying effective tax rate of 18.8% (2020: 21.8%). The reduction in the rate was largely due to adjustments in respect of prior year balances arising from enhanced capital allowances. 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.

Earnings Per Share

Basic adjusted earnings per share increased by 34.4% to 41.0p (2020: 30.5p), reflecting the increased profitability in the year. Basic earnings per share reduced 9.9% to 13.6p (2020: 15.1p).  This reduction was due to the non-recurring items incurred in the year in relation to the Group's site rationalisation programme.

Cash Generation

Cash flow generated from operating activities was £16.8m, down from £21.6m in the prior year.  This reduction was due to the non-underlying costs incurred in relation to the site rationalisation programme in the year amounting to £5.1m. Adjusted cashflow generated from operating activities, which excluded these non-underlying costs, was £21.9m (2020: £22.5m). This was the result of improved profitability, supported by disciplined working capital management. In total working capital reduced by £0.5m in the year despite the 6.4% increase in business volumes compared to the prior year. Cashflows for tangible and intangible fixed asset additions totalled £6.2m (2020: £6.4m). The final earn out payment for the Group's acquisition of the ITL business was made in the period. The payment of £3.25m represented that business achieving at its maximum level. The payment of an interim dividend in the year totalled £1.1m. The Group's strong cash generation allowed the repayment of $19.2m (£14.1m) of borrowings and the Group closed the year with net debt of £9.2m (2020: £14.7m) or £2.6m (2020: £6.5m) when lease liabilities are excluded.

Balance Sheet

The Group's total equity at the end of the year was £114.3m, an increase of £0.9m over the prior year. This comprised an increase of £2.3m from retained earnings, a £0.7m increase to reserves in relation to share schemes and a net reduction of £2.1m arising from foreign exchange and hedging movements.

During the year, additions to property, plant and equipment amounted to £5.4m (2020: £5.4m) and to intangible assets £0.8m (2020: £1.3m).

Dividend Policy

The Board has a progressive dividend policy. In determining the level of dividend the Board considers not only the adjusted earnings cover, but also looks to the future expected underlying growth of the business and its capital and other investment requirements. The Group's balance sheet position and its expected future cash generation are also considered. The Board also takes in to consideration the Group's principal risks. The Group's ability to pay a dividend is impacted by the distributable reserves available in the parent Company, which operates as a holding company, primarily deriving its net income from dividends paid by its subsidiary companies. At 30 September 2021, Gooch & Housego PLC had sufficient distributable reserves to pay dividends for the foreseeable future.

Given the strength of the business recovery in the year and the positive outlook for the coming trading period the Board is proposing a final dividend of 7.7 pence per share, giving a total of 12.2 pence per share for the year when combined with the 4.5 pence per share paid as an interim dividend in July 2021.

Funding and Liquidity

The Group's operations are funded through a combination of retained profits, equity and borrowings. Borrowings are raised at Group-level from the Group's banking partner and lent to the subsidiaries. At 30 September 2021 the Group had available undrawn committed and uncommitted facilities of $55.2m. The Group's borrowings are in the form of a US$ denominated Revolving Credit Facility (RCF). The RCF matures in April 2023.

The Group's leverage is expressed in terms of its net debt/adjusted EBITDA ratio. Under the Group's credit facility the figure for net debt used in this ratio excludes IFRS 16 lease liabilities and other IFRS 16 impacts. The Group's main financial covenants in its bank facilities states that net debt must be below 2.5 times adjusted EBITDA, and adjusted EBITDA is required to cover interest charges, excluding interest on pension schemes, by at least 4.5 times. At 30 September 2021 net debt/adjusted EBITDA was 0.1 times (30 September 2020: 0.4 times). Interest cover at 30 September 2021 was 34.2 times (30 September 2020: 10.8 times).

The Group maintains sufficient available committed borrowings to meet any forecast funding requirements.

Financial Risk Management

The Group's main financial risks relate to funding and liquidity, interest rate fluctuations and currency exposures. The Group uses financial instruments to manage financial risks arising from underlying business activities.

Foreign Currency

The Group's policy is to reduce or eliminate, whenever practical foreign currency transaction risk. The Group hedges expected foreign currency cash flows wherever possible.

The following are the average and closing rates of the foreign currencies that have the most impact on the translation of the Group's Income Statement and Balance Sheet into GBP.

Group Income Statement

For the year ended 30 September 2021